UltraTech Cement's Q3FY20 results (Outperformer) - Volume miss;De-leveraging, a positive

Q3FY20 result highlights

• Consol adj. PAT +103% yoy to Rs8bn: as higher realisations led to +508bp yoy margin to 20.3% & 32% yoy EBITDA growth. Earnings were lower vs estimates largely on volume miss during the quarter. 
• Volumes fell 3.8% yoy: to 20mt largely led by Century assets (-28% yoy, 55% utilisation in 3Q20 vs 76% in 3Q19) due to transition to Ultratech. Ex-Century, volumes were flat yoy led by weak demand on slow construction and infra project execution.
• Blended realisations +3.9% yoy: led by price hikes across regions in 1HCY19. However, realisations fell 3.7% qoq (Rs191/t) due to price corrections in East, South and West. Hence, India ops revenues were flat yoy at Rs100bn.
• Cost/t fell 2.2% yoy (-3.5% qoq) to Rs3980: driven by 14% yoy (-8.5% qoq) decline in P&F costs to Rs972/t led by lower petcoke prices (-31% yoy) and higher contribution of green power (WHRS & CPPs - 12.7% in 3Q20 vs 8.7% in 3Q19). Freight cost too fell by 4% yoy to Rs1177/t on lower diesel prices (~0.5% benefit), market mix strategies and extended exemption of busy season surcharge from railways (~3% benefit). However, fuel benefits were offset by higher RM costs (+8% yoy; higher blending & fly ash prices) & negative op. leverage.
• EBITDA/t jumps +38% yoy to Rs1020: driving 32% yoy growth to Rs20.4bn and Rs6.9bn PAT (India ops; incl UNCL (Binani), Century)

Conf call highlights: (1) 3Q20 industry demand declined by 1-2% yoy in 3Q20, however, the same has picked up in Dec-19 and is expected to continue on back of uptick in infra spend (2) Cement price hikes taken in Jan-20 in Maharashtra, North and East, while South is likely to see hikes as demand is improving (3) Century: Dec-19 utilisation was higher at 79%, 3Q20 EBITDA/t was at Rs270 (nil in 2Q20) as only 55% volumes shifted to UTCEM brand (85% by 2Q21), higher cost structure (incl Rs310mn one-time costs) and negative op. leverage. Century asset EBITDA/t to improve to Rs1000 by Sept-21. (4) Focus on deleveraging; not bidding for Emami: UTCEM is not bidding for Emami cement assets due to unfavourable valuations and will be deleverage further as seen in YTD-20, wherein net debt has reduced by Rs35bn to Rs186bn. (5) Capex: 2mtpa GU Bara plant commissioned in Jan-20, with balance 2mtpa GU to be commissioned in Sept-20. The 3.4mtpa East GU and 2.1mtpa clinker unit (Super Dalla) in East to be operational by 4Q21.

Impact on financials: No change to FY20/21 earnings - Rs137/179

Valuation and view

UTCEM has been impacted by the overall demand weakness, which has not been able to offset the decline in Century volumes (in transition) and driven down realisations. However, sustained cost efficiencies (higher petcoke usage, lower lead distances, higher usage of green power, etc) and deleveraging has enabled UTCEM to sustain the growth momentum during the quarter. While Century asset turnaround is taking long than anticipated, the next 3 quarters should see sharp improvement led by cost efficiencies, re-branding, etc. Concurrently, UTCEM’s sustained focus on costs as also deleveraging would drive strong 40% earnings CAGR over FY19-21E. Overall, we expect a gradual uptick driven by increased infra spend and affordable housing to drive volume growth and thereby realisations. We believe UTCEM’s decision to not bid for Emami assets would alleviate investor concerns on likely stress on balance sheet and drive a re-rating. Considering, the earnings momentum, scale and efficient operations, we believe valuations are attractive (12.4x FY21E EV/EBITDA and US$178 on EV/t). Outperformer.