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MOSL: ULTRATECH CEMENT: Cementing its leadership position (UTCEM IN, Mkt Cap USD23.3b, CMP INR6455, TP INR7210, 12% Upside, Buy)

EBITDA outperformance on better cost management and higher volumes

• UTCEM beat the street and our EBITDA estimate, led by higher sales volumes and better cost management (standalone variable cost increased by INR135/t v/s our estimate of INR210/t). Consolidated EBITDA stood at INR31b (v/s Bloomberg/our estimate of INR25.7-28b/INR28b). OPM stood at 20.4% (est. 19.2%). Adjusted PAT stood at INR16b (est. INR14b). 
• Given the better demand scenario, the management remained optimistic about the industry’s long-term growth prospects. Though there could be a fall in margin in 2Q due to lower cement prices (Jun-exit price down 3-5% v/s 1QFY23 average) and cost inflation (full impact of higher energy prices), we expect margin to gradually recover from 3QFY23.
• We raise our FY23/FY24 EBITDA/EPS estimate by 6-7%/8-9%. The management aims to achieve a capacity of 200mtpa by FY29-30 (v/s its earlier plans of achieving a capacity of 160mtpa by FY23E). We maintain our Buy rating on the stock.

 

Realization increased better than peers; EBITDA/t at INR1,236

• Consolidated revenue/EBITDA/adjusted PAT stood at INR152b/INR31b/ INR16b (+28%/-6%/-7% YoY and +5%/+11%/+15% v/s our estimates). Sales volume grew 16% YoY to 25mt (4% above our estimate). Blended realization rose 10% YoY and 6% QoQ.
• Grey Cement realization rose 7% each YoY and QoQ (v/s a 4% QoQ increase reported by ACC and ACEM). The gap between its trade and non-trade products is narrowing (at INR15-20/bag from over INR20/bag earlier).
• OPEX/t increased by 22% YoY and 5% QoQ, led by a sharp rise in variable costs (up 40% YoY and 4% QoQ). Average fuel consumption cost stood at USD184/t v/s USD164/t in 4QFY22. Freight cost/t grew 7% YoY and 5% QoQ on higher diesel prices. Other cost/t increased by 12% YoY and 8% QoQ, led by higher fixed costs and inflationary impact.
• Higher costs led to a 6% YoY decline in EBITDA and 7.6pp YoY drop in OPM. EBITDA/t fell 20% YoY, but rose 11% QoQ to INR1,236 (est. INR1,148/t). Other operating income stood lower at INR63/t v/s INR76/t in 4QFY22.
• Consolidated net debt stood at INR55.6b v/s INR39b in Mar’22, with a net debt/EBITDA ratio of 0.49x v/s 0.34x in Jun’22 (on a 12M trailing EBITDA).

Highlights from the management commentary

• The momentum in cement demand continued after a robust 4QFY22. Demand is expected to grow at 8% CAGR over the next five years.
• Cement prices grew by over 10% QoQ in North and Central India and by 5-6% in western and eastern regions. Prices remained flat QoQ in South India. Exit cement prices in Jun’22 was 3-5% lower v/s its 1QFY23 average.
• Input costs have been consistently increasing. Fuel cost is expected to remain at elevated levels over the next few quarters.
• The recently announced capacity expansion plan of 22.6mtpa has been a part of its earlier growth plan of 50mt. It aims to achieve 200mtpa capacity by FY29-30.

Capacity expansion and better cost management should help; reiterate Buy

• UTCEM’s capacity expansion plans, along with scope for an improvement in utilization of existing capacities, offer strong growth visibility. We expect a growth of ~9% in sales volumes in FY23-24.
• Increase in WHRS/solar capacities (green power usage to increase to 36% by FY25 v/s 18% in FY22), along with scope for reducing lead distance (with better capacity planning), will help it to structurally improve its cost structure.
• Continuous improvement in leverage (to become net cash positive in FY24E v/s a net debt/EBITDA of 3x in FY19) will help it to pursue growth opportunities in the future. We expect it to trade at higher-than-historical multiples, given its leadership position and strong growth opportunities.
• We maintain our Buy rating, valuing the stock at 16x FY24E EV/EBITDA (v/s 15x earlier). We raise our FY23/FY24 EPS by 8%/9% given its strong 1QFY23 performance. Our TP of INR7,210 offers an upside of 12% from its CMP.