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MOSL : ULTRATECH CEMENT: Soft quarter; energy prices remain volatile

ULTRATECH CEMENT: Soft quarter; energy prices remain volatile

(UTCEM IN, Mkt Cap USD22.2b, CMP INR6398, TP INR7510, 17% Upside, Buy)

• UTCEM reported consol. EBITDA of INR18.7b v/s estimated INR16.8b and EBITDA/t of INR808 v/s estimated INR723, driven by higher ‘other operating income’ (up INR65/t QoQ). Profit was at INR7.6b v/s estimated INR5.9b. 
• The management expects demand to recover post the festive season. Though energy cost has peaked out in 2Q, petcoke price remains volatile and has increased to USD205/t, after declining to USD165-170/t in Aug/Sep’22.  
• UTCEM remains best placed to benefit from demand recovery, helped by its consistent capacity additions plans. Cost-savings initiatives (higher green energy; scope for reducing lead distance, etc.) should help structural cost improvement. We reiterate our BUY rating on the stock.

 

Volume in-line with estimate; grey cement realization down 3% QoQ

• Consolidated revenue/EBITDA/PAT stood at INR139b/INR19b/INR7.6b (+16%/-31%/-42% YoY and 4%/11%/28% above our estimates). Volume grew 7% YoY to 23.1mt (in-line with estimates). RMC revenue was up 44% YoY.
• Grey cement realization was up 6% YoY (down 3% QoQ). Blended realization rose 8% YoY (down 1% QoQ) and was 4% above estimates due to higher ‘other operating income’. Opex/t increased 21% YoY (and 8% QoQ), led by 39%/7%/9% increase in variable/freight/other costs.
• Higher costs led to 9pp YoY drop in OPM to 13.4% and 36% YoY decline in EBITDA/t. ‘Other income’ was up 35% QoQ and interest expense declined 13% YoY/7% QoQ.
• Revenue grew 22% YoY in 1HFY23, backed by a 9%/12% YoY rise in blended realization/volume. Opex/t increased 21% YoY, leading to 18% YoY drop in EBITDA to INR50b and ~8pp YoY decline in OPM to 17%. Profit declined 22% YoY to INR23b.
• OCF in 1HFY23 declined 76% YoY to INR8.3b, due to lower profitability and a sharp increase in working capital. FCF turned negative at (INR23b) in 1HFY23 v/s INR13b in 1HFY22 as capex stood at INR31b in 1HFY23 v/s INR21b in 1HFY22.

Highlights from the management commentary

• Cement demand is expected to pick up post the festive season and volume growth should be in double-digits in FY23/24. Prices should improve going forward to mitigate the impact of sustained cost pressures.    
• Given the geo-political tension, coal prices are likely to remain at an elevated level. The company has ~55days of coal/petcoke inventory v/s normal levels of 45days.
• Net debt increased to INR83.6b in Sept’22 v/s INR55.6b in Jun’22 on account of higher capex and working capital. The management expects capex to be INR60-70b in FY23 and INR60b in FY24/FY25.