MOSL: ULTRATECH CEMENT (Buy)-Healthy pricing drives margin expansion
ULTRATECH CEMENT: Healthy pricing drives margin expansion
(UTCEM IN, Mkt Cap USD16.5b, CMP INR4232, TP INR5010, 18% Upside, Buy)
** Moderate volume growth amid healthy realizations: Consolidated volumes (including white cement) grew 2% YoY to 18.8mt in 1QFY20. Realizations grew 10% YoY. Net sales grew 13% YoY (-7% QoQ) to INR102b (v/s est. of INR90b). Cost/t remained flat YoY. Thus, EBITDA/t increased 57% QoQ to INR1,444/t. Consequently, EBITDA increased 60% YoY to INR27b (v/s est. of INR20b), with margin expanding 7.9pp YoY and 5.2pp QoQ to 26.6%. Due to adoption of IND-AS116, EBITDA for the quarter was higher by INR434m. PAT was up 91% YoY to INR12b.
** Management commentary: (1) Industry utilization for 1QFY20 stood at 67% while volumes declined 3-4% YoY. (2) Industry should record a growth of 6% in FY20. While demand has witnessed a slowdown in 1HFY20, it should revive in 2HFY20. (3) Sand mining issues are prevalent in Andhra Pradesh, Rajasthan and West Bengal. (4) On an all-India level, current prices are 3% lower than 1QFY20 average.
** Enhanced pricing power aided by aggressive capacity growth: Driven by an inorganic growth strategy, UTCEM has expanded its capacity by 65% since FY17 to 109.4mt (including Century), 23% of all India capacity. We believe this has provided it significant pricing power, particularly in Central and West India where it will have ~40% market share once the Century acquisition is completed. We forecast a 28% CAGR in EBITDA and 36% CAGR in EPS in FY19-21E, driven by 14% CAGR in volume and better margins. Supported by financial leverage, UTCEM is also one of the biggest beneficiaries of higher pricing. While pricing and margins are expected to decline sequentially in the current quarter, we attribute this in a large part to seasonality. The company trades at 14.5x/12x EV on FY20/FY21 EBITDA. We value UTCEM at 14x FY 21 EV/EBITDA and arrive at a Target Price of INR 5,010. Buy.
UltraTech Cement Limited is engaged in the business of cement and cement-related products. The Company manufactures a range of products that cater to construction needs from foundation to finish, including Ordinary Portland Cement (OPC), Portland Blast Furnace Slag Cement (PSC), Portland Pozzolana Cement (PPC), white cement and white cement-based products, ready mix concrete, including specialty concrete, building products, such as aerated autoclaved concrete (AAC) blocks and joining mortars and a host of others in retail formats. Its geographical segments include India and Rest of the World. The Company focuses on various areas, including alternative fuels, waste heat recovery systems, carbon dioxide emission reduction, waste management, water re-cycling and bio-diversity management. It has over 10 integrated cement units, approximately 10 grinding units, a white cement unit, a wall care putty, over five bulk terminals and over 100 ready mix concrete units.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
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