MOSL: ULTRATECH CEMENT (Buy)-Healthy volume traction-Cost push impacts margins
Ultratech Cement: Healthy volume traction; Cost push impacts margins
(UTCEM IN, Mkt Cap USD15.4b, CMP INR3860, TP INR4536, 18% Upside, Buy)
- Ex-JPA volumes increase 10% YoY: 1QFY19 volumes grew 33% YoY to 17.5mt (est. of 17.63mt), as JPA operated at 70% utilization. We estimate ex-JPA volumes to have grown 10% YoY. Realizations increased 1.4% QoQ to INR4,946/t (est. of INR5,030) due to higher prices in the central and west markets and higher subsidy income. Net sales rose 31% YoY (-4% QoQ) to INR86.5b (est. of INR88.6b).
- Higher costs QoQ mitigated by realization improvement: Cost/t rose 2% QoQ, led by an increase in employee, P&F and freight costs. However, EBITDA/t remained stable QoQ at INR928 (led by a sequential improvement in realization), but came in below our estimate of INR950 due to lower-than-estimated realizations. PAT declined 33% YoY to INR5.98b (est. of INR6.05b), led by higher depreciation and interest cost.
- Management commentary: (1) Variable cost/t differential between JPA and UTCEM assets is INR160, of which INR50 has scope for further improvement. (2) UTCEM commissioned its 1.75mt cement grinding unit at Dhar in 1QFY19. (3) 62MW of WHRS is also under commissioning, which should help meet 15% of power requirement.
- Valuation view: UTCEM is likely to witness healthy growth in EBITDA in FY19, led by the full impact of ramp-up of acquired capacity and growth in the underlying markets. The company is likely to be the biggest beneficiary of a likely upturn in the Indian cement cycle over FY18-20, as it commands ~23% market share. We value UTCEM at 14x FY20 EV/EBITDA to arrive at a target price of INR4,536/share, implying an 18% upside. Maintain 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.
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