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MOSL: UltraTech Cement (Buy): Demand outlook improving; Limited capex to reduce debt

UltraTech Cement: Demand outlook improving; Limited capex to reduce debt

(UTCEM IN, Mkt Cap USD16.4b, CMP INR4061, TP INR5050, 24% Upside, Buy)

 

We met UltraTech Cement’s (UTCEM) CFO Mr. Atul Daga for an update on the business and the company’s growth plans. Key insights highlighted from the meeting:

 

Demand has been weak; expect recovery from 4QFY20

The past few quarters have witnessed weak overall demand in India due to slow construction activity; however, the North and parts of the South (Tamil Nadu) have fared better. Demand has picked up recently, which has improved visibility of growth in 4QFY20. While overall demand in the country should be better in FY21 (~6% YoY), the East should see stronger growth (~10% YoY).

 

Clinker-backed supply limited

While capacity addition continues to lag demand and is expected to drive higher utilizations, most additions are those of cement grinding units, which does not necessarily create new supply, and are at times, only for logistical reasons. We estimate capacity to grow at 5%/4% MMTPA in FY20/FY21.

 

Prices lower in the South/East; the North/Central-India relatively better

Prices in the South/East have been weak, emanating particularly from the weak demand in Andhra Pradesh and Telangana, which has been impacting pricing in adjacent states. The eastern region also faced supply pressures as several new capacities got added. However, the North and Central-India were relatively better. According to our checks, currently all-India prices are up 5% YoY; led by ~10% growth in the North/Central-India, while the East/South have been nearly flat.

 

Limited new capacity additions on the anvil

UTCEM has announced a 3.4 MMTPA expansion in East India, which should get commissioned in 1HCY21. Besides this, there is no ongoing expansion program and the company’s focus is to sweat existing assets (capacity of 109 MMTPA; 70% current utilization). The capex for Bara grinding unit and Super Dalla clinker (acquired from Jaypee Associates in CY17) is limited as the capacities are awaiting only final clearances. While the Bara unit should start soon, Super Dalla clinker could take another year to start operations.