Strong profitability barring Century
UltraTech Cement (UTCEM)’s Q2FY20 consolidated EBITDA (including cement assets of Century) increased 35% YoY to Rs19.2bn, marginally lower than our estimates of Rs20bn as Century assets just broke-even at EBITDA level owing to heavy rains and major annual shutdown. India operations EBITDA/te increased 38% YoY to Rs1,069/te (I-Sec: Rs1,099/te). UTCEM announced 3.4mnte grinding capacity expansion in East at capex of Rs9.4bn (US$40/te) to be commissioned by Mar’21. Management guided consolidated net debt to EBITDA of <2x (vs 2.2x as of Sep’19) by Mar’20. Factoring lower volumes, we reduce our FY20-FY21E EBITDA by 1-3% and reduce our target price to Rs4,950/share (earlier Rs5,040) based on 14x FY21E EV/E. Maintain BUY.
* India operations revenue increased 5% YoY to Rs91bn, in-line with our estimates. Total volumes declined 1% YoY to 17.8mnte and adjusting for Binani/ Century, volumes likely declined 4% YoY. Management expects cement demand to accelerate in H2FY20 with an increase in government spending and better monsoon. Grey cement realisation likely declined 4.5% QoQ / increased 8% YoY to Rs4,677/te. India operations EBITDA increased 36% YoY to Rs19bn (I-Sec: Rs19.8bn) with EBITDA/te increasing 38% YoY to Rs1,069/te (I-Sec: Rs1,099/te).
* Cement assets of Century (CENT) just broke even at EBITDA level in Q2FY20 vs Rs1.1bn EBITDA (Rs468/te) in Q2FY19 owing to heavy monsoon in its key markets of West Bengal, Madhya Pradesh and Bihar along with major annual shutdown. Revenue declined 24% YoY to Rs7.5bn owing to 25% YoY decline in volumes to 1.74mnte, implying capacity utilisation of 48%. Management expects gradual transition to ‘UltraTech’ brand in 1-2 quarters for 3 out of 4 plants of Century and expects Century’s Birla Gold brand to continue at Chhattisgarh plant for about a year. Management guided to operate these assets at 60% utilisation with EBITDA/te of Rs500/te in H2FY20 without factoring any benefit for transition to UltraTech brand of Rs300-400/te. Management expects to operate these assets in-line with UTCEM’s utilisation and profitability (barring structural cost difference) within a year’s time.
* UNCL (erstwhile Binani) operated at 60% utilisation in Q2FY20. Management intends to monetise UNCL’s non-core assets (in China, UAE and Bangladesh) before Mar’20. Besides, UTCEM may need to take some hair cut on loans and advances amounting to Rs16.8bn of UNCL.
* UTCEM announced 3.4mnte grinding capacities expansion in East (0.6mnte each brownfield at Bihar and West Bengal and greenfield 2.2mnte in Odisha) at a capex of Rs9.4bn to be commissioned by Q4FY21. Excess existing clinker capacity at Central region would be utilised for this expansion. Besides, Bara grinding unit is scheduled to be commissioned in Q3FY20.
* Consolidated net debt increased Rs21bn QoQ to Rs206bn as of Sep’19-end owing to Rs30bn outflow on CENT’s acquisition. Management expects net debt to EBITDA of <2x by Mar’20 from 2.2x now. Consolidated EBITDA to OCF conversion was strong at 58% in H1FY20 vs 20% in H1FY19. UTCEM generated consolidated OCF of Rs27bn and FCF of Rs17bn in H1FY20.
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