All eyes on price sustainability!
UltraTech during the quarter managed to deliver volume growth of 3% YoY in domestic market primarily due to ramp-up of UNCL, which operated at about 60% utilization level. Consolidated grey cement volumes stood at ~18.48 MT (est. of 19.5 MT), which was up by ~2.6% YoY. Overall net sales stood at Rs 101.8 bn (est of Rs 103.8 bn) and grew by 14.4% YoY led by strong cement prices during the quarter (net realization/tonne up 11.4% YoY). Aided by higher prices, benign input costs and significant improvement in UNCL operations (PBT break even within two quarters), UltraTech operated at EBITDA/tonne of Rs 1,465 in Q1FY20 (+56.1% YoY/+37.3% QoQ). Absolute EBITDA came in at Rs 27 bn, surging by 60.2% YoY/16.1% QoQ.
Going ahead, the company continues to maintain industry growth guidance of ~6-7% in FY20E with infrastructure being the key demand driver. Further, NCLT approved the scheme of merger between UltraTech and Century cement assets in July and the scheme is likely to become effective in Q2FY20. Due to breakdown during trial runs of Bara grinding unit (4 MTPA), the commissioning is delayed to Q3FY20 while Dalla clinker plant (2.3 MTPA) is expected to be operationalized by Q1FY21. With respect to capital allocation, current focus remains on deleveraging and acquisition of Century cement assets, while expansion at Pali is put on hold currently.
We estimate total cash outgo of Rs 40 bn over FY20E-FY21E and net debt/EBITDA to decline to 1.38x by FY21. We have increased our EBITDA/tonne estimates by 16.5%/12.9% for FY20/FY21. Valuing UTCEM at 16x EV/EBITDA on FY21, we increase our target price to Rs 5,087 (previously Rs 4,840). We have a BUY rating at CMP of Rs 4,243.
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