A robust quarter despite hiccups
We recommend BUY on UTCEM with a TP of Rs 5,350 (15x its Sep-21E EBITDA, implying EV of USD 210/MT).
HIGHLIGHTS OF THE QUARTER
* During 2QFY20, UTCEM’s standalone revenue/ EBITDA/PAT rose 4/29/72% YoY to Rs 92.54/ 18.13/6.39bn respectively. UTCEM has restated its numbers to include Century cement w.e.f. May 2018.
* UTCEM’s grey vol fell 2% YoY
to 17.8mn MT, on weak demand. Adjusted for sales from Nathdwara, grey cement volumes declined ~5% YoY. UTCEM’s white cement/putty volumes stood flat YoY at 0.32 mn MT. The Century plants operated at low utilization of ~50% in 2QFY20, owing to production disruptions (amid heavy rains), driving down total sales volumes.
* Pricing and cost tailwinds amid weak demand:
Amidst weak demand, NSR remained strong at 6% YoY (as it moderated only 3% QoQ). UTCEM’s unitary input costs remained flat QoQ (-7% YoY) on stable fuel costs, while freight cost fell 2/4% QoQ/YoY. However, lower utilization QoQ, and production disruptions at Century plants inflated opex by 4% QoQ and 1% YoY.
* Unitary EBITDA rose 31% YoY
to Rs 1,020/MT, driving 29% EBITDA rise. Stable capital charges thus drove 72%
PAT rise. Adjusted for ~Rs60/MT EBITDA for Century (as per the co), UTCEM’s EBITDA stood at Rs 1,100/MT.
* Capex updates:
UTCEM guided for Rs 20/20bn capex for FY20/21E, towards expansions of grey cement in central & east regions and additions of WHRS & putty capacity. The co expressed its intent to acquire Emami Cement as it faces capacity crunch in peak quarters in east.
* Robust outlook:
UTCEM completed two major acquisitions – Nathdwara and Century cement and will complete production/ distribution stabilization by end FY20E. We believe these will bolster UTCEM’s leadership position across regions, and add to its production/ distribution efficiencies. These alongwith fuel cost tailwinds and demand recovery shall drive 16/30% consol EBITDA/PAT CAGRs during FY19-22E.
We reiterate BUY on UTCEM with a TP of Rs 5,350 (15x its Sep-21E EBITDA, implying EV of USD 210/MT). In our view, UTCEM deserves premium valuations for its capacity & cost leadership and for its balance sheet discipline. The stock currently trades at 12.8/11.5x FY21/21E consol EBITDA and at an EV of USD 170/MT.
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