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New capacity to revive growth…

At 96% capacity utilisation, the company operated almost at full capacity in Q1CY21. This, along with the low base of last year led to sales volume growth of 25.7% YoY to 7.24 MT (vs. I-direct estimate: 7.32 MT). Realisations were also up 1.9% YoY to | 5002/t (flat QoQ) vs. I-direct estimate of | 5025/t leading to revenue growth of 28.1% YoY. Absolute EBITDA increased 61.9% YoY to | 977 crore (vs. I-direct estimate: | 786 crore).

On QoQ basis, EBITDA/t was up | 267/t to | 1,349/t (up 28.8% YoY) vs. I-direct estimate: | 1074/t. Key contributors to margin expansion (on QoQ basis) include 1) benefit of inventory adjustments (| 161/t), improvement in logistic efficiencies aided by master supply agreement (| 12/t) and other cost optimisation (| 83/t) that led to overall cost reduction of | 256/t on a QoQ basis.

The greenfield project at Marwar Mundwa, Rajasthan (1.8 MT GU, 3 MT clinker) is expected to be commissioned by Q3CY21E. This would help improve sales volume by ~5 MT in the north and west regions. With ambition to reach 50 MT capacity in mid-term through significant debottlenecking opportunities, we expect the company to get back to industry leading growth trajectory once these new capacities comes on stream.

To enhance capacity to ~50 MT from current 29.7 MT

The company has laid out growth plans to increase their capacity in India with the target to become a 50 MT player from current 29.7 MT. In terms of regions, the company is exploring opportunities in markets of east and west India, with brownfield expansions in Bhatpara and Maratha plants. While its upcoming facility in Marwar Mundwa, Rajasthan will enhance clinker capacity by 3 MT, it would help improve cement sales by ~5 MT. Apart from this, the company is also looking at significant debottlenecking opportunities across all its plants to further enhance their cement capacity.

Strong b/s to support expansion, help improve RoE

The ongoing capex at Marwar Mundwa with total investment of | 2350 crore is mainly funded through internal accruals and would commence operations by Q3FY21. While we await clarity on capex on incremental capacity of ~15 MT, we believe the capex would be far lower on a per tonne basis than the capex required for brownfield expansions as majority these new capacities would be added though de-bottlenecking. Hence, we believe the cash balance of over | 2700 crore and annual OCF of | 2500 crore is sufficient to support these expansions. Overall, this move would not only aid in gaining market share but also would help improve return ratios.

Valuation & Outlook

While short-term demand may get impacted due to Covid induced restrictions, the long-term growth trajectory of the company to remain healthy with capacity expansions backed with strong b/s. Hence, we maintain BUY rating with unchanged TP of | 365 (implying a consolidated EV/t of $154 on expanded capacity and 14.5x CY22E EV/EBITDA).

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