Published on 21/09/2019 11:59:43 AM | Source: ICICI Securities Ltd

Buy UltraTech Cement Ltd For the Target Rs.5,040 - ICICI Securities

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FY20 to be a landmark year

FY20E is likely to be a landmark year for UltraTech Cement (UTCEM) as the same would be the first year when all the three acquisitions of JPA, Binani and CENT would operate at >75% utilisation with improved profitability. We expect 21% volume, 25% revenue, 49% EBITDA and 59% EPS growth during FY20E which would translate into 23% EBITDA and 24% EPS CAGR over FY18-21E. UTCEM is likely to report >Rs100bn EBITDA and >300bps improvement in RoE during FY20E. With the integration and ramp-up of acquired assets largely behind, we believe, UTCEM’s focus would shift to improve margins/return ratios and deleverage the balance sheet. Our FY20-21E EBITDA are 5-6% ahead of consensus. Maintain BUY with an unchanged target price of Rs5,040/share based on 14xFY21E EV/E. 

* UTCEM (first and only cement company in India) likely to report >Rs100bn EBITDA in FY20E: UTCEM has reported 58% YoY increase in EBITDA to Rs26.6bn (pre-Ind AS116 and ex-CENT) during Q1FY20 with India operations EBITDA/te increasing 58% YoY to industry leading Rs1,466/te. While the current cement prices are 4-5% lower than the average Q1FY20 prices, benefit of lower input prices and better volume growth would flow for the rest of FY20E. We factor-in strong 23% EBITDA CAGR over FY18-FY21E led by 15% volume CAGR and expect EBITDA/te to increase from Rs889/te in FY19 to Rs1,156/te by FY21E.

* Net debt to decline and return ratios to improve from FY20E: UTCEM is likely to generate OCF of Rs130bn over FY20-21E and its net debt is likely to decline from Rs196bn in FY19 to Rs146bn in FY21E. Accordingly, net debt to EBITDA is expected to slide from 2.9x in FY19 to 1.9x in FY20E and 1.3x by FY21E. With improving profitability, return ratios are likely to improve ~300bps over FY19-FY21E with >12% RoE and pre-tax RoCE from FY20E

* UTCEM likely to report ~100mnte volume in FY21E (including white cement) implying 81% utilisation: One in every four cement bags sold in India belongs to UTCEM. Media articles suggest Emami Cement could be up for sale and many PE companies and cement companies including UTCEM could be evaluating this asset. We believe acquisitions would continue to remain an integral part of UTCEM’s growth.

UTCEM enjoys track record of improving the profitability of acquired assets at faster pace: Profitability of the acquired JPA assets improved in-line with the existing UTCEM assets (in less than two years) excluding structural cost gaps of Rs100/te. Management aims to ramp-up Binani’s utilisation to >80% (vs 72% in Mar’19) and achieve significant cost savings through improving efficiency norms by Q4FY20. Similarly, the management is targeting to improve CENT’s profitability by Rs300- 400/te through rebranding and other cost efficiencies. 

* UTCEM remains focused on improving the overall margins via controlling costs by:

(i) improving blending ratio,

(ii) setting up 46MW of WHRS by mid-FY21 taking the total WHRS capacity to 131MW, sufficient for 12% of power requirements (vs ~7% currently)

, (iii) increasing the use of alternative fuels from ~3% currently,

(iv) reduction of lead distance and

(v) operating leverage on higher volume growth


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