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Century turnaround, de-leveraging – key triggers
We believe the turnaround of the acquired Century Cement’s assets itself could add 4-5% to UltraTech Cement’s (UTCEM) EBITDA in FY21. Coupled with increased cost efficiencies and industry average 6-7% volume growth, we model 13% EBITDA CAGR for UTCEM over FY20-22E on a high base of >30% EBITDA growth in FY20E. Given minimal organic capex plans, UTCEM is likely to generate FCF of >Rs120bn over FY21-22E bringing net debt down to around Rs65bn by FY22E. This should translate into 23% EPS CAGR over FY20-22E and result in 200-300bps return ratio improvement. Our FY21-22E EBITDA are 4-5% ahead of consensus. The stock trades at an attractive valuation of 10x FY22 EV/E. We maintain BUY with an unchanged target price of Rs5,480/share based on 14x Sep’21E EV/E. UTCEM remains one of our preferred picks in the sector.
* Turnaround of Century Cement (CENT) assets itself could add 4-5% EBITDA in FY21: CENT assets operated at 79% utilisation in Dec’19 compared to sub-50% utilisation from Jun-Nov’19. Management expects to further ramp-up utilisation to ~85% during H1CY20 and guided that ~84% of the production would be transitioned to UTCEM brand (vs 55% in Dec’19). Also, costs would be in-line with the existing UTCEM assets (excluding Rs70/te royalty cost) by Q2FY21. Accordingly, CENT’s assets are likely to report Rs400-500/te YoY improvement in EBITDA/te and contribute 4-5% to the overall EBITDA in FY21.
* UTCEM can still grow volumes in-line with industry average while sustaining prices. Capacity addition in high growth markets of Central and East regions (4mnte Bara expansion (Central region) by Sep’20 and 3.4mnte grinding unit expansion in East region by Mar’21), with most brand transitioning issues behind coupled with higher utilisation of CENT assets, the company can register industry average volume growth of 6-7% over FY21-22, in our view.
* UTCEM remains focused on improving cost structure by: i) Increasing blending ratio, ii) setting up another 38MW of WHRS by FY21 taking the total WHRS capacity to 141MW, sufficient for 12% of power requirements (vs ~7% currently), iii) increasing the use of alternative fuels from ~3% currently, iv) reduction of lead distance, v) better operating leverage and vi) improving cost structure of acquired entities.
* UTCEM is likely to generate FCF of >Rs120bn over FY21-22E given minimal organic capex plans of Rs45bn over FY21-22E. Hence, net debt is likely to come down to around Rs65bn by FY22E. This should translate into 23% EPS CAGR over FY20-22E and result in 200-300bps return ratio improvement, in our view.
* Our FY21-22E EBITDA is 4-5% ahead of consensus. We factor-in consolidated volume CAGR of 7% over FY20E-FY22E and expect consolidated EBITDA/te to increase from Rs889/te in FY19 (Rs1,137/te in 9MFY20) to Rs1,294/te by FY22E.
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