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Margin outlook continues to improve

Expansions provide strong growth visibility

* UltraTech Cement (UTCEM) continued to improve its costs and margins in 1QFY22; it reported the highest ever EBITDA/unit of INR1,536/t (+8% YoY) during the quarter. Coupled with volume growth of 47% YoY, this led to 59% YoY growth in EBITDA. Net debt fell INR7b QoQ to INR59.8b (0.44x TTM EBITDA).

* Market share gains should continue, aided by the ongoing 20mtpa expansion program, which should drive a 13% volume CAGR over FY21–24E.

* We raise our EPS for FY22E/FY23E by 6%/6%, factoring in a better realization outlook. We estimate a 26% EPS CAGR over FY21–23E.

Better realization and lower cost inflation drive 9% beat on EBITDA

* Consolidated revenue / EBITDA / Adjusted PAT rose 54%/59%/92% YoY to INR118.3b/INR33.1b/INR17.0b and was -1%/+9%/+9% against our estimate.

* Consolidated volumes rose 47% YoY to 21.53mt (v/s our expectation of 22.1mt), with India volumes up 47% YoY. EBITDA/t at INR1,536/t (+8% YoY, +16% QoQ) surprised positively v/s our estimate of INR1,368/t.

* Blended realization rose 5% YoY to INR5,495/t (+6% QoQ; est. 5,401/t). On the other hand, cost inflation was lower than expected at 3.7% YoY to INR3,958/t (v/s our estimate of INR4,033/t). Freight and fuel cost inflation was low despite the surge in diesel and petcoke prices.

* Other income fell 27% YoY to INR2.0b and finance cost fell 17% YoY to INR3.3b on a sharp debt reduction. Consolidated net debt fell further by INR7b QoQ to INR59.8b (implying 0.44x TTM EBITDA).

Highlights from management commentary

* Fixed costs should remain stable as travel costs were lower in 1QFY22. Variable costs, however, would rise further as fuel prices continue to increase.

* Prices have remained stable across regions in Jul’21, but are expected to soften as the monsoons pick up. The management expects pent-up demand to kick in once the monsoons recede.

* The 19.5mt expansion is progressing as per schedule, with the commissioning likely to happen in phases by FY23. It has also received the Stage 1 clearance for Dalla Super (a 2.3mt clinker unit) from MoEF; this should get commissioned by Mar’22.

* It remains committed to turning net cash, while funding ongoing capex through internal accruals. It has prepaid long-term loans of INR50b in Jul’21.

Growth at reasonable valuations – 26% EPS CAGR over FY21–23E

* With its strong pan-India distribution network and preferred supplier status for key infrastructure projects, UTCEM is well-suited to tap into expected growth in both retail and institutional (non-trade) cement demand in India.

* While it is ramping up its underutilized acquired capacities, it also has a strong pipeline of expansion projects that offers strong growth visibility.

* We estimate a 15%/26% CAGR in consolidated EBITDA/PAT over FY21–23E, driven by a 13% volume CAGR, better realizations, lower operating costs, and lower interest costs.

* The valuation is reasonable at 13.7x FY23E EV/EBITDA – a 10% discount to its last five years’ average. We value UTCEM at 16x FY23E EV/EBITDA to arrive at TP of INR8,770. Reiterate Buy.

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