Published on 2/07/2019 10:51:31 AM | Source: Reliance Securities Ltd

Buy UltraTech Cement Ltd For The Target Rs.5,040 - Reliance Securities

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Consolidated Debt Increases by 1.2x; Better OCF Augurs Well

While consolidated debt increased by 17% YoY to Rs228bn mainly led by acquisition of Binani Assets, D/E at 0.73x and Debt/EBITDA at 3x do not necessarily raise concern as of now considering strong OCF at Rs52bn. Going forward, UTCEM will add another Rs30bn of debt post the deal with Century Textile, which we expect UTCEM’s balance sheet to absorb easily with no impact on earnings due to already operational extant assets. We further note that UTCEM has generated consolidated OCF (adjusted with interest cost) in FY19 of Rs36bn against Rs27bn in FY18. Considering no further acquisition hereon atleast for two years, we expect persistent strong cash generation will lead to meaningful deleveraging and hence improvement in RoCE.


Cement-Clinker Ratio Stands at 1.28x; Improvement on the Cards

CC ratio broadly remains flat at 1.28x due to steady OPC production for non trade sales. We note that UTCEM historically holds the lower CC ratio in comparison with its key peers. Hence, UTCEM has huge scope to improve its blending ratio. UTCEM has mentioned in its strategy to reduce RM cost by improving CC ratio through the production of composite cement. Going forward, higher blending may result in reduction in RM cost/tonne, which currently stands at ~Rs840/tonne.


Fiscal Incentives See Significant Increase

UTCEM has witnessed a significant increase in fiscal incentives in last two years to Rs4.4bn (Rs62/tonne). Capital incentives under state investment promotion scheme especially from acquired units of Jaypee group and increased utilisation resulted in higher fiscal incentives. Government grant receivables currently stand at Rs7.1bn as against Rs4.3bn in FY18. We further note that there is no fiscal incentive from UltraTech Nathdwara Cement Ltd (UNCL).


No Major Capacity Addition in mention Baring Bara GU

UTCEM commissioned a greenfield 3.5mnT at Manavar (Dhar), Madhya Pradesh taking its total capacity to 88.5mnT. Further, acquisition of UNCL (Binani Assets) led total cement capacity to 94.75mnT in India and 98.75mnT globally. However, UNCL has operations in UAE and China with a total capacity of 5.2 MTPA, which are held for disposal. Going forward, UTCEM appears to be prudent by putting up limited capacity (only 4mnT Bara GU in FY20) and concentrate upon de-leveraging. It is likely to spend Rs20bn in FY20 (Rs16bn in FY19) including remaining work at Bara, WHRS projects, development of coal block at Bicharpur, packaging terminal at Mumbai, 0.4mnT Wall Care Putty projects and other normal maintenance capex.


Strong Measures to Contain Power & Fuel Cost

UTCEM has consistently been working on reducing power & fuel cost by efficiencies improvement, which has started paying off for last few quarters. A likely increase in usage of renewable energy from total share of 8.5% will aid P&F cost to trend down further. The company commissioned 26MW of WHRS in FY19, which is under ramp-up and the full benefit will be realised from FY20 onwards. It is further setting up 46 MW of WHRS capacity and is expected to be commissioned in FY21, which would cater to ~12% of total power requirement. Further entering into agreements with third parties for procuring solar power under ‘Group captive scheme’, which are under implementation, is likely to augur well. UTCEM has also increased usage of low cost fuels viz. industrial waste increased from 3% to 3.3% in FY19.


Outlook & Valuation

A strong recovery in its operating performance in 4QFY19 and likely further improvement in ensuing quarters led by superior realisations are likely to aid UTCEM. Further, consistent approach to trim down cost along with focus on improvement in RoCE by balance-sheet de-leveraging augurs well for UTCEM. Going forward, we expect demand recovery post monsoon followed by increase in government spending and recovery in private capex is likely to ensure healthy volume growth. Further, completion of deal with Century Textile is likely to be a key catalyst for the stock. We marginally tweak our estimates and upgrade our target multiple marginally from 14x to 14.5x. We maintain our BUY recommendation on the stock with a revised SOTP-based Target Price of Rs5040 (from Rs4,850).


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