ULTRA strong show; Remains top pick in the sector
Ultratech Cement (UTCEM) reported 5% miss on our EBITDA (higher by Rs339mn due to adoption of AS116 related to operating lease accounting) estimates due to elevated maintenance costs on preponement of kiln shutdown (leading to cost higher by Rs45/t) and lower volumes. Adjusted for preponement of maintenance cost, EBITDA came in line with our estimate. However, EBITDA came ahead of consensus estimates by 6%. Led by Rs100/t QoQ reduction in cost and higher realisations, EBITDA/t of Ultratech Nathdwara (UNCL- erstwhile Binani Cement) rose 45% QoQ to Rs1,200/t. Overall EBITDA/t of Indian operations (including UNCL) rose 58% YoY/37% QoQ to Rs1,466.
Led by well-diversified regional presence, dominant size (with capacity of 112mnt and market share of 22%) and highly efficient operations, UTCEM remains the best candidate in cement sector to play Indian infrastructure and housing theme. High share of trade volumes and smooth integration of acquired assets (manifested in upgrade in margins to UTCEM levels) would provide sustainability to UTCEM’s margins. We reiterate BUY with TP of Rs5,175, EV/EBITDA of 14x FY21E.
* Adjusted for maintenance costs, margins came in line with estimate: Volumes rose 2% YoY at 17.9mnt (PLe:18.2mnt). Realisations rose 11%/Rs550 QoQ (+13%/Rs620 YoY) to Rs5,400/t above our estimates of Rs5,320. Owing to 3% YoY increase in cost against our expectation of flat levels diluted higher realisations. Impacted by preponement of maintenance costs on kiln shutdown, total cost/t (adj for AS116) came at Rs4,075 against our expectation of Rs3,950. Hence, EBITDA/t fell short of our estimates at Rs1,410 (PLe:Rs1,450), up 52% YoY/36% QoQ. EBITDA rose 55% YoY to Rs25.1bn (PLe:Rs26.4bn). Higher tax rate (33% v/s PLe:31%) further widened the miss on PAT. PAT doubled to Rs12bn v/s our/consensus estimate of Rs13.2/Rs10.8bn.
* Key con-call highlights:
1) Demand weakness in infrastructure due to delay in payments to contractors; expect normalcy in 6 months
2) Realisations in July lower by 3% over Q1 average
3) Expect cement demand to grow by 6% in FY20E, factoring sharp recovery from 3-4% fall in Q1FY20
4) Rs20bn capex guidance for FY20e
5) Greenfield plant at Pali (Rajasthan) and brownfield expansion at UNCL put on hold 6) Net debt fell 5.2%/Rs10.3bn QoQ to Rs185.7bn
6) Guided Net Debt/EBITDA to fall below 2x (current 2.24x) FY20 end
7) 4mtpa grinding unit at Bara (UP)/2.3mtpa clinker unit at Super Dalla (UP) would be commissioned by Q3FY20e/Q1FY21e
8) Received NCLT’s approval for acquisition of Century cement; process for transfer of mines expected to complete by Q2FY20e;
9) Trade sales grew 100bps QoQ to 66% in Q1FY20
10) Industry to add 15mnt of capacity in FY20E against 12mnt added in FY19
11) Premium product’s volume rose 24% YoY and commands a premium of Rs50-55/bag over regular products
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