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Solid quarter; Outlook improved

UltraTech Cement Ltd. is the largest cement manufacturer in India. It is involved in the production of grey and white cement and ready-mix concrete (RMC). Company has a consolidated grey cement capacity of ~117mtpa.

* Consolidated revenue grew 32.7% YoY in Q4FY21 driven by robust growth in volumes (+29.6% YoY) and improved realisations (+2.4%).

* EBITDA surged 41.8% YoY as margins expanded 160bps YoY to 26.0%, aided by better pricing despite higher operational costs. Adj. PAT soared 60.6% YoY to Rs. 1,814cr.

* Cement industry in India is on an upswing as evidenced by significant improvements in per capita consumption levels. With improved sector outlook, UltraTech as the market leader stands to benefit the most and is well equipped to handle the growing demand. Given company’s resilient performance and improving sales realisations, we upgrade our rating on the stock to BUY with a revised target price of Rs. 7,220 based on 14x FY23E EV/EBITDA

Strong demand drives topline

Q4FY21 revenue surged 32.7% YoY to Rs. 14,406cr, supported by strong growth in volumes coupled with price improvements. Cement volumes grew 29.6% YoY to 27.8mt amid slowdown in demand. EBITDA per tonne rose 9.4% YoY to Rs. 1,350/t helped by higher realisations (+2.4% YoY) and largely stable operating expenses per tonne (+0.2% YoY). As a result, EBITDA grew 41.8% YoY to Rs. 3,751cr, while EBITDA margins expanded 160bps YoY to 26.0%. Adjusting for exceptional items, company’s adj. PAT grew 60.6% YoY to Rs. 1,814cr, despite a higher tax expense.

Key concall highlights

* Company further reduced its net debt by Rs. 2,719cr during the quarter to Rs. 6,717cr (as against Rs. 9,436cr in Q3FY21). As a result, consolidated net debt to EBITDA ratio improved to 0.55x (vs. 0.84x in Q3FY21 and 1.72x at FY20 end).

* Overall capacity utilization levels improved to 93% (+13pps YoY) during Q4FY21.

* Management expects pet coke prices to stabilize in H2FY22 with an increase in production, as refineries slowly resume operations in Texas, US.

Expansion plans on track; deleveraging accelerates.

In December 2020, company announced an investment outlay of Rs. 5,477cr towards a 12.8mtpa capacity expansion comprising of both brown and green field projects. Management recently affirmed its expansion plans to be on track for completion by Q4FY23. Post completion, company’s total capacity will expand to 136.3mtpa. Also, having benefited from improved price realisations, the company has simultaneously accelerated its deleveraging efforts, reducing its overall consolidated net debt by Rs. 10,264cr during FY21.

Valuation

Unfazed by the pandemic, company’s expansion program remains on track. Though the temporary lockdowns, coupled with fuel costs and rising pet coke prices threaten to curb profitability in the short-term, UltraTech has thus far shown resilience and managed to improve sales realisations on the back of continued demand growth for cement, thereby outperforming the industry. Moreover, the deleveraging efforts have also helped strengthen its Balance Sheet further. With improved outlook on the company’s long term performance, we upgrade our rating to BUY and value the stock at 14x FY23E EV/EBITDA with a revised target price of Rs. 7,220.

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