Published on 2/01/2020 9:29:41 AM | Source: Motilal Oswal Services Ltd

Buy UltraTech Cement Ltd For Target Rs.5,050 - Motilal Oswal

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Demand outlook improving; Limited capex to reduce debt

We met UltraTech Cement’s (UTCEM) CFO, Mr. Atul Daga for an update on the company’s business and growth plans. Key insights highlighted from the meeting:


Demand has been weak; expect recovery from 4QFY20

The past few quarters have witnessed weak overall demand in India due to slow construction activity; however, the North and parts of the South (Tamil Nadu) have fared better. Demand has picked up recently, which has improved visibility of growth in 4QFY20. While overall demand in the country should be better in FY21 (~6% YoY), the East should see stronger growth (~10% YoY).


Clinker-backed supply limited

While capacity addition continues to lag demand and is expected to drive higher utilizations, most additions are those of cement grinding units, which does not necessarily create new supply, and are at times, only for logistical reasons. We estimate capacity to grow at 5%/4% MMTPA in FY20/FY21.


Prices lower in the South/East; the North/Central-India relatively better

Prices in the South/East have been weak, emanating particularly from the weak demand in Andhra Pradesh and Telangana, which has been impacting pricing in adjacent states. The eastern region also faced supply pressures as several new capacities got added. However, the North and Central-India were relatively better. According to our checks, currently all-India prices are up 5% YoY; led by ~10% growth in the North/Central-India, while the East/South have been nearly flat.


Limited new capacity additions on the anvil

UTCEM has announced a 3.4 MMTPA expansion in East India, which should get commissioned in 1HCY21. Besides this, there is no ongoing expansion program and the company’s focus is to sweat existing assets (capacity of 109 MMTPA; 70% current utilization). The capex for Bara grinding unit and Super Dalla clinker (acquired from Jaypee Associates in CY17) is limited as the capacities are awaiting only final clearances. While the Bara unit should start soon, Super Dalla clinker could take another year to start operations.


Net debt/ EBITDA to decline

Net debt of the company is expected to decline led by limited capex spends and stronger cash flows from the ramp-up in existing capacities. We estimate net debt to decline to ~INR130b (1.1x) in FY21 led by strong free cash flow (FCF) of INR75b (~7% yield) in FY21 (v/s INR20b in FY19). Additionally, UTCEM is looking to divest its non-core assets in China and the UAE and to recover loans given to Binani’s fiberglass business (part of the Binani acquisition), which if successful will help reduce leverage further. Moreover, the company has recently sold its 0.6mt capacity in Bangladesh for a consideration of INR2b.


Century – Rebranding and revamping of assets to improve margins

The company has already started to turn around its recently acquired Century’s (CTIL) assets; it has started with logistics realignment and a few other cost-saving initiatives. UTCEM plans to transition from Birla Gold (cement brand of CTIL) to the UltraTech brand in most states (except Chhattisgarh) by 1QFY21, which should improve realization by INR12-15/bag. Balance volumes should also gradually transition once up-gradation is completed at the 2 MMTPA plant at Baikunth, Chhattisgarh (an old plant). While utilization declined to 48% in 2QFY19 due to weak operations on account of heavy rains and maintenance shutdown, it is expected to improve to ~70% in FY21.


Valuation and view

* We reiterate our Buy rating on UTCEM based on the following:

* Market mix has improved post acquisition with the North/Central-India (both regions have better utilization outlook) contributing ~45% to volumes while the share of weaker regions (the South/East) has declined.

* We estimate 26% CAGR for EBITDA and 48% CAGR for EPS over FY19-21. Driven by strong operating cash flows and reduction in interest cost, RoE/RoCE should improve by 550bp/420bp to 13.8%/11.2% over FY19-21.

* Valuation is also supportive at 11x FY21E EV/EBITDA and ~USD152/t on EV, which are at ~15% discount to the 10-year average. It is also trading 30% cheaper than its peer, Shree Cements v/s historical average of 10%.

* We value UTCEM at 14x FY21E EV/EBITDA to arrive at a target price of INR5,050 (implied EV/t of USD185/t on FY21 capacity). Maintain Buy.


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