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Preferred play on demand revival

We expect UltraTech Cement (UTCEM) to be the key beneficiary of likely strong demand revival over the next few years given its low clinker utilisation, diversified market mix and significant non-trade presence vs peers. Announced expansion of ~20mnte would drive strong volume growth and with strong OCF generation of >Rs110bn p.a., the company may further accelerate its growth plans. Costs/te could further reduce by Rs100/te by FY24E (our estimate) led by various cost efficiencies and RoCE is likely to expand by ~400bps over FY21-23E. Factoring-in higher volumes, we raise our FY22E-FY23E EBITDA by 2-3%, which takes it 12- 13% ahead of consensus. We believe UTCEM may rerate (valuation discount vs SRCM may narrow to 10-12% vs historical average of 20-25%) as it continues to gain market share with improved profitability / RoCEs. Hence, we raise our target multiple to 15x FY23E EV/E (earlier: 13x) and raise our target price to Rs8,000/sh (earlier: Rs6,700). Maintain BUY. Key risks: lower demand / pricing.

* Company may post strong 35-40% YoY EBITDA growth in Q4FY21E (vs 25-30% YoY growth for industry) led by >25% YoY volume growth (vs ~20% YoY industry growth). Diversified market mix vis-à-vis peers allows UTCEM to trade-off price in one market (say gain market share in North / Central) and compensate it by better prices in another market (say South / West) and yet improve overall profitability.

* Market share gains likely to continue for UTCEM given large unutilised capacities of acquired entities, especially in high-growth North and Central regions where many of its peers may be facing capacity constraints. UTCEM also has large non-trade exposure (~35%) and stands to benefit from likely pickup in infrastructure spend and better urban housing demand, especially in tiers-2&3 cities. Non-trade volumes grew by a strong 40% QoQ and 25% YoY, and RMC revenues too grew 43% QoQ and 24% YoY, in Q3FY21 for the company. UTCEM is likely to operate at high effective utilisation of ~83% over FY22-23E and post 9-10% volume CAGR over FY20-FY23E despite its large size vs our estimate of 6-7% industry volume CAGR.

* Volume growth to remain strong beyond FY23E too. UTCEM’s plan to add ~20mnte capacities (~18% of domestic capacities) over the next 2-3 years in the high growth / utilisation markets of East, Central and North markets would ensure faster ramp-up and higher volume growth. Given that >70% of these expansions are brownfield with average capex of US$60/te, these assets are expected to enjoy healthy RoCE of >15% (vs 11.5% in FY20) led by better profitability.

* UTCEM to become debt-free by end-FY22E and likely to generate OCF of >Rs110bn p.a. This may allow the company to accelerate its growth via both organic / inorganic routes. Historically, acquisitions have been integral to UTCEM’s growth story with the company enjoying strong track record in turning around acquisitions. We expect UTCEM to post revenue, EBITDA and PAT CAGRs of 12%, 17% and 30% respectively over FY20-FY23E.

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