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Higher fuel price continue to affect margins

Ultratech Cement (UTCEM) reported lower than-expected EBITDA of Rs17.1bn (CentrumE: Rs20.2bn), down 41% QoQ. This is result of lower volume amid demand slowdown due to excessive rainfall across India and higher CoP on account of escalated coal prices. UTCEM’s grey cement realisation of Rs5,693/t, stood marginally lower sequentially by Rs39/t (less fall than industry). The volumes were down 8% QoQ but stood higher by 8% YoY. The fuel cost increased further by Rs253/t QoQ. Company has increased fuel inventory to 55 days (Vs average 45 days) and expect to benefit from lower petcoke price along with improvement in demand expected post Diwali and higher realization in Q3FY23. Besides, on-going expansion projects are on track to lead to 131mtpa capacity by FY23E-end (FY22: ~115mtpa) and further expansion to 153.9mtpa by FY26. We reduce our FY23E/F24E EBITDA by 24%/11% factoring higher CoP and reduce our TP (based on 16.0x FY24E EV/EBITDA) to Rs7,015 (earlier Rs7,983). We change our rating to ADD (Earlier: BUY). Net sales down 8.4% QoQ

UTCEM’s grey cement volume was down ~8% QoQ (up 8% YoY) at 21.75mt in Q2FY23. Total volume, at 22.1mt, was down 8% QoQ (up 8% YoY). Average grey cement realization, at Rs5,254/t, was down 3% (Rs150/t) QoQ. with East and West better placed while North and Central witnessed fall in prices during the quarter. Revenue was down 8% QoQ/up 17% YoY. Revenue of white cement was up 8% QoQ at Rs5.4bn due to higher volume (up 2.7% QoQ to 0.38mt) & realisation (up 5.3% QoQ to Rs14,211/t) and ready mix concrete (RMC)’s revenue was lower by 1.9% QoQ to Rs8.8bn.

Higher CoP lead to fall in EBITDA/t QoQ

Cost/t at Rs 5,317 was up 8.7% QoQ primarily due to higher power & fuel cost. On QoQ basis, power and fuel cost was up ~17% (Rs253/t) to Rs1,763/t due to higher usage of imported coal. Logistic cost at Rs1,354/t, was flat QoQ. Management guided decrease in power & fuel cost for Q3FY23 and Q4Fy23 It keeps ~55 (vs average of 45days). As a result, EBITDA at Rs17.1bn, was down 41% QoQ and EBITDA/t stood at Rs775, down 36% QoQ

A 131mtpa grey cement capacity by FY23-end; next phase of expansion of 22.6mtpa starts

UTCEM’s capacity expansion of 16.7mtpa is expected to be commissioned by FY23-end (1.3mtpa commissioned in Q2FY23) taking total grey cement capacity to 131.25mtpa. UTCEM has already started work on its next phase of expansion of 22.6mtpa (including 10.8mtpa integrated units, spread across regions except west). The estimated capex for next phase of expansion is Rs 128.86bn (USD76/t) to be completed by FY26, taking total capacity to 153.9mtpa. It has guided FY23 capex guidance to ~Rs60bn out of which Rs30bn is spent in H1FY23. It targets to reach 200mtpa capacity by FY29 via organic/inorganic expansion

Margins to recover from Q3FY23; ADD

Post monsoon, cement demand is expected to recover and stay firm even in FY24 due to 2024 pre-election government spending. Though Q2FY23 margins were depressed (EBITDA/t of Rs775/t), it should recover from Q3FY23. We expect cement prices to stabilise and benefits of lower fuel cost will start occurring from Q3FY23. UTCEM with its on-going expansion projects will add ~16.7mtpa capacity in FY23 and will be the major beneficiary of demand improvement in FY24. Moreover, internal cashflows will be used for future expansion. Reiterate ADD with TP of Rs7,015.

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