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Better cost efficiencies to improve margins

Nuvoco Vistas Corporation’s (NUVOCO) Q1FY23 EBITDA at Rs3.6bn (down 30% YoY) was in line with our / consensus estimates. Total cost/te increased 22%/8% YoY/QoQ against 8%/7% YoY/QoQ rise in blended realisation YoY. This resulted in EBITDA/te falling 37% YoY while remaining flat QoQ at Rs773/te (I-Sec: Rs756/te). Volumes were up 11% YoY as East and North saw double-digit YoY growth. While higher fuel prices are likely to impact profitability in Q2FY23, we believe cost synergies from Emami Cement acquisition, higher premiumisation, improved cost efficiencies and likely lower fuel prices may drive EBITDA/te back to >Rs1,000/te by FY24E. We broadly maintain our FY24E EBITDA with target price unchanged at Rs465/sh based on 10x FY24E. Maintain BUY. Key risks: lower demand / prices, and high concentration (~70%) in East.

* Revenues rose 20% YoY to Rs26.5bn (I-Sec: Rs26bn) primarily led by 11% YoY in volumes to 4.67mnte (implying ~80% utilisation) as cement demand is estimated to have grown by ~11% and 17% YoY in East and North India respectively, during Q1FY23. Grey cement realisation rose 7.6% QoQ and 5.3% YoY to Rs5,211/te owing to higher prices and increase in premium product share by 1.6pps on YoY basis. Cement prices softened in Jul’22 and may continue to be under pressure during monsoon. RMX and MBM revenues rose 81% YoY to Rs2.4bn on low base.

* Blended EBITDA/te down 37% YoY, flat QoQ at Rs773/te (I-Sec: Rs756/te). Total cost/te increased 22%/8% YoY/QoQ to Rs4,907/te. NUVOCO managed the elevated cost pressures during Q1FY23 as it restricted inflation in unit raw material and power & fuel costs to only 1% QoQ (albeit up 36% YoY) owing to higher WHRS generation and 3pps YoY increase in AFR. Management believes its focused efforts under project SPRINT led to additional cost savings. Freight cost/te was up 14%/11% YoY/QoQ owing to unavailability of rakes and higher diesel prices; other expenses/te were also up 18%, both YoY and QoQ.

* Management targets cost savings of Rs250/te by FY23-end driven by: 1) cost synergies from the NU Vista acquisition; 2) improved cost efficiencies; 3) increasing the blending ratio, higher premiumisation, coupled with scale benefits, operating leverage and likely lower fuel prices. We factor-in 10% volume CAGR over FY23EFY24E and expect EBITDA/te to decline from Rs842/te in FY22 to Rs732/te in FY23E owing to higher fuel prices before rising to Rs1,014/te by FY24E.

* ‘Net debt to EBITDA’ may shrink to ~2x by FY24E. Consolidated net debt rose by Rs2.8bn QoQ to Rs53.5bn due to higher working capital requirements. The debottlenecking project to increase clinker capacity at Risda and Nimbol, and setting up of 1.2mnte grinding unit at Bhiwadi, are on track to be operational by FY23-FY24 while NUVOCO had earlier announced commissioning of the 3mnte greenfield Gulbarga expansion by mid-FY25.

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