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Disciplined cost management; lower capex guidance to improve balance sheet

Nuvoco Vistas Corporation’s (NUVOCO) Q2FY23 EBITDA at Rs1.9bn (down 42% YoY) was slightly below our / consensus estimates. Total cost/te increased 14%/2% YoY/QoQ against 4% YoY rise and 4% QoQ fall in blended realisation. This resulted in EBITDA/te falling 49%/44% YoY / QoQ at Rs436/te (I-Sec: Rs483/te). High double-digit growth in demand in East while mid-single digit growth in North aided NUVOCO to report 15% YoY growth in Q2FY23. Management commented that the next large scale capacity expansion is contingent on reduction in debt levels to ~Rs30-35bn (from current ~Rs53bn) and better demand / pricing in the proposed region. We estimate NUVOCO to generate an OCF of ~Rs25bn over FY23-24 while the company aims to spend ~Rs9bn (vs ~Rs18bn estimated earlier) during the same period. Hence, NUVOCO will have higher FCF for debt repayment which will improve its balance sheet health. Factoring in higher input costs, we trim our FY23-24E EBITDA by 2-8% with target price unchanged at Rs465/sh based on 10x FY24E. Maintain BUY. Key risks: Lower demand / prices and cost escalation.

* Revenue rose 19% YoY to Rs24bn primarily led by 15% YoY in volumes to 4.4mnte (implying ~75% utilisation) as cement demand improved by high double digit in East and mid-single digit in North India during Q2FY23. Grey cement realisation dipped 4% QoQ to Rs4,995/te owing to seasonal weakness in prices. Cement prices improved by Rs10- 15/bag in Nov’22 in East India while stood flat in North from Sep’22-exit. RMX and MBM revenue rose 21% YoY to Rs2.2bn.

* Blended EBITDA/te down 49% YoY at Rs436/te (I-Sec: Rs483/te). Total cost/te increased 14%/2% YoY/QoQ to Rs5,020/te. NUVOCO managed the elevated cost pressures during Q2FY23 as its unit power & fuel costs dipped 1% QoQ (albeit up 39% YoY) owing to higher linkage of coal usage and increase in AFR. Freight cost/te was up 3% YoY but down 11% QoQ due to synergy benefits from cross-sourcing of materials; other expenses/te were down 15% YoY and 10% QoQ.

* Capex of ~Rs9bn over FY23-24. Management commented that the next large scale capacity expansion is contingent on reduction in debt levels to ~Rs30-35bn (from current ~Rs53bn) and better demand / pricing in the proposed region. We estimate NUVOCO to generate an OCF of ~Rs25bn over FY23-24 while the company aims to spend ~Rs9bn (vs ~Rs18bn estimated earlier) during the same period. Hence, NUVOCO will have higher FCF for debt repayment which will improve its balance sheet health.

* ‘Net debt to EBITDA’ may shrink to ~2x by FY24E. Consolidated net debt declined by Rs0.6bn QoQ to Rs52.8bn during inflationary environment. NOVOCO aims to repay Rs6bn in FY23 and has scheduled repayment of Rs11bn in FY24. A reduced capex budget and improving balance sheet health as a perquisite for further large scale capex augur well for the company, we believe.

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