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Better placed vs peers; preferred pick

We expect UltraTech Cement (UTCEM) to continue to post industry leading growth and profitability over FY21-24E backed by low-cost brownfield expansions and increased cost efficiencies. Its diversified pan-India market mix, premium brand positioning, strong distribution network and large presence in non-trade segment allow it to wither current demand uncertainties much better than peers. Cost saving initiatives may result in Rs100/te benefits (our estimate) by FY24E, and RoCE (post-tax) may expand by >400bps over FY22-24E to ~17%. Dividend payout ratio has increased from 10% in FY20 to 20% in FY21 which may rise further as UTCEM is likely to generate Rs200bn FCF over FY21-24E. Maintain BUY with an unchanged target price of Rs8,850/sh (15x Dec’23E EV/E). UTCEM remains our top pick. Key risk: Lower demand/pricing

* Market share gains likely to continue. UTCEM’s plan to add ~20mnte capacities (~18% of domestic capacities) over the next 2-3 years in high-growth / utilisation markets of East, Central and North would likely ensure faster ramp-up and higher volume growth. Given >70% of these expansions are brownfield with average capex of 15% (vs 11.5% in FY20) led by better profitability. UTCEM also has large non-trade exposure (~33%) and stands to benefit from likely pickup in infrastructure spend and better urban housing demand, especially in tier-2&3 cities.

* UTCEM to become debt-free by H1FY23E; likely to generate >Rs340bn OCF over FY21-24E: This may allow the company to accelerate its growth via both organic / inorganic routes. Besides current 20mnte expansion, UTCEM has scope to undertake additional 30mnte low-cost brownfield expansion. Historically, acquisitions have been integral to UTCEM’s growth story with the company enjoying strong track record in turning around acquisitions. Dividend payout ratio has increased from 10% in FY20 to 20% in FY21 which may rise further (upto 25% as per current dividend payout policy) as UTCEM is likely to generate strong Rs200bn FCF over FY21-24E.

* Cost saving initiatives may result in Rs100/te benefits by FY24E; valuation gap vs SRCM may shrink further: UTCEM is setting up 177MW WHRS by Mar’24, taking its total WHRS capacity >300MW. Additionally, it plans to increase solar and wind power capacity from 125MW currently to >350MW by FY22E. Accordingly, its green power share is set to increase to 34% (WHRS 26%, solar 8%) by FY24E and provide cost savings of ~Rs6bn or ~Rs60/te. Setting up of additional grinding units, especially in East, increasing the blending ratio from 1.34x currently to ~1.4x and better operating leverage via higher volume growth could provide additional cost saving of Rs30-40/te, in our view. We believe, the company may choose a lower effective tax rate of 25% (vs 30% currently) over the next few years as it exhausts available MAT credit and accumulated losses of acquired entities. This would further improve its RoCE by another 100bps by FY23E.

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