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Higher cost led to EBITDA miss; market-share gains likely to continue

UltraTech’s consolidated EBITDA declined ~4% YoY/increased 25% QoQ to Rs23.4bn in Q3FY23, coming in 6% below our estimates (in line with consensus) owing to higher than expected cost/ton. Blended EBITDA/ton fell 14% YoY/increased 12% QoQ to Rs904 (Emkay est.: Rs985). In Phase-1, the company’s domestic grey-cement capacity is expected to increase to ~131mt by FY23-end from ~121mt currently. It may further rise to ~154mt by FY25E under Phase-II which should propel volume growth and market-share gains. Management’s commentary is cautious, as it does not expect any significant movement in cement prices in the near term, and input cost is expected to remain elevated over the longer term. Factoring-in the Q3 miss, the slow pace of price hike and higher fuel cost/ton, we reduce our FY24E-25E EBITDA by 4-6% with revised TP of Rs7,350/sh (earlier Rs7,100), based on 13x Mar-25 EV/E (on half-yearly roll-over). We maintain BUY, given that the company’s extensive pan-India presence, premium brand positioning, and focus on cost efficiency make it better placed to improve its margin in the medium term.

Results summary: UltraTech’s consolidated volume grew by 12% YoY to 25.9mt, while blended realization increased 8% YoY/~1% QoQ to Rs5,918 (Emkay Est: Rs5,958). India operations EBITDA declined ~4% YoY/increased 24% QoQ to Rs22.4bn, with EBITDA/ton at Rs910 (Emkay est.: Rs998). Capacity utilization increased by 800bps YoY to 83% in Q3FY23. Total cost/ton increased by 12% YoY/declined 2% QoQ to Rs5,101 (Emkay Est: Rs5,041). Consolidated PAT declined 10% YoY/increased 40% QoQ to Rs10.6bn. In Q3, UltraTech generated FCF of Rs6.6bn post working-capital release of Rs4bn and capex spend of Rs15bn. Accordingly, net debt declined by Rs6.4bn QoQ to Rs77bn, as of Dec-22.

What we liked: Double-digit volume growth, robust demand outlook and decline in net debt.

What we did not like: Higher-than-expected cost and Management’s cautious commentary on cement price and input cost.

Earnings call KTAs: 1) Management does not expect any significant movement in cement prices; however, it remains hopeful that price may firm up with increasing utilization levels. The company mentioned that it is disinclined to losing market share in a growing demand environment. 2) Management expects fuel cost reduction sequentially in Q4FY23; however, it does not expect any major softening in the long run. Fuel consumption costs stood flat QoQ at US$200/ton in Q3 vs spot prices of ~US$175/ton. 3) Capacity utilization stood at 83% in Q3 (92% in Dec-22) and is expected to improve >90% in Q4; Infra (owing to pre-election spending) and Rural (due to better MSP) demand is expected to be the key growth driver. 6) UltraTech has commissioned 16MW of WHRS in Q3 and expects to add another 30MW in Q4, increasing its total WHRS capacity to 238MW by Mar-23. Besides, all clinkerization units are expected to have WHRS by FY24. Green power is targeted to increase to 50% by 2030 (vs ~20% at Q3 end); 7) Company commissioned 6.8mt capacity in 9MFY23 and is expected to commission another 10mt in the next few months. Company is on track to complete Phase-2 of expansion by FY25/FY26, and targets 200mt capacity by FY30, through the organic route. Management maintained its capex guidance of Rs60-70bn in FY23; 8) Revenue from construction chemicals is likely to be Rs8-10bn in FY23; 9) Trade mix declined 200bps QoQ to 66%, while blended sales stood at 68%, Clinker-to-Cement conversion ratio stood at 1.42x, lead distance declined by 15kms QoQ to 413kms in Q3.

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