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Lower opex helps; eyes market share gain.

Strong demand momentum sustains in Apr’23; prices stable

* UltraTech Cement (UTCEM)’s 4QFY23 operating performance was in line with consolidated EBITDA at INR33.2b (v/s est. INR33b) and EBITDA/t at INR1,049 (v/s est. INR1,043). Adj. Profit was at INR16.7b (v/s est. INR17.5b). Lower-than-estimated opex/t helped offset lower realization.

* Cement demand sustains in Apr’23 after a strong 4QFY23 and UTCEM aims to grow 4-5pp above industry in FY24E. Cement prices have remained stable in Apr’23. Expansion plans of UTCEM are on track and phase-2 expansion of 22.6mtpa will be commissioned by 1HFY26E.

* We largely retain our FY24/FY25 estimates and reiterate our BUY rating on the stock, given its: a) leadership position in the industry (with a market share of ~26% in FY23), b) robust expansion plans without leveraging the balance sheet, and c) structural cost improvement. We value UTCEM at 15.5x FY25E EV/EBITDA to arrive at our revised TP of INR8,600 (implying EV/t of USD200).

Grey cement realization flat QoQ; EBITDA/t came in at INR1,049

* Consolidated revenue/EBITDA/PAT stood at INR187b/INR33b/INR16.7b (up 18%/8%/13% YoY and down 2%/up 1%/down 5% v/s our estimates). Consolidated sales volume grew 14% YoY/22% QoQ to 31.7mt. RMC/white cement revenue grew 34%/22% YoY during the quarter.

* Grey cement realization was up 4.6% YoY (flat QoQ). Blended realization was up 3% YoY (down 2% QoQ). Opex/t rose 6% YoY (down 5% QoQ) due to 11%/5% increase in variable/freight costs. Higher opex/t led to 5% YoY drop in EBITDA/t and 1.7pp YoY drop in OPM in 4QFY23.

* In FY23, consolidated revenue grew 20% YoY, led by 12%/8% growth in sales volume/realization. However, cost pressures (Opex/t up 14% YoY) led to 8% YoY decline in EBITDA to INR106b. OPM contracted 5.1pp YoY to 16.8% and EBITDA/t declined 18% YoY to INR1,005. Adjusted profit was down 11% YoY to INR50.6b. ? Consolidated net debt stood at INR27b v/s INR77b in Dec’22. CFO stood at INR90.7b v/s INR92.8b in FY22. Capex was at INR62b v/s INR56b in FY22.

Highlights from the management commentary

* Fuel prices have been softening; however, given the volatility it is difficult to predict the movement. Average fuel cost was at INR2.5/Kcal v/s INR2.6/kcal in 3QFY23. Petcoke share was at 52% v/s 49%/43% in 4QFY22/3QFY23. ? Despite high demand in 4QFY23, cement prices remained stable. Cement prices should remain stable going ahead too. Industry does not have a strong pricing power given the lower utilization (pricing power comes with utilization levels of ~85%).

* The company has taken various initiatives such as digitization, optimizing lead distance, higher AFR usage, etc. to control its costs. In FY23, UTCEM spent INR12.8b towards these initiatives.

Best play in the sector: Reiterate BUY

* We estimate UTCEM’s consolidated volume to report ~8% CAGR over FY23-25. We further estimate its EBITDA/t at INR1,175/INR1,250 in FY24/FY25 v/s EBITDA/t of INR1,005 in FY23. ? UTCEM’s net debt has declined notably to INR27b as of Mar’23 from INR77.2b in Dec’22. It has been generating strong cash flows and we estimate cumulative OCF/FCF to be at INR238b/INR121b over FY24-25. We estimate the company to become net cash positive in FY24.

* The stock trades at 15.8x/13.6x FY24E/FY25E EV/EBITDA (v/s its 10-year oneyear average EV/EBITDA of 15.7x). We value UTCEM at 15.5x FY25E EV/EBITDA to arrive at our revised TP of INR8,600 (implying EV/t of USD200). We maintain our BUY rating on the stock

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