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Steady expansion paves the way for industry leading growth

Phase-1 expansion of 19.5mtpa on track; announces further capex

* UltraTech Cement (UTCEM) is the largest cement manufacturer in India with domestic grey cement capacity of 114.6mtpa (consolidated grey cement capacity of 120mtpa) as of FY22. It is also engaged in white cement, wall care putty and RMC business segments.

* In this note, we analyze UTCEM’s FY22 Annual Report (AR). The key highlights are as follows: a) commissioned grey cement capacity of 3.2mtpa in Central and East India in FY22, as a part of its phase I expansion plan of 19.5mtpa (to be completed by FY23-end); b) announced phase II expansion plan of 22.6mtpa at an estimated capex of INR129b; c) scaled up investments in renewable energy; and d) prepared sustainability strategy and targets.

* The management highlighted that Indian cement industry will add 80- 100mtpa capacity by FY25E, driven by increased spending on housing and infrastructure. Given the company’s large scale, UTCEM is well positioned to meet the growing cement demand in the country.

Announces fresh capex of INR129b for the 22.6mtpa capacity expansion

* In FY22, UTCEM commissioned 3.2mtpa grey cement capacity in Central and East India. This was part of its Phase I expansion plan of 19.9mtpa (revised) as announced in Dec’20. The balance capacity expansion (16.7mtpa) is progressing well and is likely to be completed in FY23E.

* The company has announced its Phase II expansion plan of 22.6mtpa capacity. Capex for this expansion will be INR128.9b (translating into a capex/t of USD76) and commercial production is expected in a phased manner by FY25. The capacity expansion will be across regions (except West) and will be achieved by setting up integrated and grinding units as well as bulk terminals. Post-completion of these expansions, UTCEM’s total domestic grey cement capacity will increase to 154mtpa (up ~34% from the current levels).

Profitability maintained amid a challenging year

* In FY22, UTCEM’s consolidated revenue grew 18% YoY to INR526b backed by 9% YoY increase in volume and 8% YoY rise in blended realization.

* Operating cost/t has increased 14% YoY to INR4,371/t due to all-round cost pressure (increase in RM and energy costs, diesel prices, store and spares, packing material and AD spends).

* However, the company continued to focus on productivity enhancements, energy efficiency improvements and cost optimization. The cost optimization measures included the adoption of digital technology for process optimization, energy efficiency and reliability as well as implementation of energy saving capex (installation of WHRS, solar power plants and feeding more industrial and municipal waste to kiln).

Cash conversion days increase due to higher inventory days???????

* UTCEM’s cash conversion cycle increased (19 days in FY22 v/s 15 days in FY21), mainly due to higher fuel and work-in-progress inventories. Its trade receivable days remained flat while trade payable days increased in FY22.

* UTCEM has been generating strong cash flows and the cumulative OCF stood at INR307b during FY20-22 (v/s INR154b over FY17-19). FCF stood at INR215b during FY20-22 (v/s INR105b during FY17-19). We estimate a capex of INR50b/61b in FY23/FY24, respectively. FCF is estimated to be at INR38b/ INR46b in FY23/FY24, respectively.

* The company’s consolidated net debt stood at INR35b in FY22 v/s INR217b in FY19 (net-debt-to EBITDA at 0.3x in FY22 v/s 3x in FY19). We expect it to become net cash positive in FY24.

* UTCEM is a regular dividend paying company. Dividend payout as a % of standalone net profits was 20% in FY22 v/s 19% in FY21. The company scaled up its dividend payout from FY21 v/s 10-13% over FY15-20.

Cost structure should improve; maintain BUY

* UTCEM’s steady capacity expansion plans, along with scope for an improvement in utilization of existing capacities, offer strong growth visibility ahead. We expect ~9% sales volumes growth over FY23-24. 

* Increase in WHRS/solar capacities (green power usage to increase to 36% by FY25E v/s 18% in FY22), along with scope for reducing lead distance (with better market mix and synergies arising from integration of acquired assets) will help the company improve its cost curve structurally. 

* Strong balance sheet (expected to become net cash positive in FY24 v/s a net debt/EBITDA of 3x in FY19) will help it pursue growth opportunities in future. We expect the stock to trade at higher-than-historical multiples, given its leadership position and strong growth opportunities.

* UTCEM trades at 18.1x/14.9x FY23/24E EV/EBITDA and EV/t of USD186/USD183 in FY23/24E, respectively. The stock has traded at an average 1-year forward EV/EBITDA of 15.4x in the last 10/five years. We value it at 16x Jun’24E EV/EBITDA (v/s Mar’24 earlier) to arrive at our TP of INR7,515 and maintain our Buy rating on the stock.

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