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Healthy asset utilisation leads to better margins…

In Q4FY21, the company operated with plant utilisation of over 93% backed by strong demand across regions with east operating at almost 100% capacity utilisation. Rest all other regions barring south operated at over 90% leading to average capacity utilisation of 93% for the company in Q4. This led to sales volume growth of 29.6% YoY to 26.6 MT. With firm realisations (up 4% YoY, 1.3% QoQ), revenues grew 34.8% YoY to | 13,966 crore (above I-direct estimate: | 12,917 crore). Better fixed cost absorption kept cost of production under check that increased 1% QoQ only while remaining flat YoY. As a result, EBITDA/t for the quarter was higher at | 1,321/t (vs. I-direct estimate of | 1,218/t).

On the leverage front, the company has successfully reduced its net debt/EBITDA ratio to 0.55x from 1.72x last year and 0.84x last quarter. The board had earlier sanctioned capex plans of 19.5 MT through a mix of brownfield and greenfield expansion. Commercial production from these capacities is expected to go on stream in a phased manner during FY22, FY23. With its focus on operational efficiencies and strong balance sheet, the company is now in a better position to withstand any near term slowdown in demand.

Target capacity of 160 MT by FY30E; to reach 131 MT by FY23E

The target of reaching 160 MT by FY30E from 111.4 MT indicates capacity CAGR of 3.7% in FY20-30E. The newly announced cement capacity expansion of 12.8 MT (9.1 MT clinker capacity) along with ongoing capex of 6.7 MT would take its total capacity to 130.9 MT by the end of FY23E. Region wise, major capacities are being added in the eastern and central region (73% of 19.5 MT), which has lowest road and power density per capita representing higher growth potential while rural population share remains one of the higher, offering stability in the prices. The balance 27% of new capacities are being added in the north region. Furthermore, as these new organic capacities are being added at at lower capital costs (US$60/t), it will help boost return ratios (new capacity to generate 15%+ IRR).

Efficiency measures to help sustain margins; B/S to stay firm

While there remain uncertainty on cost inflation with respect to price fluctuations in petcoke and diesel prices, the management’s focus on consolidating acquired assets, driving synergies, especially on the logistics front, improving premium segment share (to increase from 10% to 15% in two years) and containing fixed overheads on sustainable basis provides cushion against risk of margin erosion, going forward. On the leverage front, the net debt/EBITDA is now at 0.55x, vs 1.72x last year.

Valuation & Outlook

UltraTech has successfully integrated acquired assets while protecting its b/s. Given the positive outlook, the new capex targeting central and east region would address the issue of capacity constraint post FY24E. With a target to become net debt free by FY23E and with RoCE of +16%, we remain positive on the company and maintain BUY rating with a revised target price of | 7500/share (i.e. 15.5x FY23E EV/EBITDA) (earlier TP | 6300/share).

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