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Margin stays firm; outlook remains healthy…

About the stock:

UltraTech is the largest cement manufacturer in India with a domestic capacity of 111.4 MT (23% of total market) with a leadership position in most regions (excluding east). It has grown through organic and inorganic routes and added around ~30 MT of capacity in the last three years.

* It has shown its capability to successfully integrate the acquired assets and ramped-up its utilisations in a profitable manner

* The company is now focusing on fast growing market of eastern India, which accounts for 10.2 MT of its total 19.6 MT planned expansion over FY21-23E.

Q1FY22 Results:

UltraTech surprised positively on the margin front in Q1FY22 leading to better profitability despite 17.8% QoQ drop in revenues.

* Clocked revenue of | 11,477 crore, down 17.8% QoQ led by sales volumes de-growth of 22.8% to 20.5 MT. On YoY basis, revenues were up 55.6%

* EBITDA/t up 17% QoQ to | 1,545/t (vs. last quarter EBITDA/t of | 1321/t). EBITDA margin was at 27.6%, up 249 bps QoQ, 112 bps YoY

* Ensuing PAT was at | 1,681 crore, up 108.7% YoY, down 5.4% QoQ vs. our estimate: | 1457 crore)

What should investors do?

Market leadership, strong brand with highest retail presence and robust balance sheet justifies UltraTech’s premium valuations.

* With a target to become net debt free by FY23E and expected RoCE of 17%+, we remain positive on company. Hence, we maintain BUY rating

Target Price and Valuation: We value UltraTech at | 8,700 i.e. 17x FY23E EV/EBITDA

Key triggers for future price performance:

* The new organic capacities are being added at lower capital cost (US$60/t) that will help in boosting return ratios (to generate 16-18% IRR)

* Despite capex plans, the company also aims to become net debt-free by FY23E supported by strong operating cash flows (from existing and acquired assets) and through efficient w/cap management

Alternate Stock Idea:

Apart from UltraTech, in our cement sector coverage we also like ACC.

* It has strong balance sheet with debt frees status. The company is focusing on cost reduction and also adding new capacities via internal accruals

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