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Another quarter of beat and raise

Deleveraging has been faster than expected

* UltraTech (UTCEM)’s 3QFY21 result was impressive on multiple counts. While volume growth was above industry at 14% YoY, it did not come at the cost of margins, with EBITDA/unit strong at INR1,296/t (+29% YoY). Moreover, net debt fell INR27.0b QoQ to INR94.4b (0.84x TTM EBITDA).

* We raise our above-consensus FY21–22E PAT by 4–5% for FY21–22 and TP to INR6,650 on strong volumes. It remains our top large-cap pick in the sector.

EBITDA grows 47% YoY on higher volumes and realization

* Consol revenue / EBITDA / Adj. PAT was up 18%/47%/96% YoY to INR122.5b/INR30.9b/INR15.8b and was +5%/+6%/+14% v/s our estimate.

* Volumes rose 14% YoY to 23.9mt (our est.: 22.9mt), led by an uptick in demand from government projects, infra, and urban real estate.

* While blended realization rose 4% YoY to INR5,132/t (-1% QoQ), cost fell 3% YoY to INR3,836/t (flat QoQ) despite higher power and fuel cost. EBITDA/t, thus, rose 29% YoY to INR1,296 (-4% QoQ; est.: INR1,272/t).

* Finance cost fell sharply by 24% YoY to INR3.6b (flat QoQ), supported by a sharp reduction in debt and lower interest rate.

* Consol net debt fell further by INR27.0b QoQ (INR74.3b in 9MFY21) to INR94.4b (implying 0.84x TTM EBITDA) – better than estimated.

* During 9MFY21, Consol revenue/ EBITDA/ Adj. PAT stood at INR303.1b/INR78.7b/37.2b, -3%/+13%/+39% YoY and EBITDA/t was up 18% YoY to INR1,343/t.

Highlights from management commentary

* Capacity utilization stood at 85% in Dec’20 and 80% in 3QFY21. It stood at >100% in East, ~70% in South, and ~80% in North, West, and Central.

* While rural demand remains robust, demand from infrastructure and urban real estate has picked up, which bodes well in the near term.

* Variable cost is seen rising in the near term due to higher price of petcoke and imported coal. However, the full impact would be reflected in 1QFY22 as some lower cost inventory would be exhausted in this quarter.

* The company has kept a tight leash on working capital (further INR7.8b released in 3QFY21), which has supported debt reduction.

* Work on announced capacity addition of 19mtpa has commenced, with commissioning guided in phases in FY23.

* The company has raised INR30.0b in debt to refinance long-term debt at a lower cost to capitalize on interest arbitrage opportunities.

* The 2mtpa Dubai grinding unit (part of the Binani acquisition) – which was earlier classified as held for sale – has been consolidated with the company’s UAE operations, thereby raising its overseas capacity to 5.4mtpa.

Growth at reasonable valuations – 28% EPS CAGR over FY20–23E

* UTCEM’s strong pan-India distribution network and preferred supplier status for key infrastructure projects places it well to tap into expected growth in both retail and institutional (non-trade) cement demand in India.

* While it is ramping up its under-utilized acquired capacities, it also has a strong pipeline of expansion projects that offers strong growth visibility.

* We estimate a 14%/28% CAGR in consolidated EBITDA/PAT over FY20–23E, driven by a 7% volume CAGR and lower operating/interest cost.

* The valuation is reasonable at 13.4x FY22E EV/EBITDA, a ~20% discount to peer Shree. We value UTCEM at 14x Dec’22E EV/EBITDA to arrive at TP of INR6,650. Reiterate Buy.