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Earnings upgrade continues; ripe for rerating

UltraTech Cement’s (UTCEM) Q3FY21 consolidated EBITDA at Rs31bn (up 56% YoY) with EBITDA/te at Rs1,296/te was significantly higher than our / consensus estimates. Execution was robust across all parameters: industry-leading volume growth of 14% YoY (I-Sec: +11.5% YoY), grey cement realisation decline of only 1.3% QoQ (I-Sec: 3% QoQ), EBITDA/te up 37% YoY and net debt down by Rs27bn QoQ to Rs94bn. We believe UTCEM is likely to rerate as it continues to gain market share with improved profitability / RoCEs and turn net debt free by FY23E. Factoring-in the Q3FY21 beat, we increase our FY22E-FY23E EBITDA by 6-8% and raise our target price to Rs6,700/share (earlier: Rs5,725) based on 13x FY23E EV/E on half-yearly rollover. Maintain BUY. Key risks: lower than expected demand / pricing growth, and any regulatory intervention.

* Q3FY21 capacity utilisation up 11% YoY to 80% with the company operating at 85% utilisation in Dec’20. While East operated at >100% utilisation and South at 70%, the figure for rest of the regions was 80%. UTCEM’s volumes grew 14% YoY / 19% QoQ to 22.43mnte with North and East posting >20% YoY growth. Century volumes grew by a strong 37% YoY and both Century and Binani assets worked at 75% utilisation. Share of non-trade volumes increased to 36% in Q3FY21 from 31% in Q2FY21 and 33% in Q3FY20 implying 40% QoQ and 25% YoY growth. This suggests pick-up in infrastructure spend and improvement in urban housing demand, especially in tier-2&3 cities. RMC revenues too grew 43% QoQ and 24% YoY to Rs6.2bn while white-cement/putty revenues were up 17% YoY at Rs5.4bn. White cement/putty volumes grew 13% YoY with realisation increasing 4-5% YoY and QoQ.

* India operations revenue increased 19% YoY to Rs117bn (I-Sec: Rs112bn). Grey cement realisation rose 4.5% YoY (declined only 1.3% QoQ) vs our estimate of 3% QoQ rise aided by higher prices in South and West, despite increase in non-trade volumes. Diversified market mix is aiding UTCEM to report strong EBITDA growth as it benefits from both higher volume growth in North and East and better prices from South and West. EBITDA increased 49% YoY to Rs30.3bn (I-Sec: Rs26.2bn) with EBITDA/te up 30% YoY at Rs1,328/te (I-Sec: Rs1,168/te).

* UTCEM to become debt-free by FY23E as it is likely to generate FCF of Rs70bn75bn p.a. Consolidated net debt declined by Rs27bn QoQ to Rs94bn (Rs74bn in 9MFY21) on strong FCF generation post capex of Rs4bn and working capital release of Rs8bn in Q3FY21. We factor-in capex of Rs75bn over FY22E-FY23E.

* Parent company Grasim announced plan to enter into paints business with capex of Rs50bn over the next three years. Grasim intends to leverage Birla White brand and white cement/putty distribution network of UTCEM for paints. Management mentioned the company does not have any plan to hive off its white cement and wall putty business in the near term and any transaction with Grasim will be on arm’s length basis.

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