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Lower CoP aided higher earnings

Ultratech Cement (UTCEM) reported marginally better-than-expected EBITDA of Rs29.4bn (CentrumE: Rs28.4bn), increased by 33% QoQ driven by operating leverage from higher volumes and lower CoP. UTCEM increased cement prices by Rs30/bag in April compared to Q4FY22 average to cope up with rising cost inflation which should help in higher margins QoQ in Q1FY23. Cement demand in FY23E is expected to remain strong in wake of upcoming general elections in 2024. To strengthen its market leadership in white cement business, UTCEM recently acquired majority stake in RAK Cement, UAE. Besides, on-going expansion projects are on track to lead to 131mtpa capacity by FY23E-end (FY22: ~115mtpa). We reduce our FY23E/F24E EBITDA by 22%/13% to factor in higher fuel cost. We rollover to FY24E and value UTCEM at 16.0x EV/EBITDA to arrive at a target price of Rs8,088 (earlier Rs 8,988). Reiterate BUY

Demand improved QoQ; volumes up ~21% QoQ/ flat YoY

UTCEM’s grey cement volume was up ~21% QoQ (flat YoY) at 25.95mt in Q4FY22. Total volume, at 26.55mt, was up 21% QoQ (flat YoY). Average grey cement realization, at Rs5,049/t, was up 1.8% QoQ. The average price in Q4FY22 stood at Rs360/bag against December exit price of ~Rs350/bag. The sales in trade segment stood higher (66% v/s 64% in Q3) which supported higher realization. Revenue was up 21.6% QoQ/8.6% YoY. Revenue of white cement was flat QoQ at Rs5.45bn and ready mix concrete (RMC)’s revenue was higher by 27% QoQ to Rs8.5bn.

Lower CoP aided higher EBITDA/t on QoQ basis

Cost/t at Rs 4,604 was down 1.2% QoQ benefited from operating leverage due to higher volumes during the quarter. On QoQ basis, power and fuel cost was up ~3% to Rs1,354/t despite pet coke and coal cost increasing by ~8.5% QoQ which was partially offset by lower power consumption, down 1.7% QoQ at 73.29KwH/t. While lower diesel price by 3% QoQ aided in lower logistic cost at Rs1,294/t, flat QoQ/ though up 5.7% YoY. Management guides power & fuel cost to increase by ~10% QoQ in Q1FY23E while transportation cost will be elevated due to higher oil prices. As a result, EBITDA at Rs29.4bn increased by 33% QoQ but was down 16% YoY in Q4FY22. EBITDA/t stood at Rs1,108, up 10% QoQ/ down 16% YoY

Capacity expansion to 131mtpa in FY23 on track; looking for further growth/acquisitions

UTCEM has recently acquired 29.39% stake in RAK Cement (UAE) for USD101.1mn. It has 0.9mtpa clinker capacity and 0.6mtpa white cement capacity. After this buyout, UTCEM has put Rs9.8bn capacity expansion project of white cement on hold. It guides capex of Rs40-50bn in FY23E to complete ongoing expansion plans to reach 131mtpa (currently 115mtpa). It will commission 4mtpa by Q2FY23 end, 1.5mtpa by Q3FY23 end and balance in Q4FY23. WHRS capacity is increasing to 280MW by FY23 end from currently 167MW. Management plans to expand further and is open for organic/inorganic expansion.

Margins to remain above historical average; Reiterate BUY

UTCEM has been operating at ~90% capacity utilisation (Q3: 75% CU) during the quarter. The demand improved gradually in Q4FY22 and expected to stay firm in FY23. Current price increase is sufficient to cope up with cost inflation and FY23 margins are expected to remain above historical average (FY16-22: EBITDA/t of Rs1,050). In mid-term, demand momentum will increase (Government spending before 2024 general elections). UTCEM with its on-going expansion projects will add ~16mtpa capacity in FY23 will be the major beneficiary. Moreover, strong balance sheet, negative working capital cycle and higher expected cash flow generation can provide opportunity for inorganic expansion, too. Besides, management has set Net Debt/EBITDA target of 0.5x. Reiterate BUY.

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