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Cost escalations getting passed on QoQ

UltraTech Cement’s (UTCEM) Q4FY22 consolidated EBITDA at Rs30.8bn (down 16% YoY), although in-line with our estimates, was higher than consensus. Consolidated volumes were broadly flat YoY while EBITDA/te grew 6% QoQ to Rs1,110/te (I-Sec: Rs1,116/te). Management indicated current cement prices are higher by nearly Rs30/bag vs average of Q4FY22 sufficient to pass-on Q1FY23 cost escalations QoQ, ceteris paribus. UTCEM is likely to post 10% volume CAGR over FY22-24E as it expands capacities to ~130mnte by FY23E. We believe UTCEM with its large pan-India diversified market presence, premium brand positioning, timely capacity creation and increased cost efficiencies is better placed to gain market share / improve margins in medium term. Factoring in higher cost escalations, we cut our FY23-24 EBITDA estimates by 18-5% and reduce our target price to Rs8,500/sh (earlier: Rs9,080) based on 15x FY24E EV/E. Maintain BUY. Key risk: Lower demand / pricing and sharp cost escalations.

Earnings volatility to remain high in near term owing to significant rise in fuel costs. We believe UTCEM shall try and sustain near-term EBITDA/te at ~Rs1,100/te as seen during the past two quarters amidst sharp cost increases. Our sensitivity analysis suggests UTCEM trades at ~12x FY24E EV/E assuming FY24E EBITDA/te at ~Rs1,350/te (similar to FY21 EBITDA/te) and ~15x FY24E EV/E assuming FY24E EBITDA/te at current levels of ~Rs1,100/te. We factor in EBITDA/te at Rs1,126/te and Rs1,385/te in FY23E and FY24E, respectively vs Rs1,222/te in FY22.

Net debt declined from Rs63.5bn in FY21 to Rs37.5bn in FY22 as OCF of Rs90bn (76% conversion) and Rs9bn from sale of non-core asset was utilised for Rs61.4bn capex and Rs10.7bn dividend. UTCEM is likely to become zero debt company in FY23 and turn net cash (Rs60bn) in FY24E as it generates Rs220bn OCF and incurs capex of Rs100bn in FY23-24E.

Expansion plans on track. UTCEM has added 3.2mnte cement capacity in FY22E. In FY23E, ~16.5mnte of additional cement capacity is likely to go operational in a phased manner. It plans to add 4mnte and 1.5mnte by the end of Q2FY23 and Q3FY23, respectively, while balance 11.5mnte shall be added in Q4FY23. UTCEM shall spend Rs40-50bn capex (including WHRS) in FY23E to achieve an overall capacity of 130mnte by FY23-end.

India operations revenue grew 8.4% YoY to Rs149bn. Q4FY22 volumes were flat YoY (+20.7% QoQ) to 26.6mnte (~90% utilisation) owing to high base and soft demand in the Eastern region. Management remains optimistic about demand growth despite significant price hikes and commented Apr’22 demand is higher YoY. Grey cement realisation increased ~2% QoQ and 7.8% YoY to Rs5,082/te, but the same was not enough to mitigate sharp cost increases. RMC revenue grew 27% YoY to Rs8.5bn, while white-cement/putty revenue was down 2% YoY at Rs5.4bn.

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