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Strong growth visibility; higher costs a near-term concern

Cost inflation impacts margin

* UTCEM reported an 8%/7% YoY growth in volume/blended realization. EBITDA margin declined by 339bp YoY to 22.6% due to energy cost inflation, which was further accentuated by higher maintenance and employee costs. EBITDA remained largely flat YoY at INR27.1b (-18% QoQ).

* Market share gains should continue, aided by the ongoing 20mtpa expansion program (1.2mtpa commissioned in Oct’21), which should drive a 10% volume CAGR over FY21-24E.

* We largely maintain our FY22-24E EPS estimates and expect 19% EPS CAGR over FY21-24E.

Margin misses our estimate by 222bp despite higher realization/other operating income

* Consolidated revenue/EBITDA/adjusted PAT rose 16%/1%/8% YoY to INR120.2b/INR27.1b/INR13.1b and was +4%/-5%/-13% against our estimate.

* Consolidated volumes rose 8% YoY to 21.64mt (v/s our expectation of 21.41mt), with India volumes up 8% YoY.

* EBITDA margin missed our estimate by 222bp and stood at 22.6% (-339bp YoY; -537bp QoQ) on the back of higher energy (increase in petcoke/coal prices), employee (increments were effective from 2QFY22), and other costs (due to annual plant maintenance).

* EBITDA/t declined by 7% YoY to INR1,254/t (-18% QoQ). Impact of energy cost inflation was partially offset by higher realization (Gray Cement realization fell 2.5% QoQ v/s our estimate of a 3% decline) and other operating income (incentives for Dhar plant and miscellaneous income).

* Finance cost fell 36% YoY to INR2.3b on a sharp debt reduction. Consolidated net debt inched up by INR3.5b QoQ to INR63.4b (implying 0.47x TTM EBITDA) due to higher working capital requirements.

* In 1HFY22, consolidated revenue/EBITDA/adjusted PAT rose 32%/26%/43% YoY to INR238.5b/INR60.2b/INR30.2b, whereas volume increased by 24% YoY to 43.17mt. EBITDA/t stood at INR1,395 v/s INR1,376 in 1HFY21.

* In 1HFY22, OCF/capex/FCF stood at INR34.6b/INR21.5b/INR13.2b v/s INR51.2b/INR5.2b/INR46b in 1HFY21. OCF was lower due to an INR1.8b increase in working capital.

Highlights from the management commentary

* Blended cost of fuel stood at USD120/t in 2Q and is expected to increase by USD20-30/t in 3QFY22, which will translate to an INR200/t increase in cost/t. The fuel price outlook for 4QFY22 remains uncertain. However, at current fuel prices, there could be further cost inflation of INR500/t. Usage of petcoke is cost competitive v/s other medium of fuels at current prices.

* Demand is robust and volumes have started to pick up. It sees volume growth at 6-8% YoY in 2HFY22. In the medium-term, growth in industry demand should sustain at 6-7% YoY.

* In the second week of Oct’21, UTCEM undertook a price hike of INR10-15/bag across regions, which has been absorbed smoothly. However, recent price increases are not sufficient to cover cost inflation.

* Employee cost rose due to payment of incentives and wage hikes. The same is expected to be rationalized over the next few quarters. Higher maintenance costs impacted other expenses. However, overheads in FY22 will be maintained at FY20 levels.

* Bara grinding unit and Super Dalla clinker unit are expected to be commissioned by Mar’22. All other expansion projects are largely on track. Capex in FY22 should be at INR40-50b.

Growth at reasonable valuations – 19% EPS CAGR over FY21-24E

* We expect Cement demand to remain strong, led by the government’s thrust on Infrastructure development and recent improvement in housing demand. UTCEM is in a strong position to gain market share, led by its strong distribution network.

* A strong pipeline of expansion projects and scope for improvement in utilization of existing capacities offers strong growth visibility.

* We estimate UTCEM to record an 12%/19% CAGR in consolidated EBITDA/adjusted PAT over FY21-24E, driven by 10% volume CAGR, better realizations, and lower interest costs. Higher fuel prices remain a key risk to earnings growth.

* The stock trades at 14.9x/12.6x FY23E/FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 14.3x). We value UTCEM at 16x Sep’23E EV/EBITDA to arrive at our TP of INR8,700. We reiterate our Buy rating.

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