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Margins to sustain despite cost escalations

UltraTech Cement’s (UTCEM) Q2FY22 consolidated EBITDA at Rs27.1bn (flat YoY) is broadly in line with consensus estimates. Consolidated volumes grew 8% YoY to 21.6mnte while EBITDA/te declined 7% YoY and 18% QoQ to Rs1,254/te due to various cost escalations. While investor’s concern around sharp cost increases seems valid, industry has demonstrated strong pricing resilience in the past. Our recent channel checks suggest companies have increased prices by Rs15-20/bag across regions. We believe UTCEM with its large pan-India diversified market presence, premium brand positioning and increased focus on cost efficiencies is better placed to sustain / improve margins in the medium term. We maintain BUY with revised target price of Rs8,880/share (earlier: Rs8,600) based on 15x Sep’23E EV/E on quarterly rollover. Key risks: Lower demand / pricing.

* India operations revenues grew 14% YoY to Rs112bn. Volumes increased 6.5% YoY but remained flat QoQ at 20.11mnte, implying ~73% utilisation. Management expects 6-8% YoY volume growth in H2FY22. Grey cement realisation declined 2.2% QoQ (and increased 5.3% YoY) to Rs5,034/te led by 3% sequential fall in average cement prices on pan-India basis. RMC revenues grew 21% QoQ to Rs6.1bn while white-cement/putty revenues were up 40% QoQ at Rs5.0bn.

* India operations EBITDA increased 2% YoY to Rs27.1bn with EBITDA/te declining 17% QoQ and 4% YoY at Rs1,321/te. Total cost/te increased 8.0% QoQ and 12.6% YoY to Rs4,305/te primarily on account of higher power and fuel, freight and other expenses. Management expects overall cost increase of Rs200/te during Q3FY22. Despite cost increases, the management expects to sustain margin on a YoY basis led by price increases. Other income was up 6% YoY at Rs1.4bn and recurring PAT up 9% YoY at Rs13.3bn.

* Net debt increased by Rs3.6bn QoQ to Rs63bn: ‘Net debt/EBITDA’ was less than 0.5x at Q2FY22-end. Capex in H1FY22 stood at Rs23bn and the company is likely to spend a total of Rs40bn-50bn in capex in FY22E. Despite the capex plan, UTCEM will continue to reduce its borrowings going ahead. We expect it to turn ‘net debt free’ by FY23E.

* Expansion plans on track. UTCEM commissioned 1.2mnte cement capacity (0.6mnte in Bengal, 0.6mnte Bihar) in Q2FY22 out of the scheduled 3.2mnte addition planned for FY22E. The remaining capacity of 2mnte is on track to be commissioned by end-FY22. In FY23E, ~16mnte of additional cement capacity is likely to go operational in a phased manner. Company continues to focus on increasing the share of blended cement. Total project cost for the 19.5mnte capacity addition is expected to be Rs68bn.

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