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Weak Q2; price hikes on cards to mitigate cost pressure

About the stock: UltraTech is the largest cement manufacturer in India with a domestic capacity of 111.4 MT (23% of total market) with a leadership position in most regions (excluding East). It has grown through organic and inorganic routes and added around ~30 MT of capacity in the last three years.

* It has shown its capability to successfully integrate the acquired assets and ramped up its utilisation in a profitable manner

* The company is now focusing on fast growing market of eastern India, which accounts for 10.2MT of its total 19.6 MT planned expansion over FY21-23E

Q2FY22 Results: UltraTech’s results were weak on the margin front due to sharp cost escalations on the power, fuel and freight front.

* The company clocked revenue of | 11,548 crore, up 15.3% YoY, flat QoQ. Domestic sales volume was at 20.4 MT (up 6.4% YoY). Demand in East, Central remained muted due to heavy monsoons

* EBITDA margin was down 512 bps QoQ to 22.5%, still better than last five year’s average EBITDA margin of 20%

* PAT was at | 1,300 crore, down 22.7% QoQ (our estimate: | 1267 crore)

What should investors do? Market leadership, strong brand with highest retail presence and robust balance sheet justifies UltraTech’s premium valuations.

* With a target to become net debt free by FY23E and expected RoCE of 18%+, we remain positive on company. Hence, we maintain BUY rating

Target Price and Valuation: Valued at | 8,950 i.e. 17.5x FY23E EV/EBITDA

Key triggers for future price performance:

 Expect its capacity to increase at CAGR of ~7.4% to 131 MT by FY23E against Industry average capacity CAGR of 5.6% during the same period

 The new organic capacities are being added at lower capital cost (US$60/t). This will help boost return ratios (to generate 16-18% IRR)

 Despite capex plans, the company also aims to become net debt-free by FY23E supported by strong operating cash flows (from existing and acquired assets) and through efficient w/cap management.

Alternate Stock Idea: Apart from UltraTech, in our cement sector coverage we also like ACC.

* It has a strong balance sheet with debt frees status. The company is focusing on cost reduction and also adding new capacities via internal accruals

* BUY with a target price of | 2,800/share

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