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Cost inflation behind it, robust outlook intact

Higher cost impacts margin

* UTCEM’s 3QFY22 performance was impacted by cost inflation, primarily energy and other costs, leading to a 6.7pp YoY fall in EBITDA margin and 19% YoY fall in EBITDA/t. EBITDA fell 22% YoY, despite higher other operating income (up 2.3x YoY). Adjusted for tax write-backs, profit fell 26% YoY.

* The industry has seen peak of the fuel cost inflation and imported/domestic petcoke prices have declined 38%/33% from its peak in Nov-21. This should help cost moderate from 1QFY23.

* UTCEM is expected to benefit from capacity expansions (19.6mtpa over FY21-23E) and cost saving initiatives (increase in WHRS/solar power capacities). We expect 9% sales volume CAGR over FY21-24E.

* We raise our FY22-24E EPS estimate by 3-4% on higher other operating income and lower energy costs. We factor in 21% EPS CAGR over FY22-24E after a lower growth in FY22 (growth of 5% YoY).

Operating performance in line with our estimates

* Consolidated revenue/EBITDA/adjusted PAT stood at INR129.8b/INR24.2b/ INR11.7b (+6%/-22%/-26% YoY; +1%/+2%/+8% v/s our estimate). Sales volume fell 3% YoY as demand was under pressure in Nov’21.

* Higher-than-estimated opex/t (up 19% YoY v/s our estimate of a 17% rise) was offset by higher other operating income (incentives for the Rajashree plant). EBITDA/t stood at INR1,046 v/s our estimate of INR1,016.

* Blended realization rose 9% YoY. Gray Cement realization was up 8% YoY and 0.7% QoQ. Opex/t was up 19% YoY, led by: a) a 30% increase in the variable cost of production, b) a 5% rise in freight cost/t, and c) a 19% growth in other expense/t.

* EBITDA/t stood at INR1,046 v/s INR1,299/INR1,254 in 3QFY21/2QFY22. OPM stood at 18.6% v/s 25.3%/22.6% in 3QFY21/2QFY22.

* Interest cost fell 49% YoY/21% QoQ led by debt reduction. Other income decreased by 73% YoY and 50% QoQ due to a fall in treasury yields.

* Consolidated net debt stood at INR61.5b v/s INR67.2b/INR63.4b in Mar’21/Sep’21, with a net debt/EBITDA ratio of 0.49x.

* In 9MFY22, consolidated revenue/EBITDA/adjusted PAT rose 21%/7%/14% YoY to INR368.3b/INR84.4b/INR41.9b, whereas volume increased by 13% YoY to 66.3mt. EBITDA/t stood at INR1,273 v/s INR1,345 in 9MFY21.

Highlights from the management commentary

* There was an unexpected pressure on demand in Nov’21. This led to capacity utilization falling below 70%. However, demand started to improve in Dec’21, with capacity utilization improving to 84%.

* The management said that demand is improving across the country. This has led to an improvement in Cement prices in a few markets. There are expectations of further price improvements as the demand outlook remains strong.

* Cement demand is expected to witness 6-8% CAGR over the next 10 years, with UTCEM is expected to grow ahead of the industry.

* During 3QFY22, the company commissioned a 0.6mtpa grinding unit each in Patliputra (Bihar) and Dankuni (West Bengal) and a 2mtpa grinding unit in Bara (Uttar Pradesh). It also commenced operations at its bulk terminal in Kalamboli, Maharashtra, with a cement handling capacity of 1.2mtpa.

* Capacity of White Cement will increase to 1.25mtpa from 0.65mtpa by FY26, with an estimated capex of INR9.65b. Expansion of putty capacity by 0.44mtpa (current capacity: 0.85mtpa) will be completed by 2QFY23.

* A definite agreement has been signed for the sale of its fiber asset business in Europe and the management expects to receive EUR90m. Fuel cost inflation has peaked and 4Q average cost is expected to remain at 3QFY22 levels. It is expected to benefit from a reduction in petcoke prices in 1QFY23. Benefits of a reduction in diesel prices will be visible in 4QFY22.

Strong earnings visibility – Expect 21% EPS CAGR over FY22-24E

* Cement demand is expected 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.

* Its capacity expansion plans and scope for improvement in utilization of existing capacities offers strong growth visibility. UTCEM has earmarked expansion plans in the White Cement segment, which will aid growth in the segment. The management is hopeful of achieving higher growth in the Construction Chemical segment.

* We estimate consolidated EBITDA/adjusted PAT CAGR of 16%/21% over FY22- 24E, driven by 9% volume CAGR, decline in energy costs, and lower interest expense.

* The stock trades at 16.3x/13.9x FY23E/FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 15.1x). We value UTCEM at 16x FY24E EV/EBITDA to arrive at our TP of INR9,080. We reiterate our Buy rating.

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