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Buy Ultratech Cement Ltd For Target Rs.8,500

In-line performance; price hike vital amid high input cost

* Consolidated EBITDA was flat YoY at Rs27bn (down 18% QoQ) in Q2FY22, in line with our estimate, as higher-than-expected cost/ton was offset by better blended realization (led by white cement and RMC business) and higher other operating income. Accordingly, blended EBITDA/ton declined 7% YoY/18% QoQ to Rs1,254.

* We expect UTCEM’s RoIC to increase to a sustainable level of 20%+ within 4-5 years (vs. 12% in the past decade), driven by rising utilization levels and improving margins.

* Factoring in higher opex/ton due to input cost inflation, we cut our FY22-24 EBITDA estimates by 3-4%. We roll over to Dec’22 from Sep’22 and maintain our TP at Rs8,500. Our DCF-based TP (11.25% WACC, 8% FCFF growth post FY26) implies a 1-year forward EV/EBITDA of 15x (vs. 15.6x earlier). Maintain Buy.

* Revenue from India operations rose 14% YoY to Rs112bn. Grey cement realization fell 2.2% QoQ (+5.2% YoY), in line with our estimate. Ultratech took an average price hike of Rs10-15/bag MoM in Oct’21. Management said that an additional price hike of Rs20- 25/bag is required to pass on cost inflation and is confident of a gradual pass-through. Other operating income rose 75% YoY and doubled QoQ to Rs2.7bn (~Rs127/ton), beating our estimate of Rs1.2bn, owing to receipt of incentives for the Dhar plant.

* Volumes of India operations rose 7% YoY to 20.5mt in Q2FY22. Management guided for grey cement volume growth to be in the range of 6-8% YoY in H2FY22. At the lower band of guidance, it implies grey cement volumes of 92mt in FY22 (+13% YoY).

* Consolidated cost/ton increased 12% YoY/9% QoQ (our estimate of a 3% QoQ rise), owing to higher-than-expected input costs, higher employee costs (bonus, increments) and other expenses (high maintenance costs). The average coal consumption cost stood at US$120/ton in Q2 and management guided that it might increase by Rs200/ton QoQ in Q3FY22.

* Consolidated FCF generation stood at Rs8.2bn in H1FY22 after working capital blockage of Rs17.6bn and capex spend of Rs21bn. In H1FY22, UTCEM paid dividends of Rs10.6bn and purchased treasury shares worth Rs536mn. Accordingly, net debt increased by Rs3.5bn QoQ (declined Rs58bn YoY) in Sep’21, with net debt-to-EBITDA standing at 0.47x.

* UTCEM commissioned 1.2mt (part of 19.5mt capacity expansion project) capacity in Oct’21, taking its total domestic capacity to 112.6mt. It is likely to commission 2mt grinding capacity in H2FY22, 4.1mt in H1FY23 and the balance 12.2mt in H2FY23. Capex guidance is maintained at Rs40-50bn in FY22.

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