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Strong delivery continues

* UltraTech continued strong performance in Q3 supported by higher realization/sales volume and lower opex. Consolidated EBITDA stood at Rs30.9bn vs. estimated Rs28.8bn (Bloomberg consensus: Rs27bn) and EBITDA/ton came in at Rs1,296 vs. estimated Rs1,251.

* Key positives: 1) Domestic/consolidated sales volume growth of 14.1%/14.3% yoy; 2) RMC/White cement revenue growth of 24%/17% yoy; 3) Consolidated net debt down by Rs27bn; 4) Consolidated net debt/EBITDA at 0.84x vs. 1.7x in Mar’20. Grey cement realization was down 2.5% qoq, in line with estimates.

* Management indicated demand recovery in Tier 2/3 cities, led by a pick-up in real estate activities. Exit capacity utilization was at 85% vs. Q3 average of 80%. RoE (excluding goodwill) is at 14.1% (up 1.8pp YTD), which management expects should cross 15%.

* We raise FY21-23 EBITDA estimates by 3-7% on higher volumes. UTCEM will benefit from cost saving initiatives (reduction in lead distance, commissioning of WHRS, solar power plants, etc.) and capex plans. We expect UTCEM to become net cash positive in FY23E. UTCEM is our top large-cap pick with a Buy rating and OW stance in sector EAP.

Higher volumes/realization and lower opex helps: UTCEM benefitted from higher sales volume (14% yoy growth in domestic and consolidated sales volume), better realization (grey cement realization up 3.7% yoy/down 2.5% qoq) and lower costs (opex/ton down 4.3%). Management highlighted that capacity utilization stood at 80% in Q3, with Dec’20 exit utilization at 85%. Trade sales further declined 7pp qoq (64% vs. 77-78% in Q1FY21) due to a recovery in infrastructure-led demand, which is also evident from 24% yoy growth in RMC revenues. Sales volume of white cement/putty was up 12.7% yoy, leading to revenue growth of 17% yoy. Opex/ton declined due to 1) Rs74/ton yoy reduction in variable cost/ton, 2) 13.9% yoy drop in employee cost/ton and 3) 17.1% yoy drop in other expense/ton. Pet coke consumption was at 44% (USD74/ton) and imported coal consumption (USD76/ton) was at 43%. Lower opex and higher realization/sales volume led to 56.8% yoy growth in EBITDA with 6.2pp improvement in OPM. EBITDA/ton stood at Rs1,296 vs. Rs944/Rs1,343 in Q3FY20/Q2FY21. Adj. profit was up 2.2x yoy.

Raise estimates on higher volumes; top pick in large caps: We raise volume estimates by 2- 3% for FY21-23 but reduce realization estimates by 0.8% for FY22-23. This leads to an upgrade of 3-7% in EBITDA estimates for FY21-23. We prefer UTCEM for its 1) cost saving strategies (investments in Waste Heat Recovery capacities, solar power plants, sustained fixed cost reduction guidance of Rs5-5.5bn), 2) strong scope of future capacity additions (19.5mt ongoing capacity additions and scope of 30mt+ organic capacity addition further), 3) leadership position in most of the markets where it operates, and 4) continued reduction in net debt (net cash of Rs18.8bn in FY23 vs. Rs181.2bn of net debt in FY20). Current utilization trends indicate that the industry is operating at optimum utilization in few regions at present, which if sustained, can lead to price improvements. We expect EPS to grow at a CAGR of 25.1% during FY20-23E. RoCE may improve to 16% in FY23E vs. 10.9% in FY20. We maintain Buy with a TP of Rs6,330 (14x FY23E EV/EBITDA; 10-year average multiple of 14.5x) vs. Rs6,075. Key risks: 1) steep fall in cement prices, 2) sharp decline in industry’s demand growth and 3) continued increase in fuel prices.

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