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Onwards and upwards; targeting 200MT capacity by 2030

UltraTech’s (UTCEM) 1QFY23 results were a tad higher than on our above consensus estimates. Net sales were grew 28.2% YoY, driven by robust 17% increase in volumes 24.1MT, while realisations grew by 9.2% to INR6,106/t (3% above JMFe). EBITDA was down 8% YoY to INR29.2bn, in line with JMFe, but 8% above consensus, as EBITDA margins contracted by 773bps YoY to 19.9%. Thus, EBITDA/ton declined by 21% YoY to INR1,216, as power and fuel costs continue to inch up. The quarter witnessed continued momentum in demand even after 4QFY22. Management highlighted that pressure on margins will continue for 1-2 quarters as fuel cost is likely to stay elevated as company is currently holding inventory of 50+ days, while seasonally subdued may limit price hikes. Ultratech is expected to continue to outgrow industry as it completes its Phase-1 of expansion in FY23 and has set path to further add 22.6MT capacity by FY25. In addition, its initiatives to increase the share of green power to 34% (20% currently) by FY24 and focus on margin accretive/asset light/value added business segments will be key drivers of improvement in its return ratio profile. We continue to maintain BUY with TP of INR 7,800, 15x FY24 EBITDA.

* Growth trajectory in volumes continued: UltraTech reported revenue of INR 147.1bn in 1QFY23, +28% YoY, however declined -3% QoQ. Growth in volumes was led by uptick in North and Central regions. Volumes reported a growth of 17.4% YoY to 24.1mnT (- 9% QoQ). Blended realisations were up by 9% YoY (+7% QoQ; 3% vs. JMFe). Grey cement realisation at INR 5,624/t witnessed an uptick of 7% YoY (+6% QoQ). White cement and putty segment reported a growth of 32% YoY to 0.37mnT (-7.5% QoQ). Share of premium product increased to 17.4% (+3.2% YoY).

* Higher power and fuel cost impact margins: Total direct costs witnessed a rise of 63% YoY, as the consumption price of fuel further increased in 1Q. However, company witnessed some savings in employee expenses (+INR 18/t benefit). EBITDA and EBITDA/t reported a decline of 8% and 21%YoY respectively. Management expects this pressure to continue for at least one to two quarters, given higher cost inventory procured earlier, coupled with softening in demand due to monsoon.

* Capacity expansion to meet increasing demand: Management highlighted that company intends to reach total capacity of 200mnT by 2030 given healthy demand on both private as well public space. This would be carried out in 3 phases where company intend to reach total capacity of 131.25mnT by end of FY23 and further add capacity in Phase II to reach total capacity of 153.85mnT, followed by further 47MTA capacity addition in Ph-III

* Maintain BUY with TP of INR7,800: We have marginally cut our EBITDA estimates by 3% for FY23 and 2% for FY24 factoring in the near term impact of elevated fuel costs. Although we remain positive on sectors ability to pass on the cost increases, we remain cognizant of increased competitive intensity in Indian cement sector, which may limit price hikes in certain markets. We continue to value UTCEM at 15x EVE to arrive at a revised target price of INR 7,800

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