IGI Logo

Margins bottomed; Outlook improving

Ultratech Cement (UTCEM) reported marginally lower-than-expected EBITDA of Rs22.2bn (CentrumE: Rs23.3bn), down 15% QoQ driven by higher power & fuel and other RM cost. The unexpected sharp fall in demand in November forced UTCEM to roll back the cement price hikes taken in October (average grey cement realization was almost flat QoQ at Rs4,960/t). As a result, the company was unable to pass on hike in fuel cost and margins were hit with EBITDA/t falling by 20% QoQ to Rs1,010. Fuel price has peaked and cement demand has been improving from mid-December 2021 which make us believe that Q4FY22 margins would be much better sequentially. In mid-tem, demand momentum will increase (Government spending before 2024 general elections). UTCEM with its expanded capacity of 19.5mtpa by FY23-end will be the major beneficiary. We value UTCEM at 16.0x average of FY23E and FY24E EV/EBITDA to arrive at a target price of Rs8,988 (earlier Rs 8,463). Reiterate BUY.

Demand slowdown hit realizations; volumes flat YoY/up % QoQ

UTCEM’s grey cement volume was up 7.7% QoQ (down 3.3% YoY) at 21.4mt in Q3FY22. Total volume, at 22mt, was up 7.4% QoQ (down 5% YoY). Average grey cement realization, at Rs4,960, was almost flat QoQ as the sharp fall in demand in November forced UTCEM to roll back the cement price hikes taken in October. December exit price at ~Rs350/bag was almost similar to Sep price of Rs348/bag. Lower share of sales in trade segment (64% v/s 67% in Q2) further hit realisation. Revenue was up 8% QoQ/5.4% YoY. Revenue of white cement and ready mix concrete (RMC) was higher by 8.8% and 7.5% QoQ, respectively.

Higher fuel cost depresses EBITDA, EBITDA/t declines to Rs1,010, lowest in last eight quarters

The increase in power & fuel cost (up 19.4% QoQ/Rs214/t to Rs1,319/t) and inability to hike cement prices amid subdued demand in November led UTCEM to report lowest EBITDA/t in last eight quarters. EBITDA/t at Rs1,010, fell 20.4% (Rs259/t) QoQ and EBITDA, at Rs22.2bn, fell 14.6% QoQ. Power & fuel cost is expected to remain stable in Q4FY22. Transportation cost was up 1.1% QoQ at Rs1,302/t and benefits of lower diesel prices should accrue in Q4FY22. This along with higher RM cost led overall cost/t to increase by 6.7% (Rs292/t) QoQ.

Capacity expansion on track; commissioned 3.2mtpa in FY22

UTCEM has commissioned 1.2mtpa cement capacity (brownfield expansion of 0.6mtpa in Bihar and another 0.6mtpa in West Bengal) in October 2021 and 2mtpa at Bara, UP in January2022, taking total cement capacity to 114.55mtpa in India. The remaining capacities (16.3mtpa) is expected to be commissioned in phases throughout FY23-end taking total capacity to 131mtpa. The company further announced capex of Rs9.65bn towards modernization and expansion of capacity at Birla White from the current 650ktpa to 1.253mtpa, in a phased manner by FY6. Major capex will be funded via internal accruals

Outlook and valuation: Reiterate BUY

UTCEM has been operating at ~85% capacity utilisation (Q3: 75% CU) in January, providing confidence of demand revival. The company has taken some price hikes in certain regions so far and expect it to sustain this time. Q4 being seasonally strong quarter, we expect more price hikes in February. Fuel price has peaked and with higher volume and prices, margins should improve considerably in Q4FY22. Moreover, strong balance sheet can provide opportunity for inorganic expansion, too. We value UTCEM at 16.0x average of FY23E and FY24E EV/EBITDA to arrive at a target price of Rs8,988 (earlier Rs 8,463). Reiterate BUY.

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer