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Speedbumps on growth track

UltraTech Cement’s (UTCL) dismal Q3FY22 performance (EBITDA down 22% YoY) is forcing a 9%/7% cut to our FY22E/FY23E EBITDA. With rising crude oil prices posing cost-hike concerns, we see risk of further downgrades, unless cement prices see a sharp spike (latest by Q1FY23). Our revised FY23E estimates are ~8% below consensus.

While we introduce FY24 estimates (14% EBITDA growth) assuming benefit of robust pre-election demand; believe it is a little early in the day to be excited about the same as earnings show in FY23 will instil confidence for FY24. With current valuations of over 16x FY23E EV/EBITDA appearing full, we downgrade UTCL to ‘HOLD’ with revised TP of INR8,204 (INR8,627 earlier) valued at 17x Q1FY24 EV/EBITDA.

Weak Q3FY22 drives earnings in slow lane

Q3FY22 was a weak quarter as consolidated EBITDA plunged 22% YoY/11% QoQ owing to – i) weak volumes: which dipped >3% YoY; ii) muted realisations: which rose a mere 1% QoQ and iii) high cost: wherein variable cost/t rose 11% QoQ (20% YoY) owing to sharp rise in fuel costs. Fixed cost too normalised, rising 12% YoY (flat QoQ). As a result, blended EBITDA/t at INR1,046 dipped 19% YoY and 17% QoQ. 9mFY22 EBITDA/t stands at INR1,273 and despite expected improvement in Q4F22, overall EBITDA/t for FY22 is set to see a dip of 7% YoY to INR1,246. Despite the downgrade, our FY23E EBITDA/t is at par to FY21 levels of INR1,336, which can face a downside risk in case cement prices do not recover by Q1FY23.

Optimistic on FY24; UTCL geared for growth

FY24 is expected to witness robust demand given it being a pre-election year. As a precedent, it may be recalled that cement demand had surged ~13% in FY19. UTCL is fully geared-up to capitalise on the expected demand surge, as plans to add ~19.5mtpa capacity as on track for completion within FY23. It is with this optimism, we are introducing FY24 earnings assuming volume growth of over 8%; EBITDA growth of 14% and EBITDA/t of INR1,406. UTCL has also chalked out plansto increase its white cement capacity by ~0.6mtpa in phases by FY25-26.

Outlook and valuation: Need more conviction; downgrade to ‘HOLD’

Weak performance in Q3FY22 and muted channel check feedback on cement price hikes (in Q4FY22 so far) has forced an EBITDA cut of 9%/7% for FY22E/FY23E. While FY24 may turn out to be a bumper year (owing to pre-election demand), earnings in FY23 will offer the much needed conviction. Until then, we downgrade UTCL to ‘HOLD’

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