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Our Take:

Udaipur Cement Works Ltd. (UCWL) was incorporated in 1993 as a part of JK Lakshmi cement (JKCL) which has ~39 years of experience to operate in cement industry. It is a key cement player in the Rajasthan. It has 1.60 MTPA of cement capacity, 1.50 MTPA of clinker capacity. Further volume growth will be driven by increase in capacity - cement to 2.20 MTPA by Sept-2021 and 4.7 MTPA by FY24-25; clinker to 1.50 MTPA by Sept-2021 and 3.0 MTPA by FY24-25.

We expect COVID-led lockdown and slowdown in the economy to lead to subdued growth in volumes for UCWL in FY22E but buoyant cement prices and aggressive control on variable costs are likely to drive EBITDA growth. The industry has high dependence on real estate and infra, which are likely to be impacted by the pandemic. The key growth drivers of demand are likely to be rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and increased spending on infrastructure development.

Valuations & Recommendation:

We expect the company to benefit from 1) strong promoter pedigree- JK Lakshmi Cement Ltd (credit enhancement in the form of unconditional and irrevocable corporate guarantee provided by JK Lakshmi Cement Limited), 2) Consistent capacity expansion from 0.63MTPA in FY13 to current 1.6MTPA. It recently completed its balancing Project whereby its Clinker Capacity stands increased from 1.2 MTPA to 1.5 MTPA and Its Cement capacity from 1.6 MTPA to 2.2 MTPA 3) stable utilization, and 4) industry triggers like higher realizations.

Cement companies are valued (EV/T or EV/EBITDA) based on their capacities, regional diversification, and Balance Sheet strength. Smaller companies are generally valued lower because of regional concentration, limited scale of operations, lower pricing power; however, stocks get re-rated post announcing growth plans, successfully executing expansions and forays into new markets, thus reducing concentration risk on earnings.

We think UCWL can post 21% CAGR (over FY21-FY23E) in net sales to Rs.1074.5 cr, 29% CAGR in EBITDA to Rs. 246 cr and 39% CAGR in PAT to Rs.106 cr.

We believe the base case fair value of the stock is Rs.48 (FY23E EV/T of $125 and FY23E EV/EBITDA of 8.3) and the bull case fair value is Rs.56 (FY23E EV/T of $140 and FY23E EV/EBITDA of 9.3). Investors can buy the stock at the CMP (FY23E EV/T of $111 and FY23E EV/EBITDA of 7.4) and add on dips to Rs.35 (FY23E EV/T of $100 and FY23E EV/EBITDA of 6.7).

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