Buy UltraTech Cement Ltd for target Rs.11,200 - Emkay Global Financial Services Ltd
UltraTech Cement reported broadly in-line operational performance in Q3FY24 with consolidated EBITDA increasing 39% YoY/28% QoQ to Rs32.5bn. Blended EBITDA/t improved by Rs236/t (QoQ) to Rs1,191 mainly driven by increased average realization (+2% QoQ). Volume trajectory tapered down to 6% YoY (2% QoQ) to 27.3mt (9MFY24: +14% YoY). The company has increased its growth capex guidance to Rs90bn each in FY24-FY25 vs. earlier guidance of Rs60-70bn p.a. UltraTech has reiterated to reach ~180mt domestic grey cement capacity by FY27E (~10% CAGR, excluding Kesoram Industries), which would enable it to post industry-leading volume growth over the next few years. We have yet to factor in Kesoram’s acquisitions in our estimates. Factoring in little lower volume growth, we have cut our FY25-26E EBITDA estimates by 1-4% and revised down TP to Rs11,200/sh, based on 18x Dec25 EV/E. Maintain BUY.
Result Summary
UltraTech’s India operations EBITDA increased by 40% YoY/29% QoQ at Rs31.5bn with EBITDA/t at Rs1,208. Capacity utilization improved marginally by 200bps QoQ to 77% (Q3FY23: 83%) and management is targeting it to improve to 80-85% utilization in Q4FY24. Industry demand during the quarter was lackluster (3-4% YoY) owing to elections in four major states, unseasonal rainfall in the South, construction ban in NCR, and sand shortage in some of the areas. Grey cement realization increased 2.1% YoY/ 2.8% QoQ to Rs5,499. Total cost/t declined 3% YoY/2% QoQ to Rs4,936 mainly led by a decline in RM+P&F cost (Rs76/t). Growth capex guidance has been revised to Rs90bn p.a. each in FY24/FY25 vs. earlier guidance of Rs65-70bn p.a. Net debt increased by Rs6.2bn QoQ to Rs55bn as on Dec-23.
What we liked: Increased capex intensity.
What we did not like: Increased net debt and higher operating overheads.
Earnings call KTAs:
i) On the demand front, the company has started witnessing gradual improvement and is expecting 80-85% capacity utilization in Q4FY24; ii) Spot cement prices are marginally lower than average cement prices in Q3FY24; iii) Blended fuel cost per kcal stood at Rs2.04 in Q3FY24 vs. Rs2.18 in Q2FY24. Fuel consumption cost stood at $150/t in Q3FY24 vs. $162/t in Q2FY24. Management is expecting at least 7-8% reduction in fuel cost over the next two quarters; iv) It has a total growth capex outline of Rs250bn, of which Rs180bn will be likely to be spent in FY24-25. There will be an additional maintenance capex of Rs10-12bn p.a.; v) Management indicated that all expansions are clinker-backed and will likely add 14mt/10-12mt under phase II/III expansions. Projects in states like Rajasthan, Bihar, and U.P. will be eligible for incentives; vi) Effective date of the merger of Kesoram’s acquisition is likely to be from 1-Apr-24.
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