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Variable cost is expected to decline further in 1HCY24

* UTCEM’s 3QFY24 operating performance was largely in line with our estimates. EBITDA stood at INR32.5b (est. INR33.8b) and EBITDA/t came in at INR1,191 (est. INR1,236). PAT at INR17.8b was 7% below our estimate on account of lower-than-estimated other income and higher interest costs. 

* The management remains optimistic about demand growth prospects and expects capacity utilization to improve to ~80-85% in 4Q (77% in 3Q). Demand has recovered in most of the markets, except the North region, since mid-Dec’23. The cost has been falling and the average fuel cost should further drop by 7-8% over the next six months. Capex is pegged at INR90b for FY24/FY25 each given the accelerated expansion plans. 

* We largely maintain our estimates and reiterate BUY rating on the stock, given its: a) leadership position, b) robust expansion plans without leveraging the balance sheet, and c) structural cost improvement measures. We value UTCEM at 18x FY26E EV/EBITDA to arrive at our TP of INR12,000.

Grey cement realization up 3% QoQ; EBITDA/t stood at INR1,191

* Consolidated revenue/EBITDA/PAT stood at INR167b/INR32.5b/INR17.8b (up 8%/ 39%/ 68% YoY and down 0.4%/4%/7% vs. our estimates). Consolidated sales volume grew 6% YoY to 27.3mt. RMC/white cement revenue grew 13%/29% YoY during the quarter. 

* Grey cement realization was flat YoY (up 3% QoQ; ~1% below our estimate). Blended realization was up 2% YoY/QoQ (in line with estimate). Opex/t was down 3% YoY (in line with estimates), led by a 9%/1% decline in variable/ freight costs. Other expenses and employee cost per tonne rose 13%/5% YoY. EBITDA/t was up 32% YoY and OPM improved 4.4pp YoY to 19%. 

* In 9MFY24, revenue was up 13% YoY, primarily led by an increase in volume. EBITDA grew 21% YoY, while OPM rose 120bp to 17.5%. EBITDA/t grew 7% YoY to INR1,055 led by lower opex (down 2% YoY). Net debt stood at INR55.4b vs. INR27b at Mar’23. Capex in 9MFY24 stood at INR69.2b.

Highlights from the management commentary

* Industry volume growth should be 3-4% in 3QFY24, partly impacted by elections in four major states, fiscal challenges in Bihar/West Bengal, and other regional headwinds. The management estimates industry growth of 8-9% YoY in FY24.

* Cement prices improved in 3QFY24; however, due to a demand slowdown, prices corrected in Dec’23. Prices should improve when demand rebounds. 

* Blended fuel consumption cost stood at USD150/t vs. USD162 in 2Q. Avg. fuel cost stood at INR2.05/kcal vs. INR2.18 in 2Q. Fuel cost is expected to decline further by 7-8% in the next six months.

Valuation and view

* We estimate a consolidated volume CAGR of ~10% over FY23-26 and EBITDA/t of INR1,090/INR1,220/INR1,300 in FY24/FY25/FY26 (vs. INR1,005 in FY23). We estimate its ROE/ROCE to improve to 15%/14% in FY26 vs. 10%/9% in FY23, aided by profitability improvement and low-cost expansion.

* The stock trades at 19x/16x FY25E/FY26E EV/EBITDA (v/s its 10-years' average EV/EBITDA of 16x). We value UTCEM at 18x FY26E EV/EBITDA to arrive at our TP of INR12,000. We reiterate our BUY rating on the stock.

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