Buy UltraTech Cement Ltd for the Target Rs 13,800 by Motilal Oswal Financial Services Ltd
Outgrowing the industry; widening the lead Structural cost benefits, stronger cash flows
* UltraTech Cement (UTCEM) continues to extend its lead over peers across scale, market share, cost leadership, and cash-flow generation. Its large and diversified manufacturing footprint enables it to capture a disproportionate share of industry growth, while scale benefits structurally lower opex/t. The integration of ICEM and Kesoram offers further margin upside as their operations improve toward UTCEM’s efficiency levels.
* Over the medium term, we expect UTCEM’s profitability to be supported largely by structural cost savings and operating efficiencies, with pricing action likely to remain gradual. Strong operating cash flows should enable the company to fund sizeable capacity expansion while maintaining a net debt-to-EBITDA ratio of <1x. With domestic grey cement capacity already crossing the 200mtpa mark and further expansions underway, we expect the company to continue gaining market share over the medium term.
* UTCEM’s scale, cost advantage, organic growth, acquisition synergies, and strong balance sheet position it for strong earnings growth. We estimate a consolidated revenue/EBITDA/PAT CAGR of ~12%/17%/19% over FY26-28, aided by ~10% volume CAGR and ~1.5pp OPM expansion to ~21% by FY28. Improving profitability and disciplined capex should drive RoE/RoCE to ~14%/~12% by FY28 (vs. ~11%/~10% in FY26). We value UTCEM at 18x FY28E EV/EBITDA to arrive at our TP of INR13,800. Reiterate BUY.
Scale-led volume growth reinforces market leadership
* UTCEM’s volume growth continues to outpace the broader cement industry. Its domestic grey cement volume CAGR at 13.4% over FY22-26 outpaced the industry CAGR of ~8%, as well as that of most cement players under our coverage. The strong performance reflects the company’s ability to leverage its extensive manufacturing and distribution footprint, deepen market penetration through an expanding dealer network, and integrate recently acquired businesses under the UTCEM brand.
* Market share gains are increasingly evident in the company's underlying volume performance. In 1QFY27, UTCEM’S domestic grey cement volumes grew ~13% YoY, ahead of industry growth of ~7-8%, implying continued market share gains. We estimate its market share to increase to ~32% by FY28 vs. ~30% in FY26.
* Regionally, UTCEM now holds a leadership position across India, with a capacity share of ~38% in the West, followed by ~34% in the Central, ~27% in the North, ~23% in the South, and ~20% in the East. The company’s all-India capacity share stood at ~27%. UTCEM continues to pursue its capex plans, targeting domestic grey cement capacity of 237.1mtpa by FY28 (capacity addition of 6.6mtpa/29.8mtpa in 9MFY27/FY28), from 200.7mtpa currently.
Valuation and view: Strong cash flow generation underpins balance sheet strength
* UTCEM has continued to generate strong operating cash flows, supported by aggressive capacity expansion, higher capacity utilization, and timely integration of large acquisitions. In FY26, OCF surged ~43% YoY to INR153b, outpacing EBITDA growth of ~36% to INR170b. OCF/EBITDA conversion ratio stood at ~90% in FY26. Further, the company has maintained a higher cash flow conversion ratio (in the range of ~80-100% over FY21-26), supported by disciplined working capital management.
* We expect the company to continue generating strong FCF, with cumulative OCF estimated at INR331b over FY27-28, rising from INR260b over FY25-26. We estimate cumulative capex of INR200b over FY27-28, compared with INR185b over FY25-26, resulting in cumulative FCF of INR131b over FY27-28 vs. INR75b over FY25-26. Net debt is expected to peak at INR185b in FY27, and should decline from FY28 onward, while net debt-to-EBITDA ratio is expected to remain <1.0x through FY27-28.
* We estimate UTCEM’s consolidated revenue/EBITDA/PAT CAGR at ~12%/17%/19% over FY26-28, with consolidated volume expected to expand at a CAGR of ~10% over FY26-28. We estimate OPM to expand 1.5pp to ~21% by FY28. RoE/RoCE is expected to increase to ~14%/12% by FY28 from ~11%/10% in FY26, supported by rising profitability and low expansion costs. The stock is currently trading at 18x/15x FY27E/FY28E EV/EBITDA. We value UTCEM at 18x FY28E EV/EBITDA to arrive at our TP of INR13,800. Reiterate BUY
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
