Ultratech reported a 2% y-o-y decline in domestic grey cement sales in Q3FY17; however operating efficiencies on the logistics and energy costs led to flat Ebitda y-o-y. However due to demonetisation, realisations have dropped by 2% q-o-q. Demonetisation impact has been highest in the North, with volumes down 7-8% y-o-y in Q3FY17. Ultratech also announced a new 3.5 mnt integrated plant in MP.
North worst affected by demonetisation: Ultratech’s domestic grey cement sales volumes declined 2% y-o-y in Q3FY17, along with realisations falling 2% q-o-q. North and West region have been the worst hit due to demonetisation with volumes declining 7-8% and 4% y-o-y respectively in Q3FY17. East saw 5-6% growth y-o-y. South had the least impact of demonetisation with 10% y-o-y growth, due to better demand from Andhra/Telangana area. Individual housing segment has been most impacted.
Capacity addition, even ex of JP: Ultratech announced a new greenfield capacity of 3.5 mnt at a capex of R26 bn (implied cost $110/ton) in Dhar, Madhya Pradesh to gain access to newer markets and reduce logistics cost. This capex includes land cost which has already been acquired. Management suggested that all approvals are in place and expects to start commercial production by Q4FY19. Management was clear that it will continue to grow capacity and aspire to gain further market share as and when demand recovers. Hence we believe that this may not be the only capex, ex of Jaiprakash (JP) assets.
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Logistics cost down 3% y-o-y, energy cost down 5% y-o-y in Q3FY17: Ultratech did a commendable job in terms of cost containment in a difficult quarter. Reduction in lead distance as well as better utilisation of grinding units led to 3% y-o-y decline in logistics cost. 5% reduction in energy costs was led by: (i) enhanced waste heat recovery share from 5% to 7%, (ii) lower fuel consumption by 100 bps, (iii) increase in pet coke consumption from 74% to 78% y-o-y, (iv) higher use of industrial waste. However, we believe energy cost will spike in Q4FY17 and in FY18 due to the recent increase seen in pet coke.
Valuation/Risks: We believe current price levels completely factor in the volume upside from capacity expansion and hence we maintain Hold with a target price of R3,349. We have valued Ultratech at 13x FY19e EV/Ebitda, in-line with its last 5-years’ trading history. Upside risk: Demand growth picks up earlier than expectation. Downside risk: JP integration takes longer.
Company description: Ultratech is the largest cement company in India with an installed capacity of 69 mnt of grey cement. UltraTech Cement has pan-India presence with 12 integrated plants, 1 clinkerisation plant,
19 grinding units and 7 bulk terminals. With JPA deal, it will add another 21 mnt to its current capacity. As demand remained subdued in the last 5 years, cement
industry utilisations dropped to 65% in FY16 from 75% in FY10 due to large scale capacity additions. This has impacted pricing in all regions except the South. Taking into account the capacity addition plans of industry players, we believe if demand growth improves to 7%/9% in FY18e/19e, incremental (supply-demand) will turn negative after a long time. As a result, utilisations and realisations will improve pan India. We expect the divergence between the South and other regions to narrow as well.