Prima facie, Ultratech Cement’s Q1FY17 numbers suggest that the sharp 31% y-oy net profit jump to Rs 7.7 billion was largely driven by cost savings, which will be reversed post consumption of low-cost fuel inventory. However, this is only partially true. A closer look at the result indicates: Rs 100/t cost reduction is primarily from higher blending — a structural change; better working capital management led to higher cash release resulting in the company turning net cash a couple of quarters ahead of our estimate; and higher focus on rural penetration coupled with JPA acquisition will help UTCL gain better foothold in India’s fastest-growing markets and boost market share gains, akin to Shree Cement. Ergo, we raise FY17E and FY18E EPS and target price to Rs 3,670 (earlier Rs 3,570). Maintain buy.
In the post result call, management appeared confident on: robust demand uptick — especially in rural areas — from H2FY17; lack of new greenfield capacities implying a cyclical upturn for the sector; blended cement proportion rising to 67% (earlier pegged at 62%), which lowers cost of production medium term initiatives include setting up 50MW of waste heat recovery plant-which would further lower cost of cement production.
We marginally raise our estimates factoring in benefits of lower cost. EPS has been revised up 8.6% and 3.0% for FY17 and FY18, respectively. While our FY17 estimates are 4.5% below consensus, FY18 estimates appears in line considering dispersed small-ticket investments driving current investment cycle, UTCL, appears well placed.