UltraTech’s Q4 FY17 numbers sprung a positive surprise, especially on volumes. Management is cautiously optimistic on the affordable house segment and believes it entails significant potential to drive the nascent demand recovery well into the medium term. While the cost pressure challenge persists, the firm is reasonably confident that the market can absorb any industrywide cost push. We are enthused by UTCL’s cost savings, especially in energy & freight and, more importantly, its ability to release cash by shrinking working capital by eight days to 27 days — still a shade inferior to MNC subsidiaries, offering scope for improve-ment. Overall, at current valuations, though near-term upside appears capped, in the medium term the operating leverage could be significant. Maintain ‘BUY’ with target price of Rs 4,422 a share.
UTCL reported gross revenue of Rs 75 billion, up 3% y-o-y, aided by strong domestic cement volumes at 13.4 mt and realisations, up 2% y-o-y. Management’s sustained focus on cost efficiency helped limit energy cost and freight cost/t despite sharp run-up in petcoke and diesel prices. Ergo, total cost/t surge was limited to only 5% y-o-y. As a result, EBITDA at Rs 12.8 billion was 6% above consensus, while EBITDA/t fell to Rs 910 from Rs 985 in Q4FY16. Management believes the drive to prune costs will sustain and a lot more has to be achieved in upcoming days. Q4FY17 PAT stood at Rs 6.9 billion, down 12% y-o-y; adjusting for one-time provision reversal, it stood at Rs 6.0 billion.
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Fly-ash shortage, especially in the east and north, and overloading restrictions may lead to supply shortage. To that extent, outlook on cement prices may remain benign and the price-to-volume trade-off is likely to be positive in coming quarters. Factoring robust volumes, while we revise up FY18E EPS 4%, we retain FY19 estimate. On account of rising utilisation/consolidation, EPS CAGR of 30% over FY16-19E can well sustain till FY21. We maintain ‘BUY/SO’ and revise target price to Rs 4,422 on account of upward revision in EPS estimates.