Analyst Corner: Maintain ‘buy’ on Ultratech Cement, target price Rs 5,480

We believe the turnaround of the acquired Century Cement’s assets itself could add 4-5% to UltraTech Cement’s (UTCEM) EBITDA in FY21. Coupled with increased cost efficiencies and industry average 6-7% volume growth, we model 13% EBITDA CAGR for UTCEM over FY20-22E on a high base of >30% EBITDA growth in FY20E.
Given minimal organic capex plans, UTCEM is likely to generate FCF of >`12,000 crore over FY21-22E, bringing net debt down to around Rs 6,500 crore by FY22E.

The stock trades at an attractive valuation of 10x FY22 EV/E. We maintain ‘BUY’ with an unchanged target price of Rs 5,480/share based on 14x Sep’21E EV/E. UTCEM remains one of our preferred picks in the sector.  Turnaround of Century Cement (CENT) assets itself could add 4-5% EBITDA in FY21. CENT assets operated at 79% utilisation in December 2019 compared to sub-50% utilisation from Jun-Nov 2019.

The management expects to further ramp-up utilisation to ~85% during H1CY20 and guided that ~84% of the production would be transitioned to UTCEM brand (vs 55% in Dec’19). Also, costs would be in-line with the existing UTCEM assets (excluding Rs 70/te royalty cost) by Q2FY21. Accordingly, CENT’s assets are likely to report Rs 400-500/te YoY improvement in EBITDA/te and contribute 4-5% to the overall EBITDA in FY21.

UTCEM remains focused on improving cost structure by increasing blending ratio, setting up another 38MW of WHRS by FY21 taking the total WHRS capacity to 141MW, sufficient for 12% of power requirements (vs ~7% currently), increasing the use of alternative fuels from ~3% currently, reduction of lead distance, better operating leverage and improving cost structure of acquired entities.

UTCEM is likely to generate FCF of >Rs 12,000 crore over FY21-22E given minimal organic capex plans of Rs 4,500 crore over FY21-22E. Hence, net debt is likely to come down to around Rs 6,500 crore by FY22E. We factor-in consolidated volume CAGR of 7% over FY20E-FY22E and expect consolidated EBITDA/te to increase from Rs 889/te in FY19 (Rs 1,137/te in 9MFY20) to Rs 1,294/te by FY22E.