Margins under pressure q-q due to higher costs; demand outlook is bright; TP raised to Rs 7,400 from Rs 6,950; ‘Reduce’ retained
UTCEM‘s Q2FY22 EBITDA was marginally higher than our estimates on higher-than-expected realisations. Margins remained under pressure q-o-q with higher costs and lower volumes. Fuel cost inflation will keep costs elevated; however, we expect price hikes amid a strong demand environment to offset it. Expansion projects are on track and we estimate UTCEM to become net debt-free by end-FY2022e despite growth capex. Increase FV on rollover. Maintain Reduce.
Q2FY22—Ebitda outperformance on higher-than-expected prices
UTCEM’s earnings were higher than our estimates—the company reported India operations Ebitda of Rs 27 bn (+2% y-o-y, -17% q-o-q) against our estimate of Rs 25.5 bn. Volumes increased 6% y-o-y to 20.4 mn tons (flat q-o-q), in line with our estimate. Blended realisations increased to Rs 5,643/ton (+8% y-o-y, +1% q-o-q) on higher premium product sales and trade volumes. Costs/ton increased to Rs 4,318/ ton (+13% y-o-y, +8% q-o-q) due to higher energy and freight costs and were 3% higher than our estimates led by higher other expenses. Ebitda/ton declined to Rs 1,325/ton (-4% y-o-y,-17% q-o-q).
Expansion remains on track; focus on sustainability to aid margins
The management maintained its guidance for completion of its 19.5-mtpa grinding and 11.1-mtpa clinker capacity expansions by FY2023-end. UTCEM’s India capacity would increase to 131 mtpa by FY2023e (capex of $46/ton) or at a two-year CAGR of 5.5%, ahead of industry capacity growing at 4.4% CAGR. Further, WHRS capacity would increase from current 137 MW (+12 MW in Q2FY22) to 300 MW by FY2023e-end, increasing the share of green power to 34% by FY2024e from 15% in Q2FY22. This shall result in annual power costs saving of Rs 6 bn.
Deleveraging to continue
With strong operational cash flows, we estimate 4-6% FCF yield in FY2021-24e despite growth capex and UTCEM becoming net cash positive in FY2022E. UTCEM in the past added leverage for inorganic growth; however, given no major cement asset on the block, we do not see M&A as a likely risk. The management’s narrative suggests focus on RoE expansion towards 18% from current 15%.
Fair Value raised to Rs 7,400
The management is confident of strong demand recovery (6-8% y-o-y in H2FY22) post the monsoons. Costs (fuel, freight) are expected to inch up further; however, we expect strong demand in H2FY22e to allow producers to pass the cost inflation into prices. We have maintained our Ebitda estimates for FY2022/23/24e mainly led by higher prices, offset by higher costs. Our Fair Value increases to Rs 7,400 (from Rs 6,950) on roll-forward to December 2022 and we maintain our Reduce rating.