Volume growth of 5% y-y in FY21 well ahead of the industry; FY22/23e Ebitda up 1/2%; TP raised to Rs 7,900; ‘Buy’ maintained
UTCEM cement volumes in Q4 at nearly 28MT, up c30% y-o-y, surpassed its previous peak in Q4FY19. For the full year FY21, volume growth of 5% y-o-y was significantly ahead of the industry (down low single digits y-o-y), as the company leveraged its strong pan-India presence, supply chain and brand equity. Demand was broad-based across regions with capacity utilisation for Q4FY21 crossing +90% across each of them other than the southern markets. The east continues to lead the pack, operating at +100% of rated capacity. The company also saw strong offtake for the RMC business, up 19%, now contributing c5% of revenues.
Admittedly, part of the market share consolidation in the industry was owing to the higher impact of COVID-19 led disruptions for smaller and regional cement players. However, in our view, UTCEM also has been successful in leveraging its strong brand, ramping up operations of recently acquired assets, participating in large infra projects and robust capacity additions in recent years. UltraTech is on track to add 19MTPA capacity over the next two years and has a strong balance sheet– enabling it to consolidate share further.
Look beyond the near term: The new COVID-19 wave in India remains a key risk in the near term. Our interactions with dealers suggest moderation in sales. However, cement demand, in our view, is often sticky and should see a quick recovery as the macro environment and impact of the pandemic normalise over the year. We continue to factor in 10% grey volume CAGR over FY21-24e for UTCEM.
Managing cost levers prudently: Ebitda margin at 25.6% in Q4 was well ahead of Street expectation of c23.5%. The company further guided that variable costs for H1FY22 are likely to remain competitive (vs peers). The grey cement realisations were up 3% y-o-y in FY21 and fared better than its peers in Q4 as well at 2% q-o-q. Post the strong Q4 performance we revise up our Ebitda estimates for FY22/23 by 1%/2% despite further escalation in input costs – as we expect pricing trends to remain supportive.
We revise our TP to Rs 7,900 from Rs 7,600: UTCEM in our view will remain the key beneficiary of the demand upcycle in the medium term. We see risk reward favourable on back of improving ROE profile and growth outlook.