Consolidated grey cement volumes rose only 2.6% y-o-y to 18.5mt owing to weak industry demand. Given the weak demand scenario, we have trimmed volumes by 5% for FY20e and 3% for FY21e.
Indian cement industry bellwether UltraTech Cement (UTCL) trumped expectations for the second consecutive quarter, turning in consolidated Ebitda (up 60% y-o-y to Rs 27 bn) 5% ahead of our and 10% ahead of consensus forecasts. Weak volume (up 2.6% y-o-y; ~4% below estimates) was more than offset by a surge in realisation of >11% q-o-q (7.5% estimate), which lifted Ebitda/t to an all-time high of Rs 1,441. Costs are largely in line. With near-term weakness in cement prices likely to be offset by the falloff in fuel cost, our earnings estimates are not at risk.
Factoring in the recent correction in UTCL’s stock price and imminent potential consensus earnings upgrade (our Ebitda is 18% ahead each for FY20 and FY21), and rolling over the valuation to Q3FY21e Ebitda, we are upgrading UTCL to Buy (from ‘HOLD’) with a TP of Rs 4,892 (at 14x EV/Ebitda; Rs 4,801 earlier).
Q1FY20: Key highlights
> Consolidated grey cement volumes rose only 2.6% y-o-y to 18.5mt owing to weak industry demand. Given the weak demand scenario, we have trimmed volumes by 5% for FY20e and 3% for FY21e.
> Grey cement realisation surged ~11% q-o-q. Hence, we see no risk to our earnings estimates.
> Blended Ebitda/t stood at an all-time high of Rs 1,441 (up 56% y-o-y, 37% q-o-q).
Outlook: on a roll—We remain upbeat on the cement sector owing to a confluence of positive fundamentals—healthy long-term demand outlook, high clinker utilisation and benign costs, and expect UTCL to be its prime beneficiary. Hence, we are upgrading the stock to a ‘BUY/SO’ from ‘HOLD/SP’. The stock is trading at 11x FY21e EV/Ebitda.