Ultratech Cement Rating: Buy; Robust performance in second quarter

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October 27, 2020 3:45 AM

Demand has recovered sharply; earnings growth of 40% expected in FY21; TP raised to Rs 6,100 from Rs 5,100; top pick in sector

Management indicated a broad-based demand recovery led by strong rural demand and a pick-up in urban demand.

Standalone EBITDA at Rs 25.5 bn (+41% y-o-y, +31% q-o-q) came in 17-19% above our forecast and the consensus estimate, driven by higher volume (+8% y-o-y vs our estimate of +5% y-o-y) and 2% higher blended realisations at Rs 261/bag (vs our estimate of Rs 255/bag). With higher realisation and operating leverage offsetting higher variable costs, blended Ebitda at Rs 1,329/t (+30% y-o-y, -5% q-o-q) was 14% above our estimate. UT’s consolidated net debt declined by Rs 47 bn (-41% y-o-y) to Rs 121 bn at end Q2FY21.

Management indicated a broad-based demand recovery led by strong rural demand and a pick-up in urban demand. Infrastructure segment recorded positive demand growth during Q2 on a pan-India basis, except Maharashtra. The demand pick-up has further accelerated in Oct-20, with UT’s capacity utilisation rising from an average 66% in Q2 to ~80-85% in Oct. With faster-than-expected demand recovery, we increase our volume estimates by 10-11% over FY21-23F. We now assume a modest 2% y-o-y decline in FY21F, followed by 16%/12% y-o-y growth in FY22F/23F.

Higher realisation, cost rationalisation steps to boost unit Ebitda margins
UT’s fixed overheads were down ~14% y-y (Rs 4.5 bn) during H1FY21, and mgmt reiterated its target of a 10% y-o-y (Rs 5 bn) annual reduction in fixed overheads on a sustainable basis. We expect higher realisation and lower fixed overheads to offset hikes in diesel and petcoke prices. We expect per unit margins to rise from ~Rs 1,100/t in FY20 to Rs 1,337/t in FY21F and sustain ~Rs 1,280/t over FY22-23F.

Raise FY21-23F Ebitda/earnings and TP to Rs 6,100; reiterate Buy rating
Driven by higher cement volumes and lower costs, our FY21/22/23F core Ebitda increases by 33%/20%/15% while adjusted earnings increase by higher 49%/27%/20%, respectively, due to lower interest outgo. We now expect sharp 40% y-o-y earnings growth in FY21F, followed by 17-18% growth in FY22F/23F. Compared to an 11% earnings CAGR over FY17-20, we expect a 25% CAGR over FY20-23F.

We value UT at 15x average FY22-23F core Ebitda (unchanged). Driven by higher volume/Ebitda, we raise our TP to Rs 6,100 (from Rs 5,100), implying 32% upside. UT trades at 13.2x FY22F EV/Ebitda (or 12x core FY22F Ebitda). UT remains our only Buy-rated stock and our preferred pick in the cement space.

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