UltraTech Cement Rating: Hold- Ebitda took a hit due to higher costs

FY22-24 Ebitda down 7-9%; ‘Hold’ maintained with unchanged TP of Rs 8,100

Mgmt indicated unexpected rain, labour/sand shortages in Nov-21 negatively impacted Q3FY22 volumes.
Mgmt indicated unexpected rain, labour/sand shortages in Nov-21 negatively impacted Q3FY22 volumes.

UltraTech reported a 25% y-o-y dip in Op. Ebitda during Q3FY22 due to acute cost pressure. In the post-result call, the management indicated that costs are likely to remain elevated in Q4FY22 also, but cement prices have started improving in a few regions. We expect price hikes in other regions as well in the next 2-3 months, with onset of peak construction season. We retain Hold, but cut FY22-FY24 Ebitda estimates by 7-9% to reflect cost pressure.

Revenues higher: UltraTech’s volumes declined 4% y-o-y to 22mt in Q3FY22, 1% above our forecasts. Revenues grew 4% y-o-y (2% higher). Overall realisation was up c.1% q-o-q, but grey cement realisation was largely flat q-o-q, in line with estimates. Cement prices were firm in the northern region and weak in the eastern region during Q3FY22, per mgmt.

Costs spike: For the quarter, costs increased sharply and exceeded our expectations. Raw materials/tonne (adjusted for stock change) increased 13% q-o-q led by increase in costs of flyash, gypsum and HSD; other expenses/tonne increased 21% y-o-y led by higher packing cost and normalisation of fixed costs; freight cost/tonne increased 1% q-o-q due to increase in diesel costs. While power and fuel cost was up 19% q-o-q due to increase in petcoke and international coal prices, the increase was in line with our expectation.

Ebitda miss: Unit Op Ebitda declined 22% y-o-y and 20% q-o-q to Rs 1,010/t. Overall Ebitda declined 25% y-o-y & 15% q-o-q (3% miss); excluding other operating income, Ebitda for the quarter was 10% below our estimate. Op. Ebitda was higher than our expectation led by few one time other operating income.

Demand outlook: Mgmt indicated unexpected rain, labour/sand shortages in Nov-21 negatively impacted Q3FY22 volumes. Demand has improved from Dec-21 and scenario looks likely to continue with major polls scheduled in the next two years.

Pricing outlook: Cement prices have started to go up in a few markets in the eastern, western and southern regions in the current month. Management indicated that the exit price for Q3FY22 was similar to the average during the quarter. With the onset of peak construction season, we expect prices to firm up in other regions as well in the next 2-3 months.

Cost outlook: Energy costs sharply increased in the past few quarters and management expects them to remain elevated in Q4FY22.

Capacity expansion: Commissioned 1.2mt of grinding capacity in Q3FY22, and in Jan-22 another line in Bara, up to the tune of 2mt, taking the total capacity to 114.6mt.

B/S & C/F: Deleveraging efforts continue as the company retired another Rs 5 bn debt in Q3; net debt to Ebitda continues <0.5x. Capex target for FY22 is Rs 50 bn and have already spent Rs 40 bn.

Earnings D/G: We cut Ebitda estimates by 7-9%, but retain our Hold rating and price target of Rs 8,100 (basis 15x Dec-23e EV/ Ebitda).

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