(Rating: BUY, TP: Rs 6,373, Upside: 15%)
Volume/EBITDA growth for Q3FY21 stood at 14% yoy/56% yoy - while it was 7%/18.5% ahead of our estimates. Ramp up in Century and UltraTech Nathdwara assets alongwith lower energy costs translated into beat vs our estimates. Post exceptional operating performance during Q3FY21, we upgrade our EBITDA estimates by 12.1%/6.5%/6.8% for FY21E/FY22E/FY23E respectively. We factor in volume/EBITDA CAGR of 10.3%/3.7% over FY21E-FY23E. Upgrade assigned valuations from 14x to 16x EV/EBITDA on FY23E and arrive at a target price of Rs 6,373/share with potential upside of 15% (previous TP of Rs 5,175). We upgrade UltraTech from ADD to BUY.
Key Result highlights
- Volumes for Q3FY21 came in at 23.88 MT, a sharp increase of ~14% y/y - vs our est. of 22.4 MT. Primary reasons for outperformance vs industry growth (~5% y/y) during the quarter was (1) 37% volume growth in Century assets (low base last year), (2) UltraTech Nathdwara was ramped up to 75% utilization level during the quarter vs 60% in Q3FY20 and (3) ramp-up of Bara line 1 to more than 70% utilization level (not present last year).
- Net sales realization/te stood at Rs 5,131 which was up by 2.7% y/y vs our estimate of +2.5% y/y.
- Accordingly, Net sales stood at Rs 122.5 bn, witnessing growth of 17.4% y/y - vs our estimate of Rs 113.6 bn.
- UltraTech delivered a strong performance on operating profit level as EBITDA surged by 56.4% y/y scaling to Rs 30.94 bn (vs. our estimate of Rs 26.1 bn). This was led by healthy improvement of 37% y/y in EBITDA/te - which stood at Rs 1,296 vs our est. of Rs 1,166. Per tonne profitability was higher than our estimates owing to lower than expected energy costs (expect to surge from Q4FY21E).
- Working capital release of Rs 7.8 bn during Q3FY21 and Net debt reduction of Rs 26.96 bn during the quarter with consol. Net debt/EBITDA at 0.84x. Total net debt reduction for 9MFY21 stood at Rs 74.24 bn with consol. Net debt of Rs 94.36 bn as of Dec 2020.
Key Presentation and Con-call Highlights
- Demand has been strong on account of stable IHB demand and infrastructure spends. Incrementally, housing segment displayed healthy signs of revival from tier-2&3 regions along with demand pickup from tier 1 cities.
- Regional mix: Although demand trends have been encouraging across the regions, East continues to be an outperformer, driving overall industry demand. In terms of regional utilization levels, East operated at 100%+ levels while South hovered around 70% and other regions in the vicinity of 80%.
- Cement Prices were marginally lower sequentially with relatively sharper dips in Eastern and Sothern markets.
- Variable Cost: Pet coke prices have increased from $60-65/te in June 2020 to ~$110/te currently. However management expects pet coke prices to have peaked out and expect prices to stabilize in coming 6 months. The high cost consumption will have impact in Q1FY22 which will not be as high as the current difference of $74/te (Q3FY21 consumption cost) Vs spot prices of $110/te.
- Capacity addition: Phase 2 Bara is expected to be commissioned by FY21 end while the ~19.6 MTPA capacity addition would be completed in staggered manner in FY23E. The 2MTPA grinding capacity of Binani which was earlier decided to be sold, will now be consolidated which will increase total UAE capacities to 5.4 MT.
- Others: Trade mix stood at 64% during the current quarter. Pet-coke/imported coal usage at 44%/43% respectively.
Valuation and Outlook
- Post exceptional operating performance during Q3FY21, we upgrade our EBITDA estimates by 12.1%/6.5%/6.8% for FY21E/FY22E/FY23E respectively.
- Led by capacity additions in Central and East (~6.7 MTPA) over FY21E-FY23E and demand normalization, we factor in volume CAGR of 10.3% over FY21E-FY23E.
- However, we anticipate EBITDA/te to peak out in FY21E as we expect (1) increase in competitive intensity post new capacity commissioning (effective capacity addition of 33 MTPA over FY20-FY22E) pressurizing cement prices and (2) recent surge in input costs (pet-coke prices moving up from $55/te to $110/te over May-Dec 2020). These factors cumulatively would start weighing on the profitability. Accordingly, we factor in gradual reduction in EBITDA/te from Rs 1,267 in FY21E to Rs 1,121 in FY23E. Accordingly, we expect EBITDA CAGR to hover around ~3.7% over FY21E-FY23E.
- Alongside cash outflow of ~Rs 65.3 bn towards capacity addition of 19.5 MTPA over FY21E-FY23E, we reckon that de-leveraging drive of UTCEM would continue with net debt reduction of Rs 135 bn over FY21E-FY23E. Net debt/EBITDA should decline to 0.4x by FY23E vs 0.84x currently.
- In terms of valuations, at CMP of Rs 5,535, UTCEM is trading at EV/EBITDA of 14.4x and EV/te of ~$174 on FY23E. Post plotting of EV/EBITDA band trajectory, we have observed that the stock has re-rated by minimum ~15% post every major capacity addition announcement. Accordingly, we assign an EV/EBITDA multiple of 16x on FY23E (previous multiple of 14x) and arrive at revised TP of Rs 6,373/share with potential upside of 15% (previous TP of Rs 5,175). We upgrade UltraTech from ADD to BUY.
Shares of ULTRATECH CEMENT LTD. was last trading in BSE at Rs.5592 as compared to the previous close of Rs. 5543.3. The total number of shares traded during the day was 11099 in over 2233 trades.
The stock hit an intraday high of Rs. 5592.7 and intraday low of 5474. The net turnover during the day was Rs. 61485517.