UltraTech Cement - Reaping benefits of scale, diversified market mix - ICICI Securities

UTCEM is likely to be the key beneficiary of expected demand recovery post monsoon, given its low utilisation vs larger peers especially in North / Central regions and expected demand improvement in South / West regions from H2FY21E. Acquired assets of Binani and Century may see gradual ramp-up after operating at 60-65% utilisation in FY20. UTCEM's strong profitability would further increase with 10% fixed costs reduction (Rs5bn p.a or Rs60/te.), improving profitability of Century's assets, better cost efficiencies and operating leverage. With better profitability and minimal organic capex plan, UTCEM is likely to turn debt free by FY23E. We maintain our FY21E-FY22E EBITDA (~15% ahead of consensus) with unchanged target price at Rs5,100/share (13x Mar'22E EV/E). Valuation at 10xFY22E EV/E is attractive, in our view. Maintain BUY.

- Volumes to grow ahead of industry average: UTCEM likely operated at 70%/75% utilisation in Central / North regions in FY20 vs these regions operating at 75-80% utilisation. Pent-up urban demand and non-trade demand especially in South and West regions could improve from H2FY21E after being severely impacted during H1FY21 with gradual relaxation in lockdown and return of migrant workers. Accordingly, UTCEM is likely to be key beneficiary of expected demand recovery and pick-up of non-trade volumes. Similarly, acquired assets of Binani and Century may see gradual ramp-up after operating at 60-65% utilisation in FY20. We expect UTCEM to post better than industry average volume growth over FY21-22E resulting in further increase in market share.

- Century (CENT) assets EBITDA/te may more than double to ~Rs1,000/te by FY22E from Rs423/te in FY20. It operated at >70% utilisation in May-Jun'20 with EBITDA/te improving to >Rs900/te with cost/te declining by Rs105/te in Q1FY21 and better realisation. Management maintained its guidance that ~84% of the production would be transitioned to UTCEM brand (vs 65% in Mar'20) and costs would be in line with existing UTCEM assets (excluding Rs70/te royalty cost) by Q3FY21.

- Sharp focus on cost reductions and efficiencies: UTCEM is targeting 10% fixed cost savings (Rs5bn p.a. or Rs60/te) in FY21 by cutting discretionary costs. Company commissioned 33MW WHRS during FY20 and plans to add another 27MW in FY21, taking total WHRS capacity to 145MW - sufficient for 13% of capacities. Besides, it plans to increase solar and wind power capacity from 99MW to >350MW by end of FY22 which can cater to ~7% of capacities. We expect consolidated EBITDA/te to increase from Rs1,144/te in FY20 to Rs1,273/te by FY22E.

- UTCEM could become debt free by FY23E as it is likely to generate FCF of Rs50-55bn p.a.: Consolidated net debt declined by Rs22bn QoQ to Rs147bn as at Jun'20-end owing to strong FCF aided by Rs8bn working capital release. Net debt has declined by Rs60bn over past three quarters. Besides, UTCEM has divested non-core Binani's assets in China in Aug'20 with net receipts of Rs7bn.

Shares of ULTRATECH CEMENT LTD. was last trading in BSE at Rs.3825.05 as compared to the previous close of Rs. 3823.15. The total number of shares traded during the day was 19417 in over 3369 trades.

The stock hit an intraday high of Rs. 3859.1 and intraday low of 3776. The net turnover during the day was Rs. 74316654.

Source : Equity Bulls

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