The robust Q4FY19 performance reported by the largest cement player UltraTech Cement (UTCL) resembled the dance of an elephant. Consolidated Ebitda at Rs 23.3 bn (up 31% y-o-y) beat our Rs 23.0 bn estimate (highest on the Street) as marginal revenue disappointment was offset by softer costs. Given recent improvement in the cement pricing scenario, we believe UTCL’s performance could improve further; factoring in the same, we revise up FY20e and FY21e Ebitda 12% and 17%, respectively. However, under our valuation framework (14x EV/Ebitda rolling over to Q2FY21e Ebitda) the stock offers limited upside (given the recent sharp run). We, therefore, maintain Hold with revised TP of Rs 4,822 (Rs 3,971 earlier). We continue to stay positive on the cement sector factoring in the industry clinker utilisation up-cycle and maintain that UTCL will be its prime beneficiary.
Q4FY19: Key highlights
*Consolidated grey cement volumes rose 15% y-o-y to 21.85mt with further ramp-up of assets acquired from JP Associates (JPA) and the recently acquired UltraTech Nathdwara (UNCL; erstwhile Binani Cement). Standalone volumes were impressive too, rising ~10% y-o-y (excluding JPA and UNCL). With further ramp-up, volume growth will continue to remain elevated.
Also read: Max Financial Rating| Buy — Valuations are factoring in binary risks
Consolidated grey cement realisation rose ~2% q-o-q and with the current price hikes is set to rise further in the near-term. Variable cost/t fell ~3% q-o-q owing to drop in fuel prices and is expected to stay under control as current fuel prices stay range-bound. Further, UTCL continues to invest in improving efficiency by adding Waste Heat Recovery and renewable energy based power plants.
Blended Ebitda/t for Q4FY19 stood at rS 1,048 (up 14% y-o-y and 39% q-o-q) even as the same for FY19 was at rS 889. We expect further sharp improvement in Q1FY20 owing to controlled cost and recent sharp price hikes in North and East.
Outlook and valuation: Riding the sector wave; maintain ‘HOLD’
We stay upbeat on the cement sector owing to a confluence of positive fundamentals: healthy demand outlook, rising clinker utilisations and controlled cost. While UTCL will be a prime beneficiary of it, the recent sharp run-up in the stock offers limited upside. Hence, we maintain ‘HOLD/SP’. The stock currently trades at 11.4x FY21e EV/Ebitda.
Investment theme
Industry leader UltraTech Cement will be the beneficiary of (i) strong demand growth momentum and rising clinker utilisations amidst tepid capacity additions;
(ii) pan-India presence that enables it to benefit from the price hikes across different regions; (iii) high operating leverage — a 1% rise in prices increases Ebit by 8%; and (iv) increasing focus on improving cost efficiency and reducing leverage. However, the recent surge in the stock price offers limited valuation comfort as we believe the benefits are largely priced in. We therefore, recommend a Hold.
Company description: UTCL is the market leader in the domestic cement industry. With acquisition of Binani and JPA’s assets, the company’s current domestic grey cement capacity has been enhanced to ~95mtpa. It is further set to rise to 113mtpa (22% of industry capacity) with the acquisition of Century Textiles assets and commissioning of the proposed 4mtpa plant in Uttar Pradesh. The company has 982MW of thermal captive power plants. Also, the company operates in the white cement segment with ~1.5mtpa capacity.
