Ultratech Cement rating | Buy — Greater visibility of growth in the last quarter

We met UltraTech Cement’s CFO, Atul Daga for an update on the company’s business and growth plans. Key insights highlighted from the meeting:

Demand has been weak: expect recovery from Q4FY20: The past few quarters have witnessed weak overall demand in India due to slow construction activity; however, the North and parts of the South (Tamil Nadu) have fared better. Demand has picked up recently, which has improved visibility of growth in Q4FY20. While overall demand in the country should be better in FY21 (~6% y-o-y), the East should see stronger growth (~10% y-o-y).

Prices lower in the South/East; North/Central-India relatively better: Prices in the South/East have been weak, emanating particularly from weak demand in Andhra Pradesh and Telangana. The eastern region also faced supply pressures as several new capacities got added. However, North and Central-India were relatively better. According to our checks, currently all-India prices are up 5% y-o-y; led by ~10% growth in North/Central-India, while East/South have been nearly flat.

Limited capacity addition on the anvil: UTCEM has announced a 3.4-MMTPA expansion in East India, which should get commissioned in 1HCY21. Besides this, there is no ongoing expansion programme and the company’s focus is to sweat existing assets (capacity of 109 MMTPA; 70% current utilisation).

Net debt/Ebitda to decline: Net debt of the company is expected to decline led by limited capex spends and stronger cash flows from the ramp-up in existing capacities. We estimate net debt to decline to ~Rs 130 bn (1.1x) in FY21 led by strong free cash flow (FCF) of Rs 75 bn (~7% yield) in FY21 (v/s Rs 20 bn in FY19). Additionally, UTCEM is looking to divest its non-core assets in China and the UAE and to recover loans given to Binani’s fiber-glass business, which if successful will help reduce leverage further.

Century– rebranding & revamping of assets to improve margins: The company has already started to turn around its recently acquired Century’s (CTIL) assets. While utilisation declined to 48% in Q2FY19 due to weak operations it is expected to improve to ~70% in FY21.

Valuation and view
We reiterate Buy on UTCEM based on the following:
> Market mix has improved post acquisition with North/Central-India (both regions have better utilisation outlook) contributing ~45% to volumes while the share of weaker regions (South/East) has declined.

> We estimate 26% CAGR for Ebitda and 48% CAGR for EPS over FY19-21. Driven by strong operating cash flows and fall in interest cost, RoE/RoCE should improve by 550bp/420bp to 13.8%/11.2%
over FY19-21.

> Valuation is also supportive at 11x FY21e EV/Ebitda and ~$152/t on EV, which are at ~15% discount to the 10-year average. It is also trading 30% cheaper than its peer, Shree Cements v/s historical average of 10%.

> We value UTCEM at 14x FY21e EV/Ebitda to arrive at a TP of Rs 5,050 (implied EV/t of $185/t on FY21 capacity).