Ultratech Cement rating: Buy; firm likely to be debt free by FY23e, says ICICI Securities

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Share of non-trade volumes increased to 36% in Q3FY21 from 31% in Q2FY21 and 33% in Q3FY20, implying 40% q-o-q and 25% y-o-y growth.

UltraTech Cement’s (UTCEM’s) Q3FY21 consolidated Ebitda at Rs 31 bn (up 56% y-o-y) with Ebitda/te at Rs 1,296/te was significantly higher than our/consensus estimates. Execution was robust across all parameters: industry-leading volume growth of 14% y-o-y, grey cement realisation decline of only 1.3% q-o-q, Ebitda/te up 37% y-o-y and net debt down by Rs 27 bn q-o-q to Rs 94 bn. We believe UTCEM is likely to rerate as it continues to gain market share with improved profitability/ RoCEs and turn net debt free by FY23e.

Factoring in the Q3FY21 beat, we increase our FY22e-FY23e Ebitda by 6-8% and raise our TP to Rs 6,700/share (earlier: Rs 5,725) based on 13x FY23e EV/E on half-yearly rollover. Maintain Buy. Key risks: lower than expected demand/pricing growth, and any regulatory intervention.

Q3FY21 capacity utilisation up 11% y-o-y to 80% with the company operating at 85% utilisation in Dec’20. While East operated at >100% utilisation and South at 70%, the figure for rest of the regions was 80%. UTCEM’s volumes grew 14% y-o-y/19% q-o-q to 22.43mnte with North and East posting >20% y-o-y growth. Century volumes grew by a strong 37% y-o-y and both Century and Binani assets worked at 75% utilisation.

Share of non-trade volumes increased to 36% in Q3FY21 from 31% in Q2FY21 and 33% in Q3FY20, implying 40% q-o-q and 25% y-o-y growth. This suggests pick-up in infrastructure spend and improvement in urban housing demand, especially in tier-2&3 cities. RMC revenues too grew 43% q-o-q and 24% y-o-y to Rs 6.2 bn while white-cement/putty revenues were up 17% y-o-y at Rs 5.4 bn. White cement/putty volumes grew 13% y-o-y with realisation increasing 4-5% y-o-y and q-o-q.

India operations revenue increased 19% y-o-y to Rs 117 bn. Grey cement realisation rose 4.5% y-o-y (declined only 1.3% q-o-q vs our estimate of 3% q-o-q), aided by higher prices in South and West, despite increase in non-trade volumes. Diversified market mix is aiding UTCEM to report strong Ebitda growth as it benefits from both higher volume growth in North and East and better prices from South and West. Ebitda increased 49% y-o-y to Rs 30.3 bn with Ebitda/te up 30% y-o-y at Rs 1,328/te.

UTCEM to become debt-free by FY23e as it is likely to generate FCF of Rs 70-75 bn p.a. Consolidated net debt declined by Rs 27 bn q-o-q to Rs 94 bn (Rs 74 bn in 9MFY21) on strong FCF generation post capex of Rs 4 bn and working capital release of Rs 8 bn in Q3FY21. We factor in capex of Rs 75 bn over FY22e-FY23e.

Parent company Grasim announced plan to enter into paints business with capex of Rs 50 bn over the next three years. Grasim intends to leverage Birla White brand and white cement/putty distribution network of UTCEM for paints. Management mentioned the company does not have any plan to hive off its white cement and wall putty business in the near term and any transaction with Grasim will be on an arm’s length basis.

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