Analyst Corner: Maintain ‘buy’ on UltraTech with target price of Rs 4,720

By HDFC Securities Institutional Research

We maintain ‘buy’ rating on UltraTech Cement with a target price of `4,720 (15xFY22 consolidated Ebitda). In FY20, UltraTech’s profits surged and it also reduced its working capital and debt on books. In FY21E, we expect falling energy costs to moderate the impact of an expected sharp 16% volume decline. However, we build in 21% volume recovery in FY22E (owing to its robust distribution) as demand normalises to drive earnings rebound in FY22E. In Q4FY20, amid a sharp 16% volume fall (Covid impact), falling energy costs and increased fixed cost controls boosted operating margin to Rs 1,139 per MT (+14% y-o-y).

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Subdued growth in January/February and 10-day sales loss in March pulled down consolidated grey cement volume by 16% y-o-y to 24.3 m MT. White/putty volumes fell 22% y-o-y to 0.32 m MT. Blended NSR rose 1% q-o-q on price hike taken in Q4, thus bolstering y-o-y gain at +3%. Unitary opex stood flat y-o-y, aided by fall in input costs.

However, the benefit was moderated on neg operating leverage. Healthy pricing thus boosted unitary Ebitda to solid Rs 1,139/MT (+14% y-o-y), restricting consolidated Ebitda declined by 4% y-o-y. Additionally, the company reduced its working capital. As capex remained flat y-o-y at Rs 1,700 crore, UTCEM’s net debt fell 25% to Rs 16,400 crore. Net debt/Ebitda cooled off to 1.8x vs 3x y-o-y.

Nathdwara plant integration achieved in Q4. Century plant’s brand integration achieved ~65% production. Falling petcoke prices’ benefits will continue in FY21. Overall, plant utilisation is seen improving month-on-month in May, mainly driven by retail demand. The Dalla Super clinker plant is expected by March 21E, the upcoming SGUs will be delayed by at least six months owing to Covid impact. We expect FY21E consolidated volumes to fall 16% on sharp loss in 1H, however, we build in 21% recovery in FY22E. The profit impact in FY21 should be moderated by falling energy cost and lower discretionary spends. We maintain ‘buy’ with a TP of `4,720 (15xFY22 consolidated Ebitda). We continue to ascribe it premium valuations (10% higher vs its 10-year average) for its capacity & cost leadership and balance sheet discipline.

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