UltraTech Cement - 3QFY17 Result Update - Improved Operating Efficiencies Overshadowed Volume & Pricing Pressure - Reliance Securities

Reported operating performance of UltraTech Cement (UCL) came in broadly in-line with our estimates with reported EBITDA (+1% yoy & -5% qoq) at Rs10.4bn (vs. our estimate of Rs10.3bn) in 3QFY17. Though average net realizations dipped by ~2.5% qoq & ~1% yoy with visible upsurge in fuel prices, UCL's operating cost/tonne remained resilient at Rs3,833 (-1.3% yoy & -0.4% qoq) owing to improvement in operating synergies led by increased utilization from new GUs / higher petcoke usage (up to 78% vs. 74%) and 200bps rise in WHR usage. Sales volume - including export and white cement - stood at 11.73mnT (-1.3% yoy & +4.9% qoq). We cut our EBITDA estimates by ~9-12% for FY17E, FY18E & FY19E mainly to factor in likely impact of demonetization on IHB segment and pricing pressure. We downgrade our recommendation on the stock to HOLD from BUY with downwardly revised Target Price of Rs3,750.

Demonetization led to Subdued Sales Volume

UCL's domestic sales volume for grey cement declined by 2.2% yoy to 11.01mnT as the construction activities especially in IHB segment came to standstill in most part of the country due to demonetization. Southern region has been the key performing markets as it was less impacted (Southern market mostly trades in cheques) and volume fur UCL grew by over 10%.

Operating Performance Remains Impressive

UCL's operating performance remains impressive, as the Company has shown immense maturity in managing cost inflation. Its operating cost/tonne improved during the quarter and stood at Rs3,833 (-1.3% qoq & -0.4% qoq) owing to improvement in operating synergies led by increased utilization from new GUs / higher petcoke usage and 200bps rise in WHR usage. Reported EBITDA rose marginally by 1% yoy to Rs10.4bn, in-line with our estimate.

Outlook & Valuation

Though we continue like UCL owing to its consistent cost reduction measures and constant outperformance vis-à-vis the industry, we cut our EBITDA estimates by 9-12% for FY17E, FY18E & FY19E mainly to factor in likely impact of demonetization on IHB segment (volume cut by 3-5% yoy) and subdued realization environment. Further, current EV/EBITDA valuations at 17.9x & 13.3x for FY18E and FY19E, looks reasonable, which limit any further upside. Hence, we downgrade our recommendation on the stock to HOLD from BUY with downwardly revised Target Price of Rs3,750 ((13.0x FY19E EBITDA)) and advise to take fresh position on any meaningful correction.

Shares of ULTRATECH CEMENT LTD. was last trading in BSE at Rs.3681.5 as compared to the previous close of Rs. 3652.5. The total number of shares traded during the day was 10031 in over 1604 trades.

The stock hit an intraday high of Rs. 3693.3 and intraday low of 3625. The net turnover during the day was Rs. 36795556.

Source : Equity Bulls

Keywords