UltraTech Cement - 2nd covid wave a blip; long-term thesis intact - ICICI Securities

Key takeaways from UltraTech Cement's (UTCEM) management concall include: i) Company to remain focused on organic as well as inorganic expansion in domestic market, given OCF generation of >Rs100bn p.a.; ii) expect strong demand growth in the medium-term; recent slowdown owing to 2nd covid wave likely to be temporary; iii) expansion of 19.5mnte capacity on track to get commissioned by Mar'23-end; iv) royalty cost savings of Rs2bn p.a owing to recent MMRDA amendments; fuel costs escalations to stabilise by Q3FY22; and v) expects return ratios to improve by at least 300bps in the medium-term. Any stock price correction given concern on demand slowdown owing to 2nd covid wave is an opportunity to BUY, in our view. Maintain BUY with a target price of Rs8,000/share based on 15x FY23E EV/E. Key risks: lower demand / prices.

- Capital allocation outlook: UTCEM to remain focused on organic as well as inorganic expansion in the domestic market and would retain liquidity of Rs100bn on its balance sheet for facilitating the same. The company remains open to acquisitions in all regions except West (where it would be restricted on account of consolidation from CCI point of view). FY21 dividend payout stood at 20% and the Board has adopted a dividend payout policy of 15-25% for the years to come. The management believes FY21 dividend payout is likely to sustain and improve going ahead.

- Expansion plan of 19.5mnte capacity on track; to get commissioned by end of Mar'23: The company's expansion plan of 19.5mnte capacity remains on track, barring the slowdown on account of the current pandemic. The capacity is expected to commission by the end of Mar'23. The company has already placed orders for most critical equipment and the civil work has already commenced. The company is likely to incur a capital expenditure of Rs40-50bn in FY22 and Rs30bn in FY23.

- Profitability improvements at UltraTech Nathdwara (UNCL) and Century assets: In Q4FY21, the capacity utilisation of UNCL stood at ~85% and that of Century assets stood at >90%. The merger with UNCL is likely in FY23. For FY21, EBITDA/te for UNCL stood at Rs1,500/te and for Century it stood at ~Rs800/te. For Century, EBITDA/te is expected to further go up by Rs64/te on account of royalty savings and coupled with implementation of costs improvements and brands transitioning will result in EBITDA/te to reach +Rs900/te. About 77% of Century volumes have been transitioned to UTCEM brand. Bihar is expected to get converted (incremental 7-8%) while Chhattisgarh will continue with old brand.

- Focus on increasing share of premium cement: Share of premium cement increased to 10% of trade volumes in FY21 from 8% in FY20 and the company is targeting the same to go up to 15% in the medium-term.

Shares of ULTRATECH CEMENT LTD. was last trading in BSE at Rs.6487 as compared to the previous close of Rs. 6405.75. The total number of shares traded during the day was 48026 in over 6703 trades.

The stock hit an intraday high of Rs. 6618.95 and intraday low of 6300. The net turnover during the day was Rs. 313473420.

Source : Equity Bulls

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