Key takeaways from FY18 annual report analysis of UltraTech Cement (UTCEM) includes: 1) management estimates demand growth of >7.5% in FY18 and remain optimistic on 8% demand growth in FY19, 2) UTCEM to grow ahead of industry backed by acquisitions and expansions; additional 7.5MT capacities to be operational by March ’19 taking total capacities to 92.5 MT, 3) acquired JPA assets ramped-up ahead of schedule with average capacity utilisation of 53% in FY18 and exit quarter utilisation of ~75% in Q4FY18; management targets PBT break-even by Q1FY20, 4) EBITDA to OCF conversion declined to 63% in FY18 (vs 96% in FY17) mainly on working capital infusion for the acquired assets; 5) return ratios declined to decade low of 8-9% owing to higher cost escalations coupled with lower utilisation of acquired JPA assets.
We expect UTCEM to post robust >20% EBITDA CAGR over FY18-FY20E led by ~15% volume CAGR and after factoring EBITDA/ tonne increase from Rs 956/tonne in FY18 to Rs 1,077/tonne by FY20E. We retain our FY19-20E estimates and target price of Rs 4,700/share based on 15x FY20 EV/E. Maintain buy. UTCEM remains our preferred pick besides SRCM.
UTCEM’s market share increased from 17% in FY17 to 19% in FY18 as volumes grew 21.4% y-o-y.
As per management, JPA assets became cash break-even in Q4FY18 (a quarter in advance) assuming 80% debt funding. Cost/tonne gap of Rs 125/tonne with existing UTCEM’s assets is likely to be bridged over the next few quarters.
RoCE / RoE ratios declined to decade low at ~8% / 10% respectively in FY18 owing to higher cost escalations coupled with lower utilisation of acquired JPA assets. We expect return ratios to
improve by 350bps over next two years backed by higher utilisation and better pricing.
