ULTRATECH CEMENT: Below estimates; revival of CTIL’s plants to remain key

–       Volumes decline, realizations decrease sequentially: 2QFY20 consolidated volumes (including white cement) declined 1% YoY to 18.7mt. Realizations decreased 3% QoQ due to weaker prices in the southern and eastern regions of India. Net sales grew 4% YoY to INR96b. Cost/t declined 1% YoY to INR 4,121/t. Thus, EBITDA/t rose 36% YoY to INR1,026/t (-25% QoQ). While EBITDA grew 35% YoY to INR19b, margin expanded 4.6pp YoY to 19.9%. PAT stood at INR5.8b (+62% YoY).

–       Ex Century, EBITDA in line: Excluding Century, volumes increased 3% YoY (in-line). Realizations increased 5% YoY (-3% QoQ) to INR5,163 and net sales grew 7% YoY to INR88.6b (in-line). Cost/t declined 3% YoY but increased 3% QoQ due to higher other expenses/t. EBITDA/t increased 42% YoY (down 22% QoQ) to INR 1,132/t (below est. of INR1,188/t due to higher other expenses). EBITDA stood at INR19.2b (v/s est. of INR20b).

–       Management commentary: (1) All India demand reduced by 2-2.5% YoY in 2QFY20 led by 3-4% decline in the South/East. (2) The board has approved 3.4mt capacity expansion in the East through two brownfield expansions (Patliputra in Bihar and Dankuni in West Bengal) and a greenfield grinding unit in Odisha. (3) Century’s cement assets operated at 48% utilization in 2QFY20 and generated nil EBITDA (INR60/t incl. other income). Utilization for 2QFY19 stood at 64% with EBITDA/t of INR500/t. The reduction in utilization was due to maintenance shutdown taken for the plants in 2QFY20. (4) Net debt reduced by INR15b over Mar-Sep’19.

–       Strong 1HFY20 performance: Revenue/EBITDA/PAT were up 12%/52%/97% YoY to INR210b/INR48.7b/INR18.6b in 1HFY20. We expect revenue/EBITDA/PAT to increase 18%/38%/42% in 2HFY20.

–       Enhanced pricing power aided by aggressive capacity growth: Driven by an inorganic growth strategy, UTCEM expanded its capacity by 65% since FY17 to 109.4mt (23% of all-India capacity). We believe that this has provided it significant pricing power, particularly in Central/West India where it now has ~40% market share. We forecast EBITDA to report 30% CAGR and EPS to show 42% CAGR in FY19-21E, driven by 14% CAGR in volume and better margins. The company trades at 13.8x/12x EV on FY20/FY21 EBITDA. We value UTCEM at 14x FY21 EV/EBITDA and arrive at a target price of INR4,950 (implied EV/t of USD180/t on FY21 capacity). Maintain Buy.

(Report on Ultratech Cement 2QFY20 by Motilal Oswal Institutional Equities)