The Q1FY22 efficiency of UltraTech Cement (UTCL) is image-perfect—akin to Q4FY21. Despite the odds, it exceeded expectations across volumes, realisation and price, driving Ebitda/t to an all-time higher. Ebitda topped our estimate by 19%. Factoring in firm underlying cement rates, we are raising FY22e and FY23e Ebitda by ~7% each and every.
UTCL’s robust efficiency – and also peers’ – reinforces our faith in the sector’s capacity to guard earnings in hard occasions. Furthermore, we view enhancing demand outlook, firm cement rates and possible peaking of fuel price as valuation re-rating arguments. Accordingly, we are revising up UTCL’s EV/Ebitda to 17x (from 15x) and upgrading it to Buy (from ‘HOLD’) with a revised TP of Rs 8,627 (Rs 6,736 earlier).
Outperformance across parameters
The second Covid wave dragged UTCL’s volumes by 22% q-o-q to 21.53mn tonnes (up 47% y-o-y on a low base), but it nevertheless came in 2.6% above our estimate. Blended realisation rose 6% q-o-q (>7% for grey segment), beating our estimate by 1.3%. While variable price/t stood flat q-o-q (2.3% beneath expectation), all round price/t was 3.5% beneath estimates (increasing 2.6% q-o-q). All in all, blended Ebitda/t rose to an all-time higher of Rs 1,536 though margins climbed to a decadal higher of 28%.
Factoring in firm underlying cement rates, we are raising FY22e and FY23e Ebitda by ~7% each and every. Our revised Ebitda/t is Rs 1,417 for FY22e and Rs 1,402 for FY23e vis-à-vis Rs 1,338 in FY21.
Strengthening sector conviction
Robust Q1FY22 efficiency displayed by UTCL and business peers (which includes pan-India significant ACC) convinces us of the sector’s capacity to guard earnings in hard times—be it by means of firm cement rates or tight price manage. With a enormous drop in Covid-19 circumstances, demand outlook has turned vibrant, however once more. While existing cement rates keep broadly firm, the current decline in international crude oil rates hints at a possible peak, for the time getting at least. Factoring in the earnings upgrade and increasing sector conviction, we are raising EV/Ebitda to 17x for UTCL.
Outlook and valuation: Improving prospects upgrade to ‘BUY’
UTCL’s agility displayed across volumes, realisation and price in the previous couple of quarters is heartening. Improving ROE, strengthening Balance Sheet and scope of efficiency enhancement complement the enhancing sector outlook. We for that reason upgrade to ‘BUY/SO’ with a TP of Rs 8,627.