UltraTech Cement - 1QFY18 Result Update - Sound Performance:BUY Target Price of Rs 4,750.

UltraTech Cement - 1QFY18 Result Update - Sound Performance amid Challenging Environment

UltraTech Cement (UCL) has reported a better-than-estimated operating performance in 1QFY18 with its reported EBITDA coming in at Rs14.7bn marginally topping our estimate of Rs14.4bn. EBITDA/tonne stood at Rs1,113 compared to Rs1,039 and Rs841 in 1QFY17 and 4QFY17, respectively. While average realization has witnessed a sharp up-tick (+7.5% YoY and +9.6% QoQ), cement sales volume remained subdued (-0.2% YoY and -6.3% QoQ) on the back of challenging demand environment led by sand crisis, water issues and drought in several pockets of Northern, Western and Southern regions. Further, a significant 2x YoY spike in the price of petcoke (which accounted for 71% of total fuel usage) and 9% YoY rise in diesel prices resulted in higher operating cost per tonne  (+5.6% YoY and +1.7% QoQ). However, the Management stated that improved efficiency led to ~5% rise in EBITDA during the quarter. Looking ahead, we expect UCL’s operating efficiency to improve further with the production ramp-up from newly acquired Jaypee units. We maintain our positive view on the stock due to: (a) a consistent rise in market share and leadership status; (b) consistent improvement in operating synergies; (c) likely turn-around of new acquired Jaypee units; and (d) well-placed to benefit from likely economic boom with ample reserve of limestone post recent acquisition. We maintain our BUY recommendation on the stock with a revised Target Price of Rs4,750.

Dismal Volume Drags Revenue

UCL’s revenue grew by ~6% YoY to Rs65.3bn vis-à-vis our expectation of Rs67.8bn mainly due to dismal sales volume. Sales volume – including exports – stood at 13.18mnT (-0.2% YoY and -6.3% QoQ) for the quarter. Looking ahead, we expect UCL’s sales volume growth to remain healthy post monsoon with the improvement in rural demand and pick-up in infrastructure development.

Operating Performance Remains Healthy Amid Cost Pressure

A strong recovery in average realisation and operating efficiency improvement enabled UCL to register 7% YoY and 24% QoQ growth in EBITDA to Rs14.7bn vs. our estimate of Rs14.4bn. EBITDA margin stood at 22.4% in 1QFY18 vs. 22.2% and 18.2% in 1QFY17 and 4QFY17, respectively. However, a significant 2x YoY spike in petcoke prices (usage is up to 71%) and 9% YoY rise in diesel prices resulted in higher operating cost per tonne  (+5.6% YoY and +1.7% QoQ).

Outlook & Valuation

We continue to like UCL given its consistent endeavour to upgrade its operating efficiencies, leadership status (an unmatched 89mnT capacity in India), strong brand equity and healthy financials. We upgrade our EBITDA estimate by 4% and 16% for FY18E and FY19E, respectively to factor in Jaypee acquisition. Considering, UCL’s healthy growth prospects in next two years due to above mentioned factors, we re-rate our target EV/EBITDA multiple from 14.0x to 14.5x. We reiterate our BUY recommendation on the stock with a revised Target Price of Rs4,750.