The Q1FY22 performance of UltraTech Cement (UTCL) is picture-perfect—akin to Q4FY21. Despite the odds, it exceeded expectations across volumes, realisation and cost, driving Ebitda/t to an all-time high. Ebitda topped our estimate by 19%. Factoring in firm underlying cement prices, we are raising FY22e and FY23e Ebitda by ~7% each.
UTCL’s robust performance – and also peers’ – reinforces our faith in the sector’s ability to protect earnings in tough times. Furthermore, we view improving demand outlook, firm cement prices and potential peaking of fuel cost 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 still 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 cost/t stood flat q-o-q (2.3% below expectation), overall cost/t was 3.5% below estimates (rising 2.6% q-o-q). All in all, blended Ebitda/t rose to an all-time high of Rs 1,536 while margins climbed to a decadal high of 28%.
Factoring in firm underlying cement prices, we are raising FY22e and FY23e Ebitda by ~7% each. 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 performance displayed by UTCL and industry peers (including pan-India major ACC) convinces us of the sector’s ability to protect earnings in tough times—be it through firm cement prices or tight cost control. With a massive drop in Covid-19 cases, demand outlook has turned bright, yet again. While current cement prices stay broadly firm, the recent decline in global crude oil prices hints at a potential peak, for the time being at least. Factoring in the earnings upgrade and rising 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 cost in the past few quarters is heartening. Improving ROE, strengthening Balance Sheet and scope of efficiency enhancement complement the improving sector outlook. We therefore upgrade to ‘BUY/SO’ with a TP of Rs 8,627.