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Lower costs led the beat in earnings; Upgrade to Accumulate
Ultratech Cement (UTCEM) reported Q4FY19 earnings above our estimates driven by 9.6%/4.8% lower than expected Energy/Freight costs (on per tonne basis). EBITDA margin reported at Rs961/t (PLe:Rs825/t), +12.2%/Rs105 YoY highest after a six quarters. Ultratech Nathdwara Cement Limited (UNCLerstwhile Binani Cement) surprised with EBITDA/t of Rs830 (substantial improvement of Rs740 QoQ) led by better realisations and cost advantages. UNCL will also reduce debt by selling non-core assets in UAE/China by Q4FY20.
Admittedly, the price hike across regions and improved share of high margin trade segment rests our concerns of poor pricing power. We upgrade our EBITDA estimates for FY20e/FY21e by 15%/21% to factor in higher realisations coupled with higher capacity utilisation, improved margins and deleveraging of Non-core assets in acquired assets. We upgrade the stock to Accumulate with TP of Rs4,700 (earlier Rs3,725).
* Lower than expected costs led the beat:
Volumes rose 15.4% YoY at 21.3mn tonnes (t), in line with our estimate. This included 975kt of volumes bought out from UNCL. Realisations rose 2.4%/Rs112 YoY (Flat QoQ) to Rs4,852/t tad below our estimates of Rs4,910. Led by 6.5%/7.6% YoY lower energy/freight cost, Cost/t was restricted to Rs3,891 (PLe:Rs4,085), +0.2% YoY/Rs7. Benefitted by lower than expected costs, EBITDA rose 30% YoY to Rs20.5bn way ahead of our estimate of Rs17.8bn. Led by 32% increase in other income, PAT rose 50% YoY to Rs10.2bn (PLe:Rs8.1bn).
* Surprised UNCL performance:
UNCL reported EBITDA/t of Rs830, excluding one of cost impact of Rs160/t. Management indicated further cost reduction of Rs50/t in FY20e on account of efficiency improvements and guided to become PBT breakeven by Q4FY19 at 85% utilisation. Plants continued to ramp-up ahead of schedule with utilisation at 62-63% in Q4 and exit rate of 72%.
* Key con-call highlights:
1) Industry witnessed increase in selling prices across regions led by strong demand and improved utilisations 2) Nameplate cement capacity/demand in India for FY19 at 480m/340m tonnes; expecting 28-30m tonnes incremental demand in FY20e 3) 12mt capacity added in FY19; will add 20mt capacity in FY20e 4) Trade: Non-Trade mix at 66%:34% 5) Rs15- 20bn capex guidance for FY20e; Rs7bn capex will be spend towards a) Bicharpur coal block development b) Bulk terminal at Mumbai c) Wall care & Putty expansion at Nathdwara d) Bara Grinding Unit e) Waste Heat Recovery (WHR) at 4 locations and balance towards maintenance capex 6) Commissioning of 4tmpa Cement grinding unit at Bara further delayed with revised timeline of Jun'20 7) Awaiting legal clearance for 2.3mtpa clinker plant at Super Dalla 8) Delay in acquisition of Century Cement by quarter; Expect to receive approvals and transfer of mines by Q2FY20 9) Locked in fuel prices till H1FY20e; Pet coke cost fell 7% QoQ in Q4FY19 10) Full benefit of change in Truck Axle load norms captured in Q4FY19.
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