Strong volume, cost efficiencies to drive growth…
About the stock: Ultratech Cement Ltd, a part of Aditya Birla Group, is the India’s largest manufacturer of grey cement. Company is also present in white cement and ready-mix concrete segments
• As of March 2024, company’s total cement capacity stood at 146.2 mtpa (including 5.4 mtpa of overseas operations). North region constitutes 23% of total capacity followed by west (~21%), central & east (~19% each), south (~14%) and overseas (~4%)
• Company’s revenue has increased by 25.9% CAGR over the period FY21-24 while EBITDA and PAT have grown at 5.9% and 14.8% CAGR respectively
Investment Rationale:
• Aggressive capacity expansion plan continues to drive volume growth: Company’s volume growth (~13% YoY in FY24) continues to beat street expectations and industry growth, mainly led by timely capacity additions, faster ramp-up of new capacities and continuous push towards gaining market share across regions. Company is in process of further expanding its total capacity by 21.5 mtpa during FY25-26E to reach 174.2 mtpa by FY26E (implies ~9% CAGR over FY24-26E). We believe that company will continue to grow its volumes better-than-industry average over the same period, led by continuous capacity additions, pick-up in demand and improvement in overall utilisation rate. We estimate company’s volume growth at 10.0% CAGR over FY24-26E to 144 mtpa by FY26E (from 119.1 mtpa in FY24)
• EBITDA/tone to improve further going forward led by cost efficiencies: Company’s EBITDA/ton improved to ₹ 1089/ton in FY24 (vs ₹ 1005/ton in FY23), mainly led by decline in power & fuel cost, though higher raw material cost and other cost partially negate the impact of lower energy cost. Going ahead, we expect EBITDA/ton to improve further to ₹ 1255/ton by FY26E, primarily driven by focus on cost saving initiatives & positive operating leverage. Management also expects further cost savings of ₹ 200-300/ton over the next 3 years, led by increase in share of lower-cost renewable power (targets ~60% from ~24% at present), increase in share of alternative fuels to 15% (from 5-6% currently), optimising freight cost (on expanding network), further improvement in blending ratio and positive operating leverage
Rating and Target Price
• UltraTech is strongly placed to benefit from its aggressive capacity addition plans with focus on further reducing cost structure. We expect revenue to grow at ~10.8% CAGR over FY24-26E while EBITDA and PAT are expected to grow at 18.1% and 21.2% CAGR respectively over the same period
• Valuation at 16.1x EV/EBITDA on FY26E basis looks fair and factoring in most of the positives. We recommend Hold on UltraTech Cement with target price of ₹ 12430 per share (based on 20x FY26E EV/EBITDA)
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