Buy Ultratech Cement; target of Rs 8500: Emkay Global Financial

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Emkay Global Financial's report on Ultratech Cement

Ultratech mentioned key elements of its growth strategy in the FY21 annual report: 1) focus on cost optimization and efficiency improvements; 2) low-cost expansion largely through the brownfield route; 3) enhance balance sheet strength and return ratios. In terms of cost optimization and de-risking efforts, we estimate sustainable cost savings of Rs90-100/ton by FY24E from the growing share of green power, improving blended ratio, lower lead distance, and better operating leverage. Ultratech would be adding ~20mt capacities in a staggered way by FY23E at capex of Rs65bn (<US$60/ton, 75% brownfield). The proposed expansion will help to gain market share (140bps to 23% by FY23E), and boost profitability and return ratios. With strong FCF generation of Rs82bn p.a. over FY22-24E, we expect Ultratech to become net cash positive by FY23E. Capital is likely to be allocated for growth opportunities and the surplus would be paid as dividends.

Outlook

We have a Buy rating on the stock with a DCF-based TP of Rs8,500 (Sep'22E), implying a 15x forward EV/EBITDA (vs. current multiple of 16x).

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