Motilal Oswal said the company's expanded capacity has provided it significant pricing power, particularly in Central/West India where it now has around 40% market share.
Shares of UltraTech Cement gained over a percent intraday on December 13 after Motilal Oswal said it is a high conviction idea, citing strong free cash flow.
"Given limited capex needs, strong free cash flow generation of more than Rs 7,500 crore per annum (7 percent yield) from FY20 should drive deleveraging and stock price appreciation," it said in a report.
Hence, net debt/EBITDA ratio is expected to reduce to 1.1x by March 2021 from 2.2x now and return on equity (RoE) is expected to rise by more than 550bp to 13.8 percent over FY19-21, driven by strong EBITDA growth (26 percent CAGR) and lower interest costs from deleveraging, the brokerage feels.
Motilal Oswal said the company's expanded capacity has provided it significant pricing power, particularly in Central/West India where it now has around 40 percent market share. "North/Central are structurally the preferred regional markets for us, where UltraTech has highest exposure."
It feels UltraTech is trading at around 35 percent discount to peer Shree Cement –10 years average: 15 percent.
"The stock is not ascribing any value to its more than 20 MMTPA low-cost brownfield expansion, wherein long-term growth visibility is good. We value UltraTech at 14x FY21E EV/EBITDA to arrive at a target price of Rs 5,050," the brokerage said while maintaining buy call on the stock.
Increase in domestic petcoke prices which is one of its key raw material is the only risk to its high conviction idea.
The stock was quoting at Rs 4,026.60, up Rs 35.60, or 0.89 percent on the BSE at 1032 hours IST.
UltraTech is the largest manufacturer of grey cement, ready mix concrete (RMC) and white cement in India with an installed capacity of 95 million tonnes (MT). The acquisition of Century’s cement asset and Binani increased its capacity to 109.4mt and took its pan-India market share to 24 percent.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.