Buy Ultratech Cement; target of Rs 5533: Emkay Global Financial

Emkay Global Financial's report on Ultratech Cement

UltraTech reported strong Q2 results supported by higher realization and lower opex. Consolidated EBITDA stood at Rs26.95bn vs. estimated Rs24.02bn and OPM at 26% vs. our estimate of 23.6%. EBITDA/ton came in at Rs1,343 vs. estimated Rs1,242. Key positives: 1) 14% yoy decline in fixed costs (10% of fixed cost reduction sustainable); 2) RMC revenue decline of only 15% yoy; 3) further reduction of Rs25.2bn in consolidated net debt; 4) consolidated net debt/EBITDA at 1.22x vs. 1.7x in Mar’20. Management believes that Oct’20 utilization is at 80-85% vs. 75%/66% in Sep’20/Q2FY21. Demand from rural markets continued to improve and 50%+ rural districts have shown improvement. Urban demand too has recently started improving.

Outlook

UTCEM will benefit from cost saving initiatives (reduction in lead distance, commissioning of WHRS, solar power plants, etc.). Debt reduction will help in improving the balance sheet further. UltraTech is our top large-cap pick with a Buy rating and OW in sector EAP.