UltraTech Cement Rating- Buy: Capacity expansion to increase market share

UltraTech Cement (UTCEM) announced expansion of 12.8mnte capacities (12% of current capacities) in the fast-growing markets of East, Central and North regions on the back of recent demand optimism. Given that >70% of these expansions are brownfield expansions with average capex cost of $60/te, mgmt expects healthy RoCE of 15% (vs 11.5% in FY20) led by better profitability. Despite these expansions, it expects UTCEM to be net debt free by FY23e. We expect UTCEM to continue to gain market share with improved profitability/ RoCEs. Maintain Buy with unchanged TP of Rs 5,725/share (13x Sep’22e EV/E).

Recent demand optimism driving expansion plans: UTCEM likely registered highest-ever monthly volumes in Oct’20 with 80-85% utilisation implying strong 88-90% utilisation in East, Central and North regions. Accordingly, company feared it may face capacity constraint in peak periods over next few years and announced expansion of 12.8mnte capacities in these regions. Management now expects positive volume growth in FY21.

Market share gains to continue: Overall, UTCEM plans to add 11.4mnte clinker and 19.5mnte cement capacities at a capex of Rs 65 bn by FY23E. Hence, its total domestic capacity will increase to 131mnte, which will expand its capacity share from the current 22.3%.

Focus on profitable growth: Grinding unit additions in East would provide logistic savings of `300-400/te and improve profitability in East. 40% of the power needs for these would be met through WHRS. And coupled with low average capex cost of $60/te and better profitability, mgmt expects IRR of 15% on these expansions.

We already factor in capex of Rs 75 bn over FY22-23e for these expansions and maintenance/operational efficiencies capex. We expect UTCEM to generate healthy OCF of Rs 190 bn over FY22-23e and turn net debt free in FY23e.

Would industry pricing/profitability be impacted? East and Central regions have been registering strong demand growth over past few years and that got accelerated over past 2-3 months. 2/3rd of 60-70mnte industry capacity additions over next three years are planned in these regions. Accordingly, utilisations are unlikely to fall below 85% in North and Central regions, and also led by higher consolidation, prices are likely to remain firm. However, prices in East may continue to remain under pressure and companies may improve cost structure to sustain current profitability.