TP: INR5,050 (+19%)
Revival of Century assets to support earnings growth
Strong FCF to drive deleveraging, RoE improvement
UltraTech Cement (UTCEM) has underperformed the Sensex by 10% over the past three
months due to weak cement demand and the dismal performance of the acquired
Century Cement assets in 2QFY20. In this note, we present (a) the premise for our
expectation of an improvement in profitability of Century and (b) the case studies on the
turnaround of the other two acquisitions – JPA and Binani. With limited capex needs
going forward, strong FCF generation (~7% yield) will likely drive deleveraging and 550bps
improvement in RoE over the next two years. Against this promising backdrop, we
maintain our positive stance on UTCEM – our top pick in the sector.
27 November 2019
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
1219 / 17.2
4904 / 3340
Financials Snapshot (INR b)
2019 2020E 2021E
416.1 449.9 487.5
73.4 103.5 117.4
Adj EPS (INR)
90.3 143.6 189.4
EPS Gr. (%)
1,230 1,361 1,534
Shareholding pattern (%)
Sep-19 Jun-19 Sep-18
FII Includes depository receipts
Stock Performance (1-year)
Century – turnaround begins, contribution to consol. EBITDA set to
Century assets generated nil EBITDA in 2QFY20, impacting UTCEM’s
profitability by 10%. EBITDA/t was down to INR1,021 (INR1,131 excluding
Century) in the quarter.
However, Century assets have started showing signs of a turnaround, which
will likely drive an improvement in earnings over the next six quarters. We
forecast Century EBITDA to increase to INR1.6b in 4QFY20 and ~INR7b in FY21,
contributing 5% and 6%, respectively, of the company’s consol. EBITDA.
Profitability improvement will primarily be driven by lower costs with better
fixed cost absorption (as utilization improves from 48% in 2QFY20), reduced
energy costs (higher petcoke usage and lower cost) and freight cost savings
(through logistics realignment).
Realization will likely improve in 4QFY20 as most of Century’s capacities
transition to the UltraTech brand by Dec’19, bettering pricing by INR12-15/bag.
Case studies: Turnaround of JPA and Binani acquisitions
Sensex - Rebased
When UTCEM had acquired JPA (21.2 MMTPA) and Binani (6.25 MMTPA) in
Jun’17 and Nov’18 respectively, their EBITDA was only INR100-300/t.
However, the company successfully turned these acquisitions around to
generate estimated EBITDA of ~INR1,300/t, driven by cost reduction,
rebranding and cement price hikes.
According to management, both these assets have achieved PBT break-even,
despite high acquisition cost of USD160/t for Binani and USD125/t for JPA.
Strong FCF to drive deleveraging, improve RoE
We expect strong FCF generation of >INR75b per annum (7% yield) from FY20,
which should drive deleveraging and stock price appreciation. Net debt/EBITDA
is expected to reduce to 1.1x by Mar’21 from 2.2x now.
RoE is expected to rise by >550bp to 13.8% over FY19-21, driven by strong
growth in EBITDA (26% CAGR) and lower interest costs from deleveraging.
Amit Murarka - Research analyst
(Amit.Murarka@motilaloswal.com) +91 22 7199 2309
Pradnya Ganar - Research analyst
(Pradnya.Ganar@motilaloswal.com); +91 22 6129 1537
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.