UltraTech Cement Share price soars 6% II Speeding on organic expansion, HDFC Sec says BUY - target price Rs 5670
UltraTech Cements capacity spread across north/central/east/west/south will improve to 20/22/19/22/16% respectively vs 22/22/13/24/19% in FY20. This will improve its capacity exposure in the high growth east markets. UltraTech Cement is adding many split GUs across eastern and central regions, which will reduce its sales lead distance and lower opex. Additionally, UltraTech Cement is also adding 57MW of WHRS across these clinker expansions, in addition to various other ongoing WHRS/solar power expansions.
UltraTech Cement has charted its expansion plans for the next three years, whereby it will increase its grey cement/ clinker capacity in India by 19.5/11.4 mn MT respectively, entailing a total Capex of Rs 65.3 bn. Post this; its cement capacity in India will increase to 130 mn MT by end FY23E/early FY24E. These should support its volume growth visibility FY24E onwards. The Capex rate is low, owing to 50% brownfield expansions and lower clinker expansion needs. Multiple split GUs (Grinding Unit) and WHRS ((Waste Heat Recovery System) additions will also help control operating cost, supporting its strong margins. HDFC Securities continue to like UltraTech Cement for its robust margin outlook and debt reduction. HDFC Securities maintains BUY with an unchanged target price of Rs 5670/share (15x Sep’22E consolidated EBITDA).
Capacity to increase by 18% in next three years:
Over the next three years, UltraTech Cement plans to add 19.5 mn MT of capacity organically, across east (10.2 mn MT), central (5.1 mn MT), north (2.5 mn MT), and west (1.8 mn MT) respectively. Of these, 6.7mn MT pertains to earlier announced expansions (3.3/3.4 mn MT in central/eastern regions respectively) to be commissioned during FY21/22E. The additional 12.8mn MT announced today is expected to be completed by H2FY23E, as per the company. Post these expansions, Ultra Cement’s grey cement capacity in India will increase by 18% to 130 mn MT. To support these, UltraTech Cement will increase its clinker capacity by 11.4 mn MT across Rajasthan (2.7 mn MT, greenfield), UP (2.3 mn MT, greenfield), MP (3.7 mn MT, greenfield), and Chhattisgarh (2.7 mn MT, brownfield).
Improvement in capacity spread in eastern region and reduction in distribution cost:
Post these expansions, UltraTech Cement’s capacity spread across north/central/east/west/south will improve to 20/22/19/22/16% respectively vs 22/22/13/24/19% in FY20. This will improve its capacity exposure in the high growth east markets. UltraTech Cement is adding many split GUs across eastern and central regions, which will reduce its sales lead distance and lower opex. Additionally, UltraTech Cement is also adding 57MW of WHRS across these clinker expansions, in addition to various other ongoing WHRS/solar power expansions. Thus, UltraTech Cement would increase the share of low-cost green power to 34% (over the next three yrs) vs 13% currently, thus reducing costs.
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Robust margin and balance sheet outlook:
UltraTech Cement expects to spend a total of Rs 65.3 bn towards these 19.5 mn MT expansions. The Capex rate is low (Rs 3.4 bn per mn MT), owing to brownfield expansion accounting for 50% of it, and lower clinker expansion. HDFC Securities expects these expansions to get fully commissioned by Q1 FY24E and bolster Ultra Cement’s volume growth visibility FY24 onwards. Hence, HDFC Securities maintains our estimates for FY21/22/23E. HDFC Securities continue to like UltraTech Cements for its robust margin outlook and debt reduction.
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