Motilal Oswal has reiterated 'buy' on UltraTech Cement with a long-term target price of Rs 5,050 per share, an over 24 percent upside potential from the current market price on improved demand outlook. The largecap cement stock traded at Rs 4060 per share on BSE at 11.07 am. So far this year, UltraTech Cement stock has returned 1.2 percent, while the 10-year return on the stock is almost 350 percent.
Motilal Oswal analysts explained the rationale of improved business outlook and share price target in its report on Thursday after a recent meeting with the company's CFO Atul Daga.
The brokerage sees recovery in the sector in the fourth quarter of the current fiscal with the overall demand in India to be around 6 percent on year-on-year basis. The Eastern region should see stronger growth at around 10 percent YoY.
"The past few quarters have witnessed weak overall demand in India due to slow construction activity; however, the North and parts of the South (Tamil Nadu) have fared better. Demand has picked up recently, which has improved visibility of growth in 4QFY20. While overall demand in the country should be better in FY21 (~6% YoY), the East should see stronger growth (~10% YoY)," the report said.
On pricing front, the brokerage said that all-India prices are up 5 percent YoY, largely led by around 10 percent growth in the North and Central India, while the East and South have been nearly flat.
UltraTech Cement's net debt is expected to decline on account of limited capex spends and stronger cash flows from the ramp-up in existing capacities, says the report.
"We estimate net debt to decline to ~INR130b (1.1x) in FY21 led by strong free cash flow (FCF) of INR75b (~7% yield) in FY21 (v/s INR20b in FY19)."
The company is also mulling divestment of its non-core assets in China and the United Arab Emirates along with a recovery of loans given to BInani's fiberglass business, helping reduce leverage further.
UltraTech Cement also recently sold its 0.6mt capacity in Bangaldesh for a consideration of Rs 2 billion, Motilal Oswal analysts said in the report.
The brokerage expects "26% CAGR for EBITDA and 48% CAGR for EPS over FY19-21. Driven by strong operating cash flows and reduction in interest cost, RoE/RoCE should improve by 550bp/420bp to 13.8%/11.2% over FY19-21."
Valuation-wise, the stock trades 30 percent cheaper than its peer, Shree Cements against historical average of 10 percent, the report said.
"Valuation is also supportive at 11x FY21E EV/EBITDA and ~USD152/t on EV,
which are at ~15% discount to the 10-year average. It is also trading 30%
cheaper than its peer, Shree Cements v/s historical average of 10%. We value UTCEM at 14x FY21E EV/EBITDA to arrive at a target price of INR5,050
(implied EV/t of USD185/t on FY21 capacity). Maintain Buy."
UltraTech Cement reported an over 72 percent jump in its second quarter standalone net profit at Rs 639 crore against Rs 371 crore in the same period last year.
The company’s revenue rose 4.3 percent at Rs 9,254 crore against Rs 8,869 crore, YoY.
Meanwhile, the benchmark equity indices, the BSE Sensex and NSE Nifty50, traded flat on Monday. The Sensex traded 40 points up at 41615, while the Nifty was at 12,257, higher by just 12 points.
First Published: IST