Teji Mandi: UltraTech Cement - getting bigger and better

UltraTech is among the largest global cement manufacturers of grey cement, ready mix concrete, and white cement. Its distribution network comprises a network of ~50 cement plants, over 100 ready mix concrete plants, more than 650 warehouses, and more than 200 railheads in India. UltraTech services 20,000 orders of different order sizes on a daily basis through a mix of logistical modes comprising rail, road, and sea.

The company also has a strong presence in international markets such as Bangladesh, UAE, Sri Lanka, and Bahrain. UltraTech is a founding member of the Global Cement & Concrete Association.

UltraTech possesses a consolidated capacity of 102.75 million tonnes per annum (MTPA) of grey cement including 4.00 MTPA under commissioning, a capacity of 0.68 MTPA of white cement, and two wall care putty plants at the close of FY19. The total capacity in India has now expanded to over 111.35 MTPA further to the merger of Century's cement business. Century's assets are in Madhya Pradesh, West Bengal, Maharashtra, and Chhattisgarh.

UltraTech provides a range of products that cater to the various aspects that includes Ordinary Portland Cement, Portland Blast Furnace Slag Cement, Portland Pozzalana Cement, White Cement, Ready Mix Concrete, building products and a host of other building solutions.

Cement is sold under the brands ‘UltraTech, UltraTech Premium and Birla Super.’ White cement is manufactured under the brand name of ‘Birla White’, ready mix concrete under the name of ‘UltraTech Concrete’ and new age building products under the names of ‘Xtralite, Fixoblock, Seal & Dry and Readiplast’. UltraTech Building Solutions is a retail format that caters to the end consumer providing a variety of primary construction materials under one roof.

As the largest cement producer in India, UltraTech Cement continually strives to play a key role in finding effective and responsible ways to preserve the environment. In line with its continuing endeavour towards enhancing environment conservation measures, the Company commenced 33 MW of Waste Heat Recovery System (WHRS) capacity during FY20. With this, the Company’s total WHRS capacity stands augmented to 118 MW. This is expected to increase to 145 MW by the end of FY21, after completion of the other on-going expansions.

The company acquiredthe cement business of Century Textiles and Industries Limited in 2019. Since then, the plants have been ramping up production on a month on month basis touching average capacity utilisation of over 80% during the quarter ended March 2020. The Company has put in place a cost reduction plan to bring the operations in line with its existing standards. 65% of sales from the acquired Century plants during the quarter were under the UltraTech brand. Brand integration is underway and is expected to reach more than 80% by Q3FY21E.

UltraTech Nathdwara Cement Limited is fully integrated with the UltraTech systems and processes. Phase I of the Bara Grinding Unit has a capacity of 2 MTPA has been commissioned, which was part of the 21.2 MTPA capacity acquired in June 2017. The operations of this acquisition are fully integrated with the company and working smoothly.

The company, under the crisis caused by COVID-19, has restricted CAPEX plan to Rs 1,000 crore as compared to Rs 1,600 crore in FY20. The company has also slowed down the work on the 2.2 million-tonne Cuttack grinding unit which was scheduled for commissioning in March 2021.

The company has also reduced its net-debt to Rs 16,800 crore in March 2020 from Rs 18,600 crore in December 2019 by working capital reduction on liquidation of inventory. India's business operation net debt to EBITDA declined to 1.55X in March 2020 from 2.64X in March FY19 and aims to bring down the leverage to 1X by FY21.

The company experienced strong demand in January and February while April remained dull due to the nationwide lockdown. However, management expects a larger part of the demand to come from the retail market, the rural markets, where the pending pre-monsoon work is being completed. Some of the infrastructure projects have commenced construction activities, and with this demand surge, few of the plants are already operating at 70% capacity.

Looking at Ultratech's last 5-year performance, the company has reported an increase in its Revenue and PAT growth. The company has also been able to sustain the double-digit return on equity (RoE) during the same period. If you look at its profitability ratios, the company's margins have improved and are in line with the industry median and also have a healthy free cash flow in its book.

Key Risks:

Likely to be affected by risks relating to input cost, realisations, and cyclicality in the cement industry

Low volume growth due to falling infrastructure demand

Lower government spending and lack of private spending

Final Thoughts:

UltraTech is India's largest cement manufacturer with 24% market share. The company has 113.35 million tonne per annum (MTPA) capacity in India. The acquisition of UNCL strengthens the market position in northern India, while the acquisition of Century's cement business should improve the position in the high-growth eastern market. The Pan-India presence protects the company from downtrends in any single region.

The stable demand outlook for cement, improved profitability of acquired assets with superior brand positioning should continue to support the business. The extent of improvement in consolidated profit and reduction in debt will also support the growth going forward.

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