Buy This Large Cap Cement Stock With A Target Price of Rs. 8,850: ICICI Securities

At 10.29 a.m. on December 30, UltraTech Cement's shares were trading in the green, reporting at Rs 7,470.40, with a plus of Rs 49.45 or 0.67 percent. In its latest research report, ICICI Securities maintained a "buy" rating on the stock, with a target price of Rs 8,850 per share.

The brokerage’s take on UltraTech Cement (UTCEM)

ICICI Securities has said in its research report that "UTCEM's plan to add ~20mnte capacities (~18% of domestic capacities) over the next 2-3 years in high-growth / utilisation markets of East, Central and North would likely ensure faster ramp-up and higher volume growth. Given >70% of these expansions are brownfield with an average CAPEX of 15% (vs 11.5% in FY20) led by better profitability. UTCEM also has large non-trade exposure (~33%) and stands to benefit from likely pickup in infrastructure spend and better urban housing demand, especially in tier-2&3 cities."

According to the brokerage "UTCEM to become debt-free by H1FY23E; likely to generate >Rs340bn OCF over FY21-24E. This may allow the company to accelerate its growth via both organic / inorganic routes. Besides the current 20mnte expansion, UTCEM has the scope to undertake an additional 30mnte low-cost brownfield expansion. Historically, acquisitions have been integral to UTCEM's growth story with the company enjoying a strong track record in turning around acquisitions. The dividend payout ratio has increased from 10% in FY20 to 20% in FY21 which may rise further (upto 25% as per current dividend payout policy) as UTCEM is likely to generate strong Rs200bn FCF over FY21-24E."

The research report of the brokerage has also highlighted that "UTCEM is setting up 177MW WHRS by Mar'24, taking its total WHRS capacity >300MW. Additionally, it plans to increase solar and wind power capacity from 125MW currently to >350MW by FY22E. Accordingly, its green power share is set to increase to 34% (WHRS 26%, solar 8%) by FY24E and provide cost savings of ~Rs6bn or ~Rs60/te. Setting up of additional grinding units, especially in the East, increasing the blending ratio from 1.34x currently to ~1.4x and better operating leverage via higher volume growth could provide additional cost-saving of Rs30-40/te, in our view. We believe, the company may choose a lower effective tax rate of 25% (vs 30% currently) over the next few years as it exhausts available MAT credit and accumulated losses of acquired entities. This would further improve its RoCE by another 100bps by FY23E."

Buy UltraTech Cement With A Target Price of Rs. 8,850 Says ICICI Securities

The brokerage has claimed that "We expect UltraTech Cement (UTCEM) to continue to post industry-leading growth and profitability over FY21-24E backed by low-cost brownfield expansions and increased cost efficiencies. Its diversified pan-India market mix, premium brand positioning, strong distribution network and large presence in non-trade segment allow it to wither current demand uncertainties much better than peers."

ICICI Securities has also noted that "Cost-saving initiatives may result in Rs100/te benefits (our estimate) by FY24E, and RoCE (post-tax) may expand by >400bps over FY22-24E to ~17%. The dividend payout ratio has increased from 10% in FY20 to 20% in FY21 which may rise further as UTCEM is likely to generate Rs200bn FCF over FY21-24E. Maintain BUY with an unchanged target price of Rs8,850/sh (15x Dec'23E EV/E). UTCEM remains our top pick. Key risk: Lower demand/pricing."

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.