UltraTech Cement dips 3% on weak operational performance in Q3

The company is hopeful that cost inflation has peaked out and, with demand picking up, all of this should bolster volume growth and lead to margin rebound Q4 onwards.

Shares of UltraTech Cement dipped 3 per cent to Rs 7,663.50 on the BSE in Tuesday’s intra-day trade, erasing the entire previous day’s gain as the company reported a weak operational performance for October-December quarter (Q3FY22) on account of higher cost pressure and weak demand owing to unseasonal rains and festive season. The stock of cement major corrected 7 per cent from its record high level of Rs 8,267 hit on November 8, 2021.

In Q3FY22, UltraTech’s revenues were up 5.4 per cent at Rs 12,471 crore year on year (YoY) led by higher realisations while earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 24.6 per cent YoY to Rs 2,221 crore. EBITDA margin was down 707 bps YoY, down 470 bps QoQ to 17.8 per cent.

The company is hopeful that cost inflation has peaked out and, with demand picking up, all of this should bolster volume growth and lead to margin rebound January-March quarter (Q4FY22) onwards.

During the quarter, trade sales were impacted more than non-trade sales, as overall cement demand remained subdued. However, with the onset of the peak season and rising construction activities, cement demand is expected to revive in Q4, driven by a pick-up in the government-led infrastructure and housing projects. Rural and urban demand is also expected to pick up going forward. All of this augurs well for the Company, UltraTech said on a outlook.

The board also approved capex of Rs 965 crore towards modernisation and expansion of capacity at Birla White from the current 6.5 LTPA to 12.53 LTPA, in a phased manner. The capacity expansion will help Birla White strengthen its presence in the growing white cement market, reducing its dependence on high-cost imports, the company said.

Analyst at ICICI Securities expects its capacity to increase at CAGR of ~7.4 per cent to 131 MT by FY23E against industry average capacity CAGR of 5.6 per cent during the same period. The new organic capacities are being added at lower capital cost (US$60/t) that will help in boosting return ratios (to generate 16-18 per cent IRR).

Despite capex plans, the company also aims to become net debt-free by FY23E supported by strong operating cash flows (from existing and acquired assets) and through efficient w/cap management, the brokerage firm said with maintain ‘buy’ rating and target price of Rs 9,300 per share on the stock.

“Cement demand is expected to remain strong, led by the government’s thrust on Infrastructure development and recent improvement in housing demand. UltraTech is in a strong position to gain market share, led by its strong distribution network. Its capacity expansion plans and scope for improvement in utilization of existing capacities offers strong growth visibility. UltraTech has earmarked expansion plans in the White Cement segment, which will aid growth in the segment. The management is hopeful of achieving higher growth in the Construction Chemical segment,” Motilal Oswal Financial Services said. It reiterates ‘buy’ rating on the stock with target price of Rs 9,080 per share.