Demand revival hopes, lower costs driving optimism for UltraTech Cement

While India's largest cement maker is adding capacities to gain market-share, margins are also seen improving

Cement is one sector where investors have been taking positions on the hope that demand would see a revival in the 2023-24 financial year (FY24), given a rebound in the realty sector as well as a strong budgetary focus on infrastructure.

Indeed, every cement major has been committed to capex to increase capacity in anticipation of rising demand. 

Another reason for optimism has been a softening of input costs. Energy costs, in particular, are down -- especially petcoke costs -- and cement production is energy-intensive and requires pet-coke as fuel. On average, the reduction should translate into savings of at least Rs 300 per tonne. Lower crude costs should also translate into lower transport costs and transport too is a significant cost for any cement company.

Market-leader UltraTech Cement claims around 90 per cent capacity utilisation in first quarter (Q1) of FY24 when it had a total production of 29.96 MT or million tonnes (combined grey and white cement) which is 20 per cent rise year-on-year (YoY) on Q1FY23 and down 5 per cent quarter-on-quarter (QoQ) from Q4FY23. Given seasonal fluctuations in the pace of construction, these are positive numbers. The all-India average price of cement remains stable though Q1 is down about 1-2 per cent QoQ. Given strong volume growth, YoY rise in Ebitda (earnings before interest, tax, depreciation and amortisation) could be substantially up.

UltraTech is the largest manufacturer of grey cement, ready mix concrete (RMC), and white cement in India. Excluding China, it is also the third-largest cement producer in the world and commands a market share of 22 per cent (in terms of capacity) in India. It is expanding existing annual capacity from 130 MT to 155 MT which will get operational in phases over FY24-FY26.

The company reported robust Q4FY23 results with higher volumes and stringent control over operating costs. The ongoing capacity expansion, superior cost controls, and improving demand should result in the company reporting revenue/Ebitda/adjusted profit after tax or PAT compound annual growth rate (CAGR) of 9 per cent, 24 per cent and 32 per cent, respectively, during FY23-FY25. The volume growth will be around 10 per cent CAGR and realisation should improve by 1 per cent CAGR during FY23-FY25. The implications are that it should also gain some market-share. 

The Ebitda margins could grow from 17 per cent in FY23 to 22 per cent by FY25. Consequently, Ebitda per tonne would also improve by 30 per cent over this period to about Rs 1,300. The company exhibits a healthy financial position with low debt to equity, high interest coverage ratio, and positive cash flows. Despite capex, the balance should remain very healthy. 

The firm’s stock has gained over 7 per cent in the last one month. It hit a 52-week high of Rs 8,499.70 during intraday trade on Monday, before closing at Rs 8,463.10 on the BSE. The enterprise value/Ebitda ratio is at around 18x which is admittedly on the high side for the industry but it is a market leader.

At least one analyst sees a target price of around Rs 10,000. According to Bloomberg, 15 out of 18 analysts polled since June have a ‘buy’/’outperform’/’overweight’, one is ‘neutral’ and two have a ‘sell’/’reduce’. Their average target price for the stock is Rs 8,575 apiece.