Ultratech Cement stock better placed amid recovery hopes in demand

Cement players hiked prices in Sept'24, but had to roll back prices in the South. In the first week of Oct'24, price hikes have again been announced and it remains to be seen if these are sustained

The cement industry struggled through the July-September quarter (Q2) of financial year 2025 (FY25) due to seasonal factors and high competitive intensity. The first half (H1FY25) saw quarters of consecutive decline. Cement prices saw 4-5 per cent quarter-on-quarter (Q-o-Q) decline in Q2FY25, despite attempts to hike prices. Despatch volumes were low due to heatwave, monsoons and a delayed Budget.

Ebitda may drop 20-25 per cent year-on-year (Y-o-Y) in Q2FY25. The H1FY25 Ebitda could drop 10-15 per cent Y-o-Y over the same prior period. Hence, the sector could be hit by earnings downgrades. The medium-term will continue to see high competitive intensity and perhaps, price wars with big companies fighting for marketshare as every cement major is in expansion mode. To some extent, lower fuel prices and relief on rail freight charges could offset low prices.

The industry is hoping for a pickup in demand in Q3FY25 during the festival season. However, Ebitda margins would need to rise substantially in H2FY25 to meet earlier FY25 consensus forecasts. The aggregate Ebitda would need to rise by around 30 per cent in H2FY25 to meet consensus estimates for FY25. In medium-term, fight for marketshare will continue. There is a likelihood that FY26 consensus estimates will be downgraded as well.

Given a difficult Q2FY25, the aggregate revenue, Ebitda and PAT are likely to have fallen by 5 per cent, 14 per cent and 40 per cent Y-o-Y, given lower prices, and lower volumes. Monitorables in the short-term would include demand rebound in festival season, sustainability of recent price hikes, and intensity of competition.

Cement players hiked prices in September’24, but had to roll back prices in the South. In the first week of October’24, price hikes have again been announced and it remains to be seen if these are sustained. While the South was affected by labour shortages, the North and Centre were affected by sand unavailability. Combinations of heatwaves and monsoon hurt demand everywhere. Volume decline for many companies was substantial. Power and fuel costs were soft due to low coal and pet coke costs. Net-Bet realisations may have declined by around 10-15 per cent/tonne.

Despite the signals of a poor Q2FY25, cement stocks have not seen major price corrections. This could leave the sector vulnerable to a really sharp correction, as results are reported. It also means that investors remain optimistic about recovery in demand.

Given the fundamentals, and the continuing competitive intensity, downgrades appear more likely than upgrades. Going forward, companies with stronger balance sheets and all-India footprints are more likely to retain valuations.

Cement prices corrected for nine consecutive months, November’23 to July’24, before finding bottom and partially sustaining price hikes in August-September. Operating expenses may have declined 3-4 per cent Y-o-Y in Q2FY25 due to lower fuel costs. If aggregate volume grows by 10 per cent in H2FY25, that would work out to around aggregated volume growth of 6-7 per cent Y-o-Y in FY25, which would meet the consensus volume expectations for the year.

While volumes will drop across the industry, larger players may actually gain market share. Despatches indicate Ultratech Cement may have seen 8 per cent Y-o-Y volume growth with 58 million tonnes (MT) sent in H1FY25 versus 54 MT in H1FY24, which is probably the best volume growth in the industry. Ultratech’s Ebitda per tonne is estimated to have declined by around 9 per cent Y-o-Y in Q2FY25, which is again among the best performances in the industry.