Sector pangs hurt UltraTech, drive downgrades

Its domestic grey cement volumes grew 2.7% year-on-year (y-o-y) to 26.4 million tonnes in Q2FY25, lower than expectations, with capacity utilization at 68%. UltraTech’s management estimates industry volume growth to be flat in Q2FY25.

The September quarter is seasonally weak for the cement sector, but this time around, the extended monsoon weighed heavily on sales.

UltraTech’s grey cement realization in Q2FY25 was lower sequentially and year-on-year, amid elevated competitive intensity. Higher maintenance shutdown costs and one-time bonuses to employees pushed expenses higher.

Also Read: Is India’s cement sector finally turning a corner?

The upshot: “UltraTech’s Ebitda per tonne fell 23% y-o-y to ₹732—the lowest in last six years," said IIFL Securities in a 22 October report. To factor-in lower volumes and decline in Ebitda per tonne in Q2, IIFL cut its FY25 and FY26 Ebitda estimates by 14% and 8%, respectively. Ebitda is earnings before interest, tax, depreciation, and amortization.\

Demand vs prices

Cement demand is likely to be relatively better in the second half of FY25. UltraTech expects to outperform the industry’s double-digit volume growth in H2FY25. But a worry for investors in cement stocks is that after a subdued H1FY25, the fight for higher volumes by UltraTech and other large cement companies in H2FY25, could further delay a significant revival in cement prices.

Pent-up cement demand is expected to drive volumes, but supply is also set to rise. In FY25 and FY26 each, industry-wide capacity addition of 30 million tonnes per annum (mtpa) is expected, out of which about 50% in each year would be done by UltraTech, the management said.

Also Read: Cement sector consolidation is good for shareholders. But what about consumers?

Also, the pace of consolidation in the sector is increasing. Adani Group company Ambuja Cements Ltd announced the acquisition of 47% stake in Orient Cement Ltd on Tuesday. The move gives Ambuja access to markets of south and west India. Recall Ultratech also acquired a stake in south-based India Cements Ltd recently and is awaiting regulatory approvals.

Interestingly, UltraTech has gained market share in southern and eastern regions of India and will be chasing profitable growth, the management said in Q2 earnings calls. Simply put, the unfavourable demand-supply scenario could keep the sector’s realizations outlook bleak. Spot cement prices have improved marginally in October to ₹354 per cement bag weighing 50 kilogrammes from the Q2FY25 average of ₹348 per bag, the management said.

Ultratech’s capacity addition plans are on track and it is expected to commission 8mtpa capacity in H2FY25. It targets a capacity of 183.5mtpa (excluding assets of Kesoram Industries Ltd and India Cements Ltd) by FY27.

Cost savings and capex

The management has guided for a capital expenditure of ₹8,000-9,000 crore for FY25 and around ₹9,000 crore annually in FY26 and FY27. On the flipside, consolidated net debt rose to ₹8,792 crore in Q2FY25 from ₹5,482 crore in Q1FY25. Analysts at Motilal Oswal Financial Services have trimmed UltraTech’s earnings per share estimate by 15% and 7% for FY25 and FY26, respectively, due to higher interest expense reported in Q2FY25.

Also Read: A sector headwind could outweigh positives of JK Cement's strategy

On the bright side, softening fuel consumption costs and with high-cost fuel contracts nearing an end, UltraTech is poised to save on input costs. With other cost-saving initiatives, UltraTech eyes ₹300 per tonne savings in operating costs in the next two to three years. Meanwhile, this CY24 so far, the UltraTech stock is up 3%, underperforming the Nifty50's 13% returns. At FY26 EV/Ebitda, the stock trades at a multiple of 18 times, showed Bloomberg data, which is unappealing in the current backdrop.