Markets
Volumes are UltraTech’s strength
Summary
Aided by ramp up of capacities amid healthy demand, UltraTech’s consolidated cement volume surged 20% year-on-year to 29.96 million tonnes in June quarter (Q1FY24). Capacity utilization was 89-90%.
UltraTech Cement Ltd’s management expects the sector’s demand outlook to remain on a solid footing in FY24 in the run-up to the general elections. It foresees double-digit volume growth for cement sector, with UltraTech poised to outperform.
The company’s confidence to beat industry growth is fuelled by its ongoing expansion spree. After the commissioning of 12.4 million tonne per annum (mtpa) capacity of grey cement capacity in FY23, it has further commissioned 4.3 mtpa capacity so far in FY24. With that, UltraTech’s total grey cement manufacturing capacity in India now is 131.25 mtpa. Aided by ramp up of capacities amid healthy demand, UltraTech’s consolidated cement volume surged 20% year-on-year to 29.96 million tonnes in June quarter (Q1FY24). Capacity utilization was 89-90%.
Work on UltraTech’s next phase of expansion of 22.6 mtpa is in full swing. Commercial production from these new capacities is expected to go on stream in a phased manner by FY25/FY26. It expects debottlenecking to add 4 mtpa additional capacity in FY24 and end the year with around 135 mtpa capacity.
In the Q1 earnings call, the management said UltraTech would incur capital expenditure at a run rate of ₹6,000-7,000 crore in FY24/25. It is expected to announce the next phase of growth plan this year. The pace of capacity additions and ramp-ups to gain market share is crucial, as competition worries have risen following Adani Group’s entry into the sector.
On the flip side, the gains from easing input costs have been delayed, though it is not a big concern yet. In Q1, energy costs rose due to currency devaluation and the rise in raw material cost was mainly driven by higher costs of fly ash and slag. Freight costs rose due to the resumption of the busy surcharge season. This weighed on operating performance, which fell short of analysts’ expectations. Q1 Ebitda dropped by 1.5% year-on-year to ₹3,049 crore at a time when revenue growth stood at 17% to ₹17,737 crore.
But given the inventory-related lag, the management expects the benefits from easing fuel prices to fully reflect by Q3FY24. The bigger problem for the entire industry remains the subdued cement prices. Despite strong demand, prices have failed to sustain at higher levels in recent months, thus indicating the focus of cement companies is on volumes rather than realizations.
According to UltraTech managem-ent, cement industry has seen a small increase in north and west markets in July. However, south and east markets are not showing traction in pricing.
Q2 is a seasonally weak quarter for the cement industry as construction activity tends to be muted in the monsoon. So, prices are unlikely to see a sharp improvement in the near term.
In this backdrop, UltraTech’s investors can seek solace from its solid volume growth trajectory, which bodes well for earnings outlook. “While Q1 was a miss on estimates due to higher costs, we expect UltraTech’s perf-ormance in upcoming quarters to be boosted by lowering costs and industry-leading volume growth," a Jefferies India report said.
So far in 2023, UltraTech shares rose nearly 17%, beating competitor Shree Cement Ltd and benchmark index Nifty 50. Positives related to capacity expansion seem largely factored into the share price, said analysts, adding that further upsides would hinge on the pace of margin improvement.
The stock trades at FY25 estimated EV/Ebitda of 16 times, a discount to Shree Cement, showed Bloomberg data.
This gap could narrow given UltraTech’s pan-India presence and strong volume growth. Also, note that Shree Cement’s shares have taken a beating lately owing to company specific regulatory concerns.
