Markets
UltraTech to sail through on volumes, at best
Summary
- Apart from an upbeat volume growth outlook, some other factors have played spoilsport for the cement firm.
UltraTech Cement Ltd managed to clock better volume growth than the industry in a quarter impacted by general elections and heatwaves. The company’s domestic grey cement volumes stood at 30.3 million tonnes (mt) in the June quarter (Q1FY25), up 6% year-on-year. This is ahead of the industry’s likely 3.0-3.5% growth, the management said. On a consolidated basis, volumes rose around 7% to 31.95 mt. Still UltraTech’s investors weren’t impressed, taking the stock down 3.3% on Friday, reacting to Q1FY25 earnings.
Last quarter, capacity utilization was 85% and volume growth was supported by rural demand, but the infrastructure segment disappointed. UltraTech expects industry volumes to grow 7-8% in FY25, whereas the company is poised for double-digit rise. An upbeat volume growth outlook aside, a few other factors have played spoilsport.
Muted cement prices weighing on the realizations, continues to be a pain point for various cement companies, including UltraTech. Average realizations fell about 3% sequentially in Q1FY25 impacted by subdued demand and competitive pressure. Current cement prices are 1.5% lower than the Q1 average, the management said. It expects an uptick in prices only in the second half of the fiscal year.
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Amid this, a spike in other expenses also hurt. Ebitda at ₹3,039 crore was flattish year-on-year, and lower than consensus estimates. Ebitda is earnings before interest, tax, depreciation and amortization. The management clarified that other expenses included a one-off brand building expense, which should normalize ahead.
In Q1FY25, other expense/tonne was ₹755, while FY25 average should be at ₹675/tonne. Overall, marketing expenditure was higher by ₹150 crore in Q1FY25, said the management.
That said, the company’s focus on controlling costs continues. UltraTech expects ₹300/tonne savings in operating costs by FY27, this compares with the earlier target of ₹200-300/tonne. This is expected to be aided by various initiatives such as investments in green power, reduction in lead distance on growing networks of plants and savings through the use of alternative fuels.
Meanwhile, the company’s expansion plan is progressing well. UltraTech aims to reach around 184 million tonnes per annum (mtpa), excluding Kesoram’s assets of 10.75mtpa by FY27-end. UltraTech’s total grey cement capacity now is 149.5mtpa. In FY25, the company will expand its capacity by 16mtpa, representing around 40% of the total industry capacity addition in the year.
UltraTech has earmarked ₹8,000-9,000 crore capital expenditure (capex) in FY25 and around similar quantum for FY26 and FY27 each. In Q1FY25, it has incurred ₹2,000 crore capex. Robust and timely capacity addition should aid market share gains and better than industry volume growth. However, the ongoing tug-of-war between prices and volumes in the sector means an increased threat of earnings downgrade in FY25.
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UltraTech’s consolidated net debt increased to ₹5,482 crore in Q1FY25 from ₹2,779 crore at the end of FY24. Given the company's thrust on organic and inorganic expansion and objective to deliver industry-leading growth, the rise in debt is not entirely surprising, but it is sentimentally negative. Recently, UltraTech made a non-controlling financial investment in south-India focused The India Cements Ltd. It has also increased its holding in RAK Cement, Dubai which will soon become its subsidiary.
Meanwhile, so far in 2024, UltraTech’s shares have risen by 7%, underperforming the Nifty 50 index. At FY26, EV/Ebitda the stock is trading at 17 times, showed Bloomberg data. To be sure, better-than-industry volume growth can support the valuation multiple only to a certain extent. Also, positives such as strong balance sheet and cost reduction initiatives are largely priced-in. So, a prolonged weakness in realizations could lead to further moderation in valuations. “Pricing pressure is estimated to continue in the near term; however, demand will stay healthy," said analysts at Motilal Oswal Financial Services. They have cut their Ebitda and earnings per share estimates by 6% and 7% for FY25.
