UltraTech Cement shares hit new all-time high; will the momentum continue?

This strategic investment marks UltraTech Cement’s entry into the state of Jharkhand, and with this addition, the company’s total capacity in India has reached 133 mtpa, solidifying its position as the country’s largest cement manufacturer.

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The demand for cement has remained robust post Covid-19, exhibiting a CAGR of 9% from FY21 to FY23. This demand surge is attributed to increased government spending on infrastructure development, affordable housing initiatives, and strong demand for urban housing and real estate.

Additionally, favorable factors such as a decline in raw material costs, lower-than-expected rainfall, and strategic price hikes have contributed to cement companies, including UltraTech, delivering strong financial performance for the quarter ending in September.

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Going forward, domestic brokerage firm Motilal Oswal anticipates a sustained surge in demand for cement, driven by key factors such as government-led infrastructure projects, housing schemes, individual housing segments, and a robust recovery in the real estate sector. 

The road sector is likely to contribute more to this growth, as both the Ministry of Road Transport and Highways and the National Highways Authority of India (NHAI) have posted a 25% and 14% YoY growth in their total outlays, respectively. Demand will be further supported by an increase in industrial and commercial construction activities, it said.

The brokerage projects a 7-8% CAGR in demand from FY23 to FY28, reaching 575 million metric tons by FY28, marking a 1.5x increase from 390 million metric tons in FY23.

With increased government spending towards infrastructure development, the brokerage estimates the share of infrastructure in cement demand to jump 29% in the long term from 24% in FY23, while it estimates the share of residential construction would reduce to 62% (from 67%) and the industrial & commercial share will remain the same at 9%.

Regarding UltraTech Cement, the brokerage notes the company’s ongoing efforts to enhance sustainability by increasing the use of alternative raw materials. This initiative, according to the brokerage, has led to a reduction in the clinker factor from 70.9% in FY23 to 69.4% currently, with blended cement accounting for 70% compared to 69% in FY23.

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The brokerage estimates a 10% CAGR in UltraTech Cement’s consolidated volume over FY23–26. It further projects EBITDA/t at ₹1,110/ ₹1,210/ ₹1,280 in FY24/FY25/FY26, respectively, compared to ₹1,005 in FY23 (EBITDA/t was ₹1,225 in FY22).

While UltraTech Cement’s net debt increased to ₹49 billion as of September 2023 from ₹27 billion in March 22 due to higher capex and dividend payout, Motilal Oswal expects a reduction in net debt in 2HFY24 owing to improved profitability and working capital management.

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The brokerage believes the company’s strong cash flows (estimated cumulative OCF at ₹406 billion over FY23–26) will support its robust capex plan. Therefore, the brokerage retained its positive stance on the UltraTech Cement with a ‘buy’ rating and a target price of ₹10,100 apiece.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 30 Nov 2023, 01:19 PM IST