UltraTech Cement Ltd’s June quarter earnings (Q1FY23) have brought cheer for investors. The pan-India cement maker’s better-than-expected operating performance is encouraging at a time when the industry has seen a sharp cut in earnings estimates due to input cost inflation.
UltraTech’s consolidated EBITDA in the first quarter was approx. 3,095 crore mainly aided by better cost management. Small surprise, UltraTech shares rose more than 5 percent on Friday
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UltraTech’s consolidated EBITDA in the first quarter was approx. 3,095 crore mainly aided by better cost management. Small surprise, shares of UltraTech were up more than 5% on Friday.
But, a meaningful respite from cost pressure is still some time away. In the Q1 earnings call, management said that although the cost of key inputs was higher, better purchase prices and increased efficiencies helped offset the impact during the quarter. Petroleum coke (or petcoke) prices have softened in July and coal prices are expected to follow suit. However, the management said the benefit of price easing would be visible only in the March quarter as there is high cost of inventory.
As such, Q2 is seasonally weak for the cement industry due to monsoon, so it will be difficult to bear the burden of higher costs. Price hikes, if any, usually do not continue due to weak demand, thus impacting near-term performance.
“Ultratech somewhat dodged input cost pressure in Q1FY23, but it needs to be seen whether it can repeat the same feat in Q2FY23,” said Kunal Motishaw, an analyst at Reliance Securities. This will be an important watchdog for investors, he said.
Even if the company did raise prices, it would be challenging to do so without hurting demand.
However, the management is upbeat about the outlook for the sector’s demand, with urban housing and infrastructure projects picking up. In anticipation of increasing demand, UltraTech is continuing to expand capacity. It plans to add 16.7 million tonnes (MT) of capacity by the end of FY2013 and 22.6 million tonnes across the fields by FY15.
Capacity expansion is expected to increase the market share from the current 22 per cent. That said, the entry of a new competitor and its impact on UltraTech’s market share gains will be a significant trigger for the stock. Kamlesh Bagmar, deputy head of research at Prabhudas Lilladher, said the medium-term competitive intensity will increase significantly in the region as new entrant Adani Group expects to aggressively expand capacity.
UltraTech’s stock has declined nearly 15 per cent year-on-year, which is more than a 5 per cent decline in the Nifty 50. Given downside risks arising from higher power and fuel expenses and increased competition, analysts don’t expect the stock to reverse these losses quickly.
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