Investors in UltraTech Cement Ltd’s shares need two things to go hand-in-hand: volumes and price realizations. UltraTech’s capacity expansion plans seem to be on track, but hopes of cement prices staying high consistently could get dashed.
For now, the management has indicated that prices have sustained in most markets. The industry has increased prices in September and October in most regions, taking the current all-India (average) prices 7-8% higher versus June, the management said in its September quarter (Q2FY24) earnings call. This could boost sequential realisations growth. Usually, pricing tends to be strong in the second half of the financial year. But peers are also adding capacities and competition should stiffen, especially as election-led demand gradually wanes, potentially weighing on prices.
However, if the recent price hikes sustain, Q3 could be more eventful. There are chances of a price hike rollback in some regions given the steep rise in a short span. Plus, crude-linked input costs have started to inch up. UltraTech expects the availability of low-cost inventory to ease its fuel costs sequentially. This has prompted some brokerages to raise their FY25 Ebitda estimates for UltraTech. In Q2, consolidated Ebitda at ₹2,551 crore slightly missed Bloomberg’s consensus estimate hurt by higher operating expenses.
Positively, UltraTech is gaining market share. Consolidated sales volume grew 16% year-on-year in Q2 to 26.7 million tonnes (mt). This is likely to be 300-350 basis points higher than the industry’s volume growth, said Emkay Global Financial Services.
After Q2, UltraTech’s shares are up 2.2% over the last two trading sessions. Also, its commitment to capacity expansions gives comfort. It increased its cement capacity by 2.5 million tonnes per annum (mtpa) last quarter. UltraTech aims to reach 159.65mtpa by June-end (FY25) from the current grey cement capacity of 132.45mt. The management is expected to announce its third phase of expansion before 2023 ends.
Investors’ excitement about the capacity expansions is evident; shares are up 34% in the past one year. The stock trades at FY25 EV/Ebitda of 15 times, a discount to close peer Shree Cement, but valuation is not cheap. All eyes are now on if volumes and realizations growth would be in tandem.
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Updated: 22 Oct 2023, 08:04 PM IST