UltraTech gears up to beat peers
Industry leader UltraTech Cement Ltd’s robust operating performance in the March quarter (Q4FY24) brings comfort amid severe pricing pressures. Lower costs, mainly due to operating leverage, gave its consolidated Ebitda a shot in the arm. Ebitda surpassed the Street’s expectations and rose to a multi-quarter high of ₹4,114 crore in Q4FY24.
Going into FY25, profitability prospects appear bright. In April, cement prices rose in the southern, eastern, and Maharashtra markets, the management said. During this financial year, barring the election and monsoon blip, the UltraTech management expects a largely stable pricing environment. That, accompanied with lower fuel costs should help. In the near term, UltraTech expects fuel cost to decline from $150/tonne to $130/tonne and its benefits on earnings are likely to reflect in the next few quarters.
In the next two to three years, UltraTech aims to reduce its operating costs by ₹300-400/tonne through internal improvements such as increasing the share of green power, alternative fuels and reducing the lead distance. This bodes well for its long-term earnings outlook and helps gain an edge over peers. “Even as we revise down our FY25E Ebitda by about 9% (tracking weak cement prices and its outlook), keeping faith on cost efficiency measures, we retain our FY26E forecast,” said the ICICI Securities report.
But post the Adani Group’s entry, the earnings narrative for large cement manufacturers continues to be driven by volume growth and pace of capacity additions. In Q4FY24, volumes for UltraTech’s domestic operations grew by 11.2% year-on-year to 33.22 million tonnes per annum (mtpa), outperforming the industry’s estimated high single-digit growth. Thus, indicating continued market share gains for UltraTech. The management expects some slowdown in H1FY25 demand amid the elections, followed by the monsoon, but it is likely to be temporary. In FY25, the cement industry is expected to clock growth of 7-9% and the management expects UltraTech to continue to outperform the industry. Given the company’s chase for industry-leading volume growth, the elevated capital expenditure (capex) intensity is not entirely surprising. In FY24, UltraTech incurred around ₹9,200 crore and ended the year with domestic grey cement capacity of 141mtpa.
In FY25, it has outlined ₹9,500 crore capex and ₹10,000-11,000 crore annually in FY26 and FY27.
Now, including Kesoram Industries capacity (regulatory approvals awaited) and overseas capacity, UltraTech is eyeing around 200mtpa overall capacity by FY27. However, in the current context of subdued cement prices and heightened competition, these positives may be overshadowed. In this calendar year so far, UltraTech shares have declined nearly 5%. “While on-track completion of capex plans and efficiency focus is heartening, the weak sector fundamentals and risk of earnings downgrade in FY25 are issues of concern,” said Nuvama Research report. Meanwhile, UltraTech targets turning net cash positive by FY25-end, excluding the Kesoram acquisition. But this goal could get further delayed. “We are building in higher capex for FY25 and FY26 and with Kesoram acquisition, expect the company to remain net debt positive compared to our earlier assumption of debt free by FY25,” cautioned Centrum Broking’s analysts. On the valuations front, UltraTech is trading at FY25 EV/Ebitda of 18 times, showed Bloomberg data. EV is enterprise value.
UltraTech enjoys the highest valuation multiple among listed peers, due to its solid volumes backed by capacity expansions, offering higher growth visibility. However, valuations could moderate if competitive pressures escalate.