UltraTech Cement's stock continues to be an attractive proposition

While Q2 was decent despite seasonally weak, higher prices and operating leverage point to better prospects

UltraTech Cement (UTCL) reported decent volume growth of around 15 per cent in the July-September quarter of 2023-24 (Q2FY24).

Realisations were more or less sustained quarter-on-quarter (Q-o-Q) despite seasonal weakness due to monsoons.

This has led to EBITDA (Earnings before interest, taxes, depreciation and amortization)/ tonne coming in at Rs 956, which was up 18 per cent year-on-year (Y-o-Y), and down 6 per cent Q-o-Q.

The management claimed prices have slightly risen except in the central region. A recent round of price hikes may be sustainable despite competition.

UltraTech’s consolidated grey cement volume surged 16 per cent Y-o-Y (domestic sales up 15 per cent). Consolidated sales volume grew 16 per cent Y-o-Y to 26.7 million tonnes (MT).

The RMC (ready-mixed concrete) and white cement revenues grew 31 per cent and 9 per cent Y-o-Y during the quarter, while grey cement declined 2 per cent.

There was a Rs 70 crore one-time cost which would have somewhat impacted EBITDA. Freight cost/tonne declined 4 per cent Q-o-Q.

The EBITDA stood at Rs 2,550 crore (up 37 per cent Y-o-Y) and PAT was at Rs 1,280 crore (up 70 per cent Y-o-Y). The consolidated revenue stood at Rs 16,000 crore, which was up 15 per cent Y-o-Y. The EBITDA margin rose 250 basis points Y-o-Y to 16 per cent in Q2FY24.

The capex plans remain in place with Rs 2,500 crore in Q2FY24 versus Rs 1,800 crore in Q1FY24. The FY24 estimated capex is likely to be Rs 6,000-7,000 crore.

The company commissioned 2.5 MT per annum (MTPA) capacity in Q2, taking total grey cement capacity to 132 MTPA. It targets 160 MTPA capacity by Q1FY26 and targets to reach 180–200 MTPA between FY28–FY30.

A new Waste Heat Recovery System (WHRS) of 30MW was commissioned, taking total WHRS capacity to 262MW – the eventual target is 425MW. UltraTech has also commissioned 83MW of renewable capacity, taking total captive capacity to 429MW.

The takeaways from the concall included the following. Volume growth in East India stood at 4-5 per cent during Q2FY24 against all-India growth of 9-11 per cent. The industry has taken price hikes over September and October except in the central region.

The current pan-India average prices (October 2023) are up by around 5 per cent compared with Q2FY24 average prices. Trade sales stood at 67 per cent while direct dispatches stood at 52 per cent. The company is upbeat on the demand scenario and expects higher utilisation to continue.

The net debt rose Rs 2,450 crore Q-o-Q to Rs 4,920 crore. On the expense front, the fuel-mix cost declined at the kilocalorie level from Rs 2.34/ Kcal in Q1FY24 to Rs 2.18 in Q2FY24. The green power mix was at 22 per cent in Q2FY24 which was flat Q-o-Q. The fuel inventory is about 60 days.

Given the all-India footprint and the leadership position in the industry, UltraTech continues to look attractive.

It has roughly 25 per cent national market share and significant expansion plans which it should be able to complete without requiring too much leverage on the balance sheet.

Despite the Q-o-Q rise, the net debt has reduced from Rs 22,200 crore at FY19-end to Rs 4,500 crore by Q2FY24. It is also likely to see continued structural cost improvements due to better scale and operating leverage, and measures such as building a warehousing network that reduces lead distance.

Most analysts remain positive on the stock.

According to Bloomberg, 25 of 34 analysts polled since Thursday (post results) are bullish on the stock; 7 have hold/neutral and 2 have sell ratings. Their average target price is Rs 9,308, for the stock trading at Rs 8,453.75.