UltraTech’s valuation may get volume push

Further, the management commentary is optimistic. In an earnings call, the UltraTech management said the demand environment remains strong with cement demand expected to grow 7-8% in FY24. Buoyed by capacity additions, UltraTech aims to outperform industry growth by 400-500 basis points in FY24. As per estimates of Motilal Oswal Financial Services Ltd, the company’s market share in FY23 stood at around 26%.

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Now, a healthy demand environment would benefit other cement producers as well, so in anticipation, many cement companies have been adding capacities lately. Also, competition is said to have intensified following Adani Group’s entry into cement. In that backdrop, what remains a crucial monitorable and differentiator is the pace of capacity additions and ramp-ups.

UltraTech has largely completed the first phase of capacity additions, taking its domestic grey cement capacity to around 129 mt, the management said. The company has maintained its target to reach 154mt by FY25/26 by commissioning 22.6mt capacity under Phase-II. This should propel volume growth and market share gains, said analysts at Emkay Global Financial Service Ltd. “Factoring in the higher volume growth, we have increased our FY24-25E Ebitda by 2%,” the Emkay analysts said in a report.

For FY24 and FY25, the UltraTech management has guided for capital expenditure of ₹6,000 crore each.

Not just earnings outlook, the quest for market share gains also bodes well for the stock. UltraTech trades at FY25 EV/Ebitda of 15 times, as per Bloomberg data. This is a discount to close rival Shree Cement Ltd’s valuation multiple of 18 times. But the scenario seems to be shifting in favour of the former.

“We feel the valuation gap between UltraTech and Shree Cement has started to narrow and will further come down given UltraTech’s focus on beating industry’s volume growth and that could drive a further re-rating in the stock,” said Rajesh Ravi, institutional analyst, cement, HDFC Securities Ltd.

Another comforting factor for UltraTech’s valuations is seen coming from its constant efforts to de-leverage the balance sheet, given Shree Cement is net cash positive. And the stock’s performance is capturing some of these positives. In the last one year, UltraTech stock has risen by 14%, compared to Shree Cement’s negative returns.

Meanwhile, UltraTech’s operating performance in Q4 was hit by higher energy costs. While energy costs fell sequentially, they were still higher by 17% y-o-y. Nonetheless, the company’s cost-saving measures such as boosting the share of green energy should help its margin outlook. That said, a pain point for the industry in Q4 was weak cement price trends, which kept UltraTech’s sequential realization in Q4 muted as well. Dealers’ channel checks by brokerages show that price hikes taken earlier in April have failed to sustain. Unfortunately, the near-term outlook is not encouraging, especially with companies chasing volumes over realizations. “As per Bloomberg, consolidated consensus (UltraTech’s) Ebitda is estimated to rise 35% y-o-y in FY24,” ICICI Securities Ltd said in a report. “Despite easing fuel costs, there exists a downgrade risk to consensus estimates given the weak cement pricing environment,” added the report.