Q2FY24 Review: UltraTech Cement: Robust volumes; profitability to improve in H2

20 Oct 2023 , 01:46 PM

UltraTech Cement (UTCEM) Q2FY24 Ebitda growth of 37% YoY was better than analysts of IIFL Capital Services estimates (4% beat), but miss consensus expectations. Strong volume growth (+15% YoY to 25.7mn MT) was partly offset by weak Ebitda/t (down 9% QoQ to Rs916/t) due to negative operating leverage. Profitability in H2 is likely to be better, given the price increases in Sept-Oct (prices are 5% higher than the Q2 avg.). Analysts of IIFL Capital Services believe UTCEM is well placed to deliver industry-leading volume growth, driven by new capacity additions. Maintain BUY and value the stock at 15.5x 2YF Ebitda. 

Negative operating leverage impacts profitability: 

UTCEM’s standalone Ebitda was up 37% YoY, but fell 19% QoQ to 23.5bn. The YoY profit growth is driven by strong volumes growth (+15% YoY) and lower power and fuel prices (down 11% YoY). However, sequential decline in profits is due to 12% QoQ decline in volumes (weak quarter due to monsoons) and sharp increase in fixed costs (+26% QoQ to Rs1,131/t – Rs700mn one-off cost + negative operating leverage). The company shared that overall Cement demand was resilient (10-11% YoY growth), with the exception of eastern markets (4-5% YoY growth) that were impacted by heavy rains (especially West Bengal and Bihar). UTCEM’s growth outpaced the market and gained market share. In Q2, it operated at 75% utilisation (flat YoY), despite 16.6mn MT capacity additions.

Sharp price increases; capacity additions on track: 

UTCEM shared that cement prices are up 7-8% since the June-exit and around 5% vs Q2 average. The price increase has been broad-based with the exception of central India. This is in line with analysts of IIFL Capital Services dealer checks. Higher cement prices are likely to drive H2 profitability. On costs, the company shared that petcoke prices have spike to ~US$140/t from the low of ~US$100/t seen in July; thus, benefit on fuel cost reduction will be limited hereon. Over last one year, UTCEM has raised capacities by 15%; the company is on track to augment capacities by another 20% to 160mn MT over the next two years. As such, target is to operate 200mn MT capacities by FY30. 

Value-accretive growth; maintain BUY: 

Despite higher capex (Rs65bn p.a.), UTCEM will generate FCFs and become a net-cash company next year. Also, given the strong brand and pan-India presence, it has been able to ramp up new capacities faster (operates at higher than all-India utilisation) and generate higher IRRs. Consequently, its ROEs are likely to improve from by 500bps to 15% by FY26.