Q3FY24 Review: UltraTech Cement: Good Q3; watchful in near term

23 Jan 2024 , 02:33 AM

UltraTech Cements’ (UTCEM) Q3FY24 Ebitda grew 42% YoY despite subdued volume growth (+5% YoY), due to sharp improvement in Ebitda/t (+35% YoY to Rs1167). Management has cautioned on near-term volume growth, given the impending elections. However, mgmt remains sanguine about the medium term growth. Despite a weak pricing environment, profitability would be supported by cost tailwinds. Analysts of IIFL Capital Services reiterate BUY on UTCEM as they see it well placed (strong brand recall, pan-India presence, timely capacity additions) to leverage on likely Cement upcycle. 

Improved profitability drives growth: 

UTCEM’s Q3 standalone Ebitda grew 42% YoY and 29% QoQ to Rs30.4bn – 6% above IIFLe. The beat was driven by lower power & fuel costs (-6% QoQ to Rs1,462). As such, strong profit growth was driven by improvement in profitability – Ebitda/t up 35% YoY and 27% QoQ to Rs1,167 (India operations: Rs1208/t). The YoY expansion was driven by a mix of cost optimisation and price hikes; while sequential increase is largely because of price hikes (grey cement prices up ~3% QoQ). Volume growth was subdued at 5% YoY and 2% QoQ to 26.1mnt – weak volumes during long festive period in November and the elections in four States weighed on demand. A 10% YoY increase in capacity to 133mn MT led to 600bps YoY fall in utilisation to 77%. 

Mixed commentary on outlook: 

Takeaways from Q3FY24 call:– 1) Industry volumes to grow at 3-4% YoY in Q3. 2) Volumes recovered from mid-Dec onwards, but Q4 growth is contingent upon Union Election dates (likely in Mar-May’ 24). 3) In worst case, UTCEM is likely to operate at 80-85% utilisation (implying 5-10% YoY volume decline). 4) Price hikes taken in early Q3 reversed, current prices are marginally lower than Q3 average. 5) Price would increase if utilisation crosses 85%. 6) Cost tailwinds to continue – expect 6-8% fall in power & fuel costs in the next six months. 7) Capacity addition on track (46mnt to be added over next three years), capex guidance hiked to Rs90bn. 8) Approvals are underway to complete the Kesoram acquisition (11mnt) – may take one year. 

Maintain estimates:

Analysts of IIFL Capital Services prune their volume growth estimate for Q4 as well as build-in 1% QoQ decline in realisation; however, cost tailwinds and Q3 beat offset any earnings impact. Analysts of IIFL Capital Services maintain their thesis that UTCEM is well placed to leverage on cement upcycle with its pan-India presence and timely capacity additions.