Margin Key for UltraTech Stock

Against this backdrop, pan-India focused UltraTech Cement Ltd. has sailed through a tough quarter with Q2 earnings that are broadly in line with analysts’ expectations. In addition, it scored over competitors on a few key metrics. For example, its Ebitda per tonne Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities, said the 808 was better than its peers, which saw a sharp decline year-on-year (year-on-year) in Q2FY23. He added that UltraTech’s petroleum coke (petcoke) consumption (at 40% in Q2 FY23) is likely to increase further in the coming quarters, giving good scope for improvement in operating margins.

UltraTech Management said that the international petcoke price briefly declined to $170 a tonne during the quarter, but has now risen to over $205 a tonne. Still, petcoke prices are very low compared to coal. Imported coal prices are trading at around $300 a tonne. The cost of these fuels is not expected to rise sharply, but management expects these to remain high. Despite the bright spots, investors weren’t particularly thrilled. Shares of UltraTech rose just 0.8% on the NSE on Wednesday. Analysts say this neutral reaction is understandable as the market has already pointed out the weak performance of cement makers in the second quarter. Investors also said that operating margins are likely to improve in the second half of the current fiscal and will be gradual. “A widely held expectation is that cost pressures for the company should come forward from Q3FY23. Any disappointment on that front will be emotive. Since UltraTech is the sector leader, its ability to take substantial price increases is an important monitor,” said Rajesh Ravi, institutional analyst at Cement at HDFC Securities.

A recent dealer channel check by various brokerages shows that cement prices have been hiked in some areas in October. It is important for cement prices to remain elevated for a meaningful improvement in margins.

UltraTech’s domestic sales volume grew 9.6% year-on-year to 21.75 million tonnes in the second quarter. Capacity utilization stood at 76 per cent in the previous quarter, up from 71 per cent in the second quarter of FY22. Close competitor Shree Cement Ltd outperformed volumes in Q2, though growth was largely supported by a lower base.

However, UltraTech’s expansion plans are on track and augurs well for its long-term sales growth, especially with increasing competition. The company’s management said the demand outlook is strong and expects cement consumption to improve after Diwali. The company expects double-digit growth in sales this year on the back of capacity expansion.

Launched in December 2020, UltraTech’s first phase of capacity expansion is on track and is expected to be completed by the end of this financial year. During Q2, the company commissioned 1.3 million tonnes per annum (mtpa) brownfield capacity at Dalla, Uttar Pradesh, taking its total capacity to 115.85 mtpa in India and 121.25 mtpa globally.

On the other hand, UltraTech’s net debt increased by 8,357 crore in Q2FY23 from 5,561 crore as of June-end, on account of increase in working capital and growth capex. Bhadang noted that the growth in net debt is a bit disappointing and needs to be closely monitored going forward. On the valuation front, UltraTech shares are trading at 12.64x the FY24 EV/Ebitda, lower than Shree’s 14.6x multiplier, showed bloomberg Information

However, as UltraTech’s expansion plans have already been laid out, the trigger for the stock will be the pace at which its operating margins will improve, Ravi said.