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The flat demand in the past few quarters, higher costs and now the global headwinds have resulted in stocks in the cement sector correcting by around 20-25 per cent from their peak. Ultratech is no exception. The stock is currently trading at a discount to its historical multiples. Its one year forward PE is at 22.4 times (Bloomberg consensus) versus five year average of 30.6. One year forward EV/EBITDA is at 13 times versus five year average of 15.5 times. While the valuation appears reasonable, new investors can wait and track how the different variables play out on the demand and cost side before they take exposure to the stock.
Raw material and fuel/power costs are major components of total cost in this sector ranging from 40 per cent to 50 per cent of revenues. The ability to pass on the cost increases to the consumer is essential in such scenario and this is easier when there is enough demand. While demand was expected to look up in the upcoming quarters with thrust on infrastructure spending in Budget 2022, the recent geopolitical risks and spike in commodity prices create some uncertainties on how demand will play out and also how much impact will be there on the cost side.
Recent performance and financials
Ultratech has an all-India capacity of 114.55 million tonnes and another 16.3 million tonnes will be added in FY23. The company has been diversifying its product portfolio by increasing presence in construction chemicals and RMC (Ready mix concrete). The company is planning to expand its white cement capacity from 6.5 lakh tonnes to around 12.5 lakh tonnes and the current capacity of putty of 8.2 lakh tonnes will be raised by 4.4 lakh tonnes through a greenfield expansion. This project is expected to launch in Q2FY23. Investors however need to note that timelines for capex may change given the current context. As of December quarter, grey cement revenue stood at 84 per cent of total revenue, RMC at 5 per cent, white cement at 4 per cent and grey cement (overseas) and others was 7 per cent.
In Q3 FY22 the total revenue was ₹12,710 crore, up 6 per cent Y-o-Y. EBITDA was at ₹2,419 crore and was down 22 per cent Y-o-Y, impacted by higher energy costs. While net profit of ₹1,707 crore was up 8 per cent Y-0-Y, this was due to benefit from exceptional items. For FY22 revenue is estimated to be nearly 18 percent higher Y-o-Y at ₹52,462 crore, and EBITDA up by around 5 per cent to ₹12,151 crore.
Consolidated volumes were down 3 per cent Y-o-Y in Q3, with better realizations driving the revenue growth. The blended realisations of the company has seen a steady rise, in Q3 FY 21 it was ₹5668 per tonne which is a 9.3 per cent YoY rise. However the cost per ton also shot up in FY 22 with spike being 19.6 per cent in Q3 FY 22.
Ultratech Cement till few quarters back was showing consistent quarterly Y-o-Y rise in EBITDA per ton. However since 2Q FY22, it has been declining as costs have been increasing. Some of the stock price correction has been due to this.
The Net debt/EBITDA (trailing 12 months) is at is 0.69 times, which indicates the company is in a very comfortable position with respect to leverage.
Raw material and fuel costs
The actual risk which the industry as a whole faces now is the increase in the prices of raw materials. South African coal and Australian coal are up 40-50 percent in recent weeks. Domestic petcoke prices are up by 24 per cent in recent weeks and up 69 percent YoY. Further crude prices have shot up by more than 20 per cent in recent weeks and are up by 72 per cent YoY.
The margins will be affected if the prices of raw materials persist unless the rise in input price is passed to consumers. The demand in Q4 FY 22 till now has been tepid, but is expected to pick up after the state elections. The current geopolitical situation (Ukraine-Russia) conflict and consequent further spike in commodity prices will further elevate raw materials costs.
With increase in clinker capacity in the industry, the input cost can be optimised to certain extent. However ability to pass on costs, pick up in volumes will be key factors for investors to monitor over the next couple of quarters.
Given its large size/ economies of scale, strong brand name and wide reach, very comfortable balance sheet position, Ultratech is a stock, investors can keep on their radar.. If input cost pressures taper and company is able to improve margins, it would be positive signals for the stock. However for now, a hold rating appears more appropriate.
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