Are UltraTech Cement’s ambitious expansion plans worth the premium?

A key driver of today’s economy is the massive expansion of the infrastructure sector. By 2027, the infrastructure industry is expected to grow at a compound annual growth rate (CAGR) of 8.2%, driven by various strategic policy initiatives implemented by the Indian government.

The government’s priorities for this industry can be seen in the investment allocation for capital expenditure expenditure for 2024-2025, which was ₹11 lakhs crores in the most recent interim budget.

It is clear that India’s ambition to achieve a GDP of USD 5 trillion is based on strong infrastructure development. The cement industry has seen increased demand as a direct result of increased infrastructure spending, necessitating expansion of production capacity.

The cement company we will examine has launched an ambitious capacity expansion drive, putting it in a strong position to capitalize on the next phase of economic growth. Ultratech Cement achieved a 35% return in less than a year. Let’s take a closer look to see where the company is headed.

Cement players’ revenue growth slowed in the December quarter due to flat realizations and modest volume growth. Revenues grew at a moderate pace of 8% year-on-year, but EBITDA and PAT grew at a healthy 39% and 68%, respectively, due to lower operating costs (fuel and power).

UltraTech Cement Business Division

The major cement business owned by Aditya Birla Group is UltraTech Cement Ltd. UltraTech, a $5.9 billion building solutions giant, is India’s leading producer of ready-mix concrete (RMC), white cement and gray cement.

Excluding China, it is the world’s third largest cement producer. With a single country cement production capacity of 130 MTPA, UltraTech is the only cement company in the world outside of China. The company operates in India, Sri Lanka, Bahrain and the United Arab Emirates.

UltraTech has the capacity to produce 136 million tonnes of gray cement (MTPA) per year on a consolidated basis. The company has a market share of over 80% in India and a network of over 1,20,000 channel partners across the country.

UltraTech markets its products in the white cement industry under the Birla White brand. Currently, we have 3 Wall Care Putty Machines and 1 White Cement Plant of 2 MTPA capacity. UltraTech is India’s largest concrete manufacturer with 231 Ready Mix Concrete (RMC) units across 109 cities.

We also offer a variety of specialty concretes to meet the specific needs of our unique customers. The company’s Building Products segment is a center of innovation, offering a wide range of products with cutting-edge engineering to meet the needs of modern buildings.

Financials of UltraTech Cement

In FY 2023, Ultratech Cement witnessed significant growth in its revenue, surging 21% to reach ₹63,239 crore compared to ₹52,598 crore in FY 2022. Analyzing four years from FY2020 to FY2023, the company has recorded a solid Compound Annual Growth Rate (CAGR) of 14%.

On the other hand, net profit declined noticeably, falling 34% from ₹7,714.34 crore in FY2022 to ₹5,073.4 crore in FY2023. The decrease in net income was due to higher input costs, partially offset by higher sales volumes and improved revenue realization.

Raw material cost increased from ₹531/t to ₹600/t due to rise in additives and fly ash prices. Rising fuel prices were the main reason for the 36% increase in overall energy costs from ₹1,240/t to ₹1,692/t. Logistics costs also rose slightly from 1,214 rupees per ton to 1,248 rupees per ton due to the rise in diesel prices and the imposition of railway freight fees during business hours.

In FY23, Ultratech Cement maintained favorable financial metrics with return on equity (ROE) of 9.69% and return on equity (ROCE) of 12.77%.

UltraTech Cement’s future plans

Various revenue streams

Because cement is a commodity, its costs are highly variable and freight and transportation costs are among the major costs. A company’s primary target region is often determined by its factory location.

UltraTech operates 8 units including Sea + Rail (7 in India and 1 overseas), 1 white cement and 3 putty units, 5 docks across India, UAE, Bahrain and Sri Lanka, and 24 integrated units (23 in India). It operates three bulk packaging terminals. one in India and one overseas).

As of September 30, 2023, the company was operating in all regions and recorded the largest capacity share in West (30.7 MTPA) followed by Central (28.4 MTPA), East (26.4 MTPA), North (26.5 MTPA) and South India. It was followed by India (20.5MTPA). No region accounts for more than 25% of total capacity share.

Compared to other regions, South India has structural excess capacity. However, this position is expected to increase further with the anticipated acquisition of KIL’s cement facilities.

Upcoming capacity expansion

As part of its Phase 2 and 3 capacity development initiatives, the company is adding capacity to maintain its market position in each region. Considering Phase 2 and 3 growth plants, the major capabilities are emerging in East and South India, followed by North, Central and West India.

The company, which currently has a total capacity of 133 Mtpa, plans to increase this to 157.4 Mtpa by FY25. Under Phase 3 expansion, the company aims to increase its total production capacity to 179.3 Mtpa by FY27.

Ultratech Cement’s capital expenditure cash flow this year is expected to exceed initial projections with an outlay of about ₹9,000 crore. Likewise, the company expects its Capex cash flow to be at similar levels next year. Ultratech Cement slightly increased its working capital by making opportunistic investments in the purchase of coal and pet coke.

conclusion

So, looking at valuation, the company is expensive compared to its industry peers, as can be seen from its price-to-earnings and price-to-book ratio of 43.54 and 5.14, respectively. The dividend yield is also 0.39%.

The company’s expansion plans and diversified geographic footprint make it well positioned to capitalize on India’s infrastructure growth. However, high valuations raise concerns about the potential upside in the stock price in the near term. Investors should evaluate whether the premium valuation is justified by UltraTech’s competitive advantages and growth prospects.

What do you think about UltraTech Cement’s future prospects? Does the stock look attractive at its current valuation, or is it better to wait for a better entry point?

Written by Narine Surya

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