On the back of strong demand opportunities, capacity expansion plans, reduction in debt, and strong growth outlook, domestic brokerage house Religare Broking has picked cement major UltraTech Cement as a 'high conviction idea'.
The brokerage has initiated a buy call on the stock with a target price of ₹7,438, indicating an upside of 22 percent.
UltraTech’s leadership position along with its capacity addition and debt reduction plans bode well for the future and this would give an edge to the company over other players. Further, demand visibility, improved realization and utilization from existing capacities would aid in better volume growth, noted the brokerage. From an investment perspective we are positive on the stock, it said.
Investment Rationale
Largest cement manufacturer: UltraTech Cement is the cement flagship company of the Aditya Birla Group. It is the largest manufacturer of grey cement and ready mix concrete (RMC) and one of the largest manufacturers of white cement in India. It is the third largest cement producer in the world, excluding China. It has a total capacity of 120 MTPA of grey cement and 22 integrated manufacturing units, 27 grinding units, one clinkerisation unit and 8 bulk packaging terminals, informed Religare.
Strong demand opportunity in the Cement sector: India is the second largest cement producer in the world with a 31.4 percent share after China (53.8 percent share). The demand for the cement sector is expected to grow by a CAGR of 8-9 percent from 345-350 MT to 500-550 MT over FY22-27, noted the brokerage. It believes the growth will be driven by government spending on infrastructure development as in the Union Budget 2022-23, the government has provided higher allocation for infrastructure, affordable housing and road projects. Besides, pickup in rural and urban housing as well as growth in industrial and commercialization will further aid demand for the cement sector, it added.
Capacity expansion plan to drive growth: As per the brokerage, UltraTech is well placed across India and in the next 3 years it has plans to expand its capacity which will be a mix of brownfield and Greenfield projects. The company’s capacity will increase to 160 MTPA by FY25 from 120 MTPA in FY22, which will aid in strengthening its position as the 3rd largest cement player in the world as well as maintain a leadership position in India. It will also help in capitalizing on the opportunity arising from industries like housing, roads and infrastructure, mentioned Religare.
Plans to gain share in the east: UltraTech is a market leader in most of the regions in India such as the west, north, central and south. It holds a market share of ~25 percent in terms of grey cement capacity in India. Going ahead, with an organic expansion plan of 40-42 MTPA capacity pan India, it would strengthen its market position across regions as well as gain share, especially in the east, informed the brokerage.
Consistently reducing debt: According to the brokerage, UltraTech is focusing towards its target plans of becoming net debt free by FY23 which will further help in improving its financial strength going ahead. During FY18 & FY19, UltraTech completed the acquisition of companies such as Jaiprakash Associates and Jaypee Cement along with Binani and Century Textiles and post-acquisition it led to an increase in its debt levels to ₹18,000-24,000 crore and debt/equity stood at 0.7-0.8x while Net debt/Equity was 0.5-0.6x. As a result, in the last 3 years, UltraTech focused on re-paying debt as its plan was to further strengthen the Balance sheet. Thus, its Debt/Equity and Net Debt/Equity reduce to 0.2x & 0.1x in FY22, noted Religare
Valuation
On the financial front, UltraTech has consistently grown its revenue/EBITDA/PAT by 15.7/17.2/21.5 percent CAGR between FY17-FY22. Going forward, as well it expects the firm's financial performance to continue. It sees UltraTech's revenue/EBITDA/PAT growing at a 16.6/20.1/27.7 percent CAGR over FY22-25E.
This would be driven by improved realization, utilization & addition of capacity. Moreover, the company’s plan to improve margin is to focus on a better product mix, increase in usage of green power (to 36 percent by FY25 from 18 percent in FY22) and decline in cost of fuels and other raw materials, stated the brokerage.
Stock Price Trend
UltraTech cement added nearly 8 percent in the last 1 year and around 6 percent in 2023 YTD. Just in Feb, the stock is up over 4 percent.
In the last 5 years, the stock has surged nearly 88 percent.
It hit its 52-week high of ₹7,489 on February 20, 2022, and its 52-week low of ₹5,158 on June 17, 2022.
Q3 Earnings
In the December quarter, the firm reported a 38 percent YoY drop in its consolidated net profit at ₹1,058.20 crore from ₹1,708 in the year-ago period. However, its revenue from operations rose 19.5 percent YoY to ₹15,520.93 crore as against ₹12,985 in the corresponding quarter last year.
The company's operating margin fell 350 bps to 15 percent in Q3 from 19 percent in the year-ago period but was up 100 bps sequentially. Volume growth was strong during the quarter but cost pressures resulted in subdued margins.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.