Shares of Ultratech Cement, a flagship company of the Aditya Birla Group, ended in the green in Friday's trade despite the company's Q2 earnings falling below market expectations. In Friday's trading session, the stock opened higher at ₹6,315.60 against the previous close of ₹6,302.30 and rose further to a intra-day high of ₹6,421, and it finally finished the day with a 0.96% gain at ₹6,362.90.
On October 19, Ultratech Cement reported a 42% drop in its consolidated net profit to ₹755.7 crore from ₹1,310.3 crore in the same quarter of last year. The company's operating margins were badly hit by the rise in input costs, including crude oil, pet coke, and coal. The total expenditure of the company jumped nearly 30% to ₹12,026 crore in Q2 from ₹9,302 crore in the corresponding quarter of last year.
At the beginning of Q2FY23, analysts estimated profit margins of the cement majors would fall due to a rise in fuel costs, and they also expected that the recent price hike in cement prices would not translate into gains for the cement companies.
In September, credit rating agency firm CRISIL in its report estimated that the operating profitability of cement makers will decline 15% year-on-year to ₹900–925 per tonne this fiscal, adding to the pain of a 9% decline last fiscal, as an increase in realisations will not be enough to offset the increase in prices of coal, petcoke, and diesel that has pushed the average cost of production higher.
The rating agency said power and fuel costs, which account for roughly 30% of production costs, are expected to rise by ₹300 per tonne this fiscal year and freight costs by ₹10–15 per tonne, as diesel prices remain high.
Meanwhile, Brokerages raised their target prices for Ultratech Cement while maintaining their bullish sentiment toward the stock. Domestic brokerage firm ICICI Securities said the results of the company were below their estimates.
The cost of production of the Ultratech cement increased 8.7% QoQ to ₹5,317 per tonne due to higher power and fuel expenses. As a result, EBITDA/tonne declined by 50.6% YoY and 30.6% QoQ to Rs. 775/tonne, the brokerage firm said.
However, ICICI said that the company's strong strategic growth plan, a prudent approach to generating higher cash flows and capex while maintaining a strong balance sheet would keep it ahead in the league. It had given a 'buy' recommendation on the stock with a 12-month target price of ₹7,700, an upside of over 20.88% from the current market price.
The brokerage also anticipates the cement capacity of Ultratech to increase at a CAGR of 10.2% MT as against the industry average capacity CAGR of 7.2% over the next three years.
In Q2FY23 the company commissioned a cement capacity of 1.3 MT at Dalla Cement Works, Uttar Pradesh in this quarter, taking the total grey cement capacity of the company to 115.85 M. The remaining capacity expansion is on track to be commissioned by March 2023 (9.6 MT in Q3 and 5.8 MT in Q4). After this expansion, the total grey cement capacity of the company will be 131.25 MT in India. In phase II, the company will be adding another 22.6 MT by FY25E. This will take its total capacity to close to 154 MT, said ICICI securities.
While HDFC Securities also maintained a 'buy' call on the stock with an unchanged target price of ₹7,615/share, which hints towards potential upside of 20% from the stock's previous closing price. "We continue to like the company for its strong growth and margin outlook and balance sheet management," said the brokerage.
On the other hand, Motilal Oswal is also bullish on Ultratech Cement and recommended a 'buy' rating on the stock with a target price of ₹7,510/share.
The brokerage said the company is best placed to benefit from demand recovery, helped by its consistent capacity addition plans. Cost-savings initiatives (higher green energy; scope for reducing lead distance, etc.) should help structural cost improvement, it added.
The brokerage expects cement demand to pick up post the festive season and volume growth should be in double-digits in FY23/24. Prices should improve going forward, it expects to mitigate the impact of sustained cost pressures.
An average of 42 analysts polled by MintGenie have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.