The stock of UltraTech Cement looks set to end the year on a disappointing note.
The stock is down 5 percent against an 8 percent rise in the benchmark Sensex this year as of December 14. Shares of UltraTech Cement hit their 52-week high of ₹7,947.90 on January 17, 2022; at present, it is down more than 9 percent from that level.
The company faced the heat of higher power and fuel costs while demand remained low amid excess rainfall in South India.
The September numbers of the company failed to meet market expectations. As reported by Mint, the Aditya Birla Group firm reported a 42 percent decline in its consolidated profit after tax (PAT) at ₹756 crore for the quarter that ended September 2022, as against ₹1,314 crore in the year-ago quarter. Analysts estimated a fall of 38 percent in the company's consolidated net profit.
Revenue from operations rose 15 percent to ₹13,893 crore during the September quarter against ₹12,016.78 crore in the corresponding quarter of the last fiscal.
On December 13, Ultratech announced the commissioning of a 1.9 mtpa greenfield clinker-backed grinding capacity at Pali Cement Works, Rajasthan. The company’s total cement manufacturing capacity in India now stands at 121.35 mtpa.
Should you buy it?
The days ahead for UltraTech Cement may be better as the company may benefit from demand revival in November. Price increases in October-November and easing power and fuel costs are also expected to augur well for the company.
The stock appears to be a decent medium to long-term buy due to improved fundamentals and cheap valuation of the stock.
Trendlyne data shows the stock has valuation comfort as the PE (price-to-earnings ratio) of the stock is undervalued at 31. The PE ratio of a stock indicates how cheap or expensive a company’s stock price is relative to its earnings. PE is the price an investor needs to invest to receive ₹1 of the company’s earnings.
Recently, Fitch Ratings affirmed UltraTech Cement's long-term foreign and local currency issuer default ratings (IDRs) at 'BBB-'. The outlook was kept 'stable'.
Fitch said UltraTech's ratings reflect its position as the third-largest cement producer globally, excluding China, and the largest in India, which has healthy long-term growth prospects.
"We think its strong branding and cost-efficient operations underpin its competitive position and keep profitability above the industry average. This and UltraTech's robust financial structure enable it to cope with the industry's inherent cyclicality despite weaker geographic diversification than larger global peers," said the rating agency.
Fitch is positive about UltraTech's strong position in the market. It highlighted that UltraTech has a capacity of 121.3 million tonnes per annum (MTPA) and a domestic market share of 21 percent by installed capacity. Its planned expansion to around 160 MTPA by FY25 will bolster its leadership.
"UltraTech commands a pricing premium over smaller brands. Fitch regards its strong brand as an important competitive strength, as it adds a degree of stability to prices and margins amid the exposure to cyclical end markets and energy price volatility," said Fitch.
Fitch expects UltraTech's sales volume to grow by mid-to-high single digits over FY23 and FY24 while the EBITDA margin may narrow to around 17 percent in FY23 and FY24 in light of higher energy costs and capacity additions in the industry outpacing demand. The company's Capex may average approximately 12 percent of sales over FY23 to FY24 and the dividend payout may be around 25 percent of net income.
Some brokerages believe cement industry volume will rise further which will help large players like UltraTech. Brokerage firm ICICI Securities believes favourable construction season will augur well and will likely provide an impetus for price hikes in Q4FY23E.
UltraTech Cement is the top pick of ICICI Securities among the large-cap stocks in the cement sector. The brokerage firm has a buy call on the stock with a target price of ₹9,000.
Brokerage firm Sharekhan by BNP PARIBAS has a buy call on the stock with a target price of ₹8,500, citing its long-term growth potential.
Sharekhan believes UltraTech may benefit from healthy cement demand over the long term, driven by its aggressive capacity expansion plans.
"Demand is expected to be strong from segments such as infrastructure, rural housing, and urban housing. Further, the recent easing in pet coke and coal prices and flat diesel prices provides a key tailwind to improve upon operating margins from Q3FY2023, although the full benefit of easing power and fuel costs is likely to reflect in Q4FY23 earnings," said Sharekhan.
Technical indicators are also favouring the stock at this point in time.
Vaishali Parekh, Vice President of Technical Research at Prabhudas Lilladher pointed out that the stock has recently given a breakout above the triangular pattern on the daily chart above the ₹7,000 level which has become the critical support level.
"The stock has maintained above the ₹7,000 level with bias and trend intact. It is anticipated to rise further with next targets of ₹7,800-8,000. The RSI is well placed and has immense upside potential for the short-term to medium-term. We suggest holding and accumulating the stock with ₹7,000 as the important support and an upside target of ₹7,800-8,000," said Parekh.
According to a MintGenie poll, an average of 42 analysts have a ‘strong buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.