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New capex announced

UltraTech Cement’s (UTCEM) board has approved cement capacity expansion of 22.6mnte (~17% of expected FY23 India operations base of 130.9mnte) at a capex of ~Rs129bn (US$76/te which the company expects to complete by FY25. The fresh round of capacity expansion will take UTCEM’s total India grey cement capacity to ~154mnte from current 114.6mnte, implying 10.4% CAGR during the next three years. Factoring-in the said expansion, industry has announced ~110mnte capacities to be added over the next three years with UTCEM alone adding 35% of it and nearly two-thirds of the additions by the top-4 group. Hence, this would lead to better industry consolidation and better pricing, in our view. Besides, based on historical trends, many of these capacities may get delayed and speed of execution would depend on demand growth. We believe UTCEM, with its large pan-India diversified market presence, premium brand positioning, timely capacity creation, increased cost efficiencies and strong balance sheet is better placed to gain market share / improve margins in the medium term. We continue to value UTCEM at 15x FY24E EV/E and maintain BUY rating with a target price of Rs8,500/sh. Key risk: Lower demand / pricing, and sharp cost escalations.

Robust capacity addition pipeline; market share gains to continue for UTCEM. UTCEM’s board approved cement capacity addition of 22.6mnte (~20% of existing India operations) at a capex of Rs129bn (US$76/te) to be completed in a phased manner by FY25. The expansion shall be through a mix of brownfield and greenfield projects and will include setting-up of integrated units, grinding units and bulk terminals. Exact details of the expansions as to location, configuration, etc. are yet to be disclosed by the company. Along with the ongoing capacity expansion (~16.5mnte), the fresh expansion will take UTCEM’s India grey cement capacity to ~154mnte from current 114.6mnte, implying 10.4% CAGR over the next three years

Cashflows for next three years tied-up for expansions: UTCEM is expected to generate cumulative operating cashflows of Rs330bn over the next three years. This would more than suffice for the expected capex of Rs200bn (including Rs129bn new capex announced on 2nd Jun’22) over FY22-25E and UTCEM is still likely to remain net-debt-free FY23E onwards

Whether industry pricing would come under pressure with higher capacity additions? We believe many of the announced 110mnte capacity additions may get delayed due to various reasons (based on historical trends). For example, recent cost pressures may shrink profitability of the industry participants, especially for mid and smaller companies in the short-term, and the resultant cashflows available for capex may shrink. This could lead to delay in implementation of the announced expansions.

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