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Lower realization impacted profitability, 2HFY25 outlook promising

Muted topline growth: For Q2FY25, UltraTech Cement reported revenue of Rs.15,635 crore, marking a decline of 2.4% YoY and 13.5% QoQ on the back muted volumes and lower price realisation. Weak government capex and monsoon led to 12.9% QoQ decline in sales volume, while on annualised basis it reported only sub 4% volume growth reaching 27.8 MT. Due to high competitive intensity price realization continue to remain under, seeing 6.4% decline on annualised basis reaching Rs.5,656 per ton. Weakest EBITDA/tonne in last seven years: UltraTech’s gross profits declined by 5.9% YoY and 14.3% QoQ to Rs.12,718 crore, with a margin of 81.3%, reflecting a decline of 308bps YoY and 81bps QoQ. Weak price realizations, higher employee cost (due to annual increment and one-time bonus) and also increase in other expense due to plant maintenance resulted in muted EBITDA margins (12.9% for Q2FY25). Based on these factors, EBITDA/tonne has fallen to seven year low levels of Rs.725 per tonne seeing 24% decline both on QoQ and YoY basis. Lower realization also impacted PAT which fell to Rs.825 crore seeing a decline of 35.6% YoY and 51.3% QoQ basis.

Efficiency improvement programme on track:

The company anticipates achieving cost improvements through a comprehensive efficiency enhancement program. This initiative includes increasing the Waste Heat Recovery System (WHRS) capacity from 278 MW to 450 MW, expanding renewable energy (RE) capacity from 612 MW in FY24 to 681 MW, and ultimately reaching 1.8 GW by FY27. Additionally, the carbon capture (CC) ratio is projected to improve from 1.44 to 1.54 by FY27, while the alternative fuel ratio (AFR) is expected to rise from 5% to 15% during the same period. The lead distance is set to increase to 360 km by FY27, further contributing to operational efficiency and leveraging opportunities for enhanced performance.

Capacity expansion plans progressing as scheduled:

The company's capital expenditure plans are progressing as scheduled, with a target capacity of approximately 200 million metric tons by FY27. This growth will be driven by several initiatives, including the ongoing Phase 2 expansion of 24.2 million metric tons, the upcoming Phase 3 expansion of 22 million metric tons, and the acquisition of Kesoram and India Cement assets. Additionally, further brownfield expansion efforts will contribute to this capacity increase. As a result, we anticipate a compound annual growth rate (CAGR) of 9.9% in volume for the company from FY24 to FY27.

Outlook & Valuations:

While H1FY25 saw comparatively lower demand first due to elections and also due to lower capex expenditure by central government. But looking ahead in H2FY25, we expect sector growth to see upward thrust as government once again picks ups their infrastructure spending and also aided by private capex from real estate and construction etc. UltraTech, as a leader, will benefit from these trends through organic expansion, improving volumes, utilization, and product mix, and inorganic growth via acquisitions. We expect revenue and EBITDA to grow at a CAGR of 13.57% and 19.4% over FY25-26E. Given its strong position and financials, we assign an EV/EBITDA multiple of 18.5x on FY26E EBITDA, slightly above its 10-year average. Consequently, we revise our rating to Accumulate (from Hold) with a target price to Rs.11,446.

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