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Weak demand and pricing hurt margin Expects recovery in 2H and outperformance of industry volume growth

* UltraTech Cement (UTCEM)’s 2QFY25 EBITDA was below our estimate due to higher-than-estimated opex/t. EBITDA declined ~21% YoY to INR20.2b (7% miss). EBITDA/t declined ~24% YoY to INR725 (est. INR775). OPM contracted 3.0pp YoY to ~13% (est. ~14%). Adj. PAT declined ~36% YoY to INR8.2b (est. INR9.3b).

* Management highlighted that the pre-election slowdown, followed by intense monsoon, led to demand weakness in 1HFY25. Pent-up demand and good monsoon should lead to demand recovery going forward. It expects double-digit volume growth in 2H and anticipates outperforming the industry’s volume growth. Further, cement prices were up ~2% vs. Aug’24- exit and have remained steady (MTD). It has added 9mtpa grinding capacity in 1HFY25 and will commission another ~8mtpa in 2H.

* We cut our EBITDA estimates by 9%/5% for FY25/FY26 and EPS estimate by 15%/7% for FY25/FY26 (higher EPS cut in FY25 due to higher interest expense reported in 2Q). The stock trades at 19x/15x FY26E/FY27E EV/EBITDA. We value UTCEM at 20x Sep’26E EV/EBITDA and arrive at a TP of INR13,000 (earlier INR13,600). Reiterate BUY. Sales volume rises 4% YoY; realization/t down 6% YoY

* UTCEM’s consol. revenue/EBITDA/adj. PAT stood at INR156.3b/INR20.2b/ INR8.2b (down 2%/21%/36% YoY and in line/down 7%/12% vs. our est.). Consolidated sales volume grew 4% YoY to 27.8mt. Other operating income per ton was at INR117 vs. INR104/INR60 in 2QFY24/1QFY25.

* Grey cement realization was down ~8% YoY/2% QoQ (in line). Blended realization declined 6% YoY/1% QoQ. Opex/t was down 3% YoY (+2% vs. our estimate), led by 6%/2% decline in variable/freight costs. Other expense/t was flat YoY. EBITDA/t declined 24% YoY to INR725 and OPM contracted 3.0pp to ~13% in 2QFY25.

Depreciation/interest expenses rose 13%/36% YoY and other income increased 32% YoY.

* In 1HFY25, consol. revenue was flat YoY, while EBITDA/adj. PAT declined 10%/16% YoY. Based on our estimate, the implied revenue growth is ~5% while EBITDA/PAT is expected to decline ~3%/11% YoY in 2HFY25. We estimate volume growth of ~11% YoY in 2HFY25 and expect EBITDA/t to be at INR1,030 in 2HFY25 vs. INR1,180/INR850 in 2HFY24/1HFY25. In 1HFY25; OCF declined 16% YoY to INR28.3b due to lower profitability and an increase in working capital. Net debt increased to INR87.9b vs. INR27.8b as of Mar’24. Net debt to EBITDA stood at 0.71x vs. 0.21x as of Mar’24.

Highlights from the management commentary

* UTCEM’s capacity utilization stood at ~68% vs. 75% in 2QFY24. Utilization across regions were in the range of ~65-75% during the quarter. Industry volume growth is estimated at -1% to +1% YoY for 2QFY25.

* Fuel consumption cost declined ~8% YoY to INR1.84/Kcal. Its high-cost fuel contracts are nearing the end and will have a slight impact in 3Q. It expects fuel cost to decline by another INR0.10/kcal (~INR70/t) in 3Q 

* Capex in 1H was INR45.0b and full-year (FY25) capex will be at INR80-90b. Capex in FY26/FY27 will also be in a similar range, given the higher organic expansions. Its grinding capacity will increase to ~169mtpa/184mtpa by FY26/FY27 through the organic expansions.

Valuation and view

* UTCEM witnessed margin pressure in 1HFY25 due to a slowdown in demand and pricing pressure. However, the company is actively working on a cost-efficiency program for sustainable cost reduction, and targeting a cost saving of INR300/t over the next three years. Its cost-saving initiatives include an increase in C:C ratio, green power, and AFR share; logistics cost optimization; and improvement in the overall plant efficiency.

* We estimate a CAGR of 16%/18% in consolidated EBITDA/adjusted PAT over FY24-FY27. UTCEM is estimated to continue to gain market share with its robust capacity expansion (including inorganic growth). We value the stock at 20x Sep’26E EV/EBITDA to arrive at our TP of INR13,000 (earlier INR13,600). We reiterate our BUY rating.

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