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Pricing pressure and lower utilization to dent margin in near-term, Reinitiated with SELL

Result Synopsis

UltraTech Cement Ltd (UTCEM) reported weak set of number amid volume pressure. Revenue down by 2.4% YoY (-13.5% QoQ), is 6.5% below our estimate mainly due to lower-than-expected volume and better than expected realization. EBITDA in absolute number down by 20.9% YoY (-33.6% QoQ), is 26.4% below our estimate, while EBITDA margin stood at 12.9% in 2QFY25 vs. 15.9%/ 16.8% in 2QFY24/ 1QFY25. EBITDA/tn stood at Rs725 (-24% YoY & -23.8% QoQ) vs. our estimate of Rs901. Decline in EBITDA/tn mainly due to lower top-line growth coupled with marginal increase in opex/tn. Especially in other expenses, employee cost, and RM cost per tonne. In fact, there is no major benefits in P&F Cost as well freight cost. Adj. PAT down by 36% YoY (-50% QoQ) is 38.4% below our estimates. We don’t see any significant increase in EBITDA numbers due to 1). Weak realization 2). Subdued volume going ahead. However, cost benefits remained exist for UTCEM which is expected to build over 2-3 years of timeframe. Aggressive expansion to gain quick market share is one of the primary reasons of price weakness in the industry. UTCEM as a panIndia cement player likely to face tough competition from Adani Cements as well as other larger players. Any organic expansion may create oversupply issue and industry would take its own sweet time to absorb the incremental capacity. Therefore, we expect volume growth momentum for the company may slow down for FY25E, however, steady pick up could be seen from mid of FY26E onwards. Also, additional volume is expected to come from Kesoram Cement in FY26E and India cement under UTCEM umbrella. However, it would take time to augment the efficiency level of both the company. We are factoring UTCEM’s capacity utilization at 77%/ 76%/ 79% for FY25E/ FY26E/ FY27E. We don’t expect any significant price improvement in FY25E (est. -3.3% YoY) and expect marginal improvement in FY26E (+0.9%) / FY27E (+1%). We believe, it may take several quarters to make Rs1100-1300 EBITDA/tn until unless the full consolidation happens, and cost efficiency level programs get over. At current market price the stock is trading at USD240 EV/tn (20% premium to its 10 years avg. EV/tn of USD198), looks overvalued. We are building Revenue/ EBITDA/ PAT at 9%/ 11%/ 9% CAGR over FY24-FY27E. And valuing the stock at 16x Sep’26e EV/EBITDA to arrive the TP of Rs8272 with SELL rating. Our valuation is purely based on Demand and Pricing dynamic. Any significant improvement in pricing and demand would be a key upside risk to our recommendation.

Result Highlights

* Revenue Rs156bn (-2.4% YoY/ - 13.5% QoQ), is ~6.5% below our est. of Rs167bn. EBITDA Rs20bn (-20.9% YoY/ -33.6% QoQ), is ~26% below our est. of Rs27bn. Adj. PAT Rs8bn (-36% YoY/ - 52% QoQ), is ~38% below our est. of Rs13bn.

* Volumes 27.8mt (+4.3% YoY/ -13% QoQ), is ~8.5% below our est. of 30.4mt. While Realization Rs5616/tn (-6.4% YoY/ -0.7% QoQ), is ~2.2% above our est. Rs5497.

* EBITDA/tn Rs725 (-24% YoY/ -24% QoQ), is ~19.5% below our est. of Rs901 - Mainly due to lower-than-expected volumes coupled with higher-than-expected operating cost.

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