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Expectations from the September quarter results (Q2FY23) of cement manufacturers were running low. First, the quarter is seasonally weak for the sector, usually characterized by muted price trends. Second, severe cost inflation pressures haunted cement companies this time.

Against this backdrop, pan-India focused UltraTech Cement Ltd has sailed through a tough quarter with Q2 earnings largely in line with analysts’ expectations. Also, it scored over competitors on some key metrics. For instance, its Ebitda per tonne at 808 was better than peers who saw a sharper year-on-year (y-o-y) decline in Q2FY23, said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. UltraTech’s petroleum coke (petcoke) consumption (at 40% in Q2FY23) can rise further in the coming quarters, offering good scope of operating margin improvement, he said.

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The price of international petcoke eased for a brief period during the quarter to $170/tonne, but has now bounced back to more than $205/tonne, the UltraTech management said. Still, petcoke prices are much lower than that of coal. Imported coal prices are trading at around $300/tonne. The cost of these fuels is not expected to rise sharply, but the management expects them to remain high. Investors weren’t particularly thrilled despite the bright spots. UltraTech’s shares rose just 0.8% on Wednesday on NSE. This neutral reaction is understandable as the Street has already factored in a weak performance by cement makers in Q2, said analysts. Investors also noted that improvement in operating margins is likely in the fiscal second half and would be gradual. “A widely-held expectation is that cost pressures for the company should come off from Q3FY23 onward. Any disappointment on that front would be a sentiment dampener. As UltraTech is the sector leader, its ability to take adequate price hikes is a crucial monitor," said Rajesh Ravi, institutional analyst, cement, at HDFC Securities.

Recent dealer channel checks by various brokerages show that cement prices have been raised in some regions in October. It is vital for cement prices to sustain at higher levels for margins to meaningfully improve.

UltraTech’s domestic sales volume in Q2 grew 9.6% y-o-y to 21.75 million tonnes. Capacity utilization last quarter stood at 76%, up from 71% in Q2FY22. Close competitor Shree Cement Ltd did better in volume in Q2, though growth was broadly aided by a low base.

Nonetheless, UltraTech’s expansion plans are on track and bode well for its long-term volume growth, especially with rising competition. The company’s management said that demand outlook is robust and expects cement consumption to rebound post Diwali. It expects to clock double-digit volume growth this year, aided by capacity expansions.

UltraTech’s first phase of capacity expansion launched in December 2020 is on track and is estimated to be completed by the end of this financial year. During Q2, the company commissioned 1.3 million tonnes per annum (mtpa) brownfield capacity at Dalla, Uttar Pradesh, taking its total capacity in India to 115.85 mtpa and 121.25 mtpa globally.

On the flipside, UltraTech’s net debt rose to 8,357 crore in Q2FY23 from 5,561 crore as of June-end, due to increase in working capital and growth capex. Bhadang notes that the increase in net debt is a bit of a disappointment and needs closer tracking, going ahead. On the valuation front, shares of UltraTech are trading at FY24 EV/Ebitda of 12.64x, lower than Shree’s 14.6x multiple, showed Bloomberg data.

However, as UltraTech’s expansion plans are already laid out, the trigger for the stock will be the pace at which its operating margin improves, Ravi said.

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Updated: 20 Oct 2022, 09:27 AM IST
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