UltraTech Cement on firm ground, but steep earnings upgrade unlikely

The outlook on demand is upbeat as a recovery is being seen across sectors, including infrastructure and individual home building. Management expects UltraTech to grow in double-digits in FY26 driven by expanded capacities, indicating continued market share gains by beating industry growth of 6-7%.

UltraTech completed the acquisition of south-focused The India Cements Ltd last quarter, while the acquisition of Kesoram Industries Ltd is likely to be completed this quarter (Q4FY25). With that, UltraTech will close FY25 with around 185 million tonnes per annum (mtpa) of cement capacity. By the end of FY27, its total capacity including ongoing expansions will be around 210 mtpa. 

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As UltraTech continues to push the pedal on organic and inorganic expansion, it is seen as a key beneficiary of ongoing industry consolidation despite the elevated competition. Timely capacity expansions provide growth visibility. UltraTech has also invested ₹7,760 crore to acquire a non-controlling 8.42% stake in Northeast-focused Star Cement Ltd.

Easier said than done

That said, steep earnings upgrades may not come easily. “We estimate the consolidation of India Cements and Kesoram to drive 21/9% year-on-year volume growth in FY26/27E. However, as these assets’ margins will remain significantly below UltraTech’s core margin, it will offset the volume gain impact on consolidated Ebitda," said analysts at HDFC Securities Ltd.

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In FY25, UltraTech will incur capital expenditure (capex) of around ₹9,300 crore. For FY26 and FY27, organic capex is pegged at around ₹8,000-9,000 crore and ₹6,000-7,000 crore, respectively. Capex will be required for investing in waste heat recovery systems and plant upgrades. These measures will help the company improve the share of green power in the overall fuel mix and aid long-term cost reduction. Management targets a cost reduction of ₹200-300 per tonne over the next three years.

Debt dampens sentiment

But for now, large debt is a sentiment dampener. Consolidated net debt rose ₹16,160 crore versus ₹8,800 crore in Q2FY25, led by the consolidation of India Cements. Debt is expected to peak in FY26 and fall thereafter, management said.

Further, cement prices are yet to improve meaningfully, keeping realisations outlook hazy. According to UltraTech management, the company’s realisations improved by around 2.5% sequentially in Q3FY25 with the north and central regions seeing relatively better growth. Currently, cement prices are around 1.5% higher in central and western regions compared to Q3’s average prices. 

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While UltraTech expects better pricing with robust demand in Q4, a concern is that the volume push cement companies typically undertake in the March quarter to meet their year-end targets will prevent a sharp uptick in prices in the near term. “While on-track completion of capex plans and efficiency focus is heartening, the weak sector fundamentals and risk of earnings downgrade in FY25 are issues of concern," said Nuvama Research. The brokerage has marginally raised its FY25 and FY26 Ebitda estimates by 1% each.

So far in FY25, UltraTech stock is up 17% compared to 4% returns from the Nifty50. It is trading at an FY26 EV/Ebitda of 17 times, showed Bloomberg data, a premium to large-cap competitors, which means a good part of the optimism is being factored into the price.