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UltraTech Cement Ltd’s shares have fallen by as much as 26% so far this calendar year. Investor concerns are understandable. Cost inflation has been a pressing worry and margins are expected to be under pressure during the first half of financial year 2023 (H1FY23). Prices of coal and petroleum coke, key inputs used in making cement, remain painfully high, weighing on profitability.

“Earnings for UltraTech Cement as well as the cement sector are expected to remain under pressure in H1FY23 and lower than our earlier estimate because of sustained cost pressures (we expect a 300-350 per tonne increase in energy costs in H1FY23); the recent decline in cement prices, which came under pressure in June 2022; lower than our estimated growth in cement demand in Q1FY23; and the tendency to increase capacities by different players," said a report by Motilal Oswal Financial Services on 29 June.

Under Pressure
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Under Pressure

Many cement companies are expanding capacity, including UltraTech, which has recently announced a 22.6 million tonnes per annum (mtpa) increase in its capacity by FY25. The completion of this round of expansion will take its grey cement capacity to 159.25mtpa. As such, given the huge capacity additions planned by many companies, there are worries on the utilization levels in the sector and the resultant impact on pricing.

Ambit Capital reckons UltraTech is growing capacity at 10% compound annual growth rate (CAGR) through FY25, above industry growth, but this expansion would limit industry clinker utilization to <70% through FY25. “That doesn’t bode well for pricing power," according to Ambit.

That is not all. Competition worries have heightened with the Adani group entering the sector after the latter decided to purchase Holcim’s cement business in India. UltraTech has gained market share over the past decade, but may well find it challenging to reap further market share gains following Adani’s entry.

Against this backdrop, UltraTech’s shares have declined and valuations are lower now. However, that is not exciting enough. “The steep correction in the UltraTech stock has made valuations favourable and it is trading below its 10-year and five-year average EV/Ebitda as well as EV per tonne multiples. Based on FY23 estimates, the UltraTech stock trades at EV/Ebitda and EV per tonne of 14.6 times and $164.1, respectively," said Mangesh Bhadang, analyst at Nirmal Bang Equities. “Even so, given the lack of positive news flow in the near term, a further time correction cannot be ruled out," Bhadang said. As such, a meaningful drop in input costs would be a trigger to watch out for.

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