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UltraTech Cement Ltd was the biggest loser among Nifty 50 companies on Monday, falling by more than 4%. Its struggle with cost inflation has likely kept investors edgy. Pan-India focussed UltraTech announced Q3FY23 results on Saturday. On a per tonne basis, energy and raw material costs have risen by 33% and 13% year-on-year (y-o-y), respectively. Although these expenses were flat sequentially, the management’s commentary on this front was not encouraging.

The ongoing war between Russia and Ukraine, along with the opening up of China, is likely to result in pressure on energy prices, the UltraTech management said in the earnings call. So, it does not expect the prices of these fuels to soften to pre-covid levels.

Graphic: Mint
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Graphic: Mint

It was widely expected that UltraTech’s operating costs would start easing from Q4 onward, but now that is unlikely to play out. Further, cement prices were muted in Q3 and currently, there is not much clarity on when the much-needed price hikes will happen. This points to subdued realization and operating margin outlook.

“The Street was expecting UltraTech’s Ebitda per tonne to improve to 1,200 by Q4FY23, but the company sees it to be lower at around 1,000. Also, cement prices are expected to remain stable instead of a hike given the elevated costs," said Mangesh Bhadang, senior vice-president, Centrum Broking.

As a result, UltraTech’s consensus FY24 earnings estimates are poised to see cuts. “We do not expect significant realization gains for the industry in Q4FY23 given that Q4 is usually a volume-sensitive quarter," said an ICICI Securities Ltd report dated 23 January. So, taking into account the slow pace of price hikes and higher fuel cost per tonne, ICICI has trimmed UltraTech’s FY23-FY24 Ebitda estimate by 7-10%.

Meanwhile, UltraTech’s domestic sales volume at 24.25 million tonnes, up 13% y-o-y, was impressive in Q3. Amid rising competition, UltraTech has been on an expansion mode. In Q3, it commissioned 5.5 million tonne per annum (mtpa) of new capacity. Work on the second phase of growth of 22.6mtpa announced in Q1FY23 has already commenced.

While this should give long-term volume growth a fillip, for now, the key upside trigger for the stock is price hikes. Despite decent demand and slated capacity additions, so far, the industry has not been able to take price hikes, said Bhadang. “Further, once these capacities come on board then prices could see further downward pressure," he cautioned.

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