UltraTech Cement’s stock seen opening up, driven by positives from India Cements stake buy, ‘near-term profitability…’

UltraTech Cement Ltd., the largest cement manufacturer by market capitalization announced that the Board of Directors have approved the purchase of 32.72 per cent of India Cements, as per the company filing in the exchange.

The shares of the cement maker closed 2.01 per cent higher at ₹11679.25 after Friday, July 26 trading session, as compared to ₹11448.90 in the previous day.

The company shares are set to open on a positive note on Monday, July 29, fueled by the purchase of a majority stake in India Cements. Cement manufacturers Adani Group and UltraTech are engaged in intense competition to improve market share.

“I think UltraTech's stock is going upwards tomorrow,” an analyst who did not want to be named, covering the sector told Mint. “The positive surprise is only that the deal has closed much sooner than expected," the analyst said.

"I think..will be positive for the movement itself because the two of them which are the Adani group and UltraTech Cement, both of them are trying hard for the competition so and some of the largest recently had gone to the Adani group. So, the completion of this asset is a positive,” the analyst said.

UltraTech's capacity outlook:

India Cements nearly has a capacity of 14.5 million tonnes, which will be “a 10 per cent addition to UltraTech's India capacity,” analysts said. The completion of the deal is looked at in a positive sense for UltraTech as it gives the company competitive power in the South Indian market.

“Ultratech will become a very large player in the Tamil Nadu market. Within the South, India Cements has about 14.5 million tonnes, out of which about 13 million tonnes capacity is in the South …and 6 million tonnes (of that) is in Tamil Nadu. UltraTech is also doing an expansion which will be completed this year. So, UltraTech will also have about 6 million tonnes of capacity, and now there will be 12 million tonnes of capacity in Southern India, and that will be equal to the leader, which is Ramco Cement, which has about 12 million tonnes of capacity,” the analyst told Mint.

After this move, UltraTech and Ramco Cements will have an identical capacity in Southern India, as per the analyst.

“It is significantly strengthening its position, and we expect its capacity market share to more than double in the South, to ~25% by FY27E,” said Dharmesh Shah, research analyst at Emkay Global Financial Services Ltd., in a research note on Sunday, July 28.

Near-term profitability prospects

Analysts expect the near-term profitability prospects to be muted as the fight for market share increases and due to an expected downward trajectory of cement prices in the upcoming quarters.

“The near-term trajectory for the earnings is downwards. Because the pricing environment is very dull currently, there has been some 5-6 per cent correction in pricing in the last 6 to 7 months, which is driving the EBITDA margins,” the analyst told Mint on condition of anonymity.

“They will not be able to recover from it in the coming quarters because the cement prices have further fallen by another 1.5 to 2 per cent, which directly disturbs the EBITDA margin and profitability,” they said.

Emkay Global expects the profitability to remain capped in the near term due to the acquisition of assets operating at a low utilisation level. The analyst firm estimates this situation to continue for the coming four to six quarters at least, Emkay said in a report.

The analyst also highlighted the overall earnings becoming weak for the cement sector but the overall perspective of the market remains positive for the Adani Group and UltraTeach if they are looking to acquire assets, “so more stress in the sector only drives consolidation.”