UltraTech Cement Rating: Hold; Capex expected to worsen sector sentiment

In the current times of weak demand, low price power, high fuel cost and uncertainty related to entry of a new aggressive player (Adani Group), any significant capacity announcement is likely to further hurt the sentiments of the sector. Looking at the background, UltraTech CementThe F25E’s plan to add 22.6mpta (~17% of its capacity) by the F25E may raise concerns over the outlook for the sector. While a lower capital expenditure cost of ~$74/t (versus an estimated replacement cost of >$100-120/t with recent inflation) is positive for UTCL, in times of trouble, it may indicate a lower asking rate for EBITDA margin. could. With peers also likely to join the capex drive, we continue to remain cautious. Maintain ‘Hold’ with a TP of Rs 5,996.

capex no wonder; but a few months ahead of our expectation

In its Q4FY22 earnings call, UTCL had already indicated plans to move towards organic expansion. However, it is still a few months ahead of our expectations. The way the Street may see expansion is that as UTCL lost its India assets to the Adani Group, it has announced a massive expansion to retain its leadership. Therefore, it could trigger hopes of a race to retain or increase capacity share, as many peers have strong balance sheets and also intend to add significant capacity. Hence, a sentimental field negative.

low cost expansion; Will this mean a lower demand rate for margin?

UTCL plans to spend a total of Rs 129 billion for the declared capital expenditure – which is only $74 per tonne. While we await finer details regarding clinker capacity as well as supporting infrastructure, the low cost certainly puts UTCL in a positive light. However, at a time of sector concerns, the Street could also read lower capex as there is less demand for EBITDA margins to generate optimal returns — and therefore a potential dampener.

Outlook: Sector Headwinds

Under normal circumstances, the capital expenditure announcement would have been neutral or positive for UTCL – as it strives to maintain market share with consistent volume growth visibility. But in times of sector headwinds (with respect to demand, pricing, cost and uncertainty, entry of a new player), capex is likely to hurt sentiment further. Numero Uno, UTCL is doing best for all its stakeholders. However, given the challenges in this area, we see this as an emotional negative. We maintain ‘Hold/SN’ with a TP of Rs 5,996 (UTCL value at 16x Q2FY24E EV/EBITDA).