UltraTech Cement’s Ambitious Expansion Plan Worth the Premium Valuations?

The economy’s primary driver today is the infrastructure sector’s tremendous expansion. By 2027, the infrastructure industry is projected to expand at a compound annual growth rate (CAGR) of 8.2%, driven by a number of strategic policy initiatives implemented by the Indian government.

The government’s priority for this industry is seen in the allocation of investments in the capital expenditure outlay for 2024–2025, which was ₹11 lakhs crores in the most recent Interim Budget.

It is obvious that India’s ambition of having a US$ 5 trillion GDP is based on the development of a strong infrastructure. The cement industry saw a rise in demand as a direct result of the increase in infrastructure spending, necessitating capacity expansion.

This cement company that we are going to explore has started an ambitious capacity expansion push, putting it in a strong position to capitalise on the next stage of economic growth. Within a year, Ultratech Cement has provided a 35 percent return. To find out where the firm is headed, let’s take a closer look at it.

The cement player’s revenue growth slowed down in the December quarter as a result of flat realisations and moderate volume growth. The revenue increased at a moderate pace of 8% year over year, but EBITDA and PAT saw healthy increases of 39% and 68%, respectively, due to the reduction in operating costs (fuel and power).

Business Segments Of UltraTech Cement

The main cement business owned by the Aditya Birla Group is UltraTech Cement Ltd. UltraTech, a $5.9 billion building solutions giant, is India’s leading producer of ready-mix concrete (RMC), white cement and grey cement.

With China excluded, it is the third-largest producer of cement worldwide. With a single nation’s capacity to produce 130 MTPA of cement, UltraTech is the only cement firm in the world (apart from China). The corporation operates in India, Sri Lanka, Bahrain, and the United Arab Emirates.

UltraTech can produce 136 million tonnes of grey cement annually (MTPA) on a consolidated basis. The company has a market reach of more than 80% in India and a network of more than 1,20,000 channel partners nationwide.

UltraTech markets its products in the white cement industry under the Birla White brand. With a current capacity of two MTPA, it has three Wall Care putty machines and one White Cement plant. UltraTech is the biggest concrete maker in India, with 231 Ready Mix Concrete (RMC) units in 109 cities.

Additionally, it offers a wide variety of specialized concrete to satisfy the particular requirements of unique clients. The company’s Building Products division is a center for innovation, providing a range of products with cutting-edge engineering to meet the needs of modern buildings.

Financials Of UltraTech Cement

In the fiscal year 2023, Ultratech Cement saw a substantial increase in revenue, surging by 21% to reach ₹63,239 crore as opposed to ₹52,598 crore in FY2022. Analyzing a span of four years, encompassing FY2020 to FY2023, the company displayed a  robust Compound Annual Growth Rate (CAGR) of 14% in revenue.

On the other hand, there was a noteworthy decrease in net profit, experiencing a 34% decrease from ₹7,714.34 crore in FY2022 to ₹5,073.4 crore in FY2023. The decrease in net profit  was attributable to higher input costs, partly offset by volume growth and better sales realisations.

The cost of raw materials increased due to a rise in additive and fly ash prices, going from ₹531/t to ₹600/t. The primary cause of the 36% increase in overall energy costs—from ₹1,240/t to ₹1,692/t—was rising fuel prices. The cost of logistics also went up slightly from ₹1,214/t to ₹1,248/t as a result of higher diesel prices and fees applied to railway freight during business hours.

In FY23, Ultratech Cement maintained favourable financial metrics with a Return on Equity (ROE) of 9.69% and Return on Capital Employed (ROCE) of 12.77%.

Future Plans Of UltraTech Cement

Diversified Revenue Streams

Since cement is a commodity, its cost is highly variable, with freight and transportation expenses being one of the main expenses. The company’s primary target geographic areas are often determined by the location of the plant.

UltraTech operates eight Bulk Packaging Terminals – Sea + Rail (seven in India and one overseas), one White Cement & Three Putty Unit, five Jetties throughout India, the United Arab Emirates, Bahrain, and Sri Lanka, and 24 Integrated Units (23 in India and one overseas). 

As of September 30, 2023, the firm operated in all areas, with the biggest capacity share in the West (30.7 MTPA), followed by Central India (28.4 MTPA), East (26.4 MTPA), North (26.5 MTPA), and South India (20.5 MTPA). No region accounted for more than 25% of the overall capacity share.

Compared to other regions, South India has a structural overcapacity; however, with the anticipated acquisition of KIL’s cement facilities, this presence is anticipated to rise.

Upcoming Capacity Expansion

As part of its Phase II and III capacity development initiatives, the company is adding capacity to sustain its market position in each geography. When taking into account phase II and III growth plants, major capabilities are emerging in East and South India, with northern, central, and Western India following suit.

With a total capacity of 133 Mtpa right now, the company has plans to increase this to 157.4 Mtpa by FY25. Under Phase III expansion, the company aims to increase its total capacity to 179.3 Mtpa by FY27.

This year, Ultratech Cement’s capex cash flow is expected to exceed its initial plans, with an estimated expenditure of around ₹ 9,000 crores. Similarly, next year, the company anticipates its capex cash flows to be around the same amount. Ultratech Cement has taken some opportunistic bets on the purchase of coal and pet coke, leading to a slight extension in its working capital.

Conclusion

So, when looking at the valuations, the company is expensive as compared to its peers in the industry as is evident from the Price-to-earnings and Price to book value ratio of 43.54 and 5.14 respectively. It also holds a dividend yield of 0.39 percent.

The company’s expansion plans and diversified geographic presence position it well to capitalize on India’s infrastructure growth. However, the high valuations raise concerns about the stock’s upside potential in the near term. Investors need to evaluate if the premium valuations are justified by UltraTech’s competitive advantages and growth prospects.

What do you think about UltraTech Cement’s future prospects? Does the stock seem attractive at current valuations, or would you recommend waiting for a better entry point?

Written by Nalin Suriya 

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