Shares of UltraTech Cement, the country's largest cement producer, more than doubled in the last one year, sharply outperforming the benchmark BSE Sensex, which rallied 52 per cent in the same period. In fact, it outpaced its closest peers, Shree Cement and ACC, also in the same period.
The cement major gained 109 percent in the last 12 months and hit a fresh high of Rs 8,070.60 on September 8, while Shree Cement and ACC rallied 58.8 percent and 87 percent, respectively. However, it marginally underperformed Ambuja Cements, which gained 111 percent.
The rally is largely attributed to its strong market share with a healthy balance sheet and the government's increased focus on infrastructure segment, with improved outlook and reopening of economic activities.
"UltraTech is the largest cement producer in India and has a strong market position, with a healthy balance sheet. The stock has surged more than 100 percent in the last one year due to the improvement in operational performance, capex and improved future outlook for its business performance. The government's support for infrastructure activities has further improved the future outlook on domestic cement companies," said Ankit Pareek, Research Analyst, Choice Broking.
Capacity expansion key trigger
The key triggers for the stock are the capacity expansion to target eastern regions while becoming net debt-free by FY23, and sustainability of operational margins.
Amidst the severe cost pressure and rising competitive intensity, Prabhudas Lilladher preferred UltraTech Cement, along with Ambuja Cements, given their diversified presence, ample levers for cost reduction (waste heat recovery, strong logistics network), and high share of trade volumes.
The brokerage believes that UltraTech stands out as the best play in the sector, led by its dominant size (22 percent market share) and highly efficient operations.
The company, in July, had prepaid its long-term loans amounting to Rs 5,000 crore through free cash flows.
In the quarter ended June 2021, UltraTech reported a 54 percent year-on-year (YoY) growth in revenue at Rs 11,698 crore and profit grew by 114 percent to Rs 1,703 crore, partly on a low base, as Q1FY21 was hit by COVID-led nationwide lockdown.
At the operating level, its earnings before interest, tax, depreciation and amortisation (EBITDA) surged 49 percent to Rs 3,512 crore, compared to the year-ago quarter.
The company has a total capacity of 116.75 million tonnes, as of FY21, which will be increased to 136.25 million tonnes by FY23. "COVID did cause some delays due to labour shortages and lockdowns. However, the company expects to commission all the projects as per the original schedule," said UltraTech.
Technical experts feel the stock can rally up to the Rs 8,500 levels in the short term, considering the current momentum despite intermittent correction and consolidation. On the monthly chart, it has formed a sizeable bullish candle pattern in last three straight months.
"On the monthly chart, UltraTech had given a breakout of Rs 4,904.95 levels in December 2020. After that, we witnessed a one-way rally, and it has gained more than 60 percent since December. Overall, the stock is in bullish territory with good momentum, and, in the recent trade, it has made a high at the Rs 8,073.30 levels," said Sachin Gupta, AVP, Research, Choice Broking.
Full support from most technical indicators
He believes all technical key indicators like RSI (14), Stochastic & MACD are indicating bullish strength for the long term. "On a weekly time frame, the stock has shifted above the immediate resistance of Rs 7,911 levels, which suggests continued strength in the counter."
At present, the stock has immediate support at the Rs 7,730 levels while the upside potential is around Rs 8,300-8,500 levels, he said.
Jay Thakkar, Vice President and Head of Equity Research, Marwadi Shares and Finance, feels UltraTech seems to have completed its five waves rising structure on the weekly and monthly charts. This means the upside potential is less from the current levels, compared to the downside risk.
"Momentum indicator MACD is well into the buy mode at all the degrees, i.e., from daily to monthly charts. However, it’s trading below its previous swing high. So, if there is a sell crossover from hereon, anytime soon, it will form a negative divergence which will be negative for the stock," he said.
"The 38.2 percent retracement of the entire rise from March 2020 comes to the Rs 6,100 levels, which is nearly 22 percent from the highs. Hence the risk to reward is not in favour of fresh longs hereon," he added.
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