Market leader UltraTech Cement has seen significant interest from investors, with its share price jumping as much as 30% in the last one year, even as several analysts downgraded the stock citing concerns over the price of cement and the demand outlook. The UltraTech Cement stock has risen from Rs 6,521.95 a year ago to Rs 8,454.89 at close on September 5.
For the April-June quarter, the cement major also reported strong earnings, with net profit at Rs 1,688.45 crore, an increase of 6.59 percent from the previous fiscal year. Net sales rose to Rs 17,737.10 crore during the quarter, up 16.97 percent from the same period a year ago. The company has also reported a reduction in long-term debt.
Also read: UltraTech Cement Q1 Results: Net profit rises 7% to Rs 1,690 crore, beats estimates
The overall sentiment on the stock among analysts has been positive, but it has also witnessed a number of downgrades. According to Moneycontrol’s Analyst Call Tracker, UltraTech is among the 10 stocks with the maximum number of downgrades in the last quarter. Its ‘Hold’ ratings have increased from 5 to 9, while ‘Sell’ calls have risen from 3 to 4. Most analysts expect the growth in market share to continue but remain cautious about low cement prices and the mixed outlook for the overall cement segment, despite market consolidation.
Price, demand concerns weigh on stock rating
In their latest sectoral report, analysts at UBS have downgraded UltraTech to ‘Hold’. This is partly due to their anti-consensus, negative outlook on the cement segment. The UBS analysts are bearish on large-cap companies in India's cement sector “considering the mounting competition and expensive valuations”.
In the near term, the UBS analysts expect strong earnings for the next two quarters for UltraTech, driven by robust demand and margin tailwinds. However, they caution that any sharp uptick in stock prices could offer a good opportunity to book profits. They also anticipate that demand will slow down after the general elections in May 2024. Another concern is the limited room for value-accretive inorganic growth through mergers and acquisitions.
Also read: UltraTech Cement hits record high as decent sales volume growth reflects strong demand
Nomura, which has downgraded UltraTech to a neutral rating, believes that despite the “ambitious” plans of larger players UltraTech and Ambuja Cement for capacity expansion, opportunities could be limited. UltraTech aims to achieve a capacity of 200 metric tonnes before FY2030. “Our long-term analysis suggests limited EBITDA/t (earnings before interest, taxes, depreciation, and amortisation per ton) expansion for the industry due to limited pricing power. As a result, industry ROCE is expected to remain below the cost of capital,” Nomura’s analysts wrote in a report.
‘Buy’ calls getting louder, too
According to the Nomura report, upside risks for the stock include higher-than-expected volume growth in core markets, a strong pickup in trade prices across key markets, and better-than-expected cost savings. On the other hand, downside risks include pricing indiscipline in key markets, higher-than-expected capacity creation costs, and stagnant cement demand in core markets.
Despite some concerns, the overall outlook on the stock remains strong, with a majority of analysts giving it a ‘Buy’ rating. The number of ‘Buy’ ratings has increased from 33 to 38 over the last quarter.
According to a report by Axis Securities, analysts continue to maintain a ‘Buy’ call due to robust demand, upcoming new capacity, the ramping up of recently commissioned capacity, and the benefit of lower commodity prices. The report also suggests that the increase in focus on green energy could help the company grow further during the FY 2023-2025 period.
Similarly, analysts at Sharekhan have also maintained a ‘Buy’ call due to its long-term potential. They expect the cement manufacturer to benefit from strong demand, especially from infrastructure projects. Regarding cement prices, the Sharekhan report highlights that over the July-August period, pan India cement prices have increased marginally. They believe these prices will remain stable due to strong demand and the accrued benefits from lower power and fuel costs.
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