Analyst Call Tracker: Why has street turned optimistic on UltraTech over the last year?

As the cement industry recovers from a year of high input costs and low margins, the street is turning bullish on the sector. However, it comes as no surprise that analysts have been optimistic on UltraTech cement for some time now — it saw the maximum number of upgrades by brokerage firms in the last year, with Buy calls increasing 14 percent from 37 a year ago to 42 this year.

Also read: Analysts’ Call Tracker - Jan 2023

The industry had been going through a difficult period over the past year as it tried to deal with high input prices resulting in slim operating margins, which are improving now as costs have fallen in the last couple of quarters. Along with that, prices have also firmed up, resulting in better realisation.

According to analysts at Motilal Oswal, “…energy cost peaked out in 2QFY23, and we expect reduction in energy costs 3QFY23 onwards (reduction of Rs 200 / tonne over 3QFY23-1QFY24E based on current coal / petcoke prices).”

While UltraTech has benefited from the revival of the industry and general optimism towards the sector, company specific initiatives focusing on cost efficiencies, reduced leverage, and capacity addition have also helped it maintain its leadership position.

On the capacity front, the company has projected a growth of 8.2 percent to 131 metric tonne / year (Mt/year) by 31 March 2023, and expects it to grow by 22 percent to 160 Mt / year by FY26. In its latest Q3FY23 results, the company mentioned that the second phase of its capacity expansion plan of 22.6 MTPA (million tonnes per annum) announced during Q1 has already commenced.

Per analysts at Sharekhan, “It continues to remain on track with respect to its capacity expansion plans owing to strong demand outlook in infrastructure, and rural housing, and urban housing segments.”

The company also took initiatives to achieve a better cost structure. For example, it commissioned solar power plants to increase green power usage, and aims to meet 36 percent of its requirement through green power by 2025, along with optimisation of logistics costs.

“We reiterate our Buy rating on the stock, given the robust expansion plans, structural cost improvement (increasing green energy share and logistics cost optimisation), and strong balance-sheet (net cash positive in FY25E),” added Motilal Oswal.

The company has worked on reducing its leverage, with net debt declining to Rs 7,720 crore as of December from Rs 8,360 crore in September. The quarter ended with a net negative working capital of Rs 125 core, which the company expects to further improve in 4QFY23, the brokerage said.