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In current times of weak demand, low pricing power, high fuel cost and uncertainty related to the entry of a new aggressive player (Adani Group), any significant capacity announcement is likely to hurt the sector sentiment further. Given the backdrop, UltraTech Cement’s (UTCL’s) plan to add 22.6mpta (~17% of its capacity post completion of projects on-hand) by F25E may raise concerns on the sector’s outlook. While the low capex cost of ~$74/t (vs. the perceived replacement cost of >$100-120/t with recent inflation) is a positive for UTCL, in times of trouble, it could imply a low ask rate for Ebitda margins. With chances of peers also joining the capex drive, we maintain a cautious sector stance. Maintain ‘Hold’ with a TP of Rs 5,996.

Capex not a surprise; but a few months ahead of our expectation

In its Q4FY22 earnings call, UTCL had already hinted at plans firming up towards organic expansions. However, it still is a few months ahead of our expectations. The other way the Street may view the expansion is that no sooner had UTCL lost out on Holcim’s India assets to Adani Group, it has announced a massive expansion to retain its leadership. Hence, it may trigger expectation of a race towards maintaining or increasing capacity share given that several peers have strong balance sheets and also the intent to add significant capacity. Hence, a sentimental sector negative.

Low cost expansion; will it mean low ask rate for margins?

UTCL plans to spend a total of Rs 129 bn toward the announced capex – implying a cost of a mere $74/t. While we await finer details with regards to clinker capacity as well as supporting infrastructure, the low cost certainly puts UTCL in a positive light. However, in times of sector concerns, the Street may also read low capex as a low ask for EBITDA margins to generate optimal returns – and hence a potential dampener.

Outlook: Sector headwinds

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



Author: Howard Caldwell