UltraTech’s Capex To Drive Cement Capacity Consolidation, Say Analysts; Shares Fall

Analysts expect UltraTech Cement Ltd.’s Rs 12,886-crore capex plan to trigger a consolidation of capacity share toward large producers.

“The top five players accounted for 41% of industry capacity in FY14. Their share is likely to rise to 52% in FY25,” CLSA said in a report.

According to Macquarie Research, industry consolidation is “positive in the medium term”.

This comes as the Aditya Birla Group flagship aims to increase its capacity by 22.6 million tonnes through brown field and green field expansions by the fiscal ending March 2025. That, along with its ongoing and proposed expansion plans, would take its total production capability to 159 MTPA by FY25.

The analysts also see the capacity expansion plan to strengthen UltraTech Cement’s pole position.

Shares of the company were down as much as 5.6% as of 1:38 p.m., the most in 12 weeks, on Friday. Of the 48 analysts tracking the stock, 41 maintain a ‘buy’, five suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies a 33.6% upside.

The stock’s trading volume is 7.7 times the 30-day average.

Here’s what analysts have to say about UltraTech Cement’s capex plan.

CLSA

• Maintains ‘buy’, cuts target price to Rs 7,640 apiece from Rs 7,980.

• Capacity expansion to reinforce leadership, but industry dynamics uncertain.

• Capacity expansion for capex implies a cost of $76 a tonne, much lower than $100-110-a-tonne benchmark.

• The top five players accounted for 41% of industry capacity in FY14.

• Top five players share likely to rise to 52% in FY25.

• Leadership reinforced through RoCE-accretive expansion.

• Better placed in an otherwise difficult macro.

• Estimates UltraTech Cement will continue to generate positive free cash flow even with elevated capex.

• See risk-reward as attractive.

• Tweaks FY23-25 Ebitda estimates by 2-3% on slightly lower price assumptions.

Goldman Sachs

• Maintains ‘buy’ with a target price of Rs 7,070 apiece.

• UltraTech will remain the clear No. 1 domestic cement producer.

• Announces capacity expansion, confirming its leadership position.

• Announcement points to a consolidation of capacity share towards the large producers.

• Preliminary calculations suggest post-tax RoCE of at least 12.5% for these assets even in a low-profitability environment.

• Recently turned cautious on the sector with UltraTech the only ‘buy’.

Macquarie Research

• Cement demand outlook remains robust due to focus on infrastructure, recovery in urban housing and private capex.

• Cement price volatility could rise.

• Industry consolidation is positive in the medium term.

• Key to track the response from other cement players, including Shree Cement Ltd., The Ramco Cements Ltd. and Dalmia Bharat Ltd.

JPMorgan

• Maintains ‘neutral’ with a target price of Rs 6,040 apiece.

• Industry entering a new capacity addition spiral in response to new entrant.

• A new capex plan would prepone company’s 160-MTPA plan by 5 years.

• It does a create the risk of further additions.