EUR 120.00 For Business Accounts Only

MOSL:ULTRATECH CEMENT: Earnings woes continue; stock correction factors in concerns (UTCEM IN, Mkt Cap USD20.6b, CMP INR5624, TP INR6450, 15% Upside, Buy)

Higher costs will impact earnings in 1HFY23

• Earnings for UTCEM as well as the Cement sector is expected to remain under pressure in 1HFY23 and lower than our earlier estimate due to: 1) sustained cost pressures (we expect a INR300-350/t increase in energy costs in 1HFY23), 2) recent decline in Cement prices, which came under pressure in Jun'22, 3) lower than our estimated growth in Cement demand in 1QFY23, and 4) tendency to increase capacities by different players (UTCEM and SRCM recently announced capacity expansions).
• Earnings recovery for UTCEM in FY21 and 1HY22 was driven by fixed cost controls as well as a better pricing scenario. Improvement in the pricing scenario in FY20/FY21 was led by lower industry clinker capacity additions over FY16-22 (a CAGR of 2.9% v/s 7.7% CAGR over FY10-16). Going forward, clinker capacity addition is estimated to be at 5% CAGR till FY25E, with higher capacities expected in Central and East India. This may put pressure on pricing power and profitability for the industry.
• Apart from the announced capacity additions, few other players may tend to announce new capacities. We understand through articles that the Adani group, the new entrant (after the acquisition of Holcim's stake in ACC/ACEM gets completed) in the industry, aims at achieving a capacity of 140mtpa over the next five years (v/s its current capacity of 68mtpa). 

UTCEM is expanding capacities by 38.9mtpa by FY25E

• UTCEM a capacity addition of 22.6mtpa at a capex of INR128.9b. Capex/t for this expansion works out to USD76. Though the company has not specified any locations for these expansions, we expect the clinker plants to be set up across regions, except the western region.