Geojit Financial Services has raised its recommendation for UltraTech Cement from HOLD to BUY with a revised target price of Rs12,320, expecting a 10% upside over the current market price of Rs11,176. Despite a challenging Q2FY25, where weak cement prices and reduced demand due to extended monsoons impacted performance, the long-term outlook remains positive. UltraTech’s strategic expansions and acquisitions, coupled with projected rural demand, set the stage for future growth, bolstered by anticipated improvements in EBITDA margins as fuel costs stabilize. Management’s commitment to green energy initiatives further strengthens UltraTech’s long-term competitive position.

Q2FY25 Performance Overview

Revenue and Volume
UltraTech reported a 2.4% decline in consolidated revenue, reaching Rs15,635 crore for Q2FY25 compared to Rs16,012 crore in Q2FY24. While sales volumes increased by 4.3% year-over-year (YoY), weakened cement prices resulted in a 6.4% YoY decrease in realization. The company’s capacity utilization also dropped to 68% from 75% a year ago.

EBITDA and Margins
EBITDA fell by 20.9% YoY to Rs2,018 crore, with the margin compressing by 302 basis points (bps) to 12.9%, primarily due to reduced top-line revenue and increased maintenance costs. This margin pressure reflects ongoing adjustments in the operating environment as the company navigates cost-related challenges.

Profit After Tax (PAT)
PAT declined 36.0% YoY to Rs820 crore in Q2FY25, affected further by elevated interest expenses. EPS for the quarter was Rs28.4, a steep decline from Rs44.4 in Q2FY24, reflecting the financial impact of lower operational efficiency.

Growth Drivers and Strategic Initiatives

Capacity Expansion and Acquisitions
UltraTech is advancing its capacity expansion plans, targeting an additional 8 million tonnes per annum (mtpa) in H2FY25, bringing total domestic capacity to 157 mtpa by FY25 and further increasing to 184 mtpa by FY27. In addition, the company is pursuing key acquisitions, including Kesoram’s cement business (10.75 mtpa) and India Cement (14.45 mtpa), which will significantly bolster its production capabilities.

Volume Growth Projections
The management anticipates double-digit volume growth for H2FY25, potentially surpassing industry trends. This projection aligns with UltraTech’s aggressive expansion strategy, enhancing its competitive edge amid increasing market demand.

Renewable Energy Initiatives
UltraTech’s focus on sustainability is evident, with green energy now constituting 32% of its energy mix, a 47% increase YoY. The company’s waste heat recovery systems (WHRS) currently provide 18.5% of energy, and renewable sources account for 13.5%. By FY27, UltraTech aims to increase WHRS capacity to 450 MW and renewable energy to 1.8 gigawatts (GW), strengthening its commitment to sustainable operations.

Sectoral Challenges and Market Conditions

Demand Impact from Extended Monsoon
UltraTech’s Q2FY25 performance reflects a period of subdued demand, primarily due to prolonged monsoons affecting construction activity. While this seasonality is temporary, the management expects a demand rebound driven by increased rural spending and government infrastructure initiatives.

Pricing Pressures and Fuel Costs
Lower cement prices pressured sales realization in Q2FY25. However, the company benefited from a reduction in power and fuel expenses, which constituted 24.5% of revenue compared to 27.4% in Q2FY24. Fuel costs, at Rs1.84 per Kcal, are expected to soften further in the coming quarters, aiding margin recovery.

Valuation and Investment Thesis

Financial Projections
For FY26, Geojit estimates UltraTech’s revenue to grow by 15%, reaching Rs86,845 crore, while EBITDA is expected to improve significantly, with a margin expansion to 21.1%. Adjusted PAT for FY26 is projected at Rs10,423 crore, marking a 34.9% increase YoY. The revised estimates reflect the potential benefits of capacity additions, operational efficiency, and favorable market conditions.

Valuation Multiples
UltraTech currently trades at an EV/EBITDA multiple of 23.4x for FY25, which is expected to reduce to 18.0x for FY26 as EBITDA growth strengthens. With a forward P/E of 31.0x for FY26, UltraTech presents a value proposition supported by anticipated earnings growth and enhanced asset utilization.

Geojit’s Recommendation
Geojit Financial Services has upgraded UltraTech Cement to BUY, supported by robust expansion plans, sustainable energy initiatives, and expected improvements in operational efficiency. The target price of Rs12,320, based on a 20x EV/EBITDA multiple on FY26 estimates, reflects a 10% upside from the current market price.

Key Risks to Outlook

Market and Regulatory Risks
Potential risks include regulatory changes impacting the cement sector, fluctuations in fuel and raw material costs, and macroeconomic headwinds that may affect demand. Additionally, the capital-intensive nature of UltraTech’s growth strategy may strain financial flexibility if market conditions deteriorate unexpectedly.

Execution and Integration Risks
Successful integration of acquisitions and timely execution of expansion projects are essential for UltraTech’s growth trajectory. Delays or integration challenges in acquired assets could impact projected financial performance and strain resources.

Conclusion

UltraTech Cement stands well-positioned for future growth, backed by proactive expansions, commitment to green energy, and alignment with government-led infrastructure development. While near-term challenges persist due to seasonal and pricing factors, the long-term growth outlook remains positive. With the upgrade to *BUY* and a target price of Rs12,320, UltraTech offers potential upside for investors seeking exposure to India’s expanding cement sector. Investors are advised to monitor operational milestones closely as UltraTech progresses through its aggressive expansion phase.