Prabhudas Lilladher has reaffirmed its Accumulate recommendation for Ultratech Cement with a revised target price of Rs 12,401. Currently trading at Rs 10,869, the stock is poised for a potential upside of 14.1%. Despite reporting weak operating performance in Q2FY25 due to lower cement volumes and high maintenance costs, the company’s long-term outlook remains strong. Prabhudas Lilladher’s updated report highlights factors such as infrastructure development and rural housing demand, which are expected to drive future growth. The report also anticipates improvements in cost efficiency, particularly in power and fuel expenses.

Key Financial Highlights of Q2FY25

Revenue Performance and Volume Growth
In Q2FY25, Ultratech Cement's revenue fell by 4% YoY to Rs 149 billion, impacted by a 3% YoY volume growth. Volumes reached 26.4 million tonnes (mt) with a capacity utilization of approximately 68%. Despite a weak monsoon season, which curbed construction activities, the company’s diversified regional presence allowed it to maintain stable realizations, with minimal impact on average pricing.

EBITDA Decline Due to Higher Costs
Ultratech’s EBITDA per tonne dropped by 20% YoY, primarily due to higher maintenance shutdown costs and one-time employee bonuses. The EBITDA for Q2FY25 stood at Rs 19.3 billion, a sharp 18% YoY decline. The company's margins were also pressured by other operational expenses, including increased staff costs and slightly higher raw material expenses.

Cost Management and Efficiency

Power and Fuel Costs
One of the key improvements anticipated for Ultratech Cement over the next few quarters is the reduction in power and fuel costs. With the end of high-cost fuel contracts, the company expects significant savings in its cost per kilocalorie (kcal), which has already shown a reduction to Rs 1.84/kcal from Rs 2.00/kcal. Additionally, the increase in green energy usage, with renewable energy (RE) accounting for 13.5% of power consumption, is expected to further enhance cost efficiency.

Operational Efficiency and Capacity Expansion
The company is undertaking significant capacity expansion efforts, with 16mtpa expected to be commissioned by FY25. Ultratech aims to increase its waste heat recovery systems (WHRS) capacity to 450MW by FY27 from the current 308MW, and its renewable energy power capacity to 1.8GW. These enhancements are expected to improve operational leverage as volumes increase, reducing the overall production costs.

Impact of Key Acquisitions

India Cements and Kesoram Deal Progress
Ultratech is in the final stages of acquiring Kesoram Industries, with the NCLT approval expected by Q4FY25. Additionally, the India Cements acquisition is awaiting approval from the Competition Commission of India (CCI), after which the company plans to launch an open offer. These acquisitions are expected to bolster Ultratech’s market share and expand its production capacity.

Future Growth Catalysts

Government Infrastructure Initiatives
The Indian government’s ongoing focus on infrastructure development is likely to drive cement demand in the coming quarters. Ultratech is strategically positioned to benefit from these investments, particularly in rural housing, which is expected to see an uptick following a favorable monsoon season.

Cost Efficiencies to Drive Profitability
With fuel contracts being renegotiated and a higher mix of renewable energy, Ultratech is expected to benefit from lower production costs. These cost efficiencies, combined with higher volumes from new capacities, should lead to margin expansion over the next two to three years. The company aims to increase its alternate fuel rate to 15% by FY27, up from the current 5%.

Revised Financial Projections

Revenue and Profit Estimates
Prabhudas Lilladher projects that Ultratech Cement’s revenue will grow at a 13% CAGR over FY24-27E, reaching Rs 10,271 billion by FY27. EBITDA is expected to rise at a 20% CAGR, driven by higher volumes and improved operational efficiency. PAT is forecast to grow at a 23% CAGR, with EPS projected to increase from Rs 242.6 in FY24 to Rs 454.2 by FY27.

Target Price and Valuation
Ultratech is trading at 16x FY26E EBITDA, with a valuation expected to drop to 13.9x by FY27. The stock’s revised target price of Rs 12,401 reflects the company’s strong growth prospects, underpinned by capacity expansion and cost-saving initiatives. Investors are advised to Accumulate the stock for long-term gains, as the company continues to outperform the broader industry once demand recovers.

Investor Recommendations

Short-Term Risks
Investors should be aware of the potential short-term risks, including weak demand due to unfavorable weather conditions or delays in infrastructure projects. Additionally, any regulatory delays in the India Cements acquisition could affect Ultratech’s expansion plans.

Long-Term Growth Potential
For long-term investors, Ultratech Cement offers strong upside potential. The company’s investments in capacity expansion, operational efficiency, and renewable energy are poised to deliver sustained growth over the next few years. As the demand for cement is expected to increase in line with India’s infrastructure development, Ultratech is well-positioned to benefit from these trends.

Conclusion

Ultratech Cement’s performance in Q2FY25 was affected by external factors, but its long-term growth story remains intact. Prabhudas Lilladher’s Accumulate rating and target price of Rs 12,401 reflect confidence in the company’s ability to overcome short-term challenges and deliver strong returns over the next few years. Investors are advised to remain patient and take advantage of any market corrections to accumulate the stock.