Company Name – UltraTech Cement Limited (UltraTech Cement) Current Share Price – INR 8,432 (July 03, 2023) Market Cap – INR 243,476 cr |
1. What is interesting about the stock?
Cement needs no introduction to anyone who has lived in a big city. They are also called concrete jungles because of the proliferation of tall buildings that owe their existence to the development of concrete.
India is the second largest cement producer in the world behind China and accounts for 8% of the global installed capacity even though its per capita consumption is nearly half of the world’s average. The cement sector has a strong linkage to other segments of the economy like infrastructure, construction, housing, transportation, coal, power, and steel among others, hence, is considered a key driver of a country’s economic progress.
The largest company in the space in India is UltraTech Cement, a part of the Aditya Birla group, a USD 60 billion Indian conglomerate. It is the largest producer of grey cement, ready mix concrete (RMC), and white cement in India, and the third largest in the world, ex-China. It operates in UAE, Bahrain, Sri Lanka and India.
The Company operates with a high level of integration, boasting captive thermal power plants (TPP) with a capacity of 1,188 MW, a waste heat recovery system (WHRS) with a capacity of 208 MW, and renewable energy sources such as solar and wind energy with a total capacity of 325 MW. Additionally, the company has access to captive limestone reserves.
UltraTech Cement, with its headquarters in Mumbai, India, has a rich history dating back to 1983 when it was established as a cement division of Larsen & Toubro Limited (L&T), a renowned engineering and construction conglomerate. Following its acquisition by Grasim Industries, which is a part of the Aditya Birla Group, the cement business was renamed UltraTech Cement, thereby positioning it as one of India's leading cement manufacturers. Since then, UltraTech Cement has consistently pursued organic growth and strategic acquisitions, which has led to the establishment of new manufacturing plants and grinding units across India, thereby increasing their production capacity and market reach. The acquisition of Dubai-based ETA Star Cement Company in 2010 marked UltraTech Cement's entry into international markets, and they have continued to make several other acquisitions, including Jaypee Group's cement assets and Century Textiles' cement business, further strengthening their market position.
Investing in the cement manufacturing industry in India can be affected by various factors that make it a cyclical business. Economic conditions, infrastructure development, construction activity, and government policies all contribute to the cyclical nature of the industry. Here are some key points specific to India:
Economic Growth: Cement demand in India is closely linked to the country's economic growth. During times of strong economic expansion, there is an increase in construction activity, infrastructure development, and urbanization, which drives the demand for cement. Conversely, economic slowdowns or recessions can result in reduced construction and infrastructure investments, leading to lower demand for cement.
Government Initiatives: The Indian cement industry is also affected by government initiatives and policies. Programs like affordable housing schemes, smart cities, infrastructure development projects, and rural development initiatives can significantly impact cement demand. The timing and implementation of these initiatives can contribute to the cyclical nature of the industry.
Monsoon Season: India's monsoon season, which usually lasts from June to September, can impact construction activity and cement demand. Heavy rainfall and adverse weather conditions during this period can affect construction projects, leading to a slowdown in cement consumption.
Seasonal Variations: In addition to the monsoon season, there may be other seasonal variations in cement demand in specific regions of India. For example, construction activity in certain parts of the country may be slower during extreme weather conditions, such as winter or extremely hot summer months.
Infrastructure and Housing Projects: Large-scale infrastructure projects, such as roads, highways, airports, and metro rail systems, as well as housing projects, drive cement demand in India. The completion of different phases of these projects can impact the cyclicality of the cement industry, as demand may fluctuate based on their progress.
Rural-Urban Divide: The Indian cement industry is also influenced by the rural-urban divide. Demand for cement in urban areas tends to be more stable due to ongoing construction and infrastructure projects, whereas rural areas may experience fluctuations based on agricultural cycles and government rural development initiatives.
UltraTech is likely to do well because of the following reasons:
Strong parentage – the Company is a part of the Aditya Birla group, a USD 60 billion group, with interests across metals, cement, fashion and retail, financial services, renewables, fiber, textiles, chemicals, real estate, trading, mining, and entertainment.
Capacity expansion – the Company is expanding its capacity from 135 mtpa to 160 mtpa at a cost of ~INR 13,000 crore between 2023-25. Presently, it has 24 integrated cement facilities, 29 split grinding units, 8 bulk packaging terminals, 1 white cement unit, 3 wall putty plants, and 231 RMC plants. This capacity is fairly distributed across all 5 regions of the country. The new expansion is being done in the central and eastern regions and is looking at doubling its RMC capacity in the next 2-3 years.
Strong brands – the Company enjoys a 22% market share across the country on the back of strong brands across both grey and white cement. UltraTech has a premium positioning across the country in grey cement, RMC, and building solutions. The Company also has a very strong brand in Birla White, that covers its products in the white cement and wall putty segments.
Geographical distribution – The Company has over 120,000 channel partners covering nearly 80% of the country. It has 231 RMC plants across 109 cities making it the largest manufacturer of concrete in the country. The Company's distribution network consists of ~30,000 dealers, ~64,000 retailers, ~2,900 UBS outlets, and a fleet of 60,000 trucks.
2. Key Historical Financials
Company revenue and profit have been growing 15% and 16% on a CAGR basis respectively in the last 5 years
Revenue growth has been healthy in the last two years – FY22 and FY23
EBITDA margin has come down from 22% in FY22 to 16% in FY23 predominantly due to higher coal (energy) prices
Deleveraging over last the few years led to higher growth in net profit; net profit de-grew in FY23 as FY22 had a low tax rate
Cash flow conversion (CFO/EBITDA) has been above 80%
ROCE and ROE were 13% and 10% in FY23 – not much above the cost of capital
3. What is my view on company valuation?
The Company is trading at a trailing P/E of 48x against a historical median P/E of 35x. As the largest company in the sector, UltraTech trades at a significant premium to its peers even when the return ratios are not significantly above the cost of capital. Therefore, there seems to be no headroom for multiple expansion.
Only Shree Cement and JK Cements (https://www.socinvest.app/post/jk-cements-cycle-turning) are trading at a significantly higher P/E multiple of 60x in the sector. In the case of UltraTech, any correction to the P/E ratio below 25x in a market-wide correction could be a good entry point for any long-term investor.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Cement is subject to regional and cyclical dynamics, and realization in any region or spike in costs can affect profitability significantly
Cement manufacturers have been imposed with fines by the Competition Commission of India on charges of price collusion and anti-competitive behavior, which has been challenged in court. But this regulatory challenge will persist in the sector
About the Author
I have over 19 years of experience in private equity and public markets. I am an engineer by background, and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.