What does UltraTech's cooled off valuation signal about cost inflation pain
UltraTech Cement’s September quarter (Q2FY27) result was largely decent, given the backdrop of elevated input costs and weak prices.
The company’s grey cement volumes rose 13.8% year-on-year to 35.94 million tonnes, outpacing the industry’s estimated 9% growth, indicating consistent market share gains for the company amid heightened competitive intensity. Capacity utilization rose to 71% from 66% last year. Demand was driven by infrastructure and housing projects across markets. UltraTech retained its FY27 guidance of 7–8% industry demand growth and its double-digit volume growth.
But input cost pressures have weighed. Q2’s consolidated Ebitda per tonne fell 20% sequentially to ₹974. Blended fuel costs climbed to ₹2.09/kcal from ₹1.90/kcal in Q1, despite reducing petroleum coke consumption in the overall fuel mix to around 25% from 36%. Fuel cost may further increase to ₹2.2/kcal in H2FY27. “While UltraTech is consistently gaining market share, cost inflation compels us to slash FY27E/28E/29E Ebitda by 5%/5%/9%,” said Nuvama Research.
On the bright side, logistics costs remained stable due to a seasonal surcharge waiver in rail freight and operational efficiency from reducing the lead distance. Plus, power was reduced by 12% year-on-year thanks to renewable energy and waste heat recovery systems. UltraTech achieved a key milestone by surpassing 2GW of green power capacity. The green power mix rose to 45.4% in Q2FY27 from 41.6% in Q2FY26; the target is to reach 85% by FY30.
Price recovery
Alongside cost control measures, UltraTech raised prices to counter inflation. More increases may be on the cards post the festive season in a relatively strong H2. Cement prices sold via the trade segment rose ₹7-10/bag month-on-month in the second half of September, with non-trade prices rising more. September exit trade prices were around 3% above the Q2FY27 average, while current spot prices are 5% higher, the management said. The full benefit of recent price hikes and improved operating leverage would be reflected in UltraTech’s Q3 earnings. UltraTech reiterated its target of achieving Ebitda/tonne of ₹1,400 by March 2028, with price hikes expected to offset cost pressures.
The chase for market share continues via capacity expansions. UltraTech commissioned 4.6mt of cement capacity in Q2FY27, taking domestic capacity to 204.7mt and is on track to reach 243 mtpa by FY28-end. A detailed plan for the next phase of organic expansion will be announced by FY27-end. This is worth tracking as consolidation continues in the cement sector. The management retained FY27 capital expenditure guidance at around ₹10,000 crore. UltraTech forayed into the wires and cables sector with Ultravolt and has spent ₹1,100 crore of the ₹1,800 crore planned investment. Prima facie, this investment may not seem huge, but UltraTech’s capital commitment to this business will be crucial as it aims to become an important player in the segment.
From its 52-week high of ₹13,110 seen in February, the stock is down around 17%. De-rating due to ongoing cost inflation concerns and muted price action has led to a compression in valuation multiples for many cement stocks, including UltraTech. DAM Capital believes that current valuations have priced in most downside risks. “Key investor concerns centre on cost inflation and the resultant medium-term spreads. However, even under an FY28 bear-case scenario of Ebitda/tonne of about ₹1,000 (at levels seen during the Russia-Ukraine war), UltraTech trades at one-year forward EV/Ebitda of around 17.5x, below its three year/ five-year average and in-line with the 10-year average,” it said.