Ultratech Cement, the market leader in the cement space, is the largest manufacturer of grey cement, ready mix concrete (RMC) and white cement in India. It is also one of the leading cement producers globally, and the only cement company in the world (outside of China) to have more than 100 million tonne capacity in one country. The company reported stellar results in the quarter ended December 2020, exceeding street expectations, driven by rural demand and revival of urban real estate. 

With an installed capacity of 111.4 million tonnes per annum (mtpa) in India, the company has a capacity share of 22.3% in the domestic cement industry. It also has a capacity of 5.4 mtpa in UAE. After the Union Budget was presented on February 1, 2021, Ultratech’s stock price has risen 17% as investors view the company as the primary beneficiary of the government’s infrastructure and housing push.

Quick Takes:

• Ultratech Cement reported more than 100% jump in net profits in Q3FY21, aided by pent-up demand, strong cost control and higher volumes

• With an ongoing expansion of capacity by 6.7 mtpa, Ultratech is also going to raise capacity by an additional 12.8 mtpa with an outlay of Rs 5,477 crore

• After completing a total capacity expansion of 19.5 mtpa by FY23, Ultratech plans to increase its capacity further 30 mtpa by 2030

• The company has reduced its net debt by Rs 7,123 crore in the first 9 months of FY21 and aims to be debt-free by the end of FY23

An exceptional December 2020 quarter

Ultratech Cement’s consolidated net profits more than doubled year-on-year in the quarter ended December 2020 to Rs 1,584 crore aided by pent-up demand, strong cost control and higher volumes. The company continued to report industry leading growth with 14% YoY jump in volumes in Q3 FY21. Revenues rose 18% YoY to Rs 12,254 crore in Q3 FY21.

Operating profit came in at Rs 3,094 crore in the December quarter compared to Rs 1,973 crore in the same period a year ago. The company’s margins expanded by more than 600 bps to 25.25%, supported by lower raw material costs (down 15%), other expenses, finance costs and depreciation.

Atul Daga, Executive Director and Chief Financial Officer at Ultratech Cement said that after the initial setback due to the pandemic induced lockdowns, the cement industry is back on track. He said the company is seeing a healthy improvement in capacity utilization across regions and has achieved an overall capacity utilization level of 80% for the quarter ended December 2020.

Rural boost and urban revival

After exhibiting healthy growth of about 13% in FY19, the Indian cement industry shrunk in FY20. Apart from the general economic slowdown, cement demand was impacted by extended monsoons, low capital expenditure on infrastructure projects like roads, and a slowdown in the housing sector caused due to the financial stress in the NBFC sector. Although there were revival signals in December 2019, this momentum did not sustain in the face of the lockdowns imposed due to the Covid-19 pandemic.

Consequently, grey cement production in FY20 was lower by 2% YoY at 79.45 million tonnes. This is the first fall in cement production in the last 20 years. Capacity utilization was also low at 70% in FY20, compared to 76% in FY19. Ultratech also witnessed domestic sales volume fall by 4% in FY20.

Due to the cessation of construction activities, and manufacturing coming to a complete halt, volumes were negligible during the last week of March, and whole of April, 2020. As a result, with 46% capacity utilization, the June quarter ended with 25% YoY revenue decline and a 22% fall in volumes. For the industry as a whole, decline was steeper at around 33-35% in Q1 FY21.

However, Ultratech witnessed some growth in central India in the quarter ended June 2020, mainly in Madhya Pradesh. Central India is mainly rural, and primarily an IHB (individual housing and buildings) market. The company has consolidated its position in central India after the acquisition of Jaypee and Century Cement. The management says there was strong momentum in Uttar Pradesh and also in Odisha due to higher spending by the government on low-income housing (rehabilitation work after the cyclone in Odisha).

Roughly 70% of Ultratech’s volumes are from retail or trade segments (higher margins) and 30% is institutional (infrastructure or non-trade). Volumes from rural areas are roughly 35-40% of total retail revenue mix. It is primarily a housing, repair and modification market. The rural market also received strong impetus from migrant labourers returning home and urban markets getting impacted by local lockdowns and non-availability of labour.

Driven by robust rural momentum, the September quarter numbers were strong. The December quarter was stellar as urban real estate too joined the growth bandwagon. Except for luxury housing, urban housing also saw a revival in Q3 FY21. Lower interest rates and sops by various state governments in the form of lower stamp duty led to home buyers advancing their buying decisions. While rural sales have grown by 91% YoY, institutional or non-trade (infrastructure) sales have also come back strongly in Q3 FY21. Trade mix for the quarter stood at 64% in December quarter FY21 compared to 70% in the September quarter.

Ultratech plans capacity expansion and debt reduction

For the Indian Cement players, it’s a complete u-turn over the past nine months. Cement companies across the board have announced capex plans as rural housing, urban real estate and infrastructure spending came back on track. Ultratech ended 2020 with over 80% overall capacity utilization, while south was lower around 70%, eastern India moved at more than 100% levels. With lead distance at a high 440 kms and eastern and central plants running at more than 100% capacity, the company pressed the pedal on its expansion plans with an outlay of Rs 5,477 crore.

In addition to ongoing expansion in Odisha, West Bengal, Bihar and Uttar Pradesh to the tune of 6.7 mtpa, UltraTech is augmenting its capacity by another 12.8 mtpa in Rajasthan, Madhya Pradesh, Bihar and Chhattisgarh. Total capacity will be 130.9 mtpa by the end of FY23 in India. This expanded capacity will be backed by an additional 11.4 mtpa clinker capacity.

Around 70% of this capacity will be brownfield, with 40% of power requirements met through WHRS (waste heat recovery system). Usage of green energy through investment in WHRS is expected to increase to 34% by FY24. This is because of the cost of green energy being 20% lesser than the current cost of power.

In addition to these capacity expansion plans, Ultratech’s de-leveraging exercise is also on track. The company has reduced net debt by Rs 2,696 crore in Q3 FY21, totalling to Rs 7,123 crore in the first 9 months of FY21. Ultratech aims to be debt-free by the end of FY23.