Sharekhan Is Bullish On This Large-Cap Cement Stock, Initiates Buy Call For Gains Upto 18%

Leading brokerage Sharekhan has given buy call to the stock of UltraTech Cement Ltd for a target price of Rs 7700 with a potential gain of 18%. UltraTech Cement (UltraTech) is expected to benefit from declining pet coke and diesel prices, the impact of which would be visible from Q3FY2023 whilst Q2FY2023 is expected to be affected by seasonally weak demand and pricing environment coupled with the peaking of power & fuel costs.

UltraTech Cement Ltd Stock Outlook

The current market price of the stock is Rs 6513 apiece. According to Sharekhan, if you buy the stock at its current market price, it has the potential to surge to Rs 7700 with a gain of 18%. The 52-week high of the stock is Rs 8267 apiece and 52-week low is Rs 5158 apiece, respectively. The stock has given a return of 65% in last 5 years and 61% return in 3 years.

UltraTech Cement Ltd Stock Outlook Market Capitalization

The stock has a market capitalization of Rs 1,88,037.47 crore.

Seasonality impacts cement demand and prices during July-August 2022

As per our channel checks, average pan-India cement prices in August 2022 have declined by 3% m-o-m (up 2% y-o-y). The average cement prices during July-August 2022 are lower by 6.7% compared to average Q1FY2023 (up 3% compared to Q2FY2022) led by 10-11% decline in Northern and Eastern regions, 8% decline in Central region, 3.5% decline in Western region and 1.2% in Southern region. The cement transported through Indian Railways declined 8% m-o-m in July 2022 (up 5% y-o-y) with the onset of the monsoon. We expect Ultratech to be affected by weak demand and pricing environment in Q2FY2023 led by seasonality.

Declining pet coke and diesel prices

Key OPM growth tailwind: International average pet coke prices during August 2022 declined by 25% m-o-m (up just 3% y-o-y) while for July-August 2022 they are lower by 23% compared to Q1FY2023 average prices. The domestic pet coke prices during August 2022 declined by 7% m-o-m (up 34.5% y-o-y) while average prices during July-August 2022 are lower 12% lower compared to Q1FY2023. On the freight costs, average retail diesel prices across metros for July-August 2022 have declined by 4.6% compared to Q1FY2023.

Aggressive capacity expansion plan to capture incremental demand

The company's phase I cement capacity addition plan of 19.9mtpa is expected to complete by the FY2023 end taking its domestic cement capacity to 131.25 mtpa. Further, its phase II expansion plan of 22.6mtpa cement capacity would increase its domestic cement capacity to 153.85mtpa by FY2026.

Valuation

According to Sharekhan, "Maintain Buy with a revised PT of Rs. 7,700: UltraTech is expected to benefit from healthy cement demand over the long term, driven by its aggressive capacity expansion plans. Demand is expected to be strong from segments such as infrastructure, rural housing, and urban housing. Further, the recent decline in pet coke and diesel prices provides a key tailwind to improve upon operating margins from Q3FY2023 although seasonality and peaking power & fuel costs are likely to affect Q2FY2023 earnings. We continue to maintain our Buy rating on the stock with a revised price target (PT) of Rs. 7,700, considering its long-term growth potential and reasonable valuation."

About UltraTech Cement Ltd

UltraTech Cement Limited is the cement flagship company of the Aditya Birla Group. A USD 7.1 billion building solutions powerhouse, UltraTech is the largest manufacturer of grey cement and ready mix concrete (RMC) and one of the largest manufacturers of white cement in India.

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.