Strong demand for cement from infrastructure, rural and urban housing segments coupled with benign fuel and raw material cost bodes well for UltraTech Cement Company. Brokerage firm Sharekhan estimates Rs 1300 per share gains in this counter, banking on four factors while underlining a strong caveat.

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Stock to Buy | UltraTech Cement | CMP 7,099 | Target: Rs 8,500 | Upside: 18%  

The stock was recommended at a price of Rs 7223. It quoted Rs 7,099 on the NSE on Monday at 11:45 AM, up 1.22 per cent from the Friday closing price.

Tailwinds 

1) Cement Price Outlook: Led by a healthy price increase undertaken in the east, pan-India cement prices in October-November 2022 have increased by 1.3 per cent compared to Q2FY2023 average and are up 3 per cent versus Q3FY2022. Prices in eastern region were up 4 per cent m-o-m and 14 per cent y-o-y followed by the central region - up 3 per cent both m-o-m and y-o-y.

2) Growth Outlook: UltraTech is expected to see sustained demand emanating from the rural and infrastructure sectors. Further, demand from the real estate segment in the urban sector has started to witness strong traction with favourable government policies and a lower interest rate regime. Management is optimistic about a sustainable demand environment for the cement sector over the next 4-5 years, barring the near-term impact of the second wave.

3) Power and fuel costs: International coal prices declined by 8.5 per cent q-o-q during Q3FY2023 till date, while domestic prices corrected by 6 per cent m-o-m for December 2022 (average Q3FY2023 flat q-o-q) after rising 15.4 per cent m-o-m in October and 4.6 per cent in November. Retail diesel prices for October-November 2022 have stayed flat compared to Q2FY2023, while they are lower by 0.7 per cent YoY. UltraTech is expected to benefit from the expected decline in power and fuel costs partially during Q3FY2023 and fully during Q4FY2023, this brokerage noted.

4) Greenfield & Brownfield Expanions: In December 2022, the company commissioned 5.5 mtpa grinding units - 1.8 mtpa greenfield at Dhule in Maharashtra; 1.8 mtpa brownfield at Dhar in Madhya Pradesh and 1.9 mtpa greenfield at Pali in Rajasthan - taking its total cement manufacturing capacity in India to 121.35 mtpa. UltraTech also commenced production of 4 LMT wall care putty plant in Rajasthan during November 2022, taking its total wall care putty capacity to 13 LMT. UltraTech is the largest manufacturer of grey cement, ready mix concrete (RMC), and white cement in India.

Impact on Key metrics 

Robust demand outlook, upward price revisions along with softer fuel and material costs will ensure better realization in key financial parameters including revenues, operating profit margins (OPM) adjusted net profit and EPS.

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Valuation - Peer Comparison

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