UltraTech Cement Q3 Review: Analysts Flag Near-Term Pain, Expect Price Hikes

Shares of UltraTech Cement Ltd. fell as analysts reiterated concerns over input inflation.

The cement maker's operating income fell and margin contracted over the year earlier, missing estimates, in the three months ended December as raw material costs surged. Its net profit, however, rose year-on-year, aided by a decline in finance costs.

JPMorgan flagged concerns on the stickiness of cost inflation if crude prices don’t fall. Prabhudas Lilladher downgraded the stock anticipating a rise in cost pressures in the fourth quarter. A few, however, raised targets anticipating price hikes.

Shares of UltraTech Cement fell as much as 2.67%, the steepest intraday decline in eight sessions in the morning trade on Tuesday. Of the 45 analysts tracking the company, 39 maintain a 'buy', four recommend a 'hold' and two suggest a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 12.6%.

Here's what brokerages had to say about UltraTech Cement's third-quarter earnings:

Goldman Sachs

• Maintains 'buy'; increases target price from Rs 8,800 to Rs 9,000 a share, potential upside of 14.4%.

• Earnings in line with estimates; mixed near-term outlook.

• Ongoing capacity addition for the industry limits price increases.

• Exceptional Q4 FY22 to keep volume growth and profitability in check.

• Volumes to grow 200-300 basis points above industry volumes in FY22E-FY24E.

JPMorgan

• Maintains 'neutral' with a target price of Rs 6,890.

• Weak Q3 as costs surged, volumes declined.

• Seasonality supports cement price hikes.

• Cost inflation could be sticky if crude prices remain high.

• Weak operating earnings, headline profit-after-tax a beat given tax write-back.

• Volumes decline, cost surge drives sharp decline in reported Ebitda per tonne.

• Demand improvement to support cement price increases in seasonally strong first half of 2022.

• Stock has underperformed, but consensus remains elevated.

• Seasonality is a near-term tailwind.

Investec Securities

• Maintains 'buy'; hikes target price to Rs 9,640 from Rs 9,030.

• Company’s Q3 operation metrics below consensus estimates.

• Price hikes lagging cost inflation weighs on performance.

• With peak cost inflation behind, incremental price hikes should dictate spreads, a relief for sector.

• Company is preferred large-cap cement play.

Prabhudas Lilladher

• Downgrades stock to 'accumulate' from 'buy'; cuts target price to Rs 8,535 from Rs 8,650.

• Reported third-quarter earnings below consensus estimates by 9-10%.

• Weighed by steeper-than-expected rise in cost and in-line realisations.

• Costs to remain elevated in fourth quarter owing to high coal prices. Reduction expected in first quarter of FY23.

• Net debt fell 3% sequentially to Rs 61.5 billion owing to reduction in working capital.

Jefferies

• Mantains 'hold' with a target price of Rs 8,100 apiece.

• Dip in operating Ebitda has been due to acute cost pressure.

• Cuts FY22-FY24 Ebitda estimates by 7-9% to reflect cost pressure.

• Takes comfort as cement prices have started improving in a few regions.

• Expects price hikes in many regions in the next two-three months, with onset of peak construction season.

• Costs are likely to remain elevated in Q4 FY22 also.

Credit Suisse

• Maintains 'outperform' with a target price of Rs 9,250 apiece.

• Sees a strong positive outlook on housing and infrastructure investment cycle.

• Cuts earnings estimates by 20% for FY22 and by 9% for FY23 due to cost impact.

• Cheaper valuation relative to the market.

• Weaker view on commodity pricing once shortages end.