UltraTech Cement Ltd., over the next three years, will invest Rs 32,400 crore in capital expenditure or capex to increase capacity to 200 million tonne or MTPA per year by 2028.
An analysis of the market dynamics and financial performance of the Aditya Birla-owned cement manufacturer shows the capex could be debt-led.
First, lets look at the company's current capacity and expansion plans.
Current Capacity
UltraTech Cement recently commissioned two greenfield capacities: a 2.7 MTPA cement grinding unit at Karur in Tamil Nadu and a 2.7 MTPA integrated cement plant at Kukurdih in Chhattisgarh.
The greenfield capacities were part of the 22.6 MTPA capacity expansion announced in June 2022, according to the company.
The new additions bring the total domestic grey cement manufacturing capacity to 146.2 MTPA. When combined with its existing capacity of 5.4 MTPA in the UAE, UltraTech Cement's total capacity now stands at 151.6 MTPA , 14% higher than its capacity of 133 MTPA as of December 2023.
Capacity Expansion
The company targets to increase its capacity to 157.4 MTPA by fiscal 2025 and 200 MTPA by 2028.
Over the last 12 months, the cement manufacturer has expanded its capacity 18.7 MTPA and has ongoing expansion of 35.5 MTPA actively being implemented across 16 locations.
With the process of closing its proposed acquisition of Kesoram Cement, UltraTech's grey cement capacity is set to expand to 198.2 MTPA.
How Can The Company Fund Its Capex?
To fund this aggressive capacity expansion plan, the company plans to invest Rs 32,400 towards maintenance and capacity expansion.
UltraTech Cement has cash and cash equivalents to the tune of Rs 4,196 crore as of last 12 months, according to Bloomberg data. As of FY23, cash and cash equivalents were at Rs 6,986 crore, the data showed.
The cement manufacturer reports its retained earnings on an annual basis; with retained earnings at Rs 9,046.3 crore as of FY23.
Cash Flows
The company's free cash flow in the last two years has decreased significantly from its FY21 level, operating in the Rs 2,000-3,000 crore range.
The company's cash flow from operations have been in the range of Rs 8,000-8,600 crore, also mirroring the same pattern.
Prabhudas Lilladher expects UltraTech Cement to become a net cash entity by FY26, despite its expansion plans, thanks to its robust operating cash flows. The brokerage projects a net cash position of Rs 700 crore by FY26, considering a Rs 25,000 crore capital expansion spanning FY24–26.
This financial strength bolsters the company's balance sheet for potential inorganic growth opportunities in the future, according to Prabhudas Lilladher.
Additionally, the brokerage anticipates strong free cash flow in the next two to three years, citing expected improvements in pricing and capacity utilisation. UltraTech Cement's capacity utilisation reached 77%, surpassing the FY23 average of 70% in the third quarter ended December 2023.
However, on the pricing front, all average India cement prices have remained flat at Rs 384 per bag as of April 2024, compared to Rs 385 in May 2023, according to Anand Rathi. The sharp rise in prices during August–September 2023 has reversed since, with prices in the last five months consecutively declining.
All India average pricing dropped 9% in the fourth quarter ended March 2024 itself, the brokerage said. This could impact the company's unit realisations due to its pan-India presence.
Debt Profile
Given the limited cash flows and retained earnings, one of the likely options to fund the heavy capex is to take on more debt.
The company has significantly lowered its leverage over the last four years. Total debt as of FY23 stood at Rs 11,058 crore, down 54% from Rs 24,180 crore in FY20.
However, the cement maker said its net debt position has marginally increased as of December 2023 due to an increase in capex cash flow and working capital.
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