ULTRACEMCO — earnings call

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Prepared remarks

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Moderator · Conference Operator

Ladies and gentlemen, good day, and welcome to the UltraTech Cement Limited Q4 FY '23

ULTRATECH CEMENT LIMITED · Management

April 28, 2023 volume, and you saw a huge amount of growth.

We have delivered a 15% growth overall in this quarter.

Fuel prices is the next big element to talk about.

Fuel prices have been softening.

Pet coke has been softening.

Coal continues to be pretty strong, still pretty strong.

In spite of whatever softening is happening, we are not yet celebrating because coal is still trending high and China, to my mind, has still not started importing.

It all depends on how the global markets perform with China coming into operation.

One more highlight is about our cash flows.

We spent almost INR6,000 crores on capex this year.

This kind of trend is expected to continue in the next two, three years.

Most important and interesting aspect about our cash flow generation has been that we have had a positive cash flow after meeting all capex requirements, working capital requirements, dividend payments as well and yet we have deleveraged.

Small bit, but that goes a long way to tell how powerful and how diligently we manage our cash flows.

With regards to green energy, we have ended this year with 210 megawatts of WHRS and 345 megawatts of renewable energy.

We are on track on our ESG targets having reached 557 kgs per ton of cement as compared to when we started this year, we were at 582 kgs per ton of cement.

Last point, which I would want to talk about is demand.

Demand in the country seems to be very strong.

We ourselves ended the year with 84% capacity utilization, the quarter at 95% and the month of March was a record-breaking 100% capacity utilization.

I'm glad to tell you that the momentum has been maintained in the current financial year in the first month, which means that the opening batting has been good, and I hope the middle order and the tail will also perform equally well.

With that, I would hand over to you for questions.

Thank you so much.

Moderator · Conference Operator

Thank you.

The next question is from the line of Devesh Agarwal from IIFL Securities.

Please go ahead.

Devesh Agarwal

Yes.

Good evening, sir.

Thank you for the opportunity.

You did mention that probably pricing may not go up, but given your high utilization, do you think that the share of premium product in your overall mix can go up and that can support the pricing?

Atul Daga

Yes, it is already going up.

We have crossed 20% in terms of premium products and which also directly indirectly help average realization.

Devesh Agarwal; Any target sir, for FY '24?

Yes, I'll tell you at the end of '24.

Devesh Agarwal

And sir, on a net basis, how much more do we earn out of premium products?

Atul Daga

Incremental margin on premium product, we have multiple -- do we have an average number?

Just one second.

So my colleague tells me INR10 a bag, would be an average earnings.

There are multiple products.

So that clearly is INR200 per ton.

Devesh Agarwal

Understood.

Okay.

Thank you, sir.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Moderator · Conference Operator

Thank you.

The next question is from the line of Keshav Lahoti from HDFC Securities.

Please go ahead.

Keshav Lahoti

Hi, sir.

Congrats on great set of numbers.

I just want to understand one thing.

If I look back your Kcal costing, you are industry leader on many operating fronts, but Kcal of Dalmia is picking about 2.06 in this quarter and you are at 2.5 Kcal.

So will this difference narrow down in upcoming two, three quarters with the proper understanding?

Atul Daga

Some mysteries can never be solved.

Having said that, our largest footprint is in all the infrastructure projects.

You name a infrastructure project where UltraTech is not present.

And that is where the whole tilt is because we are supplying OPC as compared to other players who are not supplying so much of OPC.

Everything has a challenge.

Keshav Lahoti

Okay.

Got it.

As you again reiterated your stand at once the industry capacity utilization, which is 85%, we get a pricing power, but somewhere that thing does not play out in quarter 4.

Atul Daga

So you see only three or four results have been published.

You'll have to wait for other results to come out, then you'll know what the average capacity utilization of the industry is.

Clearly, we operating at a significantly higher base and higher capacity utilization.

I believe we would have gained; we would have made significant inroads in the market.

Keshav Lahoti

Yes.

Like if you operated at, let's say, near 100% in March, obviously, I believe industry might be above 85% in March, but that pricing play is still missing.

That's what I'm trying to understand.

Atul Daga

So but I don't think India is operating at 85%-plus as yet.

Keshav Lahoti

Okay.

Got it.

One last question from my side.

You are talking about 34% green power.

Can you give a ballpark number?

How much is by WHRS and how much will be green power?

Atul Daga

26% was our target on WHRS and 9% or 10% was our target on renewable energy.

Keshav Lahoti

Okay.

Thank you.

That’s it from my side.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ritesh Shah from Investec.

Please go ahead.

Ritesh Shah

Hi, sir.

Quick two-three questions.

First is where are we on RAK.

Post RAK, how has the mix shifted of Top 2, volumes versus what we source from RAK and has our market strategy changed specific to White Cement and Wall Care Putty?

So that's the first question.

Second is on Construction Chemicals what was the...

Atul Daga

I will forget, let me just take one-by-one question.

So you said, where are we on RAK.

RAK is in Ras Al Khaimah and it's very much there.

So we have -- sorry, that was a bad joke.

But I think the operations are now coming under control.

We have started rebranding the entire RAK output into Birla White.

Birla White bags are already in place at RAK White.

And they are shipping Birla White as a product from there.

Prices for white cement have seen a consequent

ULTRATECH CEMENT LIMITED · Management

April 28, 2023 improvement in the country.

There is a consequent improvement in our market share as well in the white cement space.

This was a strategic investment, which, to my mind, is playing right at the moment.

Ritesh Shah

Right.

Sir, I think we were just at about 50%, and we had indicated we could increase the stake further.

So any timelines on going to 80% or 100%?

That is one.

And you indicated on market shares, so is that possible for us to quantify something?

Atul Daga

Going to -- sorry, what?

Ritesh Shah

Sir, RAK stake, Sir, economic interest.

Atul Daga

Stake.

So we are working on it.

Hopefully, in this financial year, we'll be able to consolidate, make it our subsidiary.

Ritesh Shah

Okay.

And sir, on market share, you indicated that market share has increased.

Possible for us to quantify?

Atul Daga

No, I don't have that data.

But the very fact that I'm importing that RAK White product as our product name is out of the market and it got replaced by Birla White, clearly, there is a market share gain.

Ritesh Shah

Sure.

Sir, construction chemicals, any headline numbers for the fiscal revenue and EBITDA and any target?

Atul Daga

The EBITDA is not measurable.

We have clocked about INR550 crores of revenues in Construction Chemicals this year.

Ritesh Shah

Sure.

And sir, we had plans on captive manufacturing over here, any updates over there?

Atul Daga

So there is a lot of captive manufacturing happening in all our construction chemicals.

Ritesh Shah

Sir, you had indicated we'll put up more plants across our factories and the revenue run rate for the…

Atul Daga

That's what I meant by captive manufacturing, we have both models, a lot of places we are using because it doesn't require so much of space.

We are using space available in our factory premises depending upon the closest to the market or doing contract manufacturing outside.

Ritesh Shah

Just a quick data point, sir.

Same thing on RMC, any change in strategy.

We have the numbers for the full year, but are we upping the number of accounts that we should look at...

Atul Daga

We are going full steam ahead on RMC.

We have already reached 231 plants.

March, we ended with 231 plants and further few more plants would have got added in April.

We will continue to grow and hope to double this number very soon.

And 39 physical locations that our contract construction chemical manufacturing is happening.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Ritesh Shah

Sir, just two quick ones.

Bulk cement terminals and railway sidings, what's the number right now?

And do we have any numbers targeted for the next two years?

Atul Daga

What was the first one you asked?

Ritesh Shah

Bulk cement terminal and railway sidings?

Atul Daga

Bulk terminals is 7 and railway heads almost 300.

Ritesh Shah

Sir, targeted numbers for next year?

Atul Daga

I don't have a target number.

And bulk terminals are as part of our 22.6 million ton, there are two more bulk terminals planned, one in UP and -- one in Karnataka and one in UP.

Ritesh Shah

Sure, sir.

This is helpful.

Thank you so much.

Atul Daga

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Amit Murarka from Axis Capital.

Please go ahead.

Atul Daga

Amit is not there.

Let's take the last couple of questions, please.

Moderator · Conference Operator

As there is no response, we'll move on to the next question from the line of Anupama Prakash Bhootra from Arihant Capital.

Please go ahead.

Anupama Bhootra

Thank you for taking question.

So I have a specific question on Eastern regions.

So I wanted to understand your perspective as far as East India markets are concerned and the company's plans in Eastern region for coming years?

Atul Daga

We will continue to grow in the Eastern markets.

Eastern markets were one of the most deep markets in terms of growth potential, highest density of population, lowest level of development that still continues to plague that market.

So there's a huge amount of opportunity that we see in the Eastern markets.

Anupama Bhootra

So like what kind of capacity expansions are -- is the company planning the coming years?

Atul Daga

Out of the 22 million tons that we have announced, close to 5 million tons or 6 million ton is coming up in the Eastern markets.

We are today present with almost 22 million tons of capacity in the East, which will go up by 5 million more tons in the next two years.

Anupama Bhootra

And how much like clinker backing for the team?

Atul Daga

We are always clinker backed.

Anupama Bhootra

Okay.

Thank you so much.

That’s it from my side.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Atul Daga

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ashish Jain from Macquarie.

Please go ahead.

Ashish Jain

Hi.

Sir, in your presentation, in Slide 24, you have given breakup of capex under various heads.

Can you give some color on what is included in ESG, other capex and strategic investments?

Atul Daga

So strategic investment was RAK White, ESG, largely is WHRS and all the capexs, which are power saving related, which help me reduce our AFR investments.

Ashish Jain

And others?

Atul Daga

Others will be balanced modernization, there is a huge amount of stuff which would keep happening in our live operation.

It could be some building also or some plant modernization, anything is possible.

Various infrastructures will be there.

Ashish Jain

Okay.

So WHRS is part of ESG and not in those capex?

Atul Daga

Yes, absolutely.

Absolutely.

Ashish Jain

Got it.

Thank you so much.

Atul Daga

Thank you.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, that was the last question for today.

On behalf of UltraTech Cement, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.

Questions and answers

Moderator · Conference Operator

Thank you very much.

The first question is from the line of Shravan Shah from Dolat Capital.

Please go ahead.

Shravan Shah

Thank you, sir and congratulations on achieving the 100 million-plus volume for this year.

Sir, a couple of data points and the questions to in terms of the data points, the lead distance for this quarter and Kcal cost for this quarter?

And how do we see this Kcal cost in the first quarter of this year and the second quarter.

Atul Daga

So lead distance, we have given in the presentation was about 413 kilometers and 2.5 Kcal is what we have reached in this quarter.

Let me not go into the next quarter because the quarter is still going on.

Shravan Shah

But broadly, how do we see in terms of the further reduction in power and fuel cost?

Atul Daga

Yes, it should be softening.

Shravan Shah

And any number we want to put?

Atul Daga

We will not be able to give any numbers.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Shravan Shah

On the sir, capacity front, so you have already mentioned that remaining 2.1 million tons will be commissioned in this quarter.

So out of the next phase, 22.6 million tons, how much will be added in FY '24?

And how much in FY '25?

Atul Daga

Let's stick to the results for the quarter, please?

And we will update as and when we make significant progress on our projects.

We will update everybody.

Shravan Shah

Okay.

And in terms of broadly, if I look at so this close to 14.4, we have already added, including this April.

So in terms of the growth in volume for FY '24, is it fair to assume that 50%, even if I assume the utilization for these new capacities for this year, so 7 million tons, 8 million tons from here.

So easily, we should be seeing a 12%-plus kind of a volume growth for this year.

Kailash Jhanwar

Jhanwar here.

So first of all, I think the volume growth has linkages not only with the plant, but it's an overall market dynamics, supply-demand kind of situation.

So even if the plant is ready to produce, ready to fire, but it has to be an economical market to service.

So it's a very volatile and very, I would say, beyond prediction that what kind of volumes would be able to sold in the marketplace, either from existing or from the new capacity.

Moderator · Conference Operator

We'll move on to the next question from the line of Pinakin Parekh from JPMorgan.

Please go ahead.

Pinakin Parekh

Thank you very much for the call.

So very strong operating performance, 15% year-on-year volume growth.

So far, it seems that UltraTech has massively outperformed the peers in terms of volume growth.

Given that UltraTech has added a lot of new capacity, is it fair to say at this point of time that the growth differential of 400 basis points to 500 basis points over industry would continue in FY '24 for UltraTech in terms of sales volume?

Atul Daga

Yes, Pinakin, I believe so.

Pinakin Parekh

Okay.

Thank you.

Second question is, sir, you mentioned at the beginning of the call, INR6,000 crores capex for the next three years broadly.

So that INR18,000 crores capex from '24 to '26, is it only on existing capacity of Phase 2, or does that include some of the next phase of expansion?

Atul Daga

I think two, three years got spoken in the casual flow.

But our 22 million tons of capex is about INR12,800 crores, that's what I was referring to.

Pinakin Parekh

Okay.

So at this point of time, FY '26, the third year of capex does not include...

Atul Daga

But as we had announced by the time we complete this phase of growth, we would have announced during this year the next phase of growth, wherein we would have capex cash flows also.

I don't have a number on that, so I don't want to comment on that.

Pinakin Parekh

Understood.

Thank you very much sir.

Moderator · Conference Operator

Thank you.

The next question is from the line of Sumangal Nevatia from Kotak Securities.

Please go ahead.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Sumangal Nevatia

First question on the volume growth.

Now the strong volume growth, if you could just share what would be the industry growth in your sense?

And is it particular region where we gain market share, or is it across regions?

Atul Daga

Sumangal, we have operated at 95% capacity utilization on a base of 120-odd million tons, then we have grown, -- performed uniformly across the length and breadth of the country.

So we've done uniformly well plus here or a minus here tolerance level of 3% plus-minus might be there.

Sumangal Nevatia

Understood.

So it's not just because of North region where because of some plant closures we would have had...

Atul Daga

No. So that's very small capacity, and I'm talking about 126 million tons of capacity and not 5 million tons of capacity now.

Sumangal Nevatia

Got it.

Sir, second question, this Nathdwara merger, I mean is it possible to quantify what could be the benefit of merger in terms of accumulated losses and also in an operating losses...

Atul Daga

No. I think it is more of consolidation that we want to carry out and have one single set of book.

We were waiting for a cleanup of all the non-core assets, which we have completed.

There were a few past legal cases, which we have completed, and now it's a clean set of books ready to get merged with UltraTech.

Sumangal Nevatia

Okay.

So no meaningful I mean benefit on this on a merger point of view?

Atul Daga

No. Synergies we have already tapped into.

It was for all intend purposes, working as a single, between Nathdwara management team was common, brand common.

Wherever synergies had to be drawn out, we have drawn out.

So it's more consolidation of numbers.

In my presentation, when you see our India operations, I think the only change might happened at the terminology India operations might undergo with change.

No, you still continue calling it India operations, sorry.

So there's no change.

It's a legal consolidation that we are going through.

Next question, please.

Moderator · Conference Operator

Thank you.

The next question is from the line of Pulkit Patni from Goldman Sachs.

Please go ahead.

Pulkit Patni

Sir, thank you for taking my question.

Sir, given the fact that our utilizations are very high already.

And if my understanding is right, the bulk of your new capacity now is going to come in FY '25.

FY '24, there's not much capacity addition.

What would your view be on pricing in that backdrop for us and for the industry?

Kailash Jhanwar

Yes.

Thank you, Pulkit.

Jhanwar, this side actually.

So, yes, our capacity in FY '24 definitely would not be -- may not be that substantial.

But let's see because ultimately.

But some other players are obviously adding the capacity.

But Pulkit, as you know, in our industry, it is very difficult to predict the demand actually, say, I'll give a live example, 15 days back, we were hoping everything going well.

But one fine morning, you start some slowdown and kind of thing,

ULTRATECH CEMENT LIMITED · Management

April 28, 2023 but that's not a permanent feature actually.

So it all depends actually.

But holistically, I would say it's likely to have the good demand, maybe anything between 7% to 8% kind of thing.

So obviously, I don't think there will be strong pricing power would be in the hands actually.

But it all depends actually how the capacity utilization set out actually.

Pulkit Patni

Sure, sir.

So cost is going to be our friend for the next six months is the way you look at it?

Atul Daga

Yes.

Pulkit, costs will definitely be a friend, and I believe just adding further to what Jhanwar Ji mentioned, see, what is happening is whilst we are doing a capacity utilization of 90%, 95%, all India capacity utilization is still not rising to a meaningful level.

All India, all industry capacity.

And my firm belief is that and I've mentioned it on several occasions, when all India capacity utilization starts going around 85%, then you see a different kind of performance level.

So yes, there is still some time.

Pulkit Patni

Sure, sir.

And any indication on costs in terms of spot fuel prices, how should we look at the next couple of quarters in terms of power and fuel cost?

Atul Daga

They are volatile whilst they are in the downward trajectory.

But suddenly, there could be a spike also as I was specifically mentioning about fuel costs, pet coke has been softening, pet coke has reached almost $150 or $160.

Coal on a same calorific value basis, coal still continues to trend around $170 to $180.

The gas prices have softened globally.

The atomic power generation has gone up in certain parts of Europe, which is easing the pressures on fuel prices also.

But as and when China starts importing and -- they will open up.

They are opening up already.

March was a phenomenal performance in China.

They started importing -- sucking out coal supplies from Australia, from New Zealand already, but we have not yet seen a big impact on the overall fuel prices.

I will not start celebrating yet, as I mentioned earlier, on fuel prices.

They are softening but they would make a reverse trend also.

Pulkit Patni

Sure.

That's useful.

You've been the most guarded in terms of any comment on fuel prices versus your competition.

But that's it from my side.

Atul Daga

All right.

Moderator · Conference Operator

Thank you.

The next question is from the line of Indrajit Agarwal from CLSA.

Please go ahead.

Indrajit Agarwal

Hi, sir.

Good evening.

A couple of questions from my side.

First, again, going back to coal and fuel cost.

Have we been changing our strategy at all in the sense of sourcing?

Have we changed our mix meaningfully?

Or like coal, are we sourcing more from US rather than Australia right now or it broadly remains the same that it was maybe a couple of quarters back?

Atul Daga

Australia for us has never been the main source of coal.

It becomes uneconomical being the distance and US has been always the main source of imported coal.

Yes, we switch between pet coke and coal depending upon pricing.

But spot prices cannot determine that at the moment we are able to cite some trends.

We try to tilt the balance towards either of the fuel, whichever makes

ULTRATECH CEMENT LIMITED · Management

April 28, 2023 economic sense.

Last quarter, for that matter, we were 52% pet coke, and we can go up further depending upon how the prices behave.

Indrajit Agarwal

Now as we are seeing prices declining, are we looking to reduce our inventory of coal pet coke?

Or we still want to be well prepared for any production update that we are like...

Atul Daga

No. Irrespective of prices, inventories have to be carried.

We do a thumb rule of 40, 45 days, 45 days of inventories can't take a risk or suddenly, if there is some mine shutdown or anything.

Suddenly, if supplies are not available, then our operations will suffer.

So, this is a long distance, long lead item.

So we can't compromise on inventory levels.

That will be very speculative.

Indrajit Agarwal

Sure.

And a couple of questions on the waste heat side.

So we had a target of 318 megawatts by end of FY '24.

Are we still on track for that?

Can we...

Atul Daga

Yes, we'll exceed that, I think so.

'24?

We'll exceed that.

Indrajit Agarwal

This fiscal.

So we will be like 34% green share that we are guided by next fiscal…

Atul Daga

Yes, that we are very confident.

We would -- because see green share, the non-investment base is alternate fuel.

We are continuously ramping up our alternate fuel, which ultimately forms part of my guidance on 34%.

So it could -- we will definitely meet our targets, for sure.

Indrajit Agarwal

Sure.

My last question is on the clinker conversion ratio.

We are at about 1.41x.

So not just in the near term, maybe a five, seven-year horizon, do you see this moving more towards 1.6x, 1.7x where the industry accepts more blended cement?

Or you think there will be a sharp distinction between the infrastructure projects, which will continue to have higher OPC?

Are you seeing any change...

Atul Daga

There are two sides of the coin to this.

One is with infrastructure continuously being a bellwether of demand, demand, the consumption of OPC will continue to remain high, which means the conversion ratios cannot improve dramatically.

However, there is a lot of advocacy, which is happening around blended cement usage in infrastructure projects.

It depends on how successful the industry is to circulate that message down.

And we could see improvement in overall conversion norms.

1.6x, I can't do the math around 1.6x.

This quarter ended 1.41x was average, but quarter ending was 1.42x.

We have once in a while touch higher than 1.42x also.

And in the near future, maybe 1.5x could happen.

Indrajit Agarwal

Sure.

Thank you sir.

Moderator · Conference Operator

Thank you.

The next question is from the line of Ritesh Shah from Investec.

Please go ahead.

Ritesh Shah

Hi, sir.

Thanks for the opportunity.

A couple of questions.

Sir, first one is on the legal side.

Sir, how should we read point 8 notes to accounts pertaining to the Dalla asset?

Atul Daga

The Dalla asset, it's under arbitration, let that process get completed, we'll then take over that asset.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Ritesh Shah

Sir, can you specify how much is the cement and clinker over the asset which is under artificial?

Atul Daga

2.3-million-ton clinker only.

No grinding capacity at that location.

Ritesh Shah

And sir, corresponding limestone?

Atul Daga

The limestone mines would be about 100 million tons over there.

Ritesh Shah

Okay.

Perfect.

Sir, you wouldn't like to comment anything on the course of actions incrementally or possibly how it landed in arbitration?

Atul Daga

It's good point, Ritesh.

Next question, please.

Ritesh Shah

Sir, next question, any specific cost initiatives besides the green power and AFR that we are working on, either on lead or moving from road to rail or exploring more of coastline, DFC, I mean anything...

Atul Daga

I think it's -- this topic might take half an hour of discussion by itself, but there are lots of initiatives that the organization is taking whether it's on digital ways of working, which is helping reduce our operation cost or optimizing my lead distance or optimizing my freight costs, there are lots of initiatives.

I think the leading question would be you might ask me what is the target number?

I don't have a target number because these are continuous improvement programs.

So we have improvement programs happening in our maintenance cost, in our power consumption.

Some are investment-led, some are improvement in efficiency, mining operations for that matter.

There are dedicated specific task force and actions being taken to improve the cost of mining.

So you name the field, work is continuously on.

There's never a status quo that we would reach.

Ritesh Shah

Correct.

Sir, just last question.

You indicated we are positive on demand.

You also indicated I think batting order, middle order and tail will follow and we are upbeat on volumes.

So my question is, and you also indicated at the India level utilization level is still not at the desired level.

Sir, what would be the probability for the cement prices to remain at the current level if the cost curve goes down and what you indicated utilization at the India level is not at the desired level?

Atul Daga

You would tell me, you are there in the field, what will happen?

Ritesh Shah

So pricing should go down logically, but I would like to have your thoughts, sir.

Atul Daga

No, I think there would not be too much pressure on prices.

I don't believe so.

We have seen in the heat of the January- March quarter.

If volumes are so high, then prices should have corrected, prices did not correct.

We have maintained our prices as we were in the last quarter.

So nobody wants to just crash prices for volumes.

Ritesh Shah

Sir, adjusting for seasonality, technically, it has to come off because volumes will dip.

ULTRATECH CEMENT LIMITED · Management

April 28, 2023

Atul Daga

July-September quarter is always a weak quarter, but my sense is, otherwise, prices should remain stable.

Ritesh Shah

Sure sir.