UltraTech Cement volume growth offsets weak margins as fuel costs intensify

Investment View and Valuation

In its October 20, 2026 results update, ICICI Securities maintained a HOLD recommendation on UltraTech Cement and reduced its target price to Rs 11,000 from Rs 12,138. The broker considers UltraTech Cement a commendably managed company, but believes the cement-sector backdrop warrants caution across demand, supply, operating costs and pricing.

ICICI Securities cut its FY27E and FY28E EBITDA forecasts by around 3 per cent each and reduced its FY28E EV/EBITDA valuation multiple to 16 times from 17 times.

Strong Q2FY27 Volume and Revenue Performance

UltraTech Cement reported strong Q2FY27 volume performance. Consolidated sales volume increased 12.9 per cent year on year to 38.2 million tonnes, while domestic sales rose 13.8 per cent and were around 3 per cent above ICICI Securities estimates.

However, EBITDA per tonne declined 19.8 per cent sequentially to Rs 974 because costs rose while volumes fell 7.5 per cent quarter on quarter.

Cost Inflation and Margin Outlook

Cost inflation is central to ICICI Securities' caution. Variable cost per tonne rose around 6 per cent quarter on quarter, driven by higher fuel costs, while fixed cost per tonne increased 15 per cent quarter on quarter because of lower operating leverage.

Q2FY27 power and fuel cost was Rs 1,442 per tonne, up 9.9 per cent sequentially. Management said fuel cost increased to around Rs 51 per bag from around Rs 45 per bag in Q1FY27. Blended fuel cost rose to around Rs 2.09 per kcal and was around Rs 2.2 per kcal in Q3FY27 so far.

Management expects this level to persist through Q3 and Q4FY27 if pet coke remains at around US$180 per tonne. Constrained domestic coal availability and high industrial diesel prices are further cost pressures.

Demand Outlook and Sector Risks

Management remains constructive on demand through at least March 2029, citing data centres, semiconductor projects, private-sector capital expenditure, urban housing, new metro extensions and Mumbai infrastructure spending. It expects stronger H2FY27 demand from mid-November 2026.

Management also expects cement price increases to absorb cost pressure and reiterated its aspiration for EBITDA of Rs 1,400 per tonne by March 2028.

However, ICICI Securities flags the following material risks to demand, utilisation, margins and pricing:

• Potential drought-related pressure on rural demand.
• Around 180 million tonnes per annum of industry capacity additions during FY26 to FY28.
• Elevated fuel prices.
• Intense competition for market share.

Capacity Expansion and New Businesses

UltraTech Cement commissioned 4.6 million tonnes per annum of grinding capacity in September 2026, taking domestic capacity to 204.7 million tonnes per annum. Management retained its plan to reach 240 million tonnes per annum, incurred around Rs 6,000 crore of capital expenditure in H1FY27 and retained FY27 capital expenditure guidance of around Rs 10,000 crore.

The company also added 116 MW of renewable power and 10 MW of waste heat recovery capacity during Q2FY27. The new Ultravolt wires and cables business was launched on September 3, 2026.

Valuation and Key Risks

ICICI Securities assigns Rs 238 per share to the Ultravolt wires and cables business, based on FY28E revenue of Rs 3,000 crore valued at 2.5 times price to sales, after a 60-day working-capital requirement.

The cement business is valued at Rs 10,762 per share using 16 times FY28E EBITDA of Rs 21,076 crore.

Upside risks: A sharp increase in cement prices or a sharp decline in fuel costs.

Downside risks: Sharply lower cement prices or a major fuel-price surge.