UltraTech Cement Limited (ULTRACEMCO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UltraTech Cement Limited conference call. We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risk that the company faces. The company assumes no responsibility to publicly amend, modify or revise any forward-looking statement on the basis of any subsequent development, information or events or otherwise. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Atul Daga, Chief Financial Officer of the company. Thank you, and over to you, Mr. Daga.

Thank you so much. Good afternoon, everybody, and welcome to this call. I guess you're all wired up today, but we are here to unwind you. Let me first talk about grey cement because that is our core and a very high-growth business. I'm sure you're all already aware of the quantum of development taking place in the country in terms of real estate, infrastructure and allied sectors and the resultant cement demand. This demand is going to continue until we reach a stage of maturity, which is not in anywhere in the near term. In fact, in the long run, in the distant future, we may replicate the demand reflected in the developed economies. For your reference, for FY '24, per capita consumption of cement in India had reached about 295 kgs. The Western World when they peaked in terms of their cement consumption, the cement consumption was somewhere around 600 kgs to 700 kgs per capita before maturing and settling down to a level of about 500 kgs. Clearly, India has a long runway for cement. And at UltraTech, we are extremely focused on aggressively pursuing the cement industries growth in the country. At the end of FY '25, we will be at 182.8 million tonnes of capacity in India, which will be approximately 28% of the industry's capacity. We have been growing faster than the industry and will continue to do so in pursuit of the growth opportunity that exists in the country. By the end of fiscal '27, we will be at 209 million tonnes of capacity and continue to participate in the high-growth story of cement in India, organically or inorganically. The doors are wide open. Over the years, we have created a well-balanced bouquet of product offering from UltraTech. We are the largest manufacturer and seller of grey cement in India. We have the largest network of RMC in the country. Globally, ready-mix concrete is the most common form of cement. However, in India, we are still under 5% as RMC, and set to grow significantly. UltraTech is already gearing up for the future and hence, growing its RMC business very rapidly. We are a very strong player in white cement. In fact, Birla White, our brand is synonymous with white cement in the country. I've often spoken to you about adjacencies. We at UltraTech have been continuously exploring adjacencies for gray cement to add value to our end customers to gain a higher share of wallet from the individual homebuilder -- homeowner in the overall construction value chain. The construction value chain can be segmented in our view in 5 phases: design, construct, enable, decorate and service. Several years ago, we started our Building Products division or what we call BPD. Within BPD, we have already launched multiple products such as motors, waterproofing agents, AAC block, routing materials and many others. Today, we service the construction industry with almost 90 SKUs. As part of extending our offering from BPD, we examined multiple other adjacencies, pipes, tiles, wood adhesives, sanitary fittings, lights and fans and dropped all these product categories because they were not a strategic fit. Cables and wires came right on top as the only strategic extension as these products are on the back of the wall, which we are already presently building. This is the only product -- mind you, this is the only product that we thought prudent to add to our portfolio of products. Let me get into a little more detail on why cables and wires. Like cement, cables and wires is not a repeat purchase for the homeowner. It is not a discretionary spend. Wired segment, almost 85% of wires market is covered by the residential markets and 65% of cement demand comes from the residential markets. Let me give guide into residential markets also. Residential markets, rural markets, which are highly retail markets, drive about 35% of demand for cement. The IHB in the rural markets, retail markets depends on the contractor who deploys masons and electricians. UltraTech has existing relationships with contractors and can leverage on the same. We also have a very strong presence through our UltraTech Business Solutions or UBS retail stores, which will provide some head start as compared to any other new player. Today, as a part of the offering from our UBS stores, we have several products of sanitary fittings, cables and wires are already being sold from there. We are also selling water tanks, paints, white cement, of course, cement is the main product and many other products, host of other products. If I look at urban housing, urban housing constitutes about 30% of cement demand. The builder community takes a decision on cement and wires along with the MEP, EPC consultant that they want to deploy. UTCL -- sorry, UltraTech connects with the corporate real estate players alike and -- as well as the EPC players. And hence, we thought it prudent and we thought it cables and wires should be a very strategic fit and easy for us to deal with. India is urbanizing, which will result in higher requirement of wires with more white goods penetration. Cables, core market for cables, I would imagine, would be infrastructure like metros, airports, railways, residential complexes, renewable energy, EV projects. And as you are aware, UltraTech is present in all the metro projects that are taking place in the country. Hence, we believe we are very well entrenched in the residential market as well as the infrastructure markets for playing the cable and wire proposition as well. We will go live with the production by December '26. Situated at Jhagadia in Gujarat, it is less than 100 kilometers away from raw material source copper, which is about 75 -- plus/minus 75% of the overall raw material. This will help us manage our working capital also well. When we look at the financials for cables and wires, they look highly attractive. Industry is growing in double digits and expected to grow at a similar pace for a long time. High asset turns, we could -- it could range from 5 to 7x, high return on capital and a capital-light -- asset-light model, IRRs of upwards of 25%. Working capital will not be an issue for us on the back of UltraTech's purchasing power. To conclude, by the time these cables and wire operations peak, cement capital employed will be almost INR 1 lakh crore against the stated INR 1,800 crores CapEx required for this business. We believe this will be a value accretive pay for our shareholders, along with our continued focus on core operations of cement. Thank you, and over to you for questions.

[Operator Instructions] The first question is from the line of Ritesh Shah from Investec.

Sir, you did indicate several categories that we have excluded. However, you did not indicate [ faucet ] wire fittings. Does it -- is it a subset of sanitary fittings? And...

Sanitary fittings, yes. And we also looked at furniture. We also looked at -- did I miss anything? Yes, we looked at everything practically.

Okay. So would it be possible for you to provide some assurance that we would not venture into any of these categories, say, over the next 5 years? The reason to ask this question is I think there are investors who are worried about capital allocation into something ex cement, that's why this specific question, sir.

Yes, we are not venturing into anything else.

Sir, over next 3 years, 5 years?

Okay, next 5 years -- next 3 years, next 5 years. But as I said, the products which we have dropped will not become attractive in future, unless there is some act of God, which makes things very attractive, which is highly unlikely.

This was very helpful. Sir, quickly, second question, you indicated that ROC of 20%, and asset turn, you indicated of around 5 to 7x. What is the underlying assumption on the margins we are looking at? Again, the reason to ask this question is, we will have some advantage on the working capital. So what's the underlying assumption on margin profile that we are looking at?

So EBITDA margin will be akin to the industry.

Okay. Fair enough. And lastly, next phase of expansion after INR 1,800 crores, what's our aspiration? Typically, we end up being 1, 2, 3. Otherwise, we don't enter any particular space. Again, there's a lot of CapEx which has already been announced by the incumbents. Hence, this question.

We don't have any plans for future CapEx as of now. I think it's most important that first, we put this up, ramp it up and it will go up to at least '30, '31, where we ramp up to full capacity. So 5 years, that takes care of my initial CapEx plan of INR 1,800 crores. Point is, I'm not spending -- we are not spending more that as of now.

The next question is from Indrajit Agarwal from CLSA.

Just one question. At INR 1,800 crores, if I...

Sorry to interrupt you, Mr. Agarwal, may we request you to speak a bit louder.

Yes. So at INR 1,800 crores CapEx, if I do a 5x asset turn, it's roughly about INR 9-odd thousand crores of top line. As things stand today, you will -- if I have to take today's number, you will be the #2 player. And if I take, let's say, even 5 years out, you will still not be -- you will be probably not in the top 3. So again, what would be our right to win in terms of the brand over here? I understand the distribution channel and all, there's a lot of similarity. So would we go more aggressive on pricing? Or would it be more like -- we will see a significant change in distribution? How is the approach on the marketing and sales side?

We are going to follow our distribution model, which is akin to the industry. Our rights to win, as I already indicated in the document, which we uploaded. A brand which is very well respected and recognized, our UBS network which gives us a head start, our B2B relationships, very strong relationships with the builder community. And we have access to the end users and the influencers community like nobody else. We are the only company on cement where truly pan-India. And with a connect of over 135,000 touch points, our technical services team, which is almost 2,000 people plus -- technical services team 2,000 people plus who are there on the field who have the intel on where what project is going on, what is the requirement. I think it's the UltraTech advantage, which will come to play.

Sure. My second question is, if I look at the industry-wise, it has grown at 13%, 14% CAGR in the last 5, 6 years in top line. Part of it has also been held by higher copper prices, depreciating rupee and all, and CapEx cycle has been like never before. Now with a deceleration in government spend on CapEx, if I add up all the capacity announcement in the cables and wire segment, it's already about INR 10,000 crores, adding to it, your INR 1,800 crores of ballpark INR 12,000 crores. So on a INR 80,000 crore industry, we have roughly about INR 50-odd thousand crores of incremental revenue potential. So do you see pricing pressure in the industry as a whole, not just because of UltraTech, but overall in the industry because of the capacity expansion by the incumbents as well?

I don't think so because I believe the industry size would be close to INR 60,000 crores, INR 70,000 crores -- sorry, it close to INR 1 lakh crores. And even if it is growing at 13%, 14%, the incremental capacity expansion is justified. And we believe there is room for one additional player, that's us. So I don't think this -- it requires any price -- there will be any pressure on prices. And with the market -- with the growing market, we also be able to find our place.

The next question is from the line of Prateek Kumar from Jefferies.

I have a couple of questions. Firstly, on -- can you share like some feedback from your channel partners you may have had regarding the launch of new segments, including UBS and maybe elsewhere?

Prateek, I didn't understand your question.

I'm sorry to interrupt you, sir.

You are not audible, Prateek.

Sir, your voice is breaking a lot. Sir, may we request you to please check your connection and rejoin the queue. The next question is from the line of Ashish Jain from Macquarie India.

Sir, my first question is in terms of adjacencies. Is there something which we haven't evaluated in this round or with whatever you listed in terms of pipe, tiles, everything is done in the...

Ashish, I will -- I have not evaluated air. I can't supply air in the house. So the point is we have evaluated everything logical and possible. We are not looking at consumer durables. If you count that as an adjacency because it's something in the house, that's way out. So whatever goes into construction and -- construction value chain is what I talked about. Ashish, I think we have looked at everything possible, everything logical. The room which I'm sitting in, there is a carpet on the floor, which is part of flooring, but no, we are not getting there. So there'll be n number of things, but core construction value chain, we have examined and kind of put to bed.

Right. Sir, if I can just harp on this a bit more like a lot of the cable and wire companies have ventured into, let's say, lighting, switches, I know it's very farfetched...

I already mentioned it in my commentary. We have also examined lights for houses -- lights and fans, what is it called FMEG. We're not getting there.

Got it. And this capital number of INR 1,800 crores is at least till 2030, '31, we are well in that...

Yes, yes. Shared under that. As of now, it shared under that, given the design and all the plan of the facility.

Right. And sir, secondly, in terms of technology and all, how do we get it? Is there a cost attached to it? Are we talking to...

It's part of my CapEx cost.

No. But you are talking to like some third party who will be handholding us and is there a cost attached to it because that will have a bearing on our margins and all.

So we will be looking at technology partners with us, but the cost has already been factored in the INR 1,800 crores of CapEx that has been provided. And what we also understand is that this technology is readily available.

Yes. So when we took advice on, Ashish, on the overall CapEx costs and the sources of technology, I think that is how we got helps and assistance in building the business model and the CapEx plans.

Okay. Okay. So just the tech-related cost is a onetime cost we're seeing, if you're factoring it in the CapEx?

What, tech-related cost. What is tech-related cost?

No, no. Basically, that technology, it will...

It's already -- yes, it will be onetime cost, yes, yes.

One-time cost. Okay. And in terms of the product mix, are we planning to be more wires versus cables...

I think 60-40 wire-cable.

The next question is from the line of Rahul Gupta from Morgan Stanley.

Just one question. I know this INR 18 billion CapEx is a small number in the overall scheme of things. But any inclination, how this will be divided over the next couple of years? Or most of it would come in the front loaded or towards the fiscal '27? Any color...

My guess is more or less equal, but it will -- obviously, like any other CapEx, it tapers down towards the end. From a cash flow point of view, there will be retention money, which will be held back. So don't have a very clear guidance on that, but it should be evenly spread out.

Great. Great. And Atul, sir, this would be too premature to ask, but would you be building a team separately or it would be in-house? How should we think that?

No, there will be specialists and there will be generalists. So generalists can be from within our team. I'll be a generalist. I'm not letting my portfolio to be taken away by anybody else. But there will be specialists who manufacture -- who know the tech part. The -- or the sales guys will be separate because we cannot compromise on the sales time of our salespeople for cement.

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

So beyond this INR 1,800 crores, will there be any working capital requirement or, let's say, some investment on brand building and marketing that will be required in the initial years?

Brand building will be part of my P&L, of course. And working capital, I'm working towards a very minimalistic working capital. Ambition is like UltraTech, like a cement business, we will want to be negative working capital.

Okay. So broadly, the INR 2,000 crores, you can say...

Yes, ambition -- that's the ambition. Don't hold me to it, but that's what we are working towards.

Got it. So total capital employed itself will be, let's say, INR 2,000 crores ballpark...

Not more than that. If there is initial year of -- not more than that, because there will be some initial spending before revenues start kicking in, not more than that.

Okay. And the 60-40 split that you gave for wire-cable, is it for CapEx or revenue target?

Revenues.

And CapEx split would be what then, roughly?

Do we have it, or?

No. I mean also some of the facilities are common. So it's very difficult to break that out because we -- what we understand is that the technology is common up to a particular extent and then it gets divided between cables and wires. So not possible to segregate fully.

Okay. Okay. And just lastly, on the Cement capital employed of INR 1 lakh crore that you mentioned. So -- I believe it will be roughly INR 80-odd thousand crores by FY '27 once we are at 211 million tonnes. Like is that the way to look at it? Beyond that...

Amit, we're already at INR 80,000 crores, and as you saw the chart, I think -- and we are spending -- in the next 2 years, INR 20,000 crores, INR 25,000 crores on cement.

Right. So beyond '27, plans will be announced maybe, I mean, when we are closer to...

Will be announced. Will be announced. I gave you -- in my commentary, I already gave you an indication. We are already at 28% of India's capacity. India is growing, we will grow faster than the industry, organically and inorganically.

The next question is from the line of Sanjeev Singh from Motilal Oswal. The next question is from the line of Prateek Kumar from Jefferies.

He is not there.

As there is no response, we'll move to the next question, which is from the line of Piyush Khandelwal from Motilal Oswal.

Just wanted to ask on this team building as well. Will there be a separate CEO for this division? Or you would be considering the same set of people will be running the business?

There will be specialists certainly. And I think beyond that, once the team is in place, we will let you know. But there will be specialists acquired for this business. Like for our BPD, what we call Building Products Division, I have a separate CEO running that operation. Maybe he will manage it if he has a bandwidth.

Got it. Got it. And when I look at your PPT, you mentioned that especially on the cable side, you're looking at LT cables. So just wanted to ask, would you be looking at some high tension, medium tension cables or EHV cables as well? Or is it just the wires and low tension cables?

So currently, the plan is to only go after low-tension cables. We will -- we are not evaluating the HT and EVH (sic) [ EHV ]at this stage.

The next question is from the line of Prateek Maheshwari from HSBC Securities.

Sir, I just wanted to understand if you could give any color on how much -- like how are you guys thinking between wires and cables? And if there is any bifurcation in mind on how much the CapEx will be between the two?

No, I think [indiscernible] asked, Prateek, because there will be a lot of common facilities. So it will be very difficult to segregate.

Okay. But time-to-market first wires and then heater, cables is [indiscernible].

Yes, yes.

And sir, second thing, just wanted to understand just from an ambition perspective, like how much is the ROC that you would be looking at for this business, say somewhere in FY '31, '32?

25-ish.

The next question is from the line of Raghav Malik from Jefferies.

So just a few questions. The first one was, is there any kind of feedback that you've got from your channel partners, maybe at UBS as well sort of about this, if there's been some initial conversation around the segment coming in? That's the first question.

As far as my UBS partners are concerned, they are very excited because the kind of brand loyalty and brand traction that we have, they will definitely be excited to have a product from UltraTech on the shelf.

Got it. Okay. And [indiscernible] sir, what is the indication on the kind of marketing or promotional kind of spend that you'll be doing for wires and cables or maybe even -- together like as a percentage or a quantum in the...

Difficult to pin down a number. But obviously, in an initial year, it might be high and then settle down in line with the industry, that's any product launch you have to do to get it going.

Okay. And we're expecting the similar margins to other industry players given right off the bat from '31 where you get full scale of revenue?

'31 will be a mature state. That is obviously in line with the industry. The initial year might be much lesser because we would be building the -- ramping up the capacity and building the network, building the brand, establishing ourselves. '31 will be a matured state.

Got it. And -- sorry, just one last one. Like paints was talked about in 2021. So is there some like sort of -- like now that this is out, is there some sort of time line for this idea? Are you sort of conceptualize it to now to going to execute the Wires and Cables division, if you could give any color on that?

You mean, when we'll be start thinking about it?

Yes, something on that.

Let me give you a bigger picture, in a company like ours, in a group like ours, there's a think tank, which keeps on evaluating ideas. And if an idea is attractive, any company could latch on to it. And our thing tank, I believe, has been working on this idea for some time before concluding it, finalizing it and bringing to the table. So not really a 0 date -- 0 start date or end date.

The next question is from the line of Akshay Gattani from UBS.

So in terms of channel mix for cable and wire business, which you'll be doing. So wires I believe it will be mostly distributor led. But in cables, you'll be doing complete distributor-led or you will be also doing institution -- institutional business as well? Like any color around that.

Mix because as I mentioned, that's the advantage which UltraTech brings to the table, whether our connect with infrastructure community or real estate community, we are directly in touch with them. And distributors also will be used. Sales promoters will also be there as well as our direct connect with our customers.

And other question, sir, like Board approval has received a couple of things there only. So groundbreaking is yet to happen, but in terms of plant and machinery and organizational structure, like plant and machineries, vendors identified and in terms of organizational structure, like any progress you made or it will be subsequent development?

So teams such are identified, people are being taken on board. Location identified. As I mentioned, it is very close to copper facility -- copper source. Location identified. The plant layout, engineering started, design done. So we are good to go and deliver on or before December '26.

Okay. And machinery -- plant and machinery is also identified?

Yes. Sources identified, but without board approval, I can't place the order. Now that the Board has approved it, we'll get to the next stage.

The next question is from the line of Nihar Dave from IIFL Capital.

So just one question, sir. In terms of the paint business also, it's a similar sort of situation wherein the Birla House has gotten into a market that is sort of dominated by a few players. So what are some of the strategies that you would like to implement from that implementation into Cables and Wires?

The industry is growing at a healthy 12%, 13%, has shown that growth and will continue to grow. And the -- yes. Whilst the industry is growing 12%, 13%, my team tells me organized market might be growing at a faster pace. Given that scenario, I guess, we will settle in very well within the overall ecosystem.

Okay. And sir, any reason that this is not into Grasim's books and in UltraTech's books, is there...

As I explained, the construction value chain design, which is an architect work. Construct, which is cement and then comes electrification. So in a way, I would say, we build a wall and now we are wiring the wall or we are getting behind the wall. So that is the coexistence, design, construct, enabling. Enabling is wiring and electrification, et cetera. Decoration is where paints comes in, and that's why it was not as an immediate adjacency for us. This is an immediate adjacency for us, makes more sense because we have a business connect. We have a connect with the individual homebuilder. We have a connect with contractors who influence the electrician. We have a connect with the EPC companies who do all the mega intra projects, whether it's an airport or anything else. And that's why it makes more sense for us to do this project.

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.