Cost pressures weigh on UltraTech Cement in Q1; net profit down 33%

Despite strong volume growth, cost increases outweighed realisation improvement, hurting profits

As expected, the impact of cost was evident on UltraTech’s performance in the India business for the quarter ended June (Q1).

While volumes grew on almost expected lines by 34 per cent year-on-year to 16.8 million tonnes (mt), leading to 30 per cent growth in revenue, operating performance was a bit disappointing. Realisations improved but not  enough to match the pressure from rising energy and logistics cost. A 55 per cent dip in other income to Rs 731 million meant net profit fell 33 per cent over a year, to nearly Rs 6 billion.

However, the future, especially the second half of this financial year, looks good. Thus, analysts remain positive on the stock, which fell 1.3 per cent after the results were announced, taking its 2018 year-to-date loss to about 15 per cent.

The all-India cement price (for a 50-kg bag) at Rs 293 for the quarter was slightly higher than the Rs 288 in the March quarter but lower than Rs 304 in the year-before period. UltraTech’s realisation per tonne of Rs 4,391 (estimated) slipped 0.7 per cent from a year before; it was up 1.5 per cent sequentially. The pressure on realisation is due to logistics cost (34 per cent of overall expenses) increasing nine per cent to Rs 1,199 a tonne, led by rising diesel prices.

Energy costs, 30 per cent of overall expenses, jumped 18 per cent over a year to Rs 1,028 a tonne as petcoke costs grew 33 per cent. The company did well to improve cost efficiencies but its earnings before interest, tax, depreciation and amortisation (Ebitda) at almost Rs 17 billion was two per cent less on a year-on-year basis. The company said that on a sequential basis, it was able to maintain operating Ebitda per tonne at Rs 929 (Rs 922 in the previous quarter).

However, analysts say the adjusted Ebitda at Rs 826 a tonne (Rs 857 in April-June) appears the lowest in the past 14 quarters. They are, however, hopeful of a recovery in profitability, as cement prices catch pace after the monsoon.

UltraTech, meanwhile, has done well with the 21.2 mt capacities it acquired from Jaypee Associates, with average capacity utilisation of 70 per cent and generating a cash profit. The acquired capacities could have impacted its earning and that worry is now behind it.

Volume growth, helped by acquisitions and expanded capacities, remains strong and the momentum is likely to continue. Last month, it commissioned a second cement unit of 1.75 mt per annum (mtpa) capacity in Madhya Pradesh. It plans to integrate Century’s cement business once the acquisition is approved, which will take its capacity higher to 111.1 mtpa, including its units abroad. Hence, with volume drivers in place, only realisation improvement is awaited, say analysts. The ongoing quarter is traditionally a seasonally weak one but the second half is expected to be better.

UltraTech says it is confident. The management said with the cement industry in a rising cycle, demand is expected to be healthy. While spending on infrastructure, housing and smart cities is likely to keep demand growth strong, a good monsoon, higher minimum support prices for crops and the government’s rural push should lift rural demand, too. Most analysts, thus, maintain a positive stance on UltraTech.

Binod Modi at Reliance Securities says, “We opine UltraTech’s operational performance will improve further in ensuing quarters, owing to the recent spike in realisations.” Another analyst said the company had been able to manage its operating costs well in an environment of soaring expenses, which should be taken as a positive.