Input costs weigh on UltraTech's Q2 show

Softer volume growth and rising coal and petcoke costs were a dampener, but efficiency improvements provide some support to operating performance; road ahead looks good

The impact of hardening costs was visible in UltraTech’s profitability during the September quarter and that might have disappointed some on the Street. Coal costs have been on the rise and so have been petroleum coke (petcoke) prices, which have more than doubled in six months.

Support came from stable cement realisations, though it was a seasonally weak quarter for those in this segment, due to the monsoon. The average all-India price of a 50-kg bag at Rs 300 was flat compared to Rs 299 in the June quarter and Rs 296 in the one a year before. Cement volumes at 11.2 million tonnes (mt) were a shade higher than the 11.1 mt in the year-before quarter but lower than the 13.2 mt in the previous one. This, too, might have disappointed some.

So, while consolidated revenue at Rs 6,446 crore came higher than the Bloomberg consensus estimate of Rs 6,322 crore, profit was less than this, impacted by higher costs (energy, employee and others) on a sequential basis. Overall, costs per tonne at Rs 3,851 increased six per cent sequentially (but seven per cent lower than the year- ago quarter). Positively, the company’s petcoke usage at 71 per cent rose two per cent sequentially and 15 per cent year-on-year. Petcoke prices are 10-15 per cent less than those of imported coal and, hence, the increase in petcoke usage is beneficial.

UltraTech is also working on waste heat recovery systems (WHRS). The WHRS power share at seven per cent rose three per cent over a year before and one per cent sequentially. These helped keep overall costs in check. UltraTech said efficiency improvement contributed a third of cost improvement.

Hence, Ebitda (earnings before interest, taxes, depreciation and amortisation, or operating profit ) at Rs 1,378 crore (up 16 per cent over a year) was slightly lower than the Rs 1,394 crore in the Bloomberg estimate. Net profit (up 25 per cent year-on-year) at Rs 614 crore, thus was way lower than consensus estimates of Rs 701 crore.

 

With operational performance slightly lower than expected, the stock slipped 0.7 per cent on Monday, closing at Rs 4,008.70. This comes after a 55 per cent rally in the past nine months.

Moving forward, though, the prospects remain strong. Analysts believe demand is likely to grow and help realisations in the second half of FY17. These, have already started to improve. After the October price rises, cement prices are up by Rs 30-40/bag in the west, north and central markets over the past few months, by Kotak Institutional Equities' checks. If this continues, better realisation would help mitigate rising fuel prices.

Further, it is undertaking efficiency improvement and is to increase investments in WHRS. It is also seeing lower logistic costs, down four per cent over a year and sequentially in the September quarter. More benefits here are likely with implementation of the coming goods and services tax; the rate of levy is also to come down, say experts.

Sreedevi Kandipan at Cholamandalam Securities said that efficiency improvement has supported profitability for the company. For instance, the company’s Ebitda per tonne of Rs 1,033 may be lower than Rs 1,078 in June’16 quarter, but is much better than Rs 936 seen in FY16.

Not surprisingly, UltraTech, also the largest pan-India entity in the segment, remains the preferred pick of most analysts to play on a cement up-cycle. Analysts at Reliance Securities said after the results were announced that they continue to believe UltraTech is well poised for the period ahead, owing to its leadership status, increasing market share and improving operating leverage.