UltraTech Cement stock likely to be impacted by near-term hurdles

Besides pricing pressure, muted demand from the trade segment and recent acquisitions could hit margins

Despite a robust demand trajectory, 2018 was not a good year for the cement sector on account of pricing pressure. The stock of cement major Ultratech Cement (UTCEM) declined 7 per cent in 2018, underperforming a 6 per cent rise in the Sensex. 

Analysts believe that the stock is unlikely to see any significant upswing, even in the near term, as UTCEM is unlikely to exercise pricing power in spite of its leadership position.

Besides lower cement prices even after the festive season, demand is being driven mainly by the low-profitable and highly competitive non-trade segment. UTCEM is unlikely to undertake sharp price hikes, even in the near term.

Analysts at Emkay Research believe that higher demand from the non-trade segment, coupled with increased competition between cement manufacturers, will lead to a muted pricing power.

The company’s recent acquisitions — Ultratech Nathdwara Cement (formerly Binani Cement) and Century Textile — have improved its leadership position in all the regions except North India.

However, the same will weigh on the company’s short-term earnings, amid increase in interest cost and depreciation. 

According to Morgan Stanley, with Century Textile’s takeover (for instance), UTCEM’s net debt is estimated to rise to Rs 23,000 crore from the beginning of FY20, though leverage position would be comfortable. 

As of September 2018, the company’s debt stood at Rs 19,769 crore, on a consolidated basis. Margins at the operating profit level are expected to remain around the September 2018 quarter level of 18 per cent till FY21, say analysts. 

What could cap the downside risk to UTCEM’s profitability, besides cost efficiency measures, is a benign cost environment. 

With the recent sharp correction in the crude oil prices and rupee-US dollar exchange rate, prices of key cost elements, i.e. diesel and petcoke, have also fallen. 

This should help in terms of logistic and energy cost, which together accounted for over 60 per cent of the total cost in the September 2018 quarter. 

However, this will help only if the lower cost benefits are not passed on to the consumers.

While lower costs and improving utilisation are positives, investors should wait for an improvement in pricing before taking an exposure to the stock.