UltraTech: Challenges continue unabated

Weak demand and realisation have taken a toll on company's Q2 performance

UltraTech’s performance in the September 2013 quarter came much below street expectations. The Net for the quarter at Rs 264 crore declined 52% Year-on-year and was 33.3% lower than consensus estimates of Rs 396 crore (as per Bloomberg).

The impact of soft cement demand and realisations was visible on UltraTech’s September 2013 quarter performance. While the cement and Clinker sales at 9.1 million tonne were marginally higher than 9.06 MT seen in the year ago quarter, it is the realisations that took the toll on company’s revenues. The average cement prices in the country at Rs 279 per 50 kg bag in the quarter were lower than Rs 288 a bag seen in June 2013 quarter and much lower than Rs 300 a bag seen in September 2012 quarter. Apart from South India which saw 11% decline in per bag prices, rest of India (East West South Central regions) saw 22-25 % decline in cement prices.

In the backdrop, net sales at Rs 4,502 crore declined 4.2% year-on-year (lower than street estimates of Rs 4,544.8 crore). The benefits of lower imported coal costs were negated by the rupee depreciation and hence the costs pressures continued unabated. Thus the company saw its operating profits at Rs 717 crore too decline 33.3% y-o-y taking the toll on the bottom line.

Moving forward as the monsoon season gets over, the Street is betting on demand revival in the cement sector. The cement players had hiked prices by Rs 26 a bag in the South, the prices have increased by Rs 15 and Rs 10 a bag in West and North too. This bodes well for players like UltraTech that have all India presence. Thus with impetus provided by price hikes and in anticipation of demand recovery the stock has run-up sharply.

However, experts feel that there are no clear signals of demand recovery yet. In fact with the festive season kicking off, the shortage of labor will mean that the demand recovery will not be very swift. The benefits of good Kharif crop should help rural demand but again the same is anticipated to start showing signs in December only. Thus the road onwards will not be easy for cement manufacturers in the near-term. The company in its press release post results observed that “The outlook continues to remain challenging. Demand growth in Fy14 is likely to be around 5%, though in the long term it is likely to be over 8%.”

The company is gearing up for the future and also is ahead of its peers in terms of capacity additions. UltraTech had added 2.5 MT capacity in Karnataka during June 2013 quarter taking its annual capacities around to 54.5 MT. During the September 2013 quarter, the company has commissioned a 25 Mega watt Thermal power plant in Karnataka and its 1.6 mtpa cement Mill at Jharsuguda in Orissa also went on stream. Ultratech's overall capacities are likely to touch 64.5 MT by 2015. The benefits of all this are likely to accrue in the medium- long run.

However, out of 16 analyst polled in the October only four have 'BUY' ratings, 11 have 'HOLD' ratings while one has 'SELL' rating. Consensus target price for the stock stands at Rs 1,940, meaning a limited upside from current levels of Rs 1963.50. In fact after the disappointing performance, the stock can also see correction.