UltraTech: On a strong wicket

Realisations, overall performance beat most estimates, but some analysts are disappointed as cost pressures continue

On the one hand, delayed monsoons led to better sales volumes for UltraTech Cement. On the other, rising realisations helped by strong price recovery in the South added to the company’s overall performance for the September 2014 quarter. Although costs moderated at a slower pace than some analysts were expecting, it is not seen as a significant issues. After the results, according to Bloomberg poll of 17 analysts, 14 have a ‘buy’, one ‘neutral’ and two ‘sell’ rating on the stock. Their average target price of Rs 2,816 indicates an upside potential of 15 per cent, despite the stock surging 5.5 per cent in Monday’s trading (results were announced on Saturday).

The company’s cement and clinker sales volumes at 10.35 million tonnes (mt) grew more than 12 per cent over the year-ago quarter’s 9.23 mt. As the volumes grew, the average per 50 kg bag cement prices at Rs 320 were much better than Rs 297 in the year-ago quarter and Rs 316 in the seasonally strong June 2014 quarter. Thus, UltraTech’s consolidated revenues at Rs 5,772 crore grew by a strong 18.5 per cent year-on-year. Earnings before interest, depreciation, taxes, and amortisation (Ebitda) at Rs 938 crore, too, was better than the year-ago quarter’s Rs 733 crore, while net profit jumped 48 per cent, year-on-year, to Rs 414.2 crore.

However, the company’s September 2014 quarter numbers also included financials of acquired cement units of Jaypee Cement Corporation (4.8 mt per annum capacity). And, hence, the results are not strictly comparable on year-on-year basis. Nevertheless, the performance was generally ahead of the Street estimates. There was some disappointment on profitability as some analysts were expecting moderation in costs on the back of lower imported coal costs. The cost pressures, however, continued and were evident with freight costs increasing 29.6 per cent and power and fuel costs 19 per cent. Thus, while sales were clearly ahead of analysts’ estimates Rs 5,094 crore to Rs 5,365 crore, Ebitda and net profit were lower than few analysts’ estimates. Ebitda estimates by analysts ranged from Rs 800 crore to Rs 979 crore and profits estimates ranged Rs 281 crore to Rs 424 crore.

Giriraj Daga at Nirmal Bang Institutional Equities is among those who were expecting some cost moderations; he maintains his positive stance on the stock. Most analysts remain positive on UltraTech stock on expectations of higher cement demand after monsoon and helped by economic recovery. The growing GDP, improved macro outlook and governments policy push should provide further momentum. Analysts at ICICI Securities believe that industry utilisation levels have bottomed out at 69 per cent in FY14 and expect utilisation levels for the industry (excluding South India) to improve to 85 per cent by FY17 offering pricing power to cement makers.

The company is also geared up with increasing capacities to meet the rising demand. During the quarter, UltraTech commissioned a 1.4-mt cement mill in Karnataka and a 25-Mw thermal power plant in Andhra Pradesh. With this, the company’s total cement capacity in India stands at 60.2 mt and power capacity 733 Mw meeting 80 per cent of its power requirement. Although this is positive, some analysts are also getting cautious on capacity expansion. According to analysts at Ambit, UltraTech is achieving growth at the cost of the balance sheet.

However, UltraTech is confident and is looking at the long-term growth opportunities that are coming up. After announcing the acquisition of Jaypee’s capacity, Kumar Mangalam Birla, chairman of UltraTech Cement, said: “With this acquisition of 4.8 mtpa, the company’s current capacity increases to 59 mtpa. With projects underway, it will stand raised to 70 mtpa by 2015. Despite the prevailing muted growth of the industry, we believe the long-term fundamentals and growth prospects remain intact. We will add more capacities in coming years.”

One factor that investors need to watch is the company’s plan to foray overseas.

“Stock fell by 12 per cent in the past month due to concerns largely attributed to the company's plan for overseas acquisitions. The acquisition could potentially derail the visibility of the company's earnings and, hence, would result in de-rating in valuations. We, however, believe that management would be very reasonable while bidding for these assets,” said Kamlesh Bagmar of Prabhudas Lilladher in his post-results note.

On the outlook for UltraTech, Bagmar maintains the company will consistently outperform the sector on growth as well as quality of earnings, led by timely addition and highly efficient operations. Although the current valuations at enterprise value per tonne $156 (FY16 estimated capacity) might sound expensive, its strong volume growth and dominant franchise would drive the expansion in the stock’s valuation to the peak-cycle levels of $170 a tonne.