UltraTech: Operating performance disappoints

Better cement demand, turnaround of acquired assets should help the firm

UltraTech’s December 2017 quarter (Q3) performance bore the brunt of rising costs, lower realisations and integration of cement capacities acquired from Jaypee group, thereby leading to disappointments on the profitability front.
 
Even though cement sales volumes at 15.1 million tonnes (mt), up 37 per cent year-on-year (y-o-y) and 22 per cent sequentially (helped by market share gains and acquisition of Jaypee assets), look impressive and drove revenues by 33.3 per cent y-o-y, average realisations were short of the Street’s expectations.
 
Analysts peg average realisations at Rs 4,161 a tonne, up just a per cent y-o-y, and lower by 5.1 per cent sequentially, saying these are unable to offset the rising costs.
 
Pet coke prices have increased by about 33 per cent y-o-y to $104 a tonne. Import duty on this crucial input has been hiked to 10 per cent from 2.5 per cent. The ban on pet coke use in some states also impacted UltraTech’s profitability. While cost-control initiatives lowered the impact of fuel price increase by about four per cent, these were not adequate to offset the rise in per tonne energy costs (28 per cent of overall expenses).
 
At Rs 949, energy costs were up 21 per cent y-o-y and 2.6 per cent sequentially. Logistic costs per tonne, which are a third of overall expenses, at Rs 1,127, too, were up six per cent y-o-y and three per cent sequentially. A 17 per cent y-o-y increase in operating profit (Ebitda or earnings before interest, tax, depreciation and amortisation) to Rs 14.94 billion was supported by a reversal of District Mineral Foundation provisions of Rs 1.04 billion. Yet, margins at 19 per cent were lower than 22 per cent in the year-ago quarter. Per tonne Ebitda at about Rs 717 thus disappointed, given the year-ago figure of Rs 949 and Rs 957 in Q2.
 
The UltraTech stock fell three per cent on Thursday to close at Rs 4,408.55. But, the seasonally strong March and June quarters for cement demand and an expected increase in realisations should help profitability. Cement demand is expected to improve on the government’s spending on infrastructure.
 
Analysts such as Binod Modi at Reliance Securities say, “We opine UltraTech’s operational performance to improve from the current quarter owing to a recent spike in realisations and maintain our positive view on the company.”
 
A faster-than-expected turnaround of the 21.2 mt capacities acquired from Jaypee group also provides a silver lining. The utilisation of these capacities touched 60 per cent by the end of Q3 from a low of 18 per cent at the time of acquisition, and was also higher than analysts’ expectations of 40-45 per cent. Since Ebitda per tonne of these capacities is half of UltraTech’s roughly Rs 900-1000, it weighed on the overall profitability in Q3. However, UltraTech expects these units to achieve cash breakeven by April-June 2018. Coupled with improved synergies, expect earnings contribution from the Jaypee units to improve from here on.