Operational efficiencies drive UltraTech's profits

Cement demand, realisations weak; lower input, energy costs boost margins

UltraTech continued its strong show in terms of operational performance in the quarter ended December 2015 (Q3), despite weak cement demand and realisations in the country. Average prices in all regions except south India fell on year-on-year (y-o-y) and sequential basis. However, operational efficiencies, lower input costs, increased pet coke usage (which is cheaper than coal) together helped post Ebitda (earnings before interest, tax, depreciation, and amortisation) per tonne of Rs 900 as compared to Rs 835 in the September quarter and Rs 749 in the year-ago period.

Thus, standalone (domestic operations) net sales at Rs 5,747 crore (up 4.7 per cent y-o-y) may have come slightly below the Bloomberg estimate of Rs 5,842 crore, but operating Ebitda at Rs 1,122 crore was better than the estimate of Rs 1,085 crore, and the net profit of Rs 509 crore was better than the estimated Rs 450 crore. Ebitda margins expanded about 280 basis points.

Also, UltraTech, which continues to add capacities both organically and inorganically, is now reaping benefits and reported volume growth despite weak demand. Grey cement and white cement & putty sales at 11.26 million tonnes (mt) and 338,000 tonnes came higher than 10.51 mt and 317,000 , respectively, during the year-ago period (combined increase of seven per cent).

While improvement in demand and realisations are key, the company’s strong operating performance instils confidence. Cement prices in January have improved in most regions barring the north. Analysts feel prices may have bottomed in the north too and prices would recover soon. Thus, the March 2016 quarter is likely to be comparatively better sequentially for cement players in terms of realisations with softening input costs supporting operational performance. Further, analysts expect a recovery in demand in FY17, led by infrastructure projects.

UltraTech remains a preferred pick. Binod Modi at Reliance Securities says, “UltraTech will continue to report healthy growth with the expected pickup in demand scenario and improved operating synergies." Modi maintains a positive stance on the stock.

Analysts like Ravi Shenoy, vice-president – Mid-caps, Motilal Oswal Securities, also expect the company to participate further in industry consolidation and believe the recent price correction factors in participants’ concerns that acquisitions could raise leverage along with market share.

Good results saw the stock close at Rs 2,625.2, down 0.73 per cent on a day when the Sensex lost 1.7 per cent.