UltraTech's strong operational performance in Q1 enthuses the street

Better-than-expected realisations and lower costs led to improvement in per-tonne profitability

India’s largest cement maker, UltraTech, impressed the Street with its June quarter operational performance. The stock gained over 7 per cent in trade on Tuesday.  While demand was affected by the lockdown, the company reported a strong beat on the operating profit front, propped up by savings on costs, lower raw material prices, and robust realisations. Though ACC, the other pan-Indian player, also reported a steady performance, UltraTech’s showing was better and was led by superior per-tonne profits and overall improvement.

UltraTech’s reported Ebitda/tonne of Rs 1,416 at the consolidated level was much better than Rs 1,385 in the year-ago quarter and Rs 1,139 in the previous quarter. Analysts had been anticipating per-tonne profits to be maintained at previous quarter levels.

ACC, too, had reported good Ebitda/tonne at Rs 915, but was slightly lower than Rs 922 in the year-ago quarter, though this was appreciably higher than Rs 741 in the March 2020 quarter.

Cement players have benefited from production and pricing discipline shown by the industry. The all-India average cement price per 50 kg bag was up 7.6 per cent sequentially, and 2 per cent year-on-year (YoY).

This meant that UltraTech’s average cement realisation of Rs 4,902 per tonne was up 6.1 per cent sequentially, though it was marginally down on a year-on-year (YoY) basis.

Consolidated operating profit at Rs 2,353 crore — down 24 per cent YoY — came much better than Rs 1,495 crore estimated by analysts.

The company gained from lower petcoke and coal prices, which resulted in an 11 per cent YoY decline in energy costs for domestic operations to Rs 913 a tonne. Even logistics costs declined 5 per cent YoY to Rs 1,116 per tonne, which the company attributed to continued savings on railway freight and synergy related to acquired plants from Century Cement. Lower gypsum and fly-ash prices meant that raw material costs declined 2 per cent YoY to Rs 477 per tonne. 

 

 

Other cost savings were helped by lower packaging costs and cost-saving initiatives. At Rs 577 per tonne, other costs declined 12 per cent YoY. The lower costs helped, even though the effective consolidated volumes at 14.65 million tonnes declined 22 per cent. Consolidated revenue on the back of lower sales volume at Rs 7,634 crore were down 33 per cent YoY, but came much better than analyst estimates. This was mainly led by higher realisations. Even profit before tax at Rs 1,157 crore, though down 39 per cent YoY, was much better than consensus estimates of Rs 585.5 crore. This was despite Rs 157 crore exceptional expenses pertaining to the adverse hearing by the Supreme Court in the company’s claim of capital investment subsidy in Rajasthan.

Given the strong performance in the quarter, analysts remain positive on the stock. Though demand concerns persist because of regional lockdowns and disruptions, analysts say realisations remain supportive. Even Century assets have operated at more than 70 per cent capacity utilisation during May and June and cost reduction of Rs 105 per tonne was achieved sequentially as the acquired asset generated per tonne profitability of more than Rs 900, pointed out analysts. 

The target is to complete 84 per cent brand transition of Century Cement to UltraTech Cement by Q3FY21 and this should help the company further, said Keshav Lahoti at Angel Broking.

The better-than-expected realisation and cost-cutting measures in discretionary and freight expenditures aided the company to report a strong performance, said Binod Modi at Reliance Securities, who has ‘buy’ rating on the stock. Analysts at Emkay Research, too, were positive on the stock and said the increased valuation discount, compared to Shree Cement over the last few months, should reduce, going forward.