Volume growth, realisations and cost controls help UltraTech beat estimates

Despite being twice the size of ACC, UltraTech's domestic sales volume at 18.52 million tonnes (MT) grew 20 per cent year-on-year

UltraTech Cement on Wednesday reported consolidated net profit of Rs 1,235 crore in the July-September quarter, more than double of Rs 578 crore reported in the corresponding period last year.

Consolidated profit after exceptional items, but before tax, of Rs 1,464.98 crore in the quarter was up 65 per cent from the same period last year as revenues increased and expenses declined.

The Aditya Birla Group company reported a consolidated top line of Rs 10,231 crore in the quarter gone by, up nearly 8 per cent from the corresponding period last year on demand pick up. 

Without the exceptional item of Rs 336 crore, largely an impairment provision made by the company on a loan receivable, the company’s consolidated profit before exceptional item and tax stood at Rs 1,800.55 crore. 

UltraTech’s performance for the quarter ending September 2020 (Q2) beat Street estimates, driven by higher realisation, as has been the case with its pan-Indian peer, ACC. However, UltraTech also managed to post strong year-on-year (YoY) volume growth beating ACC’s one per cent increase in volumes by a big margin.

At the consolidated level, revenues, EBITDA and net profit were at Rs 10,231 crore, Rs 2,820 crore and Rs 1,235 crore for UltraTech. These were significantly ahead of consensus estimates of Rs 9,140 crore, Rs 2,043 crore and Rs 835 crore, respectively.

Despite being more than twice the size of ACC, UltraTech’s domestic sales volume at 18.52 million tonnes (MT) grew 20 per cent YoY. Although it was helped by acquisition of Century’s cement capacities, even on a like-to-like basis volumes grew by a strong 8 per cent YoY. 

This, after declining volumes in the past two quarters (impacted by lockdown), is encouraging. With growing demand, analysts expect strong growth in the coming quarters.

“There was a strong demand pick up in the rural market along with increased government spending in infrastructure segment, which helped volumes. We saw a lot of road projects in execution during the quarter that lent support to the top line,” said Atul Daga, executive director and chief financial officer (CFO) at Ultratech Cement, in a post earnings call.

UltraTech also saw average cement realisation improve 3 per cent YoY to Rs 4,874 a tonne. Even though September quarter is weak with monsoon impacting construction activities and realisation declining 2.6 per cent sequentially, it was much better than analysts’ expectations.

Emkay Global had expected a slight decline in realisations on YoY basis, and had pegged volume growth of 6 per cent.

With robust volume and healthy realisations, UltraTech’s revenue at Rs 9,861 crore, grew 8 per cent YoY for domestic operations. ACC had reported flat revenue on YoY basis.

UltraTech, like ACC, also did well on the operations front as it saw per tonne costs decline. Production cost declined six per cent YoY. Though logistic costs (a third of overall costs) were up a per cent YoY to Rs 1,140 a tonne, savings on sourcing realignment, geography mix optimisation and improved clinker-to-cement conversion ratio helped. 

Energy costs (27 per cent of overall) also declined 9 per cent YoY to Rs 937 a tonne despite rise in pet-coke prices. These also took care of the 3 per cent rise in raw material expenses (15 per cent of costs).

Overall, the company reported a strong growth of 35 per cent YoY in operating profit from Indian operations. 

EBITDA per tonne at Rs 1,343 was much better than Rs 1,026 a year ago, though slightly lower than Rs 1,416 in Q1FY21. However, this was much better than ACC’s EBITDA per tonne of Rs 918 for the recently concluded quarter, Rs 747 in the year-ago period and Rs 922 in the April-June 2020 quarter.

The strong per tonne profitability being reported by both cement manufacturers bodes well. However, with costs rising on a sequential basis, it may prove to be a concern. Analysts, however, remain positive on profitability, moving forward, looking at improving realisations. UltraTech is also expected to see profitability improvement as it turns around Century’s cement assets. The start of WHRS (waste heat recovery system) at the Madhya Pradesh plants of Century will reduce energy costs. Also, while pet-coke prices are rising, the company plans to increase use of coal too.

“Though the September quarter is seasonally weak and this time we were hit by the pandemic, our profitability was at record high as we were also able to lower cost overheads by 14 per cent in the period under review,” Daga said.

During the quarter, a tight working capital arrangement led to strong cash management, which resulted in working capital requirement reducing by Rs 1,000 crore, Daga added.

“Also, improved efficiency parameters by way of better inventory management and renegotiations with suppliers, among others, helped release close to Rs 200 crore during the quarter. During April-September, efforts in efficiency improvement led to savings of about Rs 700 crore,” he said.

Overall, the company’s Q2 performance impressed analysts and investors. The stock closed 1.8 per cent higher on Wednesday.

Better realisation and resilient operating expenditure helped UltraTech report strong performance and operating cash flow (OCF) was also healthy, said Binod Modi of Reliance Securities who expects earnings estimates to be upgraded.

Analysts also say that considering the Rs 5,100 crore OCF generated in the first half of FY21 against Rs 3,600 crore in the year-ago period, UltraTech can easily achieve targeted net debt to EBITDA of 1x by end of FY21, from 1.22x at the end of September 2020. This is way lower compared to 3.34x in December 2018.