Weak volumes take sheen off UltraTech Cement's Q1 show; stock falls over 2%

Better realisations though helped post strong profitability and helped company beat analysts' expectations

Subdued sales volume reported by UltraTech Cement impacted Street sentiment with the stock slipping 2.57 per cent on the BSE on Thursday, a day that saw the best rally by leading indices in many months. Sales volume of India’s largest cement maker grew by a mere 2 per cent year-on-year to 17.86 million tonnes (MT) in the June quarter (Q1). Considering the organic and inorganic capacity expansions undertaken by UltraTech, the Street was expecting higher volume growth despite elections impacting cement demand during the seasonally strong June quarter. For instance, HDFC Securities had pegged UltraTech’s sales volume at 18.5 MT during Q1.

On the positive side, strong realisations helped drive the company’s revenues and operating performance. Per tonne cement realisation witnessed a sharp improvement of 13.5 per cent year-on-year and 12 per cent sequentially to Rs 5,037, as per analysts calculations. ACC and Ambuja Cements had seen realisations improve up to 9 per cent year-on-year in June quarter. UltraTech’s pan India reach with a more diversified geographical presence helped it score on this front. Notably, UltraTech scored over peers on volumes too. ACC, the company’s pan India peer, had reported flat volumes, while Ambuja Cements (parent of ACC), a regional player largely focused on West and North-West regions, saw volumes decline by 9 per cent during the quarter.

As a result, UltraTech’s standalone sales grew 14.7 per cent year-on-year to Rs 9,795 crore and were a shade above consensus analysts’ estimates of about Rs 9,730 crore as indicated by Bloomberg. 

Better realisations also drove operating performance with the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) growing 57 per cent year-on year to  Rs 2,550 crore. The per tonne profitability came at Rs 1,428, much better than ACC and Ambuja Cements’, which reported per tonne EBIDTA of Rs 934 and Rs 1,086, respectively. 

Analysts say that higher realisation growth with soft volumes validates channel check findings that UltraTech offered relatively less incentives or discounts to dealers compared to peers during the quarter at the cost of volume. Consequently, while volumes suffered it was able to report superior profitability.

The net profit at Rs 1,199 crore thus was visibly ahead of analysts’ estimate of Rs 1,103 crore. 

Meanwhile, the company continues moving ahead on integration of the acquired capacities to drive future growth. With major overhauling of the plant and completion of quality upgradation, UltraTech Nathdwara Cement (earlier a Binani Cement facility) has been fully integrated with UltraTech’s systems and processes. The company highlighted it has achieved break-even at the profit before tax level within two quarters of its acquisition.

The 21.2 MT per annum of cement capacities acquired from Jaiprakash Associates (Jaypee) in June 2017 are also operating in line with the existing plants of UltraTech. The management highlighted that the acquisition has now become earnings accretive. However, the Bara Grinding Unit associated to these capacities is scheduled for commissioning during Q3-FY20 due to some technical delays.

On the whole, analysts remain positive on the company despite the lower than expected volumes in Q1. Binod Modi at Reliance Securities says that while operating expenses and volumes were key negatives, a substantial improvement in realisation drove overall operating performance. Jaypee Assets turning earnings accretive in the quarter was also a key positive and Modi maintains his positive recommendation on the stock. Even analysts at IDBI Capital maintain their positive rating post strong set of numbers albeit a nominal volume hit, while those at Sharekhan see UltraTech as their preferred pick in the sector with its timely expansions and increasing profitability of acquired units in the shortest possible time.

The cement demand scenario, however continues to remain soft in the ongoing quarter. With the monsoon season under progress and construction activities getting impacted, it is also weighing on realisations. Though analysts expect a revival in rural cement consumption and government’s spending on infrastructure and housing projects to push up demand post monsoons thereby driving cement volumes, investors need to be watchful on volume trends and realisation improvement before taking exposure to cement stocks.