Input cost pressure hits UltraTech Cement's operating performance

Last week, India's top cement companies by market value Shree Cement and UltraTech reported strong volume growth, led by revenues for the December 2018 quarter (Q3). As robust demand remains supportive, Shree Cement's total volume (cement plus clinker) growth of 11 per cent year-on-year (YoY) (5 per cent sequentially) was driven by strong sales in eastern India. UltraTech, too, saw volumes surge by 14 per cent YoY (15 per cent sequentially) led by buoyant demand, and high capacity utilisation of the cement plants acquired from JP group.

While both companies reported strong volumes, softer than expected realisation and input cost pressure affected UltraTech's operating performance. 

Consequently, it reported an Ebidta per tonne of Rs 772, compared to Rs 801 in the year-ago quarter and Rs 824 in the previous quarter. Ebitda is earnings before interests, taxes, depreciation and amortisation. While Shree Cement, too, continued to witness cost pressure, better than expected realisation helped it achieve ebitda per tonne (cement division) of Rs 1,067 in Q3 versus Rs 995 in the year-ago quarter, and Rs 1,000 in the previous quarter.

With improving per tonne profitability, Shree Cement scored over UltraTech. However, unlike UltraTech, a pan-India player, Shree is largely present in north and east, and, of late, in south India.

Going ahead, the volume outlook remains strong for both the companies, led by rising capacities. Shree Cement saw full commissioning of its Karnataka-based integrated cement plant, with three million tonnes per annum (MTPA) clinker capacity coming on-stream (grinding units operational since June 2018). UltraTech, too, completed the acquisition of Binani Cement's assets. Both companies are expected to benefit as the new capacities come at an appropriate time. However, for UltraTech, acquisitions are adding to near-term profitability concerns, observed analysts.

Binod Modi at Reliance Securities believes that ambiguity pertaining to profitability of Binani's assets, absence of pricing recovery, skewed return ratios, and pricey valuations may be a key drag for UltraTech's stock performance in the near-to-medium term.

Analysts at Elara Capital too, after factoring in Binani Cement and Century Textiles' acquisitions, have lowered their FY20 EPS estimates for UltraTech by 23 per cent given higher depreciation and interest costs. For Shree Cement, analysts are positive, given improving margins and gains from turnaround in its power business.