UltraTech: Recovery hinges on demand

While the company is progressing well in terms of capacity expansion, cement demand revival is crucial for benefits to accrue

With UltraTech Cement reporting a lower-than-expected decline in net profit for the June 2013 quarter, its stock inched up a per cent to Rs 1,880 on Monday, compared to a 0.8 per cent fall in the Sensex. Though on the back of weak demand and realisations, the company saw profits declining 13.5 per cent over the June 2012 quarter and 7.3 per cent over the March 2013 quarter, the reported profit at Rs 672 crore, aided by a jump in other income, was higher than the consensus estimate of Rs 627 crore for the quarter. In fact, its operational performance was impacted due to lower volumes and realisation.

Cement demand recovery holds the key to prospects. Since not much is expected during the September 2013 quarter, when construction activities tend to slow due to monsoon, the stock is likely to lag in the near term. However, most analysts see a recovery in the second half of FY14, and, hence, expect action to pick up. UltraTech, ramping up its capacity, is likely to be the biggest beneficiary of any demand revival as most peers lag in terms of capacity expansions. Thus, analysts prefer UltraTech over other cement players and advice that investors with a medium-term investment horizon can accumulate the stock.

Profitability under pressure
The quarter saw company's domestic cement volumes at 9.88 million tonnes (mt), slightly lower than 9.94 mt in June 2012 quarter. Including exports, the total cement volumes were 10.3 mt, down two per cent year-on-year, say analysts. Weak realisations added to the woes and impacted operating performance.

The benefits of lower coal costs were negated by rupee depreciation, while the freight costs remained high due to higher diesel and railway freight charges. Thus, the Ebitda margins at 21.2 per cent came much lower than 25.5 per cent in the year-ago quarter and 22.3 per cent during the March 2013 quarter. Ebitda a tonne came at Rs 1,016, lower by Rs 224 compared with the year-ago period and by Rs 47 over the March 2013 quarter, according to Religare.

The rise in other income and lower-than-expected tax rate provided some respite, in the absence of which profits could have fallen further.

Realisations down, too
The trend of strengthening of cement prices since the December 2010 quarter was broken in the June 2013 quarter. After remaining weak in March 2013, the cement prices further weakened in April (at Rs 280 a bag the prices were three per cent lower than the Q4FY13 average). Though some recovery was seen in May end, it was short-lived due to the early onset of monsoon. The average cement prices during the quarter at Rs 288 a bag were 2.3 per cent lower year-on-year with the south worst-affected (prices down 4.5 per cent) followed by the east (down 3.6 per cent), according to Emkay.

Realisations are unlikely to see respite during the September 2013 quarter as monsoon will continue to impact demand and, in turn, cement prices. Despatches should improve in H2FY14 (post-monsoon) as construction activities pick up, which will also help manufacturers raise prices, says Sanjeev Kumar Singh at Centrum Broking. UltraTech remains his top pick among large players.

Expansions to up volumes
Capacity expansion continue to progress well. While the company had added 2.5 mt capacity in June quarter, additional capacities in Chattisgarh and Karnataka are likely to come in the September quarter. The company has commissioned 3.3 mt clinker capacities in Karnataka. While the annual capacities are 54.5 mt, they are likely to touch 64.5 mt by 2015.

Thus, the company is moving ahead of peers in terms of expansion and should gain the most from any recovery in demand. It remains the top pick of most analysts. Ravi Sodah at Elara capital says at the current price, the stock is trading at an enterprise value a tonne of $146 on FY15 capacity. He says the company will grow faster than its peers due to timely capacity additions.