Subdued demand taking a toll on UltraTech Cement

No sign of demand revival, expectations of govt's pre-poll spending picking up may not materialise, say analysts

Unlike the usual trend that follows the monsoon season, the December 2013 quarter was different, wherein cement demand and, consequently, realisations were muted. The impact of lower demand and realisations was visible in UltraTech’s December quarter performance, lower than Street expectations.

Weak volumes, soft realisations and cost pressures were largely responsible for the performance. Grey cement and clinker volumes at 9.7 million tonnes (mt) were lower than 9.94 mt in the year-ago quarter. Average per bag cement price improved, albeit marginally, by two per cent year-on-year, or y-o-y, (one per cent sequentially).

Hence, net sales at Rs 4,786 crore were down 1.5 per cent, y-o-y, and came in lower than expectation of Rs 4,835 crore.

Cost pressure continued, given the higher diesel and freight costs. UltraTech’s operating margins fell almost 500 basis points, y-o-y, to 16.5 per cent, and earnings before interest, depreciation, taxes and amortisation (Ebitda) at Rs 796 crore was lower than expectation of Rs 814 crore. As a result, net profit at Rs 370 crore was down 38.5 per cent y-o-y, and lower than the estimated Rs 383 crore. Moving forward, there is no sign of a revival in cement demand.

While there were expectations that demand would look up due to government’s pre-election spending, the same looks difficult now given the cost-cutting measures being undertaken by the government. Rikesh Parikh at Motilal Oswal Securities observes demand failed to recoup in a seasonally stronger quarter and volume growth for the sector has been subdued on the back of slower demand from infrastructure. “Adverse impact continues in housing and infrastructure verticals, coupled with sand mining issues. Hence, we maintain neutral view on stock,” he says.

According to Mihir Jhaveri of Religare Capital Markets, cold conditions in northern India, too, are affecting demand growth. He, however, adds that earnings-cut cycle for the cement sector still continues and upside for the stock is limited. He is tweaking his target price for the stock.

India Ratings & Research on Monday said it has maintained a stable to negative outlook for the sector for FY15 with limited downside risk for integrated players. Infrastructure and construction are likely to pull down demand in CY2014, though rural demand will provide some cushion, it said. UltraTech’s stock closed with 0.3 per cent gains at Rs 1,721 on Monday, versus a 0.7 per cent rise in the Sensex. This can be partly attributed to its correction of 13 per cent from closing highs in October 2013. Analysts believe the current price factors in the demand situation could bottom out, and hence, the downside is limited. However, since upside trigger is missing, it may remain a laggard. After the results, majority of analysts have a ‘neutral’ rating.