UltraTech: Input costs pinch

These are not easy times for cement makers; demand has been reasonably good, high input costs continue to hurt profits. That’s the story at Ultra Tech Cement which posted an increase in net sales of 18 per cent at Rs 1631 crore in the December 2008 quarter. However, the net profit came off by 15 per cent to Rs 238 crore because operating expenses surged, especially costs for fuel, resulting in a dip in operating margins of over 700 basis points y-o-y to 26.4 per cent. That was of course better that the 25 .7 per cent posted in the first six months to September 2008.

Fuel prices have started softening but demand could flag given that the realty space, which consumes around 50 per cent of the country’s cement, isn’t buying too much. Volumes have been strong both in November and December but, as the Ultra Tech management points out, that could change with an estimated 100 million tonnes of capacity coming on stream, in phases, over the next couple of years.

By March 2009, Ultra Tech itself will have added around five million tones taking its total capacity of 23 million tonnes. JP Morgan reckons that the strong growth over the past couple of months will not sustain and expects volumes will weaken. The addition to capacity couldn’t have been worse –times coinciding as it does with a slowdown in the economy. And that, the management concedes, could crimp both sales and margins in 2009-10.

JP Morgan believes pricing pressures have increased in select clusters where new capacity is coming up and believes there could be a cut in prices of anywhere between 5-8 per cent over the next six to nine months before some discipline is seen.