UltraTech surprises with strong performance

Despite soft demand & realisation, operational efficiency, cost control help exceed profit estimates

For the quarter ended June, UltraTech Cement impressed with its strong operating performance. While not much was expected on the volume and realisations fronts for the industry, UltraTech’s operating profit margins improving 400 basis points year-on-year led by operational efficiencies was a big positive.

Ebitda (earnings before interest, taxes, depreciation and amortisation) of Rs 1,573 crore for Indian operations, up 24 per cent year-on-year (Y-o-Y), was higher than Bloomberg consensus estimate of Rs 1,381 crore. Ebitda per tonne at Rs 1,043 was among the best in three years. It improved Rs 162 Y-o-Y and Rs 123 sequentially, better than Rs 896-971 levels seen in the previous 12 quarters.

Though average domestic realisation was down two per cent Y-o-Y at Rs 4,683 a tonne, costs at Rs 3,643 per tonne declined seven per cent. Power and fuel costs (a fourth of overall costs) declined 16 per cent Y-o-Y, aided by better fuel mix and a three per cent decline in power consumption. Even logistics costs (37 per cent of overall cost) at Rs 1,170 a tonne shrank six per cent. Operational efficiency contributed to a third of total cost savings, the company said.

Although sales volume at 12.57 million tonne (mt) was up six per cent Y-o-Y, the two per cent fall in realisations curtailed overall sales, which at Rs 6,182 crore increased four per cent and came in much lower than Bloomberg estimates of Rs 6,400 crore.

The adoption of new accounting norms (Ind AS) had a positive rub-off on Ebitda (Rs 8 crore) and other income (Rs 103 crore). Consequently, net profit at Rs 775 crore came ahead of estimate of Rs 732 crore.

Consolidated sales (including UAE business) grew four per cent Y-o-Y to Rs 6,538 crore. Ebitda at Rs 1,475 crore was up 21.2 per cent (margin expanded 350 bps to 22.45 per cent), thus net profit grew 29 per cent.

In the long run, UltraTech should do well on the back of improved operational efficiencies and increasing dominance in the industry. However, some costs are rising, and demand as well as realisation growth is expected to be restricted by the monsoon. Also, the acquisition of 21.2-mt cement capacity of JP group will dilute earnings initially. All these could cap the stock’s upside in the near-term.

Analysts’ 12-month consensus target price of Rs 3,550 according to Bloomberg also indicates limited upside for the stock trading at Rs 3,506.

Long-term investors could use corrections to accumulate the stock.