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UltraTech: Lower prices pressurise margins
Jan 18, 2010

Performance summary
  • Topline grows by merely 1.3% YoY. The growth has largely been backed by double digit growth in volumes.
  • Operating profits decline by 10.9% YoY as costs continue to grow at a faster rate as compared to sales.
  • Poor show at the operating level boils down to the bottomline. Net declines by 17.8% YoY.
  • The board of the company has approved the amalgamation of Samruddhi Cement Ltd and ahs also approved share exchange ratio of 4 equity shares of face value of Rs 10 each for every 7 shares held in Samruddhi Cement of face value of Rs 5 each.


Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 16,308 16,518 1.3% 45,230 51,405 13.7%
Expenditure 12,000 12,682 5.7% 33,496 35,702 6.6%
Operating profit (EBITDA) 4,308 3,836 -10.9% 11,734 15,704 33.8%
EBITDA margin 26.4% 23.2%   25.9% 30.5%  
Other income 204 300 46.8% 836 950 13.6%
Interest 359 262 -27.0% 915 891 -2.7%
Depreciation 805 985 22.4% 2,324 2,888 24.2%
Profit before tax/(loss) 3,348 2,888 -13.7% 9,330 12,875 38.0%
Tax 964 928 -3.7% 2,567 4,228 64.7%
Profit after tax/(loss) 2,384 1,960 -17.8% 6,763 8,647 27.9%
Net margin 14.6% 11.9%   15.0% 16.8%  
No of shares (m)       124.5 124.5  
Diluted EPS (Rs)*         93.6  
P/E (times)         10.9  
*trailing twelve month earnings

What has driven performance in 3QFY10?
  • UltraTech Cement reported merely 1.3% YoY growth in topline during the 3QFY10. Despite double digit growth in volumes (production up 10.6% YoY, domestic volumes up by 11.9% YoY), net sales reported subdued growth. This is on account of lower cement prices. The slowdown in demand growth in southern markets that account for 30% of the company’s sales along with commissioning of new capacities within the region led to fall in cement prices. Additionally, drop in clinker export realisation also impacted topline growth. The meltdown in construction activity led to reduction in off-take in the Middle East. Thus, while domestic volumes were robust, falling realisations arrested growth in net sales.

  • The impact of lower cement prices is also visible at the operating level. The operating profits declined by 10.9% YoY resulting into 3.2% contraction in EBITDA margins.

  • The overall cost of operation reported increase of 5.7% YoY. The company has been able to contain growth in cost of operation on account of commissioning of thermal power plants. The variable cost declined by 8% YoY mainly on account of pared down energy costs.

  • Despite higher other income and lower finance charges, growth at the net lower has come in lower. Net profits declined by 17.8% YoY. This is primarily a result of poor show at the operating level.

What to expect?
The demand for the commodity is expected to grow at the rate of 10% backed by government’s initiatives to boost rural, housing and infrastructural development. However, upcoming capacities have started exerting pressure on realisations. The planned new capacities are in the various stages of commissioning, which upon becoming operational will certainly result in downward pressure on margins. The industry is likely to witness excess capacity scenario over the next 18 to 24 months. Thus, going forward, those companies that are able to control costs better will have the competitive advantage. UltraTech has been taking steps in this direction, benefits of which have been reflected in this quarter’s performance.

The company has performed almost in line with our estimates as far as the topline is considered. At the net level, the company is likely to end in line with our estimates considering the sector outlook and the 3QFY10 performance.

At the current price of Rs 1,016, it is trading at an EV/tonne of over Rs 6,600 based on our FY12 estimates. On an asset based valuation method, the stock is trading at the fag end of our valuation band. Thus, we maintain our view on the stock.

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