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UltraTech: Not just realisations! - Views on News from Equitymaster

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UltraTech: Not just realisations!
Jan 19, 2007

Performance summary
Ultratech Cement announced outstanding results for 3QFY07. On the back of higher capacity utilization, strong volume growth and strong realisations, the company has reported topline growth of 60% and significant improvement in margins. The operating profits of the company have more than tripled while net margins witnessed expansion of 1390 basis points (13.9%), courtesy the favourable pricing scenario and reduced interest outgo costs.

In view of the amalgamation of Narmada Cements, figures for the three months and nine months ended December 31, 2005 and December 31, 2006 are not strictly comparable.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 7,886 12,605 59.8% 22,220 34,453 55.1%
Expenditure 6,783 8,802 29.8% 18,975 24,360 28.4%
Operating profit (EBITDA) 1,103 3,802 244.8% 3,245 10,093 211.0%
EBITDA margin 14.0% 30.2%   14.6% 29.3%  
Other income 71 167 135.3% 262 42 -84.0%
Interest 228 202 -11.5% 672 665 -96.5%
Depreciation 515 571 10.9% 1,545 1,662 7.5%
Profit before tax/(loss) 431 3,196 641.6% 1,290 7,808 505.4%
Tax 192 1,072 457.4% 450 2,679 495.2%
Profit after tax/(loss) 239 2,125 790.1% 840 5,130 510.8%
Net margin 3.0% 16.9%   3.8% 14.9%  
No of shares (m) 124 124   124 124  
Diluted EPS (Rs)*         51.0  
P/E (times)         22.3  
*trailing twelve month earnings

Company Background
Ultratech (ULT), An Aditya Birla Group Company and a 51% subsidiary of Grasim, has a consolidated capacity of 17 MT, thus making it the second largest cement producer in the country (10% market share). The company has presence in western, eastern and southern regions. It has 5 integrated plants, 5 grinding units, and 4 terminals – three in India and one in Sri Lanka. It exports over 3 MT per annum, which is about 30% of the country's total cement exports. Cement and clinker is exported to countries around the Indian Ocean, Africa, Europe and the Middle East. Its plant in Chhattisgarh and Orissa are the ideal locations for export of cement and clinker to Nepal and Bangladesh. Recently, the company approved the amalgamation of its 98% subsidiary, Narmada Cement, with itself.

What has driven performance in 3QFY07?
Volumes and realisations led growth: The topline growth of 60% achieved by the company is not just on account of better domestic and export realisations but also aided by increased sales volume growth. The company’s cement production and sales during the quarter reported an increase of almost 8% YoY and 15% YoY respectively, almost in line with the industry. The capacity utilization of the company was higher at 103% as compared to 88% for the same period last fiscal. With cement consumption growing faster than demand, prices continued to rise. During the quarter, consumption growth has been faster compared to production mainly due to buoyant construction, infrastructure and housing sectors. This has led to continued firm prices, which have increased by almost 40% to 50% YoY.

Operating leverage kicker: With improved realisations, operating costs as a percentage of sales have come down to 70% from highs of 86% corresponding previous quarter. However, when looked at cost per tonne basis, total operating cost have increased by almost 21% YoY. Cement is a high fixed-cost intensive industry and hence, bulk of the price increase directly adds to the EBDITA, leading to margin expansion. Reduced availability of domestic linkages forced the company to import coal leading to increased power costs. The company tried to restrict power costs by resorting to better consumption norms and change in power sources, however, the power costs per tonne basis increased by almost 17% YoY. Thus, the margins expansion of 1,620 basis points (16.2%) would have been even higher had it not been for the higher power costs. Though costs on a YoY basis have gone up on account of rising input costs, QoQ basis costs per tonne have come down by 2%. We maintain our view that with the planned captive power plants, the company will be in a position to save power costs significantly in the near future. The current 30% operating margins enjoyed by the company are almost in line with the industry.

Cost break up (% of sales) 3QFY06 3QFY07
Consumption of raw materials 5.0% 8.6%
Staff cost 2.7% 2.5%
Power and fuel 29.0% 23.0%
Outward freight 22.8% 19.9%
Other expenditure 12.8% 12.0%
Purchase of finished goods 12.9% 3.9%
Total expenses 85.3% 69.8%

Bottomline leapfrogs: Led by a substantial improvement in operating margins and lower interest costs, Ultratech reported a 790% YoY growth in net profit for the quarter. Improvement in margins has also been brought about by reduction in debt burden, which has led to substantial decrease in interest amount.

Performance over the past few quarters
Particulars 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07
Net sales growth (YoY, %) 18.6% 46.5% 44.8% 58.3% 59.8%
Operating margins (%) 14.1% 18.8% 31.7% 25.0% 30.2%
Net profit margin (%) 3.0% 8.0% 17.9% 12.7% 16.9%

Over the past few quarters, company’s utilistion levels have gone up from 80% to 103%. This was further aided by improved pricing scenario. These factors have helped the company to continuously report a robust topline growth and strong margins. Cost reduction measures such as setting up of a captive power plant, de-bottlenecking and modernisation projects accompanied by a favorable price environment seems to have benefited the company immensely. The benefits of branding initiatives have also kicked in and these have also led to better realisations.

What to expect?
At Rs 1135, the stock is currently trading at a price to earnings multiple of 22.3 times its trailing 12-month earnings. Work on setting up captive power plants at the company's units in Gujarat, Chhatisgarh and Andhra Pradesh is progressing on schedule. These are expected to be commissioned during 2008. Upon commissioning, the power costs will reduce substantially. The enhanced capacity will meet the growing demand in the lucrative markets. While this is positive for the company, we expect cement prices to cool off by the end of 2008. In the medium term, cement realisations will continue to be on higher side, as majority of capacity additions announced by the players will start flowing in 2008. At the current level, we believe growth has already been factored in and hence suggest caution.

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