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UltraTech Cem: Profits tank 38% in 3QFY14 - Views on News from Equitymaster

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UltraTech Cem: Profits tank 38% in 3QFY14
Jan 20, 2014

UltraTech Cement has announced its standalone financial results for the third quarter of the financial year 2013-14 (3QFY14). During the quarter, the company's sales and profits declined by 1.5% YoY and 38.5% YoY respectively. Here is our analysis of the results:

Performance summary
  • On a standalone basis, sales decline by 1.5% YoY during the quarter on account of flat volume sales and lower cement prices.
  • Operating profits decline by 25.4% YoY as operating margins decline from 21.1% in 3QFY13 to 16% in 3QFY14.
  • Other income decreases by 17.8% YoY during the quarter.
  • Depreciation charges and interest expenses increase by 10.7% YoY and 73.6% YoY, respectively.
  • Net profits decline by 38.5% YoY during the quarter; net margins decline from 12.4% in 3QFY13 to 7.7% in 3QFY14.

Standalone financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 48,574 47,864 -1.5% 146,287 142,460 -2.6%
Expenditure 38,331 40,222 4.9% 113,095 117,731 4.1%
Operating profit (EBDITA) 10,243 7,642 -25.4% 33,192 24,730 -25.5%
Operating profit margin (%) 21.1% 16.0%   22.7% 17.4%  
Other income 1,211 996 -17.8% 2,787 3,452 23.9%
Depreciation 2,388 2,645 10.7% 6,994 7,738 10.6%
Interest 521 905 73.6% 1,619 2,452 51.5%
Profit before tax 8,545 5,088 -40.5% 27,366 17,991 -34.3%
Tax 2,537 1,391 -45.2% 8,074 4,927 -39.0%
Effective tax rate 29.7% 27.3%   29.5% 27.4%  
Profit after tax 6,008 3,698 -38.5% 19,292 13,065 -32.3%
Net profit margin (%) 12.4% 7.7%   13.2% 9.2%  
No. of shares (m)       274.2 274.2  
Diluted earnings per share (Rs)*         74.1  
P/E ratio (x)*         23.1  
*trailing twelve-month earnings

What has driven performance in 3QFY14?
  • UltraTech Cement reported 1.5% YoY decline in net sales for the quarter ended December 2013. In volumes terms, domestic cement and clinker sales of grey cement remained flat at 9.7 million tonnes during the quarter compared to the corresponding quarter of the previous financial year. The overall slowdown in the economy impacted cement demand growth. Sales of white cement and wall care putty increased by 10.3% YoY to 2.89 lakh metric tonnes.

  • Operating profits decreased by 25.4% YoY owing to subdued cement price realisation. On the cost front, all major cost heads, barring power and fuel expenses witnessed inflationary pressures. While power and fuel expenses (20.9% of net sales) declined by 1.3% YoY (as a percentage of net sales), raw material costs (17.1% of net sales), freight and forwarding expenses (23.4% of net sales) and other expenses (17.5% of net sales) increased by 3.4% YoY, 1.6% YoY and 1.4% YoY (as a percentage of net sales). The company's operating margins declined from 21.1% in 3QFY13 to 16% in 3QFY14.

    Operating cost break-up
    (Rs m) 3QFY13 3QFY14 Change
    Cost of raw materials 7,037 7,198  
    Change in inventory (1,001) 190  
    Purchases of stock-in-trade 603 781  
    Total Raw Materials 6,639 8,169 23.0%
    % of net sales 13.7% 17.1%  
    Employee expenses 2,444 2,443 0.0%
    % of net sales 5.0% 5.1%  
    Power & fuel 10,827 10,023 -7.4%
    % of net sales 22.3% 20.9%  
    Freight & forwarding expenses 10,587 11,193 5.7%
    % of net sales 21.8% 23.4%  
    Other expenses 7,835 8,394 7.1%
    % of net sales 16.1% 17.5%  
    Total operating expenses 38,331 40,222 4.9%
    % of net sales 78.9% 84.0%  

  • The other income (including other operating income) dropped by 17.8% YoY during the quarter. Depreciation charges and interest costs increased by 10.7% YoY and 73.6% YoY respectively.

  • At the bottomline level, net profits decreased by 38.5% YoY. Net profit margins declined from 12.4% in 3QFY13 to 7.7% in 3QFY14.

  • The Company commissioned a 25 megawatt (MW) thermal power plant at Andhra Pradesh Cement Works.
What to expect?
UltraTech Cement's cement sales remained muted owing to the slowdown in the housing and infrastructure industry. There was a significant drop in margins on account of lower cement realisations and increasing cost pressures.

Given the sluggishness in the economy and persistent inflationary pressures, we expect growth and profitability to be subdued during the current financial year. At the current prices of Rs 1,720 the stock is trading at 23.2 times its trailing twelve month standalone earnings. We believe that at the current level, the stock is trading above our valuation band. As such, we reiterate our 'Sell' view on the stock from a 2-3 year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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