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Ultratech Cement: Pricing power persists - Views on News from Equitymaster

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Ultratech Cement: Pricing power persists

Jan 21, 2008

Performance summary
  • Aided by better realisations, topline grew 10% YoY and 13% YoY during 3QFY08 and 9mFY08 respectively.

  • Despite increase in cost of operation owing to escalating coal prices, the company was able to contain overall cost of production on account of improved physical performance.

  • EBITDA margins expanded by 3.7% in 3QFY08 owing to cost control measures (the cost of operation increased by merely 4% YoY) apart from favorable pricing scenario.

  • Good show at operating level coupled with reduced interest cost and higher other income led to 32% YoY growth in net profits during the 3QFY08 and nine month ended December 2007.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 12,605 13,821 9.7% 34,453 39,081 13.4%
Expenditure 8,802 9,137 3.8% 24,360 26,765 9.9%
Operating profit (EBITDA) 3,802 4,685 23.2% 10,093 12,316 22.0%
EBITDA margin 30.2% 33.9%   29.3% 31.5%  
Other income 167 201 20.7% 420 728 73.5%
Interest 202 174 -13.5% 665 564 -15.3%
Depreciation 571 583 2.1% 1,662 1,722 3.6%
Profit before tax/(loss) 3,196 4,129 29.2% 8,186 10,758 31.4%
Tax 1,072 1,334 24.4% 2,679 3,511 31.1%
Profit after tax/(loss) 2,125 2,795 31.5% 5,507 7,247 31.6%
Net margin 16.9% 20.2%   16.0% 18.5%  
No of shares (m)       124 124  
Diluted EPS (Rs)*         76.8  
P/E (times)         11.3  
*trailing twelve month earnings

What has driven performance in 3QFY08?
  • Consumption growth is in line or has exceeded production growth in last couple of quarters. Ultratech being a major player and an exporter of cement has been and is witnessing benefits of favourable scenario. Though during the quarter, the company’s volumes reported stagnant growth, it achieved 10% YoY growth in topline owing to better realisations.

  • The company’s capacity utilisation stood at 102% during the quarter under review. As the company is operating at optimum 100% utilisation levels and as there is hardly any scope to increase cement production, it has lined up huge capex plans to the tune of Rs 33 bn to increase cement production capacity by almost 4.9 MTPA, setting up of ready mix concrete unit of 2.9 million cubic metres and 225 MW of captive thermal power plants to meet 80% of its power requirements.

    Cost break up
    (% of sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Consumption of raw materials 8.5% 7.6% 7.9% 8.3%
    Staff cost 2.5% 3.2% 2.6% 3.1%
    Power and fuel 23.0% 23.4% 23.9% 22.6%
    Outward freight 17.1% 17.1% 17.7% 17.5%
    Other expenditure 18.8% 14.8% 18.6% 16.9%

  • The operating profit grew by 23% YoY backed by cost control measures and faster growth in topline compared to operating costs. The volume growth during the quarter was almost stagnant. Still, the company witnessed 3.7% expansion in EBITDA margins on account of firm realisations and improved physical performance.

  • The company could restrict growth in cost of production to 4% (even on cost per tonne basis) owing to improved production efficiencies.

  • The coal prices are scaling northwards and considering the demand for the key input by the core sectors and its availability, its only expected to witness further upward movement.

  • Net margins have expanded by 3.3% a tad lower compared to operating margins. With the improvement in cash flows owing to favourable scenario, the company has reduced its debt burden, which is reflected in reduced finance charges. During the quarter, depreciation charges witnessed marginal expansion, however, going forward, the same are expected to increase sizeably owing to capital expenditure planned by the company.

What to expect?
On the operational front, the company has historically been heavily dependant on furnace oil for its operations and hence, in order to reduce the same, it is looking to set up captive power plants based on coal feedstock. Further the company has lined up huge capex plans (mentioned above) to maintain its market share and cater to the increasing demand for the commodity.

The industry is expected to witness commencement of 90MT capacity over the next three years as per the announcements and this may put downward pressure on prices. Thus, moving on from here, the companies that are able to control costs better will have competitive advantage.

The stock at the current price of Rs 870 is trading at an EV/tonne of over US$ 100 based on our FY10 estimates. Considering the current fair valuations based on replacement costs and the above-mentioned factors, we suggest investors’ to practise caution.

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