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UltraTech: Slack growth in cement demand
Jan 22, 2013

UltraTech Cement has announced its standalone financial results for the quarter ended December 2012. During the quarter, the company reported a rise of 6.4% YoY in net sales and 2.6% YoY decline in net profits. Here is our analysis of the results:

Performance summary
  • On a standalone basis, sales grow by 6.4% YoY during the quarter as volume sales remain almost flat.
  • Operating profits grow in line with topline growth, operating margins remain unchanged.
  • While other income decreases by 25.5% YoY, interest costs shoot up by 85.3% YoY.
  • Net profits decline marginally during the quarter; net margins decline from 13.5% in 3QFY13 to 12.4% in 3QFY12.

Standalone financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Sales 45,654 48,574 6.4% 128,246 146,287 14.1%
Expenditure 36,092 38,331 6.2% 100,974 113,095 12.0%
Operating profit (EBDITA) 9,563 10,243 7.1% 27,273 33,192 21.7%
Operating profit margin (%) 20.9% 21.1%   21.3% 22.7%  
Other income 1,626 1,212 -25.5% 3,280 2,787 -15.0%
Depreciation 2,236 2,308 3.2% 6,694 6,994 4.5%
Interest 281 521 85.3% 1,653 1,619 -2.1%
Profit before tax 8,672 8,545 -1.5% 22,206 27,366 23.2%
Tax 2,503 2,537 1.4% 6,417 8,074 25.8%
Profit after tax/(loss) 6,169 6,008 -2.6% 15,789 19,292 22.2%
Net profit margin (%) 13.5% 12.4%   12.3% 13.2%  
No. of shares (m)       274.1 274.2  
Diluted earnings per share (Rs)*         102.0  
P/E ratio (x)*         18.9  
*trailing twelve-month earnings

What has driven performance in 3QFY13?
  • UltraTech Cement reported 6.4% YoY rise in net sales for the quarter ended December 2012. In volumes terms, domestic sales of grey cement remained almost flat at 9.62 m tonnes against 9.61 m tonnes in corresponding quarter of the previous financial year. While cement realisations grew on a year-on-year basis, there was a drop if compared with the immediately preceding quarter.

  • Operating profits increased by 7.1% YoY, almost in sync with the topline growth. Power and fuel costs (22.3% of net sales during the quarter) decreased by 2.3% YoY (as a percentage of sales) on account of softening international coal prices. However, the decrease would have been greater if not for the rupee weakness. On the other hand, freight and forwarding expenses (21.8% of net sales) and other expenses (16.1% of net sales) increased by 1.1% YoY and 1% YoY (as a percentage of net sales). Freight expenses were higher on account of increase in railway freight and diesel prices. The company's operating margins improved marginally from 20.9% in 3QFY12 to 21.1% in 3QFY13.

    Operating cost break-up
    (Rs m) 3QFY12  3QFY13 Change
    Cost of raw materials 6,080 7,037  
    Change in inventory (215) (1,001)  
    Purchases of stock-in-trade 448 603  
    Total Raw Materials 6,313 6,639 5.2%
    % of net sales 13.8% 13.7%  
    Employee expenses 2,220 2,444 10.1%
    % of net sales 4.9% 5.0%  
    Power & fuel 11,242 10,827 -3.7%
    % of net sales 24.6% 22.3%  
    Freight & forwarding expenses 9,426 10,587 12.3%
    % of net sales 20.6% 21.8%  
    Other expenses 6,891 7,834 13.7%
    % of net sales 15.1% 16.1%  
    Total operating expenses 36,092 38,331 6.2%
    % of net sales 79.1% 78.9%  

  • The other income (including prior period subsidies of Rs 666.3 m) declined by a 25.5% YoY during the quarter. On the other hand, interest costs increased by 85.3% YoY. It must be noted that interest costs are net of subsidy pertaining to the State Investment Promotion Scheme. The increase in interest costs could be attributed to the decline in subsidy from Rs 384.1 m in 3QFY12 to Rs 164.3 m in 3QFY13.

  • At the bottomline level, net profits decreased by 2.6% YoY. Net profit margins declined from 13.5% in 3QFY12 to 12.4% in 3QFY13.

  • The company's expansion plans are on track and are expected to be commissioned by early FY14. After expansion, the company's capacity will increase to 62 m tonnes.

What to expect?
While cement demand is expected to grow at about 8% per annum, the surplus capacity scenario in the cement industry is likely to continue over the next 3 years.

At the current prices of Rs 1,925 the stock is trading at 18.9 times its trailing twelve month earnings. We believe that at the current level, the stock is trading significantly above our valuation band. As such, we reiterate our 'Sell' view on the stock from a 2-3 year perspective.

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