UltraTech Cem: Post monsoon revival - Views on News from Equitymaster

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UltraTech Cem: Post monsoon revival

Jan 23, 2012

UltraTech Cement has announced its standalone financial results for the quarter ended December 2011. During the quarter, the company reported a rise of 23% YoY and 93% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • On a standalone basis, sales grow by 23% YoY during the quarter. Combined domestic cement and clinker sales volume of grey cement rises by 6% YoY during the quarter.
  • Operating profits increase by 36% YoY. Operating margins improve from 19.1% in 3QFY11 to 21.1% in 3QFY12.
  • Higher other income, lower interest costs help bottomline to surge by 93% YoY. Net margins improve from 8.6% in 3QFY11 to 13.5% in 3QFY12.
  • During 9MFY12, sales and profits grow by 18% YoY and 59% YoY respectively.

Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11^ 9MFY12 Change
Sales 37,152 45,719 23.1% 109,197 128,470 17.6%
Expenditure 30,074 36,069 19.9% 88,043 101,123 14.9%
Operating profit (EBDITA) 7,078 9,649 36.3% 21,154 27,347 29.3%
Operating profit margin (%) 19.1% 21.1%   19.4% 21.3%  
Other income 606 1,554 156.4% 2,147 3,246 51.2%
Depreciation 2,191 2,236 2.1% 6,507 6,694 2.9%
Interest 818 295 -63.9% 2,450 1,693 -30.9%
Profit before tax 4,675 8,672 85.5% 14,344 22,206 54.8%
Tax 1,486 2,503 68.5% 4,420 6,417 45.2%
Profit after tax/(loss) 3,190 6,169 93.4% 9,925 15,789 59.1%
Net profit margin (%) 8.6% 13.5%   9.1% 12.3%  
No. of shares (m)         274.1  
Diluted earnings per share (Rs)*         72.6  
P/E ratio (x)*         16.8  
*On a trailing twelve month basis; ^Restated figures for nine months ended December,2010 are aggregation
of the company's result and 1QFY11 result of erstwhile Samruddhi Cement Ltd. The company was
amalgamated with UltraTech Cement with effect from 1st July, 2010.

What has driven performance in 3QFY12?
  • UltraTech Cement reported a 23.1% YoY rise in net sales for the quarter ended December 2011. The seemingly improved performance was mainly on account of a lower base effect. The combined cement and clinker sales volume registered a rise of 6.1% YoY. There was improvement in realisations post the monsoons. However, whether the same may prevail is uncertain given the overall weakness in the macroeconomic environment.

  • The company's operating margins improved from 19.1% in 3QFY11 to 21.1% in 3QFY12 as all cost heads witnessed a decline (as a percentage of net sales).

  • The other income rose by a whopping 156.4% YoY during the quarter on account of subsidies related to prior years, in terms of State Investment Promotion Scheme (SIPS).

  • Depreciation was marginally higher by 2.1%. However, interest costs declined significantly by 63.9% YoY as a result of subsidies in terms of SIPS.

  • At the bottomline level, profits increased by 93.4% YoY. Net profit margins improved from 8.6% in 3QFY11 to 13.5% in 3QFY12.

  • The company has planned a capex of about Rs 110 bn over the next 3 years for setting up of additional clinkerisation plants at Chhattisgarh and Karnataka together with grinding units, bulk packaging terminals and ready mix concrete plants across the country. These expansion projects are expected to be commissioned by 1QFY14. As a result, the company's cement capacity will increase by 9.2 m tonnes per annum (mtpa).

What to expect?
The cement industry continues to be in the throes of excess capacity and the scenario is likely to persist for another 3 years. As such, cement price realisations will remain under pressure. Additionally, high input prices will keep margins under check. The energy cost is expected to rise further as Coal India has changed the pricing mechanism from Useful Heat Value (UHV) to Gross Calorific Value (GCV) effective from 1st January, 2012.

At the current prices of Rs 1,220, the stock is trading at 16.8 times its trailing twelve month earnings, making it expensively valued as per the replacement cost method. We maintain our "Sell" view on the stock.

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