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UltraTech Cem: On acquisition spree - Views on News from Equitymaster
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UltraTech Cem: On acquisition spree
Jan 28, 2015

UltraTech Cement has announced its financial results for the third quarter of the financial year 2014-15 (3QFY15). During the quarter, the company's consolidated net sales increased by 13.6% YoY, while consolidated net profit reported a marginal rise of 1.2% YoY. Here is our analysis of the results:

Performance summary
  • On a consolidated basis, sales rise by 13.6% YoY during the quarter.
  • Operating profits grow by 10.2% YoY as operating margins contract marginally from 16.1% in 3QFY14 to 15.6% in 3QFY15.
  • Other income increases by 44.2% YoY during the quarter.
  • Depreciation charges and interest expenses increase by 3.3% YoY and 63.6% YoY respectively.
  • Consolidated net profit increases marginally by 1.2% YoY during the quarter; net margins contract from 7.8% in 3QFY14 to 6.9% in 3QFY15.

Consolidated financial performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Sales 51,367 58,346 13.6% 152,577 175,466 15.0%
Expenditure 43,098 49,232 14.2% 126,293 147,090 16.5%
Operating profit (EBDITA) 8,269 9,115 10.2% 26,284 28,375 8.0%
Operating profit margin (%) 16.1% 15.6%   17.2% 16.2%  
Other income 1,016 1,464 44.2% 3,407 5,033 47.7%
Depreciation 2,865 2,961 3.3% 8,381 8,972 7.1%
Interest 1,003 1,640 63.6% 2,755 4,268 54.9%
Profit before tax 5,416 5,977 10.4% 18,554 20,168 8.7%
Tax 1,425 1,965 37.9% 5,045 5,716 13.3%
Effective tax rate 26.3% 32.9%   27.2% 28.3%  
Profit after tax 3,991 4,013 0.5% 13,509 14,452 7.0%
Minority Interest 40 13 -68.0% 97 41 -58.0%
Net profit 3,951 4,000 1.2% 13,412 14,411 7.5%
Net profit margin (%) 7.8% 6.9%   8.9% 8.2%  
No. of shares (m)       274.2 274.4  
Diluted earnings per share (Rs)*         84.0  
P/E ratio (x)*         37.4  
*trailing twelve-month earnings

What has driven performance in 3QFY15?
  • UltraTech Cement reported 13.6% YoY growth in consolidated net sales for the quarter ended December 2014. Consolidated cement and clinker sales increased by 10% YoY to 11.8 million tonnes during 3QFY15 as against 10.8 million tonnes in 3QFY14. White cement and wall care putty sales volume was also up by 10% YoY. It must be noted that the figures for the quarter include those of the Gujarat Units of Jaypee Cement Corporation Limited. As such, the financial performance of the December 2014 quarter is not strictly comparable with the corresponding quarter of the previous financial year.

  • Operating margins contracted from 16.1% in 3QFY14 to 15.6% in 3QFY15. While cement prices were higher on a year-on-year basis, they witnessed a downward trend on a sequential basis on account of uneven demand scenario.

  • The other income (including other operating income) grew by 44.2% YoY during the quarter.

  • Depreciation charges increased by 3.3% YoY. It must be noted that the company revised the depreciation rate on certain fixed assets as per the useful life specified in the Companies Act, 2013. Finance costs increased by 61.5% YoY during 3QFY15 on account of acquisition of Gujarat units as well as commissioning of new capacities.

  • On account of higher finance costs and higher effective tax rate, the consolidated net profits increased only marginally by 1.2% YoY. The net profit margin contracted from 7.8% in 3QFY14 to 6.9% in 3QFY15.
What to expect?
The short term outlook for cement demand appears challenging owing to excess cement capacity of over 100 million tonnes. However, with the overall macroeconomic indicators showing signs of improvement, cement demand is expected to revive over the medium to long term. Moreover, easing commodity prices and lower interest rates should augur well for cement demand in India.

The company's board of directors has approved the acquisition of Jaiprakash Associates Ltd cement business in Madhya Pradesh. This will augment the company's clinker capacity by 5.3 million tonnes per annum, cement grinding capacity by 4.9 million tonnes per annum and thermal power capacity by 180 MW. For this acquisition, UltraTech plans to issue non-convertible debentures worth Rs 45.38 billion and non-convertible cumulative redeemable preference shares worth Rs 1 million. As part of the deal, it shall take over Rs 6,265 million of debt and negative working capital of Rs 1,605 million. This deal, which is subject to approval from shareholders, creditors and statutory bodies, is expected to conclude in about 7 to 9 months. Post acquisition, UltraTech domestic cement capacity will increase to about 65 million tonnes per annum. With its expansion projects underway, the company's domestic cement capacity is expected to increase to 71 million tonnes per annum in 2016.

At the current stock price level the stock is trading at nearly 37.5 times its trailing twelve month consolidated earnings. At this level, the stock is above the upper valuation band that we assign to it. As such, we continue to maintain a SELL view on the stock.

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