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Ultratech Cement: Long way to go…

Mar 22, 2005

Performance Summary
While the cement industry has been witnessing good times in the recent past, the case is not the same with Ultratech Cement, the erstwhile Ultratech Cemco (L&T's cement division). The company has registered a loss in the nine-months ending December 2004. We analyse the 9mFY05 performance of the company in this article.

(Rs m) 1QFY05 2QFY05 3QFY05 9mFY05
Net Sales 6,797 5,878 6,877 19,552
Expenditure 5,857 4,935 6,347 17,138
Operating Profit (EBDITA) 940 943 531 2,414
EBITDA margin (%) 13.8% 16.0% 7.7% 12.3%
Other income 78 49 46 174
Interest 284 269 254 806
Depreciation 542 649 518 1,709
Profit before tax 193 74 (194) 72
Tax 80 98 (84) 93
Profit after Tax/(Loss) 113 (23) (110) (21)
Net profit margin (%) 1.7% -0.4% -1.6% -0.1%
No. of Shares (m) 124 124 124 124
Diluted earnings per share* 3.6 (0.7) (3.5) (0.2)

Company background
Ultratech Cement Ltd., an Aditya Birla Group company and a Grasim subsidiary, has an annual capacity of 17 MT, thus making it the second largest cement producer in the country. The company has 5 integrated plants, 5 grinding units, and 4 terminals - three in India and one in Sri Lanka. It is the country's largest exporter of cement and clinker. It exports over 3 MT per annum, which is about 47 per cent of the country's total cement exports. Cement and clinker is exported to countries around the Indian Ocean, Africa, Europe and the Middle East. Europe and UAE are the major markets for Ultratech Cement.

What has driven performance in 9mFY05?
No problem at the topline: The company's net sales have consistently managed a good performance in the first three quarters of the current fiscal. Strong volume sales coupled with even stronger exports of cement and clinker to Middle East nations has aided the company's topline. With about a 14%-15% improvement in domestic cement realisations compared to the previous year and an over 20% improvement in clinker realisations, the company has already achieved 87% of its FY04 topline in this nine-month period.

Operating margin blues: This is one of the grey areas in the company's performance as the operating margins have consistently fallen in the last three quarters (see chart above). It must be noted that the company had closed FY04 with over 14% margins while the margins during 9mFY05 have been affected by the poor quarterly performances at the operating level. The primary reason for the hit in margins can be attributed to the rise in power and fuel costs during the year. While the cost of power increased substantially at the company's Gujarat plant owing to increase in naphtha (used in captive power plants) prices, a sharp hike in domestic coal prices (16% YoY) and soaring imported coal prices (up 80% YoY) have proved to be a drag on the company's performance.

More pressure…: The company is laden with huge debt, a fact vindicated by the significant amount of interest expense the company has on its books. Just to put things in perspective, the company's interest coverage ratio for 9mFY05 is a poor 0.9x compared to almost 5x of Gujarat Ambuja (1HFY05) and about 4x of ACC (9mFY05). It must be noted that interest coverage is basically how convenient it is for a company to meet its interest obligations from its current earnings. The lower the ratio, the poor the position of the company. Pressure on operating margins and high interest outgo pushed the company into the red during the period under consideration. While the 9mFY04 performance is not known, the company had ended FY04 on a positive note.

What to expect?
The stock currently trades at Rs 361. While 9mFY05 performance of the company fails to inspire confidence as yet, its presence in a sector, which is likely to be in the limelight for the next couple of years, could see things improve for the company going forward. While the company has seemingly taken some measures to keep a check on its power and fuel costs, the impact of the same will take some time to come by. It must be noted that the company is setting up a 92 MW lignite (locally available) based thermal plant at its Gujarat unit. Further, with respect to its association with Grasim, FY06 will see the synergy gains being realised by the company in terms of improved logistics and distribution costs, procurement, etc. Further, with the company aiming at rationalising its debt position, benefits could also accrue in the form of lower interest expenses. Investors should thus wait and watch before investing as to how these expected developments pan out.

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