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Ultratech Cement: Concrete gains - Views on News from Equitymaster
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Ultratech Cement: Concrete gains
Apr 22, 2008

Performance summary
  • Topline grows by 9% YoY in 4QFY08 and by 12% YoY for the fiscal ended FY08 led by volumes and better realisations.
  • Operating margins expand by 2.6% during 4QFY08 and 2.3% in FY08 as costs grow at a slower pace compared to net sales.

  • Net profits grow by 22% YoY in 4QFY08 owing to good show at operating level, lower finance charges and higher other income. The same has been the reason behind a 29% YoY growth in bottomline in FY08.

  • If one excludes other income, net profit has grown in line with operating profits during 4QFY08.

  • Recommends dividend of Rs 5 per share.

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 14,653 16,017 9.3% 49,105 55,092 12.2%
Expenditure 10,568 11,132 5.3% 34,927 37,892 8.5%
Operating profit (EBITDA) 4,085 4,885 19.6% 14,178 17,201 21.3%
EBITDA margin 27.9% 30.5%   28.9% 31.2%  
Other income 195 270 38.8% 615 999 62.5%
Interest 203 193 -5.0% 868 757 -12.9%
Depreciation 601 650 8.2% 2,263 2,372 4.9%
Profit before tax/(loss) 3,476 4,312 24.0% 11,662 15,070 29.2%
Tax 1,161 1,483 27.8% 3,839 4,994 30.1%
Profit after tax/(loss) 2,315 2,829 22.2% 7,823 10,076 28.8%
Net margin 15.8% 17.7%   15.9% 18.3%  
No of shares (m)       124 124  
Diluted EPS (Rs)*         80.9  
P/E (times)         10.1  
*trailing twelve month earnings

What has driven performance in FY08?
  • For the full year, the company has reported 12% YoY growth in topline on the back of sound growth in volumes and realisations

  • The company continued to operate at 113% capacity utilisation levels during 4QFY08. Though the company is one of the major exporters of cement, recently it had curtailed exports to cater to rising domestic demand, thus achieving 4% YoY growth in domestic sales volume.

  • During the same period under consideration, the realisations grew by 5% on a YoY basis. While the exact details are not given, our calculations show that for the full year too, realisations have grown at similar levels.

    Cost break up

    (% of sales) 4QFY07 4QFY08 FY07 FY08
    Consumption of raw materials 16.4% 11.2% 12.5% 9.5%
    Staff cost 2.0% 3.2% 2.4% 3.1%
    Power and fuel 21.5% 23.0% 23.2% 22.7%
    Outward freight 18.3% 17.6% 18.0% 17.6%
    Other expenditure 13.9% 14.4% 15.1% 15.8%

  • Operating profits that grew by 20% YoY during 4QFY08 have outpaced topline growth. The robust growth in operating profits is attributed to the improved physical performance of the company owing to which it could restrict growth in cost of operation.

  • Operating costs though on a percentage of sales basis has reduced, the same have witnessed 4% YoY growth on a cost per tonne basis.

  • The variable costs grew by 8% YoY on account of rising input costs, mounting freight charges and increased dependence on imported coal. Coal prices have more than doubled in 4QFY08 as compared to the same period last year.

  • The healthy operating profits have boiled down to the bottomline which grew by 22% YoY in 4QFY08. Growth has also come in on account of reduced finance charges as improved cash flows have been helping the company in reducing its debt burden. Other income has also come in higher, clocking a 39% YoY growth. The same has been true for the full year, where a 29% YoY growth in net profits has been witnessed.

What to expect?
In order to sustain its profitability and improve the same, the company has taken few steps such as setting up thermal power plant and venturing into RMX business (Ready mix concrete). In order to maintain its market share, it has been expanding its capacity either by de-bottlenecking, setting up split grinding units etc. During the year, the company has added approximately 1.2 MT of capacity to its current base of 17 MTPA.

While all seems to be good, the picture is not so rosy going forward. The same could be gauged by the slowdown in the growth of the realisations, which could be attributed to the fact that capacity addition is taking place. As per CMIE, the industry has added almost 22 MT during FY08 and expects another 25 MT of new capacity to come on-stream in FY09. Such huge capacity built up has to some extent capped year on year rise in realisations. Going forward as the announced capacities become operational, industry might witness an excess supply situation that would exert downward pressure on realisation and in turn on margins. Thus, cost control measures would determine profitability in future.

At the current price of Rs 820, the stock is trading at US$ 119 on the enterprise value per tonne (EV/tonne) basis. The stock is trading at the fag end of the valuation band as per FY10 estimates and considering the probable future developments within the industry, we would advise investors to continue to practice caution.

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