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Ultratech: All round growth - Views on News from Equitymaster

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Ultratech: All round growth
Apr 23, 2007

Performance summary
Ultratech Cement announced impressive results for 4QFY07 and for the full year FY07. The company reported a healthy topline growth of 38% YoY during 4QFY07 on the back of improved physical performance and robust realisations. The bottomline however, grew at a faster rate of 75% YoY, on account of 90% YoY growth in operating profits, higher other income and lower interest outgo. For the full year also, the company’s performance was quite encouraging. The topline grew by 49% YoY, while net profit margins expanded by almost 900 basis points (8.9%).

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change 12mFY06 12mFY07 Change
Net sales 10,604 14,655 38.2% 32,995 49,108 48.8%
Expenditure 8,457 10,570 25.0% 27,452 34,930 27.2%
Operating profit (EBITDA) 2,146 4,085 90.4% 5,543 14,178 155.8%
EBITDA margin 20.2% 27.9%   16.8% 28.9%  
Other income 105 195 86.2% 370 615 66.1%
Interest 223 203 -8.7% 896 868 -3.1%
Depreciation 599 601 0.2% 2,160 2,263 4.7%
Profit before tax/(loss) 1,429 3,476 143.3% 2,856 11,662 308.3%
Tax 108 1,161 978.6% 558 3,839 587.6%
Profit after tax/(loss) 1,321 2,315 75.3% 2,298 7,823 240.5%
Net margin 12.5% 15.8%   7.0% 15.9%  
No of shares (m) 124 124   124 124  
Diluted EPS (Rs)*         63.1  
P/E (times)         12.7  
*trailing twelve month earnings

Company Background
Ultratech (ULT), An Aditya Birla Group Company and a 51% subsidiary of Grasim, has a consolidated capacity of 17 MT, thus making it the second largest cement producer in the country (10% market share). The company has presence in western, eastern and southern regions. It has 5 integrated plants, 5 grinding units, and 4 terminals – three in India and one in Sri Lanka. It exports over 3 MT per annum, which is about 30% of the country's total cement exports. Cement and clinker is exported to countries around the Indian Ocean, Africa, Europe and the Middle East. Its plant in Chhattisgarh and Orissa are the ideal locations for export of cement and clinker to Nepal and Bangladesh. Recently, the company approved the amalgamation of its 98% subsidiary, Narmada Cement, with itself.

What has driven performance in 4QFY07?
All round performance: During the quarter, topline of the company grew by 38% YoY mainly on account of improved capacity utilisation (113% in 4QFY07 as compared to 102% in 4QFY06), higher sales volume, improved sales realisation with a higher share of blended cement. The 32% YoY growth in net sales realisations and 9% YoY growth in volumes helped company register a robust topline growth. It must be noted that the company is well poised to benefit from demand for cement from the Middle East, given the fact that it has its own captive jetty in the western region.

Also, for the full year FY07, the company’s performance is enthusing as the topline grew by 49% YoY mainly on account of improved physical performance, higher sales volume and improved net realisations.

Cost break up (% of sales) 4QFY06 4QFY07
Consumption of raw materials 10.9% 10.4%
Staff cost 3.1% 2.0%
Power and fuel 24.2% 21.5%
Outward freight 24.3% 21.2%
Other expenditure 11.0% 11.3%
Purchase of finished goods 6.3% 5.7%
Total expenses 79.8% 72.1%

Margins improve, however… The 50% YoY increase in net realisations is clearly reflected at the operating profit level. Since cement is a high fixed cost industry (almost 65% to 70% of total cost is fixed in nature), any improvement in prices directly adds to the profitability. The operating margins witnessed 770 basis points (7.7%) expansion on account of favourable pricing scenario apart from its efforts to reduce costs. Though the company tried to curtail costs by setting up captive power plant, debottlenceking, alternative use of fuels etc, on a cost per tonne basis, expenses grew by almost 20%YoY. With freight operators hiking charges to pass on the rise in input costs and reduced availability of domestic linkages, the company was forced to import coal, leading to increased cost pressure. However, during the quarter, the company managed to lower employee costs. Employee costs on a per tonne basis declined by almost 16% YoY.

Strong bottomline: Improvement in margins has also been brought about by reduction in debt burden, which has led to lower interest outgo. The company reported a 75% YoY growth in bottomline for the quarter. The substantial improvement in operating profits coupled with lower finance charges (declined by 9% YoY) and higher other income (grew by almost 86% YoY) led to 330 basis points expansion in net profit margin.

Over the past few quarters: Over the past few quarters, higher utilisation levels (capacity utilisation level has gone up from 80% in FY06 to 102% in FY07) along with improved pricing scenario helped the company to continuously report a robust topline growth and strong margins. The benefits of branding initiatives and cost reduction measures have further helped matters.

Performance over the past few quarters
  4QFY06 1QFY07 2QFY07 3QFY07 4QFY07
Net sales growth (YoY, %) 46.1% 44.8% 58.3% 59.8% 38.2%
Operating margins (%) 20.2% 31.7% 25.0% 30.2% 27.9%
Net profit margin (%) 12.5% 17.9% 12.7% 16.9% 15.8%

What to expect?
Riding on the back of strong growth in the housing industry and the construction sector, the industry is expected to grow at around 8%-10% in the coming years. Ready mix concrete is likely to see substantial growth in the years to come and to benefit from this growing segment, the company is setting up ready mix concrete plants in various places in the country.

The company’s performance in the past has not been heartening. It was only post FY04 when cement prices moved up that the company reported double digit margins. However, any decline in sales realizations or slowdown in exports (as capacities are also coming up in Middle East) would impact profitability. Moreover, the stock at the current price of Rs 804 is trading at EV/Tonne of US$ 154 based on our FY09 estimates, which is expensive considering the replacement cost.

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