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UltraTech: Strong growth may not sustain

Apr 24, 2012

UltraTech Cement has announced its standalone financial results for the quarter ended March 2012. During the quarter, the company reported a rise of 18.9% YoY and 19.3% YoY in sales and net profits respectively. Here is our analysis of the results:

Performance Summary
  • On a standalone basis, sales grow by 19% YoY during the quarter owing to higher sales volumes and better cement realisations.
  • Operating profits increase by 22% YoY. Operating margins improve marginally from 23% in 4QFY11 to 23.7% in 4QFY12.
  • Other income increases by 115% YOY, while interest costs dip by 29% YoY.
  • Net profits grow in line with the topline, net margins remain constant.

Financial performance snapshot
(Rs m) 4QFY11  4QFY12 Change FY11  FY12 Change
Sales 44,901 53,366 18.9% 132,062 181,664 37.6%
Expenditure 34,558 40,725 17.8% 106,465 141,657 33.1%
Operating profit (EBDITA) 10,344 12,641 22.2% 25,597 40,007 56.3%
Operating profit margin (%) 23.0% 23.7%   19.4% 22.0%  
Other income 930 2,000 114.9% 2,619 5,186 98.0%
Depreciation 2,267 2,332 2.9% 7,657 9,026 17.9%
Interest 828 586 -29.3% 2,725 2,239 -17.9%
Profit before tax 8,179 11,723 43.3% 17,833 33,929 90.3%
Tax 911 3,050 234.8% 3,791 9,467 149.7%
Profit after tax/(loss) 7,268 8,673 19.3% 14,042 24,462 74.2%
Net profit margin (%) 16.2% 16.3%   10.6% 13.5%  
No. of shares (m)       274.0 274.1  
Diluted earnings per share (Rs)*         89.3  
P/E ratio (x)*         15.8  

On account of the amalgamation of Samruddhi Cement Limited ("Samruddhi") with the Company w.e.f. July 2010, the figures for the full financial year FY12 are not strictly comparable with those of FY11.

What has driven performance in 4QFY12?
  • UltraTech Cement reported 18.9% YoY rise in net sales for the quarter ended March 2012. The growth was driven by 8.4% increase in sales volumes, while the remaining came on account of improvement in cement realisations.

  • Though input and energy costs remained high, overall operating costs witnessed slight moderation compared to the previous period. As such, the company's operating margins improved marginally from 23% in 4QFY11 to 23.7% in 4QFY12.

  • The other income rose by a whopping 114.9% YoY during the quarter. Interest costs dipped by 29.3% on account of subsidies by State Investment Promotion Scheme (SIPS). This caused the company's profit before tax to rise by 43.3% YoY.

  • Tax expenses were higher by 234.8% YoY as they were net of excess provision reversal pertaining to prior years.

  • At the bottomline level, profits increased by 19.3% YoY, almost in line with topline growth. Net profit margins remained almost unchanged as compared to the corresponding quarter.

  • The company's board of directors has recommended a dividend of Rs 8 per share (face value Rs 10) for the financial year 2011-12.

  • The company expansion plans 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 are running as per schedule. These expansion projects are expected to be commissioned by early FY14. As a result, the company's cement capacity will increase by 10.2 m tonnes per annum (mtpa).

What to expect?
UltraTech Cement posted strong sales growth for the quarter ended March 2012. The growth was driven by both increases in volumes and cement prices. But it must be noted that the March quarter typically witnesses higher sales despatches on account of robust construction activity during this period. However, whether the demand will be able to hold in the medium term remains to be seen; especially, because cement sales and prices tend to fall during the monsoon season. At the same time, cost pressures and excess cement capacity continue to persist.

The Competition Commission of India (CCI) had alleged 39 cement companies for influencing cement prices by forming cartels. Though the final report is not out yet, there are chances that guilty companies could be fined. This could have a negative impact on cement prices going forward.

At the current prices of Rs 1,410, the stock is trading at 15.8 times its trailing twelve month earnings, making it expensively valued. We maintain our 'Sell' view on the stock.

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