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Ultratech Cement: Margins under pressure - Views on News from Equitymaster
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Ultratech Cement: Margins under pressure
Jul 18, 2008

Performance summary
  • Topline grows by 10% YoY, on the back of volume growth and better realisations.
  • EBITDA margins contract by 2.4% in 1QFY09, as costs grow at a faster pace as compared to sales.
  • imported coal prices more than doubled during the quarter resulting in a 19% YoY increase in variable costs.
  • At the net profit level, the company's growth was a tad higher at 2.2% YoY. This was mainly on account of higher other income and lower tax outgo.

Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 13,600 14,960 10.0%
Expenditure 9,222 10,501 13.9%
Operating profit (EBITDA) 4,378 4,458 1.8%
EBITDA margin 32.2% 29.8%  
Other income 247 266 7.6%
Interest 222 247 11.3%
Depreciation 559 711 27.3%
Profit before tax/(loss) 3,844 3,766 -2.0%
Tax 1,250 1,116 -10.8%
Profit after tax/(loss) 2,594 2,650 2.2%
Net margin 19.1% 17.7%  
No of shares (m) 124 124  
Diluted EPS (Rs)*   81.4  
P/E (times)   6.64  
*trailing twelve month earnings

What has driven performance in 1QFY09?
  • The topline growth of 10% YoY is a factor of decent growth in volumes and realisations. The company’s domestic sales grew by 3.8% YoY during the quarter. The growth could have been on the higher side had the company been able to export cement and fetch better realisations. The company is the largest exporter of cement and the Government’s earlier move to ban exports in order to contain inflation (to increase domestic supply and arrest hike in cement prices) has impacted the company’s overall performance. There was ban on cement exports for the six weeks of the first quarter.

    Cost break up
    (% of sales) 1QFY08 1QFY09
    Consumption of raw materials 10.6% 7.0%
    Staff cost 2.3% 3.1%
    Power and fuel 22.3% 25.8%
    Outward freight 17.6% 17.1%
    Other expenditure 15.1% 17.2%

  • Operating profits reported subdued growth of 1.8% YoY as costs grew faster than the topline. The company was adversely impacted by the rising cost of imported coal. The company historically had been heavily dependant on furnace oil for its operations and hence, in order to reduce this dependence, the company had planned to set up captive power plants based on coal feedstock. However, to run the same, the company is dependant on imported coal. Imported coal prices have more than doubled during the quarter resulting in 19% YoY increase in variable costs.

  • The net margins contracted by 1.4% in 1QFY09 on account of subdued performance at the operating level and higher depreciation charges. Having said that, the company was able to grow its net profits by 2% YoY as against the 2% YoY decline in profits at the PBT level due to a lower tax outgo. During the quarter, the company revised the estimated useful life of some of the assets resulting in the 27% YoY growth in depreciation charges.

What to expect?
The company has expended Rs 21.5 bn towards capex initiatives such as setting up Ready Mix Concrete units, thermal power plants and on plans relating to expansion and modernization of the units. The company is setting up a split grinding unit in Karnataka, upon commissioning of which, the total capacity would be scaled up to 23.1 MTPA by the end of 1HFY09.

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 has outlined investment of Rs 20.5 bn for the next three years to set up thermal power plants, extension of jetty in Gujarat, setting up RMC units and other schemes for improving productivity such as Waste Heat Recovery System for generating power out of waste gases.

The industry is expected to witness 90 MT capacities coming on stream over the next three years as per announcements and this is expected to put downward pressure on prices. Thus, going forward, those companies that are able to control costs better will have the competitive advantage.

The stock, at the current price of Rs 540, is trading at an EV/tonne of over US$ 61 based on our FY11 estimates. Thus, on an asset based valuation method, the stock is attractively valued at the current levels.

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