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Ultratech: Riding the boom - Views on News from Equitymaster
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Ultratech: Riding the boom
Jul 20, 2007

Performance summary
  • Topline grew by almost 16% YoY on the back of improved physical performance and higher net realisations.
  • Operating profits have grown in line with the topline.
  • The company witnessed a marginal expansion of 10 basis points (0.1%) in EBITDA margins as the cost of operation scaled up with the rise in energy costs (coal prices increased by 22% YoY).
  • The bottomline however, grew at a faster rate of 23% YoY on account of higher other income (100% YoY) and lower interest outgo, apart from growth in operating profits.

    Financial performance snapshot
    (Rs m) 1QFY07 1QFY08 Change
    Net sales 11,803 13,653 15.7%
    Expenditure 8,057 9,317 15.6%
    Operating profit (EBITDA) 3,746 4,335 15.7%
    EBITDA margin 31.7% 31.8%  
    Other income 134 269 100.7%
    Interest 226 202 -10.8%
    Depreciation 544 559 2.8%
    Profit before tax/(loss) 3,110 3,844 23.6%
    Tax 1,002 1,250 24.8%
    Profit after tax/(loss) 2,108 2,594 23.0%
    Net margin 17.9% 19.0%  
    No of shares (m) 124 124  
    Diluted EPS (Rs)*   66.7  
    P/E (times)   14.8  
    *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 3 terminals – three in India and one in Sri Lanka. It exports approximately 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 1QFY08?
    Topline growth slows down: Ultratech reported 16% YoY growth in topline during the quarter on the back of improved physical performance and improved realisations, which grew by almost 10% on a YoY basis. During the quarter, the company operated at 104% capacity utilisation level and also curtailed its cement exports to cater to the growing domestic demand for the commodity. Given the robustness in cement prices, we expect the company to sustain performance in medium term, say for yet another year or so. But the current scenario is likely to change once the announced capacities come on stream.

    Cost break up
    (as a % of sales) 1QFY07 1QFY08
    Increase/Decrease in stock in trade -0.8% 1.0%
    Consumption of raw materials 7.7% 8.6%
    Staff cost 2.3% 2.3%
    Power and fuel 24.2% 22.2%
    Outward freight 20.8% 20.2%
    Other expenditure 11.9% 13.0%
    Purchase of finished goods 2.2% 1.0%
    Total expenses 68.3% 68.2%

    Costs remain a concern: Despite better utilization levels and increased realisations the operating margins expanded by only 10 basis points due to various internal factors, which include higher input costs as a percentage of sales (given the sharp spurt in fuel costs). Though the company tried to curtail costs by setting up captive power plants, debottlenceking, alternative use of fuels etc, on a cost per tonne basis, expenses grew by almost 15%YoY. (Just a little perspective: During the quarter, coal prices increased by almost 22% YoY, thus exerting pressure on EBITDA margins).

    Bottomline outperforms topline: The bottomline however, grew at a faster rate of 23% YoY compared to topline on account of higher other income (100% YoY). Even if one excludes other income, the net margins have witnessed marginal 30 basis points expansion (0.3%) on account of improvement in operating profits coupled with lower finance charges. On account of favourable pricing scenario, which has led to improved cash flows, the company was able to reduce debt on its books. The debt to equity ratio of the company improved from 1.5 in FY04 to 0.9 in FY07.

    Performance over the past few quarters
      1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
    Net sales growth (YoY, %) 44.8% 58.3% 59.8% 38.2% 15.7%
    Operating margins (%) 31.7% 25.0% 30.2% 27.9% 31.8%
    Net profit margin (%) 17.9% 12.7% 16.9% 15.8% 19.0%

    Over the past few quarters: Cement realization started gaining pace in January 2006 and thereafter, there was no looking back for cement manufacturers. With an improved pricing scenario, the company continued to report a robust topline growth and strong margins. However, the topline growth in recent quarters has slowed down, which can be considered as an indication of cycle has reached the peak point. Though the demand for cement is expected to grow at 10% annually on account of government’s thrust on infrastructure and growing housing demand, the announced additional capacities (brownfield as well as greenfield) of approximately 90 MT to be commissioned by FY10 are likely to exert pressure on prices. In the current quarter, the company has curtailed exports to cater to increased demand, however, going forward, the trend is unlikely to reverse itself as new capacities are being built up in the export markets too.

    What to expect?
    On the operational front, the company has historically been heavily dependant on furnace oil for its operations and hence, in order to reduce the same, it is looking to set up captive power plants. To curtail costs and increase capacity to cash on the current favourable pricing scenario, the company has earmarked Rs 33 bn investment outlay to be spent over the next three years. The company has seemingly taken some measures to keep a check on its power and fuel costs, while the full impact of the same will take some time to come by. Meanwhile, with the company aiming at rationalising its debt position, benefits could accrue in the form of lower interest expenses.

    Despite a favourable pricing environment and stable margin visibility in the near to medium term, we suggest to practise caution as valuations are expensive considering replacement costs. The stock at the current price of Rs 986 is trading at EV/Tonne of US$ 156 based on our FY09 estimates and as mentioned, is richly valued.

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