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UltraTech: Lower petcoke prices aid margins
Jul 23, 2015

UltraTech Cement has announced its financial results for the first quarter of the financial year 2015-16 (1QFY16). During the quarter, the company's consolidated net sales increased by 6.4% YoY, while consolidated net profit reported a decline of 5.7% YoY. Here is our analysis of the results:

Performance summary
  • On a consolidated basis, sales rise by 6.4% YoY during the quarter.
  • Operating profits grow by 10% YoY as operating margins improve marginally from 17.3% in 1QFY15 to 17.9% in 1QFY16.
  • Other income decreases by 45.2% YoY during the quarter.
  • Interest expenses increase by 34.8% YoY.
  • Consolidated net profit decreases by 5.7% YoY during the quarter; net margins contract from 10.5% in 1QFY15 to 9.3% in 1QFY16.

Consolidated financial performance snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 59,885 63,719 6.4%
Expenditure 49,517 52,313 5.6%
Operating profit (EBDITA) 10,368 11,406 10.0%
Operating profit margin (%) 17.3% 17.9%  
Other income 2,587 1,419 -45.2%
Depreciation 2,817 3,013 7.0%
Finance costs 1,098 1,481 34.8%
Profit before tax 9,041 8,332 -7.8%
Tax 2,760 2,422 -12.2%
Effective tax rate 30.5% 29.1%  
Profit after tax 6,281 5,909 -5.9%
Minority Interest 12 (2) NA
Net profit 6,269 5,911 -5.7%
Net profit margin (%) 10.5% 9.3%  
No. of shares (m) 274.4 274.4  
Diluted earnings per share (Rs)*   75.2  
P/E ratio (x)*   43.1  
*trailing twelve-month earnings

What has driven performance in 1QFY16?
  • UltraTech Cement reported 6.4% YoY growth in consolidated net sales for the quarter ended June 2015. In volume terms, domestic cement sales increased by 5.3% YoY to 11.9 million tonnes. Consolidated cement and clinker sales stood at 13 million tonnes, higher by 4.8% YoY. The capacity utilization rate for the company's Indian operations stood at about 80% for the quarter. It must be noted that the figures for the quarter include those of the Gujarat Units of Jaypee Cement Corporation Limited. As such, the financial performance of the June 2015 quarter is not strictly comparable with the corresponding quarter of the previous financial year.

  • Operating margins expanded marginally from 17.3% in 1QFY15 to 17.9% in 1QFY16 mainly on account of lower power and fuel expenses. This was the result of softening petcoke prices and higher usage of the low cost fuel. It is worth noting that petcoke consumption for Indian operations increased from 43% of kiln fuel mix in 1QFY15 to 68% in 1QFY16. Raw material costs were higher due to hike in limestone royalty. Logistics costs were substantially higher mainly on account of increased rail freight as well as change in plant and market mix.

    Operating Cost Break-up
    (Rs m) 1QFY15 1QFY16 Change
    Cost of raw materials 9,109 9,693  
    Change in inventory 9 926  
    Purchases of stock-in-trade 1,069 1,021  
    Total Raw Materials 10,188 11,639 14.2%
    % of net sales 17.0% 18.3%  
    Employee expenses 2,976 3,363 13.0%
    % of net sales 5.0% 5.3%  
    Power & fuel 12,918 11,684 -9.6%
    % of net sales 21.6% 18.3%  
    Freight & forwarding expenses 13,331 15,600 17.0%
    % of net sales 22.3% 24.5%  
    Other expenses 10,105 10,028 -0.8%
    % of net sales 16.9% 15.7%  
    Total operating expenses 49,517 52,313 5.6%
    % of net sales 82.7% 82.1%  

  • The other income (including other operating income) dropped by 45.2% YoY during the quarter.

  • Depreciation and finance costs increased by 7% YoY and 34.8% YoY respectively.

  • At the bottomline level, the consolidated net profits declined by 5.7% YoY. The net profit margin contracted from 10.5% in 1QFY15 to 9.3% in 1QFY16.
What to expect?
In comparison to the June quarter performance reported by ACC Ltd, UltraTech Cement's performance appears relatively resilient on both growth and realizations front. While cement prices were under pressure, softening petcoke prices aided operating margins to expand marginally.

The performance of the cement sector across different regions in the country has been a mixed bag. The eastern markets have witnessed healthy growth in cement sales driven by uptick in government infrastructure demand as well as double-digit growth in rural and housing demand. The southern markets have been the worst performers with negative growth in rural and housing demand. In the western markets, the state of Maharashtra witnessed a drop in cement sales volumes on account of sluggish housing demand. While the northern markets reported positive growth, the demand from rural and housing space remained subdued.

The company expects cement demand to improve in the second half of the financial year 2015-16. The growth drivers for cement will be the government's focus on infrastructure development with higher budgetary allocation for roads, dedicated freight corridor, irrigation, port, etc. New projects of Smart Cities and Housing For All will be key triggers for uptick in cement demand in the coming times. Further softening of interest rates may also revive retail home buying.

At the current stock price of Rs 3,236, the stock is trading at nearly 43.1 times its trailing twelve month consolidated earnings. At this level, the stock is above the upper valuation band that we assign to it. As such, we continue to maintain a SELL view on the stock.

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