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UltraTech Cem: Lacklustre quarter - Views on News from Equitymaster

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UltraTech Cem: Lacklustre quarter
Jul 30, 2013

UltraTech Cement has announced its financial results for the first quarter of the financial year 2013-14 (1QFY14). During the quarter, the company reported a decline of 2.3% YoY in net sales and 13.6% YoY decline in net profits. Here is our analysis of the results:

Performance summary
  • On a standalone basis, sales decline by 2.3% YoY during the quarter.
  • Operating profits decline by 18.7% YoY as operating margins decline from 25.4% in 1QFY13 to 21.2% in 1QFY14.
  • Other income increases by 116.5% YoY during the quarter.
  • Depreciation charges and interest expenses increase by 10.5% YoY and 32.6% YoY, respectively.
  • Net profits decline by 13.6% YoY during the quarter; net margins decline from 15.3% in 1QFY13 to 13.6% in 1QFY14.

Standalone financial performance snapshot
  Standalone
(Rs m) 1QFY13 1QFY14 Change
Sales 50,719 49,575 -2.3%
Expenditure 37,822 39,084 3.3%
Operating profit (EBDITA) 12,897 10,491 -18.7%
Operating profit margin (%) 25.4% 21.2%  
Other income 869 1,882 116.5%
Depreciation 2,281 2,521 10.5%
Interest 498 660 32.6%
Profit before tax 10,987 9,192 -16.3%
Tax 3,203 2,466 -23.0%
Profit after tax/(loss) 7,784 6,726 -13.6%
Net profit margin (%) 15.3% 13.6%  
No. of shares (m) 274.1 274.2  
Diluted earnings per share (Rs)*   93.0  
P/E ratio (x)*   20.2  
*trailing twelve-month earnings
What has driven performance in 1QFY14?
  • UltraTech Cement reported 2.3% YoY rise in net sales for the quarter ended June 2013. In volumes terms, domestic cement and clinker sales of grey cement remained flat at 10.79 million tonnes during the quarter as against 10.82 million tonnes in 1QFY13. Sales of white cement increased by 6% YoY to 1.41 lakh tonnes.

  • Operating profits decreased by 18.7% YoY as all major cost heads, barring power and fuel expenses witnessed inflationary pressures. While power and fuel expenses (20% of net sales) declined by 1.5% YoY (as a percentage of net sales), raw material costs (15.7% of net sales), employee expenses (5.1% of net sales), freight and forwarding expenses (22.2% of net sales) and other expenses (15.9% of net sales) increased by 1.1% YoY, 0.6% YoY, 1.8% YoY and 2.3% YoY (as a percentage of net sales). The company's operating margins declined from 25.4% in 1QFY13 to 21.2% in 1QFY14.

    Operating cost break-up
    (Rs m) 1QFY13 1QFY14 Change
    Cost of raw materials 6,664 6,907  
    Change in inventory 212 202  
    Purchases of stock-in-trade 568 694  
    Total Raw Materials 7,444 7,803 4.8%
    % of net sales 14.7% 15.7%  
    Employee expenses 2,236 2,507 12.1%
    % of net sales 4.4% 5.1%  
    Power & fuel 10,862 9,896 -8.9%
    % of net sales 21.4% 20.0%  
    Freight & forwarding expenses 10,384 11,018 6.1%
    % of net sales 20.5% 22.2%  
    Other expenses 6,897 7,860 14.0%
    % of net sales 13.6% 15.9%  
    Total operating expenses 37,822 39,084 3.3%
    % of net sales 74.6% 78.8%  

  • The other income surged by a 116.5% YoY during the quarter. Depreciation charges and interest costs increased by 10.5% YoY and 32.6% YoY respectively.

  • At the bottomline level, net profits decreased by 13.6% YoY. Net profit margins declined from 15.3% in 1QFY13 to 13.6% in 1QFY14.

  • The Company commissioned a clinkerisation plant of 3.30 million tonnes at Malkhed, Karnataka in July 2013. Cement grinding capacity will be operational in phases in line with clinker production.

  • The company has commenced work on 2.9 million tonnes brown field expansion project at Aditya Cement Works in Rajasthan.

  • During the quarter, the company acquired the entire equity share capital of Bhagwati Limestone Company Private Ltd (BLCPL). As such, BLCPL has become a wholly-owned subsidiary of UltraTech.

What to expect?
UltraTech Cement's cement sales remained subdued on account of the ongoing slowdown in the economy, particularly the real estate and infrastructure industry. The early onset of monsoon further impacted construction activity in the month of June 2013. The company's capacity utilisation level stood at 79% during the quarter.

Cement prices remained under pressure during April and May, though there was some recovery in June. Geographically, prices declined on a year-on-year basis across all regions except the eastern region.

On the cost front, power and fuel costs were lower during the quarter on account of 15% decline in the cost of imported coal. However, the benefit was partially offset by the rupee depreciation. Raw material costs increased due to increase in diesel prices which raised the cost of inward freight and limestone.

Given the sluggish demand and inflationary pressures, we expect growth and profitability to be impacted over the medium term. At the current prices of Rs 1,880 the stock is trading at 20.2 times its trailing twelve month standalone earnings. We believe that at the current level, the stock is trading above our valuation band. As such, we reiterate our 'Sell' view on the stock from a 2-year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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