UltraTech Cement: It's again a volume game! - Views on News from Equitymaster

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UltraTech Cement: It's again a volume game!

Oct 16, 2009

Performance summary
  • Topline grows by 10.4% YoY on the back of higher volumes.
  • Operating profits grow robustly by 58.4% YoY growth, supported by growth in topline and lower cost of operation.
  • Despite higher other income and lower finance charges, growth in the bottomline is capped at around 52.8% YoY owing to higher tax expenses.

Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 13,962 15,408 10.4% 29,250 35,268 20.6%
Expenditure 10,995 10,708 -2.6% 21,496 23,068 7.3%
Operating profit (EBITDA) 2,967 4,700 58.4% 7,754 12,199 57.3%
EBITDA margin 21.3% 30.5%   26.5% 34.6%  
Other income 278 308 10.6% 216 318 47.1%
Interest 309 299 -3.3% 556 628 13.0%
Depreciation 808 967 19.7% 1,519 1,902 25.2%
Profit before tax/(loss) 2,129 3,743 75.8% 5,895 9,987 69.4%
Tax 487 1,234 153.1% 1,603 3,300 105.9%
Profit after tax/(loss) 1,642 2,509 52.8% 4,292 6,687 55.8%
Net margin 11.8% 16.3%   14.7% 19.0%  
No of shares (m)       124.5 124.5  
Diluted EPS (Rs)*         97.7  
P/E (times)         8.4  
*trailing twelve month earnings

What has driven performance in 2QFY10?
  • UltraTech Cement achieved 10.4% YoY growth in topline during 2QFY10 on account of higher volumes. While production volumes were up 12% YoY, growth in domestic dispatches stood at nearly 11% YoY during the same period under consideration. While demand for the commodity is still ticking in, upcoming capacities have started exerting pressure on realisations.

  • The impact of softening of fuel prices has started kicking in. The company had set up captive power plants to contain costs, which also helped the company contain overall costs. These benefits resulted in 16% YoY fall in overall variable costs. The overall cost of production for the quarter was lower by 2.6% YoY. This coupled with volume driven double digit growth in revenues led to 9.3% expansion in operating margins.

  • The growth in profits before tax (PBT) stood at 75.8% YoY, outpacing growth at the operating level. This is owing to higher other income, lower interest costs and less than proportionate growth in depreciation.

  • The company has planned a capital outlay of Rs 20 bn to set up captive thermal power plants of 25 MW over the next two years. The planned investment expenditure also includes setting up additional grinding and evacuation facility and waste heat recovery systems across units for generating power out of waste gases. The company has completed its capacity expansion plans. Hence, going forward too we do not foresee interest or asset replacement cost to significantly impact the profitability of the company.

  • At the net level, growth in profits stood at 52.8% YoY. Compared to PBT, growth in bottomline slowed down on account of higher tax outgo.

What to expect?
The demand for the commodity is expected to grow at the rate of 9% backed by government's initiatives to boost rural, housing and infrastructural development. However, upcoming capacities have started exerting pressure on realisations. The planned new capacities are in the various stages of commissioning, which upon becoming operational will certainly result in downward pressure on margins. Thus, going forward, those companies that are able to control costs better will have the competitive advantage. UltraTech has been taking steps in this direction, benefits of which have been reflected in this quarter's performance.

The company has performed almost in line with our estimates as far as the topline is considered. At the net level, the company is likely to outperform our estimates owing to strict cost control measures initiated by the company that enabled the company to lower the cost of operation.

We had recommended the stock as a good investment option in January 2009. The stock has breached our FY11 target price. Also as per our revised FY12 estimates there is little upside potential left. Even if we consider an upward revision of the stock, at the current price of Rs 825, it is fairly valued on an asset based valuation method. Thus, we advise investors to practice caution while investing in the stock.

UltraTech is expected to respond to the proposal of consolidating cement assets of Samruddhi Cement with itself by the first week of November.

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