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UltraTech: Riding the wave - Views on News from Equitymaster
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UltraTech: Riding the wave
Oct 17, 2006

Performance summary
Ultratech Cement announced impressive results for the 2QFY07. The company reported growth in net profit on the back of robust realisations owing to a favourable demand-supply scenario in the country and considerable improvement in operating margins.

Financial performance snapshot
(Rs m) 2QFY06 2QFY07 Change 1HY06 1HY07 Change
Net sales 6,345 10,045 58.3% 14,495 21,849 50.7%
Expenditure 5,696 7,501 31.7% 12,354 15,558 25.9%
Operating profit (EBITDA) 649 2,545 291.9% 2,142 6,291 193.7%
EBITDA margin 10.0% 25.0% 15.0% 29.0%
Other income 81 119 46.6% 192 253 31.8%
Interest 224 237 6.0% 445 463 4.2%
Depreciation 521 547 5.0% 1,031 1,091 5.9%
Profit before tax/(loss) (15) 1,879 - 859 4,990 -
Tax (15) 605 - 258 1,607 -
Profit after tax/(loss) 1 1,274 - 601 3,383 -
Net margin 0.0% 12.7% 4.1% 15.5%
No of shares (m) 124.0 124.0 124.0 124.0
Diluted EPS (Rs)* 35.7
P/E (times) 25.2
*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 (9.7% market share). The company has presence in western, eastern and southern regions. It has 5 integrated plants, 5 grinding units, and 4 terminals three in India and one in Sri Lanka. It exports over 3 MT per annum, which is about 47% 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.

In view of the amalgamation of the Narmada Cements, the figures for the three months ended September 30, 2006 are not comparable with those of the corresponding quarter of the previous year.

What has driven performance in 2QFY07?
Not just prices: Strong volume sales (17% YoY growth) and significant improvement in realisations, both in the domestic and export markets, have helped Ultratech report a near 58% YoY growth in topline during the second quarter. Domestic cement realisation increased by 45% over the depressed price levels in the same period last year, while export prices increased by 14%. Cement capacity utilisation stood at 84% compared to 69% last year second quarter. Given the robustness in cement prices, we expect the company to sustain performance for the rest of the fiscal year.

Prices propel margins: With realizations improving dramatically, as a percentage of sales, most of the costs have declined in 2QFY07. Total expenses as a percentage of sales have come down from 90% in 2QFY06 to 75% in 2QFY07. Cement is a high fixed-cost intensive industry (fixed cost to total cost is around 65% to 70%). In a favorable pricing environment therefore, bulk of the price increases directly adds to the EBDITA thereby, propelling margins. In 2QFY07, power costs per tonne of cement sold has actually risen significantly, reflecting the inflation in crude prices. With freight operators hiking charges to pass on the rise in input costs, freight costs per tonne was also on the higher side during the quarter. In our view, with the planned captive power plants, the company will be in a position to save power costs significantly in the future. Overall, we expect operating margins to improve substantially in FY07.

Up goes the net profit: As can be seen from the table above, led by a substantial improvement in operating margins, coupled with a 47% YoY rise in other income and lower interest charges, the company reported a profit in 2QFY07 as against a net loss in the corresponding quarter of the previous year.

What to expect?
At Rs 898, the stock is currently trading at a price to earnings multiple of 25.2 times its trailing 12-month earnings. UltraTech has earmarked a capex of Rs 27 bn towards the setting up of a captive power plant at its units in Gujarat, Chhattisgarh, Andhra Pradesh and a brown-field expansion of 4 MTPA at Andhra Pradesh. These will be completed over the next three years. While these are positives, considering the current valuation of the stock, we believe that there is not much left for an investor in terms of an upside potential. Despite promising EBDITA margin expansion potential and a favorable pricing environment over the next one-year, the risk-reward equation is skewed towards risks. We expect cement prices to cool off by the end of the next calendar year.

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