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Ultratech Cement: Slowdown in growth visible - Views on News from Equitymaster
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Ultratech Cement: Slowdown in growth visible
Oct 20, 2008

Performance summary
  • Topline grows by 19.6% YoY on the back of volume growth.

  • Costs grow at a faster pace as compared to sales resulting in lower growth in operating profits, the main culprit being higher imported coal prices.

  • EBITDA margins contract by 7% and 4.7% in 2QFY09 and 1HFY09 respectively.

  • Poor show at operating level boils downs to the net profit level, which declines by 11.7% in 2QFY08 and 3.6% YoY in 1HFY09.



Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 11,676 13,962 19.6% 25,276 28,922 14.4%
Expenditure 8,366 10,995 31.4% 17,588 21,496 22.2%
Operating profit (EBITDA) 3,310 2,967 -10.4% 7,688 7,426 -3.4%
EBITDA margin 28.3% 21.3%   30.4% 25.7%  
Other income 259 278 7.5% 506 544 7.5%
Interest 203 309 52.1% 425 556 30.8%
Depreciation 581 808 39.1% 1,139 1,519 33.3%
Profit before tax/(loss) 2,786 2,129 -23.6% 6,630 5,895 -11.1%
Tax 927 487 -47.4% 2,177 1,603 -26.4%
Profit after tax/(loss) 1,859 1,642 -11.7% 4,452 4,292 -3.6%
Net margin 15.9% 11.8%   17.6% 14.8%  
No of shares (m)       124 124  
Diluted EPS (Rs)*         79.7  
P/E (times)         4.7  
*trailing twelve month earnings

What has driven performance in 2QFY09?
  • Ultratech Cements reported 19.6% YoY growth in topline in 2QFY09. The growth was backed by higher despatches that grew by 13% YoY during the quarter. The fact that revenue is a function of volumes and realisations, the growth in topline has also come in on account of decent growth in realisations (up 5.8% YoY). However, the company has confirmed that the domestic realisations remained flat. Hence, we assume it has earned better realisations in export markets. The company reported 14.4% YoY growth in topline in 1HFY09.

    Cost break up
    (% of sales) 2QFY08 2QFY09 1HFY08 1HFY09
    Consumption of raw materials 7.7% 11.3% 9.3% 9.1%
    Staff cost 3.8% 3.6% 3.0% 3.4%
    Power and fuel 22.0% 28.3% 22.2% 27.0%
    Outward freight 18.2% 16.8% 17.9% 16.9%
    Other expenditure 19.9% 18.7% 17.3% 17.9%

  • Operating profits declined by 10% YoY in 2QFY09 as costs grew faster than the topline. While the inflationary situation witnessed in the economy has scaled up the overall cost of operation, the main culprit has been higher imported coal prices. The company witnessed shortfall on coal as the new linkages have not yet become operational. Hence, the company had to import coal, the prices of which have more than doubled in 2QFY09. The sharp increase in prices of fuel and raw materials led to 37% YoY growth in variable costs. As a result, the overall cost of operation increased by 31% YoY in 2QFY09.

  • Decline in profits at the operating level (down 10% YoY) boiled down to the bottomline, which fell by 11.7% in 2QFY09. Apart from the subdued performance at the operating level, higher interest outgo and depreciation costs exerted pressure on net margins of the company.

What to expect?
    The company’s capital expenditure plans have been executed as per schedule. The company had lined up huge capex plans to maintain its market share, cater to the increasing demand for the commodity and to improve efficiency. However, lull in real estate and infrastructure sectors on account of credit crunch has resulted in slackening of demand for cement. On account of the slowdown, the company expects volume growth to come in lower at 7% to 8% as compared to earlier estimates of 9% to 10%.

    Moreover, the industry is expected to commission 90 MT of capacity in next three years as per announcements. This is expected to put downward pressure on prices. Thus, going forward, those companies that are able to control costs better will have the competitive advantage.

    The company has performed almost in line with our estimates and at the current price of Rs 372, is trading at an EV/tonne of over 2,500 based on our FY11 estimates. Thus, on an asset based valuation method, the stock is attractively valued at the current levels.

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