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UltraTech Cem: Profits plunge 52% in Sept qtr - Views on News from Equitymaster

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UltraTech Cem: Profits plunge 52% in Sept qtr
Oct 21, 2013

UltraTech Cement has announced its standalone financial results for the second quarter of the financial year 2013-14 (2QFY14). During the quarter, the company reported a decline of 4.2% YoY in net sales and 52% YoY decline in net profits. Here is our analysis of the results:

Performance summary
  • On a standalone basis, sales decline by 4.2% YoY during the quarter.
  • Operating profits decline by 34.4% YoY as operating margins decline from 21.4% in 2QFY13 to 14.7% in 2QFY14.
  • Other income decreases by 18.7% YoY during the quarter.
  • Depreciation charges and interest expenses increase by 10.7% YoY and 47.9% YoY, respectively.
  • Net profits decline by 52% YoY during the quarter; net margins decline from 11.7% in 2QFY13 to 5.9% in 2QFY14.

Standalone financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 46,994 45,021 -4.2% 97,713 94,596 -3.2%
Expenditure 36,942 38,424 4.0% 74,764 77,508 3.7%
Operating profit (EBDITA) 10,052 6,597 -34.4% 22,949 17,088 -25.5%
Operating profit margin (%) 21.4% 14.7%   23.5% 18.1%  
Other income 706 574 -18.7%  1,576  2,456 55.9%
Depreciation 2,325 2,573 10.7%  4,606  5,093 10.6%
Interest 600 888 47.9%  1,098  1,548 41.0%
Profit before tax 7,834 3,711 -52.6% 18,821 12,903 -31.4%
Tax 2,334 1,070 -54.2%  5,537  3,536 -36.1%
Effective tax rate 29.8% 28.8%   29.4% 27.4%  
Profit after tax 5,500 2,641 -52.0% 13,284  9,367 -29.5%
Net profit margin (%) 11.7% 5.9%   13.6% 9.9%  
No. of shares (m)       274.1 274.2  
Diluted earnings per share (Rs)*         82.6  
P/E ratio (x)*         23.8  
*trailing twelve-month earnings

What has driven performance in 2QFY14?
  • UltraTech Cement reported 4.2% YoY decline in net sales for the quarter ended September 2013. In volumes terms, domestic cement and clinker sales of grey cement remained flat at 9.1 million tonnes during the quarter compared to the corresponding quarter of the previous financial year. The prolonged monsoons impacted cement demand growth. Sales of white cement and wall care putty increased by 15.1% YoY to 2.75 lakh metric tonnes.

  • Operating profits decreased by 34.4% YoY owing to subdued cement price realisation. On the cost front, all major cost heads, barring power and fuel expenses witnessed inflationary pressures. While power and fuel expenses (21.2% of net sales) declined by 1.6% YoY (as a percentage of net sales), raw material costs (16.8% of net sales), employee expenses (6.3% of net sales), freight and forwarding expenses (22.1% of net sales) and other expenses (18.9% of net sales) increased by 2.9% YoY, 1.2% YoY, 2.3% YoY and 1.9% YoY respectively (as a percentage of net sales). The company's operating margins declined from 21.4% in 2QFY13 to 14.7% in 2QFY14.
    Operating cost break-up
    (Rs m) 2QFY13 2QFY14 Change
    Cost of raw materials 6,608 6,775  
    Change in inventory  (650) 90  
    Purchases of stock-in-trade 561 703  
    Total Raw Materials 6,518 7,568 16.1%
    % of net sales 13.9% 16.8%  
    Employee expenses 2,395 2,844 18.8%
    % of net sales 5.1% 6.3%  
    Power & fuel 10,741 9,566 -10.9%
    % of net sales 22.9% 21.2%  
    Freight & forwarding expenses 9,314 9,942 6.7%
    % of net sales 19.8% 22.1%  
    Other expenses 7,974 8,504 6.6%
    % of net sales 17.0% 18.9%  
    Total operating expenses 36,942 38,424 4.0%
    % of net sales 78.6% 85.3%  

  • The other income (including other operating income) dropped by 18.7% YoY during the quarter. Depreciation charges and interest costs increased by 10.7% YoY and 47.9% YoY respectively.

  • Net profits decreased by 52% YoY. Net profit margins declined from 11.7% in 2QFY13 to 5.9% in 2QFY14.

  • The company commissioned a 25 megawatt (MW) thermal power plant at Rajashree Cement in Karnataka during the quarter. It also commissioned a 1.6 million tonnes per annum (mtpa) cement grinding unit at Jharsuguda in Odhisha that went on stream in October, 2013. With this, the company's total cement capacity stands increased to 55.5 mtpa.

  • In September 2013, UltraTech acquired Jaypee Cement Corporation Ltd's Gujarat cement unit. The acquisition includes 4.8 mtpa cement capacity, 57.5 MW coal-based thermal power plan, limestone reserves of over 90 years at current capacity and a captive jetty at Sewagram. The deal has been finalised at an enterprise value of Rs 38 bn plus/minus the actual net working capital at closing. The deal will help it further consolidate its leading position in the industry.

What to expect?

UltraTech Cement's cement sales remained subdued on account of the ongoing slowdown in the housing and infrastructure industry as well as the prolonged monsoons.

There was a significant drop in margins on account of lower cement realisations and increasing cost pressures. While power & fuel costs declined on account of easing prices of imported coal, the benefit was eroded due to the rupee depreciation against the US dollar. On the other hand, increasing diesel prices exacerbated raw material and logistics expenses.

Given the sluggishness in the economy and persistent inflationary pressures, we expect growth and profitability to be subdued during the current financial year. At the current prices of Rs 1,962 the stock is trading at 23.8 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 2-3 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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