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Ultratech: Bottomline outperforms topline
Oct 22, 2007

Performance summary
  • During 2QFY08, the topline growth of 17% YoY was led by improved physical performance (domestic sales volume grew by almost 13% YoY) rather than realisations.

  • Operating costs grew at a slower pace compared to topline, translating into a 30% YoY growth in operating profits.

  • Bottomline witnessed 46% YoY growth owing to expansion in operating profits, higher other income and lower finance charges.

  • Even if one excludes other income, the net margin has expanded by 2.1% during 2QFY08, reporting almost 40% YoY growth in profit after tax.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 10,045 11,734 16.8% 21,849 25,387 16.2%
Expenditure 7,501 8,439 12.5% 15,558 17,756 14.1%
Operating profit (EBITDA) 2,545 3,296 29.5% 6,291 7,631 21.3%
EBITDA margin 25.3% 28.1%   28.8% 30.1%  
Other income 119 258 116.8% 253 527 108.3%
Interest 237 188 -21.0% 463 389 -16.0%
Depreciation 547 581 6.0% 1,091 1,139 4.4%
Profit before tax/(loss) 1,879 2,786 48.2% 4,990 6,630 32.9%
Tax 605 927 53.3% 1,607 2,177 35.5%
Profit after tax/(loss) 1,274 1,859 45.8% 3,383 4,452 31.6%
Net margin 12.7% 15.8%   15.5% 17.5%  
No of shares (m) 124 124   124 124  
Diluted EPS (Rs)*         71.4  
P/E (times)         14.1  
*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 (10% 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 30% 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.

What has driven performance in 2QFY08?
Not realisations, but… : The cement manufacturers have been witnessing robust growth in topline in the past few quarters mainly on account of firm realisations. Same was the case for Ultratech till last quarter. However, during 2QFY08, the topline growth of 17% YoY was more led by improved physical performance (domestic sales volume grew by almost 13% YoY) rather than realisations. The capacity utilisation for the company stood at 85% during 2QFY08. During the quarter, consumption growth has been faster compared to production mainly due to buoyant construction and infrastructure sectors. The company is a major exporter of the commodity. However, on account of buoyant domestic demand, the same was curtailed during the quarter.

Costs under control: During the quarter, costs grew at a slower pace as compared to topline, translating into a 30% YoY growth in operating profits. The company could not only curtail costs as a percentage of sales basis, but was also able to sustain them on a cost per tonne basis. Given the inflationary pressures and rising shipping freight and coal prices, further cost control measures are necessary.

Cost break up
(% of sales) 2QFY07 2QFY08 1HFY07 1HFY08
Consumption of raw materials 8.3% 7.7% 7.5% 8.7%
Staff cost 2.9% 3.8% 2.6% 3.0%
Power and fuel 24.7% 21.9% 24.4% 22.1%
Outward freight 17.9% 17.0% 18.1% 17.3%
Other expenditure 18.4% 21.4% 16.2% 18.3%
Purchase of finished goods 2.4% 0.0% 2.3% 0.5%
Total expenses 74.7% 71.9% 71.2% 69.9%

Boils down to the bottomline: The impressive 3.1% expansion in net margins is the result of 2.8% expansion in operating profits, higher other income and lower finance charges. Even if one excludes other income, the net margin has expanded by 2.1% during 2QFY08 reporting almost 40% YoY growth in profit after tax on account of improved physical performance and lower interest outgo costs. On account of favourable pricing scenario, which has led to improved cash flows, the company was able to reduce debt on its books. The debt to equity ratio of the company improved from 1.5 in FY04 to 0.9 in FY07.

Over the past few quarters: Over the past few quarters, high capacity utilisation levels along with improved pricing scenario have helped the company to continuously report a robust topline growth and strong margins. The benefits of branding initiatives and cost reduction measures have further helped matters. Going forward, the company’s ability to increase market share across regions and curtail costs will result in impressive performance as huge capacities have been planned and expected to come on stream starting from 2008 onwards.

Performance over the past few quarters
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Net sales growth (YoY, %) 58.3% 59.8% 38.2% 15.7% 16.8%
Operating margins (%) 25.0% 30.2% 27.9% 31.8% 29.5%
Net profit margin (%) 12.7% 16.9% 15.8% 19.0% 45.8%

What to expect?
On the operational front, the company has historically been heavily dependant on furnace oil for its operations and hence, in order to reduce the same, it is looking to set up captive power plants based on coal feedstock. To curtail costs and increase capacity to cash on the current favourable pricing scenario, the company has earmarked Rs 33 bn investment outlay to be spent over the next three years. Ready mix concrete is likely to see substantial growth in the years to come and to benefit from this growing segment, the company is setting up ready mix concrete plants in various places in the country. The company has seemingly taken some measures to keep a check on its power and fuel costs, the full impact of the same though, will take some time to come by. Meanwhile, with the company aiming at rationalising its debt position, benefits could accrue in the form of lower interest expenses.

The enhanced capacity will meet the growing demand in the lucrative markets. 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. Moreover, the stock at the current price of Rs 1,006 is trading at an EV/tonne of over US$ 150 based on our FY10 estimates, which is expensive considering the replacement cost and hence caution is suggested.

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