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Ultratech: A step forward, and one back...

Oct 24, 2005

Performance summary
Cement major, UltraTech Cement, announced its September 2005 quarter numbers during the weekend. While the company has reported a profit during the quarter under consideration vis-a-vis a loss in the corresponding quarter of the previous year, the performance has not been enthusing. Despite a robust topline growth during the quarter, substantial erosion in operating margins dented the performance.

Financial performance snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net Sales 5,711 6,345 11.1% 12,281 14,224 15.8%
Expenditure 4,768 5,696 19.5% 10,395 12,082 16.2%
Operating Profit (EBDITA) 943 649 -31.1% 1,887 2,142 13.5%
EBITDA margin (%) 16.5% 10.2%   15.4% 15.1%  
Other income 49 81 65.4% 124 192 55.2%
Interest 269 224 -16.7% 553 445 -19.6%
Depreciation 649 521 -19.7% 1,191 1,031 -13.5%
Profit before tax 75 (15) -119.6% 267 859 221.8%
Tax 98 (15) -115.8% 178 258 45.2%
Profit after Tax/(Loss) (23) 1   89 601 573.0%
Net profit margin (%) -0.4% 0.0%   0.7% 4.2%  
No. of Shares (m) 124 124   124 124  
Diluted earnings per share* (0.7) 0.0   1.4 9.7  
Price to earnings ratio (x)         42  
(* annualised)            

Company background
Ultratech Cement Ltd., 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. The company 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 per cent of the country's total cement exports. Cement and clinker is exported to countries around the Indian Ocean, Africa, Europe and the Middle East. Europe and UAE are the major markets for Ultratech Cement.

What has driven performance in 2QFY06?
Topline growth slows down: UltraTech reported an 11% YoY growth in topline during the quarter. While this performance looks decent on a YoY basis, when compared to the previous quarter (1QFY06), there is a substantial decline in topline. This could be attributed to the fact that almost half of the company’s consolidated capacity serves the western markets of the country, which was plagued by significant rains and floods in the month of July and August 2005. Apart from this, as per a company statement, the operations of the company’s plant at Kovaya were shut down for a week owing to heavy rains and floods in Gujarat. However, it must be noted that since this capacity also serves the export markets of the Middle East, which could have had acted as some cushion for the company. Though the company does not provide any break-up of volume sales, it seems to have benefited from continued strong demand and realisations in the export markets.

Operating margins tumble: Operating margins of the company tumbled from over 18% in the previous quarter to a mere 10% in 2QFY06. On a YoY basis also, operating margins have slid by a good 630 basis points, which is rather disappointing (see chart above). This poor performance could be attributed to a sharp rise in expenses pertaining to purchase of finished goods (up 165% YoY), freight & handling charges (up 40% YoY) and other expenditure (up 20% YoY). Freight & handling charges, which forms almost 25% of the company’s total operating expenses seemingly was affected on the back of a rise in fuel prices in the country. Apart from this, it must be noted that the company incurred additional costs for repairs, maintenance, raw materials, stores and spares totaling to Rs 105 m on account of plant shutdown, which could have saved the company’s performance to a certain extent. However, the comforting factor was the continued control over power costs, which reduced from 37% as % of net sales to 29% (see table below). It must be noted that power and fuel costs is the biggest contributor to the total operating expenses of the company at 32% (40% in 2QFY05).

Cost break-up (% of net sales)
2QFY05 2QFY06 1HFY05 1HFY06
Inc/Dec in stock in trade -6.4% -3.7% -4.1% -2.6%
Raw material consumed 10.1% 8.8% 10.3% 8.8%
Purchase of finished goods 5.9% 14.0% 6.0% 10.7%
Staff costs 3.7% 3.0% 3.5% 2.4%
Power & Fuel 37.0% 28.6% 34.0% 27.5%
Freight & Handling 18.0% 22.7% 17.9% 22.7%
Other expenditure 15.2% 16.5% 17.1% 15.4%
Total expenses 83.5% 89.8% 84.6% 84.9%

Recording profits, but…: Though the company has registered a profit of less than Rs 1 m for the September 2005 quarter, which appears favourable compared to a loss of Rs 23 m in the corresponding quarter of the previous year, it is negligible when considered with the Rs 600 m earned by the company in 1QFY06. The situation during the quarter would have been worse but for the 65% rise in other income and a 17% YoY and 20% YoY fall in interest and depreciation expenses respectively along with a tax write-back.

What to expect?
At Rs 410, the stock is currently trading at a price to earnings multiple of 42 times its 1HFY06 annualised earnings (approx. US$ 90 EV/ton). After a strong first quarter performance, the company’s second quarter performance has taken us by a bit of a negative surprise. In fact, we believe that the company’s 2QFY06 performance has negated its robust performance of the previous quarter.

Nonetheless, considering the fact that the company is present in a sector, which is likely to be in the limelight for the next couple of years, things could improve going forward. Further, while the company has seemingly taken some measures to keep a check on its power and fuel costs, the full impact of the same will take some time to come by. It must be noted that the company is setting up a 92 MW lignite (locally available) based thermal plant at its Gujarat unit. Further, with respect to its association with Grasim, FY06 onwards will see the synergy gains being realised by the company in terms of improved logistics and distribution costs, procurement, etc. Further, with the company aiming at rationalising its debt position, benefits could also accrue in the form of lower interest expenses. Investors should thus wait for an opportune time to invest in the stock depending on how these developments pan out.

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