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UltraTech Cement: Hit by the down-cycle - Views on News from Equitymaster

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UltraTech Cement: Hit by the down-cycle

Oct 30, 2010

UltraTech Cement has announced its 2QFY11 results. The company has reported a decline of 9% YoY and 60% YoY decline in sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Topline declines by 9% YoY during the quarter. The growth was impacted by the overall bleak scenario in the cement industry.
  • Poor realisations and high input costs lead to a 18.7% contraction in operating margins.
  • Operating profits decline by 59.8% which culminate into the bottomline declining by 81.6% YoY.

Financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change
Net Sales 35380 32150 -9.1
PBIDT 11840 4760 -59.8
Operating profit margin 33.5 14.8  
PAT 6310 1160 -81.6
Net Profit margin 17.8 3.6  

UltraTech's performance for the second quarter reflects the first financial results post the amalgamation of Samruddhi Cement Limited with the Company. The results include the performance of Samruddhi with effect from 1 July 2010, which was the Appointed Date for the amalgamation. The results for the corresponding Quarter of FY10 have been re-casted to include Samruddhi's performance for like-for-like comparison and are strictly not comparable with the corresponding period of the previous year.

What has driven performance in 2QFY11?
  • UltraTech Cement reported 9.1% YoY decline in net sales for the quarter ended June 2010 despite a 5% increase in combined cement and clinker sales volume (Cement sales were up by 8% while clinker sales fell by 46%). The fall in realisations (18%) was due to subdued demand on account of monsoons and excess supply due to significant capacity additions.

  • Along with poor realisations, a substantial increase in cost impaired the company's performance. The prices of imported coal rose from US$ 76/Mt to US$ 110/Mt drastically escalating the company's energy cost. During this quarter, power & fuel costs (26%) and freight & handling costs (20%) together comprised about 46% of the company’s net sales.These factors put the company's margins under pressure. As a result, the company’s operating profit margin was down at 14.8% compared to 33.5% in the corresponding quarter last year.

  • Higher depreciation and interest expense brought the bottomline down by 81.6% YoY. The net profit margin dwindled to 3.6% compared to 17.8% in the corresponding quarter last year.

  • The Company's wholly-owned subsidiary, UltraTech Cement Middle East Investments Limited, has completed the acquisition process of ETA Star Cement together with its operations in the UAE, Bahrain and Bangladesh. It has also acquired management control. With the amalgamation of Samruddhi and the acquisition of ETA Star Cement, the Company's capacity stands augmented to 52 MTPA making it the eigth-largest cement company in the world.

What to expect?
The September quarter has been the worst for the cement industry in the recent down-cycle and UltraTech Cement has been no exception to this. However, the worst seems to be over as demand and prices of cement have started firming up.

Significant capacity additions have resulted in a surplus scenario. These capacity additions which will continue in the current year will lead to a further surplus scenario over the next 18 to 24 months. This may impact cement prices to some extent. However, this scenario is a medium term concern. We are positive on the sector from a long perspective. On the other hand, Government initiatives on infrastructure and housing and improving civic amenities are expected to enable the sector grow over 9-10%.

At the current price of Rs 1,100, the stock is trading at an EV/tonne of over Rs 6,200 based on our FY13 estimates. (ResearchPro subscribers, kindly click here). On an asset based valuation method, the stock is trading much above the upper end of our valuation band. Hence, we advise investors to practice caution.

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