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UltraTech Cem: The lower base effect
Nov 1, 2011

UltraTech Cement has announced its financial results for the quarter ended September 2011. During the quarter, the company reported a rise of 22% YoY and 141% YoY in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 21.6% YoY during the quarter on account of lower base effect. Combined domestic cement and clinker sales volume rise marginally by 2.1% YoY during the quarter.
  • Operating profits increase by 43% YoY. Operating margins improve from 12.7% in 2QFY11 to 14.9% in 2QFY12.
  • Higher other income, lower interest costs help bottomline to surge by 141% YoY. Net margins improve from 3.6% in 2QFY11 to 7.1% in 2QFY12.
  • During 1HFY12, sales and profits grow by 15% YoY and 43% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11^ 1HFY12 Change
Sales 32,147 39,098 21.6% 72,045 82,751 14.9%
Expenditure 28,069 33,281 18.6% 57,969 65,054 12.2%
Operating profit (EBDITA) 4,078 5,816 42.6% 14,076 17,697 25.7%
Operating profit margin (%) 12.7% 14.9%   19.5% 21.4%  
Other income 684 1,034 51.2% 1,541 1,692 9.8%
Depreciation 2,184 2,228 2.0% 4,316 4,457 3.3%
Interest 845 672 -20.5% 1,632 1,398 -14.4%
Profit before tax 1,733 3,951 128.0% 9,669 13,534 40.0%
Tax 575 1,162 102.1% 2,934 3,914 33.4%
Profit after tax/(loss) 1,158 2,789 140.9% 6,735 9,620 42.8%
Net profit margin (%) 3.6% 7.1%   9.3% 11.6%  
No. of shares (m)         274.0  
Diluted earnings per share (Rs)*         61.8  
P/E ratio (x)*         18.6  
*On a trailing twelve month basis; ^Restated figures for six months ended September, 2010 are
aggregation of the company's result and 1QFY11 result of erstwhile Samruddhi Cement Ltd.
The company was amalgamated with UltraTech Cement with effect from 1st July, 2010.

What has driven performance in 2QFY12?

  • UltraTech Cement reported a 21.6% YoY rise in net sales for the quarter ended September 2011. The seemingly improved performance was mainly on account of a lower base effect. In fact, the company's performance was subdued if compared with that of the quarter ended June 2011. The combined cement and clinker sales volume registered a marginal rise of 2.1% YoY as cement demand remained subdued. Sluggish demand, weak realisations and significant increase in costs were the main reasons for it.

  • The company's operating margins improved from 12.7% in 2QFY11 to 14.9% in 2QFY12 as most cost heads barring raw materials and purchase of traded goods, witnessed a decline (as a percentage of net sales). Higher other income, marginal increase in depreciation charges and lower interest costs led profit before tax (PBT) to increase by 128%.

  • At the bottomline level, profits increased by 140.9% YoY. Net profit margins improved from 3.6% in 2QFY11 to 7.1% in 2QFY12.

  • The company has planned a capex of about Rs 110 bn over the next 3 years for setting up of additional clinkerisation plants at Chhattisgarh and Karnataka together with grinding units, bulk packaging terminals and ready mix concrete plants across the country. These expansion projects are expected to be commissioned by early FY14. As a result, the company's cement capacity will increase by 9.2 m tonnes per annum (mtpa).
What to expect?
The cement industry continues to be in the throes of excess capacity and the scenario is likely to persist for another 2-3 years. As such, cement price realisations will remain under pressure. Additionally, high commodity and input prices will keep margins low.

At the current prices of Rs 1.135, the stock is trading at 18.6 times its trailing twelve month earnings, making it expensively valued as per the replacement cost method. We maintain our "Sell" view on the stock.

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