Good volume growth in December in cement dispatches has led to a spurt in the prices of cement stocks and Ultratech Cement Ltd is no exception. The company’s stock has zoomed from Rs271 at the beginning of December to Rs381 now, reaching a high of Rs438 earlier this month.
In short, the stock is up 40% since the beginning of December. The move is essentially a reaction from the extreme pessimism about the industry’s prospects, with worries about an impending collapse in real estate and a huge capacity coming on stream in the near future.
There were three big worries for the industry: high and rising input costs squeezing margins, excess supply and demand collapse. The December volume data suggest there has been no collapse of demand. That has led to cement prices holding their ground. Hence, the rebound in cement stocks.
Ultratech’s 6% increase in sales volume (12% rise in domestic volumes) needs to be seen in the context of the earlier Armageddon scenario being painted by analysts. Net sales rose 18% year-on-year and although operating profits were down 8%, that’s much better than what most analysts had expected. Interest costs increased, which is why net profits, at Rs238 crore, were down 15%. But even that has been better than most analyst estimates.
Also See Firm Trend (Graphic)
Total sales during the quarter amounted to 4.49 million tonnes while earnings before interest, tax, depreciation and amortization (Ebitda) was Rs451 crore. That gives Ebitda per tonne of Rs1,004, well above analyst estimates of Rs850-900 per tonne.
The company management says the benefits of lower fuel prices will be felt from the March quarter because it used oil from inventory and from orders placed earlier during the December quarter. Also, as Gaurav Dua, head of research at broking firm Sharekhan Ltd, points out, there are a host of factors driving costs down such as the cut in central value-added tax, fall in material costs, and decline in freight and packaging costs. The impact of this will be felt from the next quarter.
Ultratech will be commissioning new plants and captive power plants this fiscal, which will mean higher volumes and lower costs.
But perhaps the biggest argument for a relook at cement stocks lies in the possibility that the recent upsurge in cement volumes could indicate resilience in infrastructure spending. Nevertheless, the fact remains that, as the company management points out, “the likely release of around 100 million tonnes capacity in a phased manner over the next two years coincides with slower economic growth. This will put pressure on sales realization and margins in FY10.”
Add to that the fact that the stock has already risen so much, and it doesn’t seem there’s much of an upside from current levels.
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Graphics by Ahmed Raza Khan / Mint