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UltraTech margins hit by lower cement prices

UltraTech margins hit by lower cement prices
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First Published: Sun, Jan 17 2010. 08 38 PM IST

Updated: Sun, Jan 17 2010. 08 38 PM IST
UltraTech Cement Ltd’s third quarter net profit came in lower than consensus estimates. Its net profit declined by 17.8% to Rs196 crore, as lower cement prices in the southern market and weak West Asian demand for clinker hit margins. Cement sales in the domestic market grew by 9% to 4.34 million tonnes, but net sales rose by only 1.3% to Rs1,651 crore. Volume growth in the cement industry is not enough to assure sales and profit growth, as prices make a bigger impact.
Higher volumes actually affect margins if cement prices fall, as variable costs increase with the level of production. UltraTech’s operating expenditure increased by 5.7% to Rs1,268 crore. It would have been higher but for the company having commissioned captive power capacity recently, which led to power costs falling by 33% to Rs356 crore. UltraTech’s operating profit margin declined to 24% in the December quarter, from 26.7% in the same period a year ago.
Graphic: Yogesh Kumar / Mint
Two main factors affected performance. Companies such as UltraTech that export clinker, an intermediate substance in cement production, in addition to selling cement in the domestic market have been hit by the drop in demand in West Asia. Price realizations, too, have fallen. In southern India, there has been a fall in demand, particularly in Andhra Pradesh, which has coincided with a sharp jump in capacities. That too has led to cement prices falling in that region, which contributes one-third of UltraTech’s revenue.
There is no clarity at the moment on when construction activity in West Asia will recover, nor on when demand in the south will recover enough to see prices move up. To add to it, in the next 12 months, nearly 40 million tonnes of new cement capacity may come on stream. That may lead to pressure on prices in new markets, depending on the schedule of commissioning. UltraTech expects the industry to be in a surplus situation over the next 18-24 months, resulting in pressure on margins. The company is in the process of merging Grasim Industries Ltd’s cement business with itself, creating a much larger entity. But that may not be enough to cheer investors in a period when India’s gross domestic product growth is getting back on track, but cement may lag other industries in profiting from it. The stock price has gained by around 5% in the last week.
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First Published: Sun, Jan 17 2010. 08 38 PM IST