UltraTech Cement: weak pricing power and high costs mar Q3 results
The 3% drop in UltraTech Cement Ltd’s stock price on a day when the domestic equity markets were soaring showed that investors were disappointed by the company’s December quarter (Q3) results. A like-to-like comparison of the quarter’s performance with a year back is not meaningful, due to the recent acquisition of cement units from the Jaypee Group. But operating profit missed forecasts significantly in spite of a ramp-up in cement sales because of weak realizations and unanticipated cost hikes.
The Aditya Birla Group cement conglomerate’s stand-alone net sales catapulted by an impressive 33% to Rs7,471 crore. But this was driven by a 37% jump in volumes, thanks to the incremental capacity from its acquired units too. However, sales realization per unit of cement sold was not up to expectations. It was even lower than the September quarter by about 5% and flat on a year-on-year basis. This explains the weakness in cement prices. Besides, analysts say that the pan-India cement producer’s non-trade (large institutional) sales were substantially higher during the quarter, where prices are much lower than in the trade segment.
Further, it was a quarter of unanticipated cost hikes. The ban on use of petroleum coke by cement firms and the hike in import duty on it, after the ban was subsequently lifted, increased energy costs by 21% year-on-year. That apart, rise in diesel costs resulted in higher logistics expenses. These two components account for about two-thirds of the total operating costs, therefore taking a toll on operating performance.
The quarter’s operating margin (excluding other operating income) at 15.5% missed Bloomberg’s estimate by a huge 350 basis points. According to Binod Kumar Modi, senior research analyst at Reliance Securities Ltd, the per tonne Ebitda (earnings before interest, tax, depreciation and amortization) at Rs717 was poor compared to Rs949 and Rs957, respectively, in the year-ago period and the September quarter.
This is not to say that there is gloom ahead. Clouds appear to be clearing up and the management, in the analysts’ conference call, painted an improving demand environment for cement. The infrastructure and low-cost housing push should augur well for the industry and for UltraTech, the country’s largest cement producer.
Although costs continue to rise, analysts reckon that the company has deftly steered through challenging times. Also, costs during the quarter could have been higher due to incremental maintenance cost of the newly acquired units, which will normalize as capacity utilization improves from the current 70% levels. Dealers say that the pan-India company has been pushing sales aggressively in new regions to gain market share.
The key to higher profits in the coming quarters therefore rests on cement prices that should support realizations along with higher sales volumes. Otherwise, the story of rising revenue and declining profits may continue as was the case in the December quarter, when the reported net profit at Rs422 crore was 25% lower year-on-year.
A ramp-up in utilization of capacities of its acquired units, along with improved realization, is important to support the stock price.