BackBetter realizations cushion UltraTech Cement from cost pressures
The performance is helped by favourable base, since the firm and the industry were facing headwinds such as sluggish demand and weak prices a year ago
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Better realizations and higher volume helped UltraTech Cement Ltd report a healthy performance for the second quarter. From a year ago, stand-alone sales rose almost 20%, aided by 11% growth in domestic volume. Five domestic broking firms forecast sales to rise in the range of 11-19%. The performance, however, is helped by favourable base, since the company and the industry were facing headwinds such as sluggish demand and weak product prices a year ago. The situation is not that bad now. Note that the reported numbers also include those of the acquired units in Gujarat.
That said, the company has managed costs well. Raw material, power, and freight costs rose, but as a percentage of sales they remained more or less stable. That was made possible because of improvement in realizations. “Led by better-than-expected realizations, UltraTech clocked an Ebitda (earnings before interest tax depreciation and amortization) per tonne of ₹ 780, up by ₹ 80 YoY (year-on-year)," Religare Institutional Research said in a note. Better volume also helped the company improve operating leverage. This resulted in a 29% rise in Ebitda, or operating profit. Margins expanded 113 basis points to 16.2%. As the company acquired cement units from Jaiprakash Associates Ltd, interest costs rose sharply, but that was more or less negated by the sharp rise in other income and by lower tax expense. Also, the company changed the depreciation policy lowering the chargeable amount. All this helped it report a 55% jump in net profit to ₹ 410 crore, more or less in line with analysts’ estimates.
At its 2013-14 annual general meeting, UltraTech Cement chairman Kumar Mangalam Birla said the company’s revenue may touch ₹ 25,000 crore in the current fiscal year. If achieved, revenue growth will be 15% in the current fiscal year, much better than the flat growth the company saw a year ago.
Revenue rose 16% in first half of this year. If the growth rate is maintained, UltraTech Cement can easily achieve the target. But for it to do even better, the much awaited pick up in construction and economic activity has to happen.
Market participants expect the volume recovery to gather steam in coming months. Many forecast the coming quarterly performances to reflect the improvement.
If that does not happen, UltraTech Cement and other cement stocks face a threat of price correction as the stock valuations reflect the optimism. “Cement prices and demand are estimated to remain under pressure in October 2014 due to the festival season. However, we expect a recovery thereafter, failing which there can be downward risk to our FY15 earnings estimates," Edelweiss Securities Ltd said in a note.
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