UltraTech Cement: surging fuel cost remains a worry
UltraTech Cement Ltd’s power and fuel cost continues to escalate at a worrying pace. In the September quarter, this expense surged to as much as 20% of revenue. Of course, some of this is due to the integration of assets acquired by the company from Jaiprakash Associates Ltd, but higher petroleum coke (pet coke) and coal prices are leading to the surge in costs as well.
On a year-on-year basis, pet coke prices have increased 70% to $95/tonne, the company said in an investor presentation. Pet coke is a key input for cement producers and makes up 76% of UltraTech Cement’s fuel mix.
In a post-earnings conference call, the management told analysts that pet coke prices have further risen to $105/tonne and the company might consider increasing the usage of coal going ahead.
Cement analysts say fuel cost is likely to remain elevated going ahead as well, with pet coke prices continuing to surge. While UltraTech Cement’s earnings are not comparable given the acquisition of Jaypee assets, a northward-headed fuel cost is a concern, they added.
Other than fuel expenses, freight costs too saw an increase annually due to higher diesel prices, although they fell sequentially. In the company’s transport mix, roads have the highest share of 74%. As a result, operating cost has risen sharply.
“Operating cost/tonne surged to Rs3,973, up 3.2% y-o-y and 3.3% sequentially. EBITDA/tonne came in at Rs957 last quarter, as against Rs979 and Rs1,113 in 2QFY17 and 1QFY18, respectively,” said Binod Modi, analyst at Reliance Securities Ltd, in a note. Ebitda is short for earnings before interest, tax, depreciation and amortization
Cement sales volume (including exports) surged by nearly 17.5% year-on-year to 13.14 million tonnes, aided mainly by the inclusion of the acquired units. As per analysts’ estimates, the company’s average realization rose more than 4% year-on-year to Rs4,340/tonne in the September quarter, although it fell sequentially given the seasonal weakness.
Meanwhile, the stand-alone net profit at Rs431 crore and net sales at Rs6,478 crore were higher than Bloomberg analysts’ estimates of Rs376.50 crore and Rs6,406.30 crore, respectively.
On a year-to-date basis, the UltraTech Cement stock has rallied 26%, outperforming the Sensex, and trades at a one-year forward price to earnings multiple of 29 times.