The September quarter results of UltraTech Cement Ltd reflect the impact of falling cement prices since September and an increase in key costs. The company’s operating margin fell by at least 600 basis points sequentially as a result. Consequently, the firm’s shares closed around 4% lower is Friday’s trading session. One basis point is one-hundredth of a percentage point.
Revenues fell by at least 20% on a sequential basis to Rs1,541 crore. Net sales in the June quarter stood at Rs1,952.8 crore. Sales are typically lower in the July-September period because construction activity slows during the monsoon. But the company has been hit further this year owing to falling prices. Since August this year, cement prices started correcting due to a fall in demand in some key states and also because of an increase in supply. Cement prices have in fact fallen 8-10% in the southern markets, which constitute around 30% of the cement despatches of UltraTech. Besides, there has been an increase in freight costs on a per-tonne basis ,and other expenditure increased by 13% quarter-on-quarter on an absolute basis, despite the sharp drop in revenue.
The numbers look impressive on a year-on-year basis, with net profit growing by 53%, simply because realizations have been higher on a year-on-year basis. But considering the fast-changing dynamics of the industry, a quarter-on-quarter comparison on margins and profit makes more sense.
More importantly, considering that the firm’s merger with Grasim Ltd’s cement business will be announced next month, the results have little significance. The key driver of the stock will be the merger ratio that will be announced next month. In the medium to long term, the stock is expected to do well relative to its peers as it will become the largest cement producer in India, with a presence in all key markets. But considering that cement prices may correct further owing to oversupply, stocks in the sector, including UltraTech, may come under pressure. Analysts estimate that surplus capacity in the next 15-18 months will drive down prices by another 15%.
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