UltraTech Cement builds foundation for growth
UltraTech Cement's strong cost management and growth has placed it among the most favoured cement stocks
UltraTech Cement Ltd’s March quarter can be called decent, if one considers the discouraging backdrop of oversupply and cost pressures plaguing the cement sector. Net profit (after adjusting for tax write-backs) at ₹ 742 crore, which was only marginally above the year-ago period’s figure, beat Bloomberg’s consensus estimate of ₹ 635 crore by nearly 17%.
A higher-than-expected other income growth contributed to better profits. But what’s remarkable is UltraTech Cement’s ability to contain costs and also maintain growth in cement sales volumes. Fuel optimization and other measures helped offset higher input and logistics costs, the company said in a statement. It was able to maintain raw material, staff and other costs as a percentage of sales at the year-ago period levels. However, freight costs rose significantly, both due to higher fuel costs and volumes.
Operating profit was a tad lower than the Bloomberg forecast of ₹ 1,143 crore. Operating margin at 19.6% was marginally lower than forecast and is 265 basis points lower than the year-ago period. One basis point is one-hundredth of a percentage point.
The 9% increase in sales volumes did little to improve profitability, though the net sales rose by 8.2% to ₹ 5,831.2 crore. The main reason for that was a decline in sales realizations by 1.2% from a year ago, implying poor pricing power.
The company’s realization could have been hit due to its exposure to the southern market, analysts say, which comprises about 20% of its sales. The southern market has been reeling under oversupply and weak demand for the past few quarters and was the only region where cement prices declined in the March quarter. The woes in the southern market were offset by demand improvement in the rest of the country on the back of higher construction activity and pace of project execution. Incidentally, the shutdown of Binani Cement Ltd had cut supply, which supported prices in northern India.
UltraTech Cement’s March quarter results had some positive tidings as well. It commissioned fresh capacity and secured court approvals for the merger of its ₹ 3,800 crore Jaypee cement unit acquisition. The one event that hangs over it is the penalty imposed by the Competition Commission of India for fixing cement prices through a cartel.
Among the top three cement firms in the country, UltraTech Cement’s strong cost management and growth has placed it among the most favoured cement stocks. The company’s significant cash generation every year through difficult years has helped it add capacity despite maintaining a healthy debt-to-equity ratio of 0.3 times. The shares have outperformed the benchmark indices and peers in the last several quarters.
“Post a disappointing fiscal 2014, UltraTech is on a road to register a sharp recovery in earnings with expected compounded growth rate of about 25% in earning per share over fiscal 2014–16," Emkay Global Financial Services Ltd said in a report. If that comes true, it should be something to look forward to for shareholders.
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