UltraTech Cement: No respite from cost pressures

UltraTech Cement Ltd’s volume jumped 34% year-on-year to 16.8 million tonnes in the June quarter, aided by faster ramp-up of assets acquired from Jaiprakash Associates Ltd. While UltraTech Cement further consolidates its national leadership position, it gives investors in the stock little reason to cheer.

Although cement volume grew in double-digits, surging operating expenses and interest cost weighed on overall financial performance. Freight, energy and raw material costs continue to head northwards (see chart).

Increased diesel prices pushed logistics costs higher. Additional royalty on limestone mines transfer and higher additive costs impacted raw material costs.

Further, the company increased its petroleum coke (petcoke) usage from 75% in the previous quarter to 83% in the June quarter. Prices of this key input material have increased around 35% year-on-year. Also, its import duty was raised to 10% a few months ago from 2.5%. Since most cement makers meet their petcoke requirements through imports, the depreciating rupee is adding fuel to the fire.

A relief on the cost front is unlikely anytime soon. Cement prices were weak even in a busy construction season and the inability of cement producers to pass on the burden remains a worry. Consequently, margins have suffered. But this is the case with all cement makers and not just UltraTech alone.

However, the company’s ongoing acquisition spree, which is feared to push debt higher, is seen as an added concern for investors. As debt levels rise, interest expenses would also increase.

UltraTech will acquire 13.4 million tonnes per annum of Century Textiles’ cement assets for an enterprise value of ₹ 8,600 crore. The company is simultaneously battling to acquire Binani Cements Ltd and may pay around ₹ 7,900 crore for it.

Finance cost or interest expense saw a sharp increase of 161% year-on-year in the June quarter. That, along with increased depreciation, eroded its stand-alone net profit.

No wonder then the UltraTech Cement stock ended Wednesday’s session down 2.2% on NSE. The stock trades at a rich one-year forward price-to-earnings multiple of 33 times and given these concerns, its valuation needs to correct.