UltraTech margins improve, but cost pressures to continue

UltraTech margins improve, but cost pressures to continue

The December quarter results of the AV Birla group cement company UltraTech Cement Ltd reflected improved realizations on the back of better cement prices in the last three months. In spite of a mere 4% increase in despatches on a quarter-on-quarter (q-o-q) basis, the pan-India cement player clocked a 12% jump in average realization/tonne to Rs4,084.

Also, UltraTech’s 25-30% exposure to the southern markets, where there is oversupply, adds to its woes. It, however, gained as disciplined production among the southern producers helped improve prices by 13-15% to around Rs230/bag in the quarter.

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Improved realizations offset cost pressures that have strangled the industry. The biggest hike on a q-o-q basis was seen in its freight costs—at Rs794/tonne during the quarter, it was 11% higher. Raw material cost/tonne rose 10% to Rs560 while power and fuel costs went up 5.6% to Rs980/tonne.

Consequently, UltraTech’s operating profit surged by 74% q-o-q to Rs770/tonne. Operating profit margin (OPM) jumped by about 600 basis points (bps) on a q-o-q basis to 20%.

One must note that a perfect y-o-y comparison is not appropriate as Grasim’s cement business, which was merged into UltraTech in July was not included in the year-before data. If adjusted for the same, net sales showed a flattish trend at Rs3,715 crore in the December quarter. The adjusted operating profit was lower by 25% y-o-y at Rs768 crore on account of poor industry fundamentals.

Likewise, reported profit after tax at Rs319 crore, adjusted for the merger, posted a y-o-y decline of 36%.

UltraTech shares have been no exception to the sector’s performance. At Rs1,019, the scrip has underperformed the Sensex significantly over the last one year. To be sure, the December quarter has come as a relief with improved operational efficiencies, but the ability of cement prices to remain stable even as a glut persists for the next 15 months, is what will determine investor sentiment towards UltraTech and the sector as a whole.

Graphic by Ahmed Raza Khan/Mint

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