Ramp-up of acquired plants to weigh on UltraTech Cement margins
Though acquisition of Jaiprakash Associates cement assets has boosted UltraTech Cement size, the latter’s units operate at a high variable cost and at a relatively low capacity utilization of 50-55%
UltraTech Cement Ltd may find its profitability come under pressure in the next few quarters, adversely affecting its overall earnings growth in 2017-18.
The completion of its acquisition of Jaiprakash Associates Ltd’s (JPA’s) cement assets makes UltraTech the largest cement firm in India, with a capacity 93 million tonnes per annum (mtpa).
Though the acquisition has boosted its size, JPA’s units operate at a high variable cost and at a relatively low capacity utilization of 50-55%, lower than the industry average of 70-72%. This will eat into UltraTech’s Ebitda/tonne for fiscal 2018, analysts cautioned.
“Pre-deal completion, we were working with FY18 Ebidta/tonne of Rs1,000; now, subdued operation performance from acquired units may result in FY18E Ebitda/tonne at Rs900. Also, since the deal has been done on debt basis, impact on overall earnings due to incremental interest cost and depreciation is likely. Our earlier estimate of FY18 Ebitda margin of 21% may also witness some correction,” Binod Modi, analyst at Reliance Securities said. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of profitability.
Voicing a similar concern, Vijay Goel, an analyst at Karvy Stock Broking Ltd, said UltraTech’s portfolio comprises mostly of a premium brand of cement, and it may incur additional cost to rebrand cement made by JPA. Goel’s latest calculations show UltraTech’s FY18 Ebitda/tonne could correct by Rs50-60/tonne from his earlier estimate of Rs1,044/tonne.
For now, investors will have to be content with the step-up in UltraTech’s capacity and getting access to newer markets of central India. “JPA’s units will lift UltraTech’s volume CAGR (compounded annual growth rate) to 15% in FY17-19, but at lower margins,” foreign brokerage firm Jefferies said in a report dated 28 June.
But cement demand in most parts of the country is yet to see a significant revival; so, volume off-take hasn’t been very impressive. Cement prices, too, have cooled off. Thus, a muted macro scenario could impact the pace of ramp-up of these plants, hurting UltraTech’s volume growth in the interim.
Worried over this, Jefferies has cut the company’s volume growth forecast.
“With only a few mine transfer approvals pending, UltraTech’s takeover of JPA’s cement assets is now a matter of time. We build this in 2QFY18 (from 1Q) but now factor in a slower ramp-up here to cut FY18-19 volumes by 5-9%,” the report said. Since the deal has completed a bit earlier, towards the end of first quarter, these estimates should not change much.
All the three broking firms mentioned above have a “hold” rating on the stock. On a year-to-date basis, UltraTech Cement shares have gained more than 20%, but the aforementioned concerns may slow it down somewhat.
The share is trading at a one-year forward price-to-earnings multiple of 26 times, lower than peers ACC Ltd, Ambuja Cements Ltd and Shree Cement Ltd. A positive trigger for valuations could be a faster than expected improvement in profitability of JPA units, analysts said.