PremiumBetter-than-expected realizations and tight cost curbs aided the earnings performance of UltraTech Cement Ltd in a quarter marred by covid-led curbs. The pan-India focused cement maker saw realizations hit a multi-quarter high in an otherwise seasonally weak quarter because of firm cement prices. On a per tonne basis, its average realization stood at ₹5,157 in Q1FY22, up by around 7% sequentially.
Operating costs remained elevated during the quarter mainly because of higher freight expenses. However, input costs per tonne declined sequentially, because of UltraTech’s fuel mix strategy and increasing dependence on green energy. Consequently, Ebitda/tonne improved to ₹1,536 in Q1FY22 from ₹1,416 in Q1FY21 and ₹1,328 in Q4FY21. Ebitda is short for earnings before interest, tax, depreciation and amortization.
However, for investors in this stock, UltraTech’s debt reduction spree is more comforting as the company aims to become net-debt free by FY23. Its net debt reduced further by ₹733 crore in Q1FY22.
In a post-earnings conference call, the management said that covid impacted cash flows in Q1 and there was an increase in working capital requirements of ₹600-700 crore. Working capital increases in Q1 because of inventory built up for monsoons and then reduces gradually, the management explained.
The management expects cash flow trajectory to remain strong. UltraTech has prepaid long-term loans of ₹5,000 crore this month and its net debt-to-Ebitda is now less than 0.5 times, it added.
“UltraTech’s operating cash flow generation has been quite healthy in recent years, mainly supported by steady realization and cost deflation, which have enabled the firm to deleverage its balance sheet meaningfully. Therefore, we expect its net debt-to-Ebitda to reach 0.27 times in FY22 and -0.21 times in FY23," said Binod Modi, head of strategy at Reliance Securities Ltd.
Achieving a debt-free status is expected to give UltraTech’s valuations a boost and bridge the gap with its peer Shree Cement Ltd. The latter is debt-free and the most expensive listed Indian cement stock. On a one-year forward enterprise value/Ebitda basis, the former is trading at a valuation multiple of 13 times and the latter at 16 times, according to Bloomberg data.
“UltraTech’s volume growth is expected to beat the industry because of its huge capacity addition and the upward movement in the stock factors in this positive. We feel the next trigger for the stock would come from the trajectory of cash flows and timely achievement of its debt reduction target," said an analyst with a domestic brokerage house requesting anonymity.
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