Diving input costs may ease Ultratech Q3 pain

UltraTech Cement has managed to pare its debt, and continuing it can support the stock’s performance
UltraTech Cement has managed to pare its debt, and continuing it can support the stock’s performance


  • Except in the north, demand in other markets remained muted for varied reasons in Q3
  • The benefits of the recent drop in costs may start reflecting meaningfully in costs from Q1FY23.

December quarter performance remained subdued for Ultratech Cement Ltd, a cement-maker with a pan-India focus. Consolidated sales volume (grey and white cement) in Q3FY22 fell 3% year-on-year (y-o-y) to 23.13 million tonnes. Except in the north, demand in other markets remained muted, impacted by cyclones in the east and south, and reduced cement demand from the infrastructure segment in the central region.

Further, elevated input costs meant consolidated operating margin contracted sharply to 20% from 28% in the same period last year. In Q2FY22, margin was at 24%.


Weak volumes
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Weak volumes

Despite weak performance, Ultratech’s shares rose about 3% on NSE on Monday. “Ultratech’s Q3 earnings were disappointing on volumes and margins due to poor demand in November. However, investors have drawn comfort from management’s upbeat commentary on demand and easing costs. This is likely to rub off on valuations of Ultratech as earnings improve in a seasonally strong Q4," said Mangesh Bhadang, research analyst, institutional equities at Nirmal Bang Securities Ltd.

Last quarter, on a per tonne basis, Ultratech’s logistics cost increased by 4% y-o-y, energy cost increased by 39% and raw material cost was up 7% y-o-y. In a post-earnings conference call, the management said Q3 was a challenging quarter with an unexpected demand decline in November and consequent impact on prices. Unseasonal rainfall in some parts, shortage of labour and sand availability and a construction ban in the National Capital Region were factors that weighed on demand in November. However, demand was back on track in December with capacity utilization for the month improving to about 84% from 75% capacity utilization seen throughout the quarter, pointing to better demand. The management further said Q4 has begun on a positive note with improvement in demand and prices. Urban housing is seeing rapid growth and new infrastructure projects by the government should support demand in the March quarter, the management said.

The management said prices of key inputs, petroleum coke and international coal, have begun to soften from their peak but remain elevated y-o-y. The benefits of the recent drop in costs should start to reflect meaningfully from Q1FY23.

Meanwhile, in CY21 Ultratech beat close competitor Shree Cement Ltd by a wide margin, with its shares rallying 44% compared with the latter’s 12% return.

“Our estimates for FY23 show that the Ultratech stock is trading at an EV/Ebitda of around 14 times. With reducing debt, we see its gap with Shree Cement (FY23 EV/Ebitda of 17 times) narrowing. Also, one problem with Shree is its comparatively high exposure to east, which faces oversupply. As such, the Shree Cement stock may continue to underperform vis-à-vis Ultratech at least in the near term," said Bhadang. EV is enterprise value. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Ultratech would incur a capex of 965 crore for modernization and white cement capacity expansion in phases. It has also commissioned its line II of the Bara grinding unit in Uttar Pradesh, which has cement capacity of 2 million tonnes per annum (mtpa). With this, in FY22 Ultratech has commissioned 3.2mtpa of new cement capacity, as planned, taking its manufacturing capacity to 114.55mtpa.

What is more, the company has also managed to reduce its debt. On a consolidated basis, its net debt fell by about 190 crore sequentially to 6,147 crore with net debt-to-Ebitda improving from 0.55 in the March quarter to 0.49 times in the December quarter. Continuous paring of debt could aid the stock’s performance.

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