Sharp reduction in debt gives UltraTech an edge over peers
UltraTech Cement saved ₹780 cr in working capital needs, which helped the company pare debt in Q3
UltraTech Cement Ltd has put up an impressive earnings show for the December quarter. Robust volume growth of 14% year-on-year (y-o-y) to 23.9 million tonnes exceeded analysts’ estimates by a mile. Volumes were aided by improved demand from government projects and the real estate sector.
Better demand translated into around 4% y-o-y growth in realizations to ₹5,132 per tonne. While the quarterly results beat the Street’s estimates on many counts, one area that stood out was the faster pace of deleveraging at UltraTech. This gives the company an edge over most of its competitors, analysts said.
On a sequential basis, its net debt reduced by ₹2,696 crore to ₹9,436 crore at the end of the December quarter. With that, its consolidated net debt-Ebitda, a key metric, improved from 1.87 times to 0.84 times y-o-y. Ebitda is short for earnings before interest, tax depreciation and amortization. Higher cash conversion and a squeeze in working capital requirements has supported debt repayment.
In a post-earnings conference call, the management said that it kept a tight control on its working capital. The company saved ₹780 crore in working capital needs, which helped the company pare debt.
Investors must note that UltraTech had previously said that it aims to become net-debt-free by fiscal year 2023. Analysts said quicker deleveraging is a sentiment positive and should help bridge the gap with peer Shree Cement Ltd, which is the most expensive listed Indian cement stock. Bloomberg data shows that UltraTech is trading at an EV-Ebitda of 16 times, a discount to Shree Cement’s 22 times valuation multiple. EV is short for enterprise value.
While all this is good, operating margins are under threat from rising costs. In a post-earnings conference call, the management said that variable cost is expected to increase in the near term as prices of petroleum coke and imported coal have risen. However, the full impact will start showing in Q1FY22, as some low-cost inventory will be exhausted during this quarter, it added.
So, investors should brace for some impact on operating margins, especially in view of the limited or no price hike opportunities in the near term. In the December quarter, operating margins rose from 20.3% to 25.3% from the year-ago period. In a note to clients, foreign brokerage CLSA said that while UltraTech’s Q3FY21 earnings were significantly ahead of estimates, cost pressures loom.
The UltraTech stock hit a fresh life-time high of ₹5,831.80 on the NSE on Monday. However, at the end of trading session, it closed in the red on profit-booking.
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