Mumbai: The key positive highlight of UltraTech Cement Ltd’s June quarter earnings is the sharp improvement in operating margin. Cast your eyes on the chart alongside. Ebitda margin surged 26%, exceeding analysts’ estimate of 23-24%.

Ebitda is earnings before interest, tax, depreciation and amortization, and is a key measure of profitability.

This improvement in margin was primarily driven by higher price realizations. “Cement realisation/tonne witnessed sharp uptick by 13.5% YoY and 12% QoQ at 5,037 (which seems to be the highest compared to peers reported so far)," said analysts from Reliance Securities Ltd. Softening input costs also supported operating performance.

Unfortunately, the margin performance wasn’t enough for investors to shift focus from the company’s weak volume growth. Cement sales volume increased by merely 2% year-on-year to 17.86 million tonnes (mt), much lower than the anticipated 18.5 mt.

In its investor presentation, UltraTech Cement indicated that the cement industry’s volumes declined by 3-4% during the June quarter. At the same time, industry’s capacity utilization was at 67%, suggesting demand was rather tepid.

In a post-earnings conference call with analysts, the management said that cement demand was impacted by general election code of conduct, but is likely to improve in the second half of the year. The company foresees 6% growth in cement demand for the industry in fiscal year 2020.

As far as prices are concerned, the management said the June exit price was 3% lower than the average price seen earlier in the month and the demand-supply dynamics would play on prices, hereon. The benefits of the decline in the price of petroleum coke, a key input, will be seen in the quarters ahead, it added.

Going ahead, UltraTech Cement’s focus remains on deleveraging and consolidation of sister firm Century Textiles’ cement assets.

Meanwhile, improved performance of the acquired assets from Binani Cement Ltd and Jaiprakash Associates Ltd (Jaypee Cement), besides sequential reduction in debt were some other positives. But the sour point for the market remained poor volume growth.

Reacting to its earnings, the UltraTech Cement stock swung from the green to red, closing over 2% lower to 4,233.15 on Thursday. Nonetheless, it was the second-most expensive pan-India-focused cement stock after Shree Cement Ltd, trading at a one-year forward EV/Ebitda of 15 times. EV stands for enterprise value.

To be sure, analysts have cautioned of some more downside in the UltraTech Cement stock given that September is a seasonally weak quarter for the sector.

The lull in demand, especially from the housing sector, continues to weigh on cement prices. This does not bode well. Cement prices across the country corrected further in July and are likely to remain on a weak footing, at least for now.

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