Home / Markets / Mark To Market /  UltraTech’s valuation gap with Shree Cement may narrow post earnings

Stellar September quarter earnings by ACC Ltd raised the bar for cement makers. Competitor Ultratech Cement Ltd not only exceeded the Street’s expectations, but also outperformed ACC on key parameters.

UltraTech’s cement volumes grew 7% year-on-year (y-o-y) to 20.1 million tonnes. Analysts were pencilling in a low single-digit volume growth. ACC had earlier reported 1% y-o-y volume growth. UltraTech’s rural market penetration has increased in the past year, driving growth. UltraTech’s volumes got a fillip from rural demand and government spending on infrastructure, chief financial officer Atul Daga said in an interview. He expects demand momentum in the rural areas to continue going ahead.

Source: Reliance Securities Ltd
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Source: Reliance Securities Ltd

Dealers channel checks have been indicating pent-up demand in the individual home-building segment, especially from smaller towns. Sequentially, realizations declined given the seasonal weakness in prices, but the fall was lower than expected, analysts said.

UltraTech’s tight leash on costs continued, with fixed costs declining by 14% y-o-y in the September quarter. Daga pointed out that some of these costs would make a comeback as normalcy resumes.

As expected, increased diesel prices pushed its logistics cost higher. Similarly, costlier fly ash resulted in higher raw material cost. Both these components form around 50% of UltraTech’s overall cost structure. The saving grace was energy costs, which declined around 9% y-o-y due to the use of low-cost petroleum coke. However, sequentially, energy cost moved up. Analysts expect higher pet coke prices to impact UltraTech towards the end of Q3FY21.

Strong volumes and strict cost control helped UltraTech’s profit and revenues beat Bloomberg’s consensus analysts’ estimates. Another positive was the net debt reduction of 2,519 crore in the September quarter. Consolidated net debt now stands at 12,132 crore. UltraTech’s elevated debt has been a concern for investors lately. Daga said that the company aims to bring its net debt/Ebitda below 1x by the end of this financial year. Currently, this metric stands at 1.22x. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Analysts expect the stock’s valuation to improve, aided by strong volume growth and debt reduction. They expect UltraTech’s valuation gap with Shree Cement to narrow from hereon. On a one-year forward EV/Ebitda basis, UltraTech is trading at a valuation multiple of 15 times. It is the second most expensive listed Indian cement stock after Shree Cement Ltd, which trades at an EV/Ebitda multiple of 19 times. EV is short for enterprise value.

Meanwhile, the UltraTech stock ended Wednesday’s session at 4,631, up around 2%. The stock is close to reclaiming its 52-week high of 4,754 seen in January this year.

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