Investors must not get carried away by near-term spurt in UltraTech share prices as a look at the stock’s valuations is a must. (Sarvesh Kumar Sharma/Mint)
Investors must not get carried away by near-term spurt in UltraTech share prices as a look at the stock’s valuations is a must. (Sarvesh Kumar Sharma/Mint)

UltraTech Q4 results beat ACC’s hands down, but so do valuations

  • The positives accruing from UltraTech Q4 results have been factored in its valuation, limiting a meaning upside from current levels
  • Unless cement prices rise meaningfully and hold ground, valuations of most cement stocks, including UltraTech, look expensive

Mumbai: Ahead of its Q4 results announcement on Wednesday, the UltraTech Cement Ltd stock was in the red. Clearly, after peer ACC Ltd’s disappointing earnings, the Street was fearing a repeat. But on the contrary, UltraTech posted decent quarterly results.

In fact, it has surpassed analysts’ estimates on most counts. Standalone net profit more than doubled to 1,017 crore in the March quarter (Q4). Bloomberg’s consensus net profit estimate was at 769.90 crore. Aided by robust domestic sales, its overall cement volumes grew 15% year-on-year to 21.3 million tonnes.

Unlike ACC, UltraTech’s operating margins improved by more than 100 basis points year-on-year to 21%. This was on the back of a sharp reduction in freight costs and other operating expenses. UltraTech said it saw complete benefits of the revised axle load norms in the March quarter, which helped lower freight costs.

While fuel cost was flat sequentially, but remained high annually, the recent softening of petroleum coke and coal prices are expected to aid margins, going ahead.

In the case of ACC, lower supply of linkage coal and an increased mix of domestic petroleum coke pushed costs higher. Its operating margins missed estimates.

Another disappointment was ACC’s lower-than-industry cement sales volume growth. No wonder then that ACC trades at a much lower valuation than most of its large peers.

Meanwhile, improved performance of acquired assets from Binani Cement Ltd and Jaiprakash Associates Ltd (Jaypee Cement)—which translated into better overall capacity utilization levels—was another positive for UltraTech.

Further, the company is in the process of selling non-core assets acquired in the United Arab Emirates (UAE) and China. The sale proceeds of these are said to be used to deleverage the balance sheet.

Rewarded for stellar Q4 results, UltraTech shares surged nearly 6% intraday on NSE, ending the day 4.68% higher at 4,394.65. But before one gets carried away by this near-term spurt, a look at the stock’s valuations is a must.

The UltraTech stock is trading at a rich one-year forward EV/Ebitda of 16 times. EV stands for enterprise value and Ebitda is earnings before interest, tax, depreciation and amortization. It is the second most expensive pan-India focused cement stock after Shree Cement Ltd. As per analysts, most of these positives have largely been factored in, limiting a meaningful upside from the current levels.

Had cement prices been on a firm footing, these valuations would have seemed justified. But as witnessed lately, cement price hikes in most regions have failed to sustain. Although several media reports say that prices were increased again in April, it remains to be seen if these hikes sustain.

Unless cement prices increase meaningfully and hold ground, valuations of most cement stocks, including UltraTech, look expensive.

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