UltraTech’s results are a mixed bag as far as outlook on costs and pricing go

  • A number of brokerage firms recently downgraded the sector due to concerns on pricing
  • UltraTech’s stand-alone operating margin shrunk 121 basis points on a year-on-year basis to 15.8%

Elevated input costs eroded margins of UltraTech Cement Ltd even in the December quarter. The pan-India focused company’s stand-alone operating margin shrunk 121 basis points on a year-on-year basis to 15.8%. A basis point is 0.01%

Increased diesel prices pushed logistics cost higher by 4% year-on-year to 1,169/tonne. A rise in the prices of petcoke during the quarter along with a depreciating rupee led to energy costs rising 16% as well. Petcoke, which is crude oil derivative, is a key input for cement producers. UltraTech meets 35% of its petcoke requirement via imports. Further, raw materials costs rose 3% owing to increased additive prices.

Not just UltraTech, but the whole sector has been battling cost pressures for some time now. What makes the situation worse is the lack of pricing power alongside.

Thankfully, crude oil prices are now easing. In a post-earnings conference call with analysts, Atul Daga, UltraTech’s chief executive, said that there is some relief on the cost front. Diesel and petcoke prices have corrected and would reduce the company’s overall costs, which would start reflecting from the March quarter onwards.


Life would have been simpler for investors in cement stocks if a timeline for price recovery would be known as well. But as Daga said, it would require a magic wand or crystal ball to know when prices will start improving.

The pricing environment for the sector remains challenging as average cement prices dropped nearly 1-2% compared to the preceding quarter, according to the company’s investor presentation. North and central India witnessed marginal improvement, whereas prices in the rest of the markets declined.

High competitive intensity in the sector has kept supply higher than demand, resulting in low utilization levels. The industry’s current capacity utilization of around 70% is not good-enough for natural pricing improvement. In the past, cement companies did well on profitability when capacity utilization was above 85%, said Daga. However, cement prices have been hiked in the northern and southern markets in January.

But sustenance is the key here. Note that a number of brokerage firms recently downgraded the sector due to concerns on pricing. It has been witnessed in the past that cement companies had to roll back prices due to subdued demand. The same is feared this time as well.

A key concern on the demand front is the forthcoming general election, said Daga. Usually, the fourth and first quarters are seasonally strong for the sector. But due to the election model code, which restricts the incumbent government from massively spending on infrastructure and related activities, Daga expects demand in the April-June quarter to be subdued. However, for the full fiscal year 2020, he foresees 7-8% cement demand growth.

Meanwhile, UltraTech’s cement volume grew 13% year-on-year to 17.9 million tonnes, in line with expectations. However, profit growth missed analysts’ estimates due to rising costs and weak realization growth.

In reaction to this, the UltraTech stock declined nearly 2% intraday on the National Stock Exchange on Thursday and ended the day’s session in the red. The stock is trading at a one-year forward EV/Ebitda multiple of 15 times, making it the second-most expensive cement stock. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization.

Analysts are also concerned about the sector’s valuations, which they find uncomforting given the pressure on realizations and profits.