UltraTech sees steady fourth quarter, rocky road ahead spoils prospects

The Aditya Birla Group-owned UltraTech Cement Ltd’s stock closed 3% higher on Wednesday, cheering a strong March quarter (Q4FY20) performance. The pan-India cement maker gained from strong product prices and lower material cost, as did its peers that have declared results in the last fortnight.

On a per-tonne basis, the earnings before interest, tax, depreciation and amortization (Ebitda) rose 14% year-on-year (y-o-y) to ₹1,144. This was primarily due to lower costs on most fronts—raw material, freight and energy. Strong cement prices meant net blended realizations improved by 3%. To some extent, this alleviated the pain from the steep 16% y-o-y drop in cement sales.

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The upshot: UltraTech’s Ebitda margin of 22.7% surprised positively. It was 220 basis points (bps) higher from the year-ago period. One basis point is one-hundredth of a percentage point.

The moot point now is whether cement prices will sustain to give UltraTech’s profits a leg up in the coming quarters, too.

In the analysts’ call, UltraTech’s management said March exit prices were better than the Q4 average. Most plants were operating at 65-70% capacity utilization. However, some analysts were sceptical that this may be the pent-up demand to complete unfinished work in infrastructure or housing, with an uptick from rural areas. If so, it would wane as the monsoon sets in, which anyway stalls construction activity and pulls down cement demand.

“The macroeconomic challenges envisaged in India even after the lockdown eases paint a gloomy picture. Infrastructure and real estate, the two big consumers of cement, are hit badly and unlikely to return to pre-covid-19 levels soon,” said Sanjeev Kumar Singh, analyst, Emkay Global Financial Services Ltd.

In this context, the findings of a survey conducted by Crisil Research on 100 cement dealers are interesting. It said almost all dealers foresee a 10-30% drop in demand in fiscal 2021 due to delay/freeze in construction activity. Dealers’ credit cycle is also likely to get stretched from four to eight weeks over the next two to three quarters.

In any case, cement sector forecasts are grim for the June and September quarters given the overhang of the lockdown and monsoons.

Nonetheless, UltraTech’s ability to rationalize costs across facilities will see it through tough times. Analysts said it intends to conserve cash in FY21, with a target to cut overheads by 10%. The company’s capital expenditure of ₹1,000 crore estimated for FY21 is lower than FY20, indicating caution on near-term outlook. This explains why the stock is down 20% from the peak market levels in mid-February, despite cement prices remaining firm.