Near-term worries for UltraTech

Last Updated: Tue, Jan 22, 2013 05:13 hrs

Most cement stocks, including India's largest cement player UltraTech Cement Ltd, delivered stellar returns in 2012. However, after scaling to their 52-week highs in October, most of them have corrected-UltraTech's stock is down 7.2 per cent. This recent weakness is due to soft realisations in the December quarter as demand has been subdued on account of slowing construction activity during the festival season, election in some states and severe cold in north India. This is also reflecting in UltraTech's December quarter performance.

Positively, though UltraTech's profits are down 2.6 per cent year-on-year in the December quarter, it has still managed to post better-than-expected results on Saturday, which helped its stock close with 0.8 per cent gains on Monday at Rs 1,924.90, compared with Sensex's 0.3 per cent rise.

Some analysts see rich valuations to be near-term overhang on the stock. But, as FY13 ends, the market will start discounting future (FY14 and FY15) earnings, and valuations will become comfortable, feels Amit Srivastava at Nirmal Bang. The optimism has increased on demand catching up post the festival of Makar Sakranti.

In Rs crore Q3'FY13 FY13E FY14E
Net sales 4,857 21,653 26,059
% change Y-o-Y 6.2 13.5 20.4
Ebitda 1,024 4,756 6,099
Ebitda (%) 21.1 22.0 23.4
Net profit 601 2,783 3,556
% change Y-o-Yy -2.6 23.6 27.8
EPS (Rs) 21.92 101.5 129.8
PE (x) - 19.0 14.8
E: Estimates,
Consolidated financials
Source: Elara Capital

The cement players, of late, have also hiked prices to offset higher costs. In this light, analysts advise that the current correction can be utilised by investors with medium-to long-term outlook for accumulating UltraTech, which has a pan-India presence, 9.2 million tonnes (mt) of new capacity coming on stream in FY14 and presence in high-margin white cement business.

Q3: Decent show
Net sales at Rs 4,857 crore grew 6.4 per cent year-on-year (y-o-y) basis (up 3.4 per cent sequentially) and came three per cent above Bloomberg consensus estimates. This was helped by better blended realisations (Rs 4,892 a tonne, up 9.5 per cent y-o-y in spite of total cement demand remaining subdued. Domestic cement sales growth of grey cement remained flat at 9.62 mt while wall care and putty grew to 262,000 tonnes (246,000 tonnes in the December 2011 quarter).

Though global coal prices remained at sub $100 levels, the gains for UltraTech were limited, thanks to rupee depreciation - per tonne power and fuel costs down 35 basis points. This, along with increase in realisation, helped UltraTech hold on to earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins at 21.1 per cent y-o-y, despite diesel price hikes and transportation costs increasing.

Other income at Rs 96.5 crore was lower than Rs 144 crore in the year-ago quarter, hence net profit fell 2.6 per cent y-o-y.

Hopes of better March quarter
The trend of improving realisations quarter after quarter that had led to cement stocks running up on the bourses saw a pause during the December quarter. Though prices are up y-o-y, average cement price of Rs 289 per bag in the December quarter was 3.7 per cent lower than Rs 300 a bag seen in the September quarter.

However, as the severity of the cold in North India starts declining post festival of Makar Sakranti, construction activity is expected to revive. Analysts at Edelweiss Securities, in their January 16 report, suggested cement prices had already increased Rs 3-25 a bag in trade and Rs 5-50 a bag in the non-trade categories across regions. In the last one week, sharp recovery is witnessed in the Delhi-national capital region (Rs 5-30 a bag). In the east, too, price hikes of around Rs 5-20 per bag are seen across the region.

Analysts add demand has improved in some regions and is expected to recover soon in rest of the markets, helping further uptick in cement prices. They thus, maintain their positive view on the sector and expect cement prices to increase Rs 5-15 per bag in the coming weeks.

Capacity boost
UltraTech's planned capital expenditure for increasing its cement capacity by 9.2 mt with a 120 Mw captive power plant is on track and their completion is expected in the first half of FY14. This will increase the overall cement capacity to 62 mt. Ravi Sodah at Elara Capital observes capacity additions are expected to drive volume growth from the second half of FY14. He adds that at Rs 1,909, UltraTech's stock trades at an enterprise value per tonne of $137 on FY15 estimated capacity, a 23 per cent discount to Ambuja Cement despite strong visibility on volume growth for the next few years.

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