Higher tax hurts UltraTech's profits

Last Updated: Tue, Apr 23, 2013 05:32 hrs

UltraTech Cement's March quarter profits fell 16.2 per cent year-on-year (y-o-y) and may have come below Street expectations, resulting in the stock falling 2.5 per cent on Monday to close at Rs 1,876. But, a key reason was the higher tax outgo, which at Rs 362.6 crore increased 42.9 per cent sequentially and 18.8 per cent y-o-y, as it includes additional charge for deferred tax liability of Rs 86.6 crore (due to increase in rate of surcharge on Income-Tax as proposed in the Finance Bill 2013-14). However, adjusted for the same, the profits came in line with expectations. At the operational level, despite lower realisations and rising costs, UltraTech posted profits largely along expectations.

The pricing and demand scenario is expected to remain muted in the near-term, and may result in pressure on the stock. But, analysts believe this could be an opportunity to buy on declines. Given that the company's 10 million tonnes (mt) new capacity will go on stream in the next 6-12 months, making it the largest beneficiary of demand improvement expected in the second half of FY14, most analysts have UltraTech as their top pick in the sector with a buy rating.

Q4: Sequential uptick in margins
Looking at the weak demand and realisation scenario as well as rising costs, the company has still managed its operating costs. Although there has been some pressure on a y-o-y basis, its performance has improved compared to the December 2012 quarter. While Ebitda per tonne at Rs 1,063 was just Rs 18 lower than in March 2012 quarter, it is up Rs 63 per tonne compared to the December 2012 quarter. Ebitda margins at 22.3 per cent did not decline much compared to 23.8 per cent in the year ago period despite the pressure on realisations and rising freight, raw material and other expenses. Sequentially though, falling coal costs (20 per cent fall in dollar terms to $84 a tonne) and increased pet coke usage provided a respite.

The all-India average cement price, after touching an all-time high of Rs 300 a bag in the September 2012 quarter has shown weakness. The festive season took a toll in the December 2012 quarter as average all-India cement prices declined to Rs 287 a bag. The March 2013 quarter (a traditionally strong quarter) has also not seen any uptick in demand and average all-India cement price has remained at Rs 288 a bag. The average cement price has been supported by Eastern and Central India which saw average price increasing Rs 11 a bag and Rs 4 a bag, respectively, as other regions saw a decline in prices. UltraTech has around 25 per cent of its capacities catering to eastern and central India and hence got some respite.

Pressure in near-term
The near-term demand and realisation scenario is still not rosy. Cement channel checks according to JP Morgan's report suggests continued weak demand in April 2013 as government spending has not yet started and rural demand is not as strong. As a result, cement prices have corrected further three-six per cent across many markets in April. West remains affected by drought while South remains affected by lower demand and prices in Andhra Pradesh.

Though demand and realisations may be subdued for now, analysts see demand picking up during the second half of FY14. Sanjeev Kumar Singh at Centrum Broking feels demand should recover in the second half post good monsoon, fall in interest rates and pick up in government spending. Analysts at Credit Suisse also expect cement demand to pick up on the back of rising rural prosperity. They expect demand growth of seven per cent in FY14 compared to four to five per cent in FY13.

UltraTech: A favourite
In the event of demand recovering, UltraTech being a pan-India player should benefit more than its larger peers due to rising capacities. From the current capacity of close to 51 MT, its capacity is expected to rise 6.6 mt in the June quarter and another three mt by end-September. Its closest peers, ACC and Ambuja, are not likely to see significant capacity-led benefits before 2015.

Analysts at Religare Securities say at current prices the stock is trading at 8.8 times FY14 and 7.4 times FY15 enterprise value/Ebitda estimates. Hence, they maintain a Buy' rating on the stock. While the company remains a top pick (in the cement sector) of analysts, the Bloomberg consensus target price of Rs 2,093 indicates an 11.4 per cent upside for the stock from current levels.

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