Cost pressures intensify for UltraTech during Q2

Improvement in realisations remains crucial for profitability

UltraTech Cement’s September quarter (Q2) performance was healthy in terms of volume growth and realisation, but higher costs impacted profitability. Analysts, though, are hopeful that the coming quarters will be better.

Domestic sales volume growth at 21 per cent yearon-year to 15.1 million tonnes (MT) stands out (including exports, volumes at 15.7 MT were up 20 per cent). Though volumes were 10 per cent down sequentially, the same is understandable given that Q2 is seasonally weak on account of monsoon. Nevertheless, volumes are closer to the upper-band of estimates of 15.5-16 MT. Also, UltraTech’s volume growth was significantly better than peers such as ACC (10 per cent year-on-year increase) in

Q2, partly aided by acquisition of the JP Group’s cement assets last year.

Secondly, the improvement in average realisation per tonne by 1.8 per cent sequentially (2.3 year-on-year) despite the monsoon effect is noteworthy. Analysts were estimating a flat-to-1.4 per cent increase.

Rising volumes and pricing helped domestic revenue grow 21 per cent to ~77.32 billion (net of taxes). Consolidated revenue at ~81.51 billion was a tad ahead of Bloomberg consensus estimate of ~81.25 billion.

Rising costs, primarily of fuel, took a toll on UltraTech’s profitability. Initiatives on logistic costs (31 per cent of total expenses) was impressive, as such expenses grew just 6 per cent year-on-year (down 4 per cent sequentially) to ~1,155 per tonne even as diesel prices were up 24 per cent year- on-year. Petcoke prices (up 35 per cent y- o-y) proved detrimental as energy costs (30 per cent of total expenses) grew 19 per cent year-onyear and seven per cent sequentially to ~1,099 per tonne.

Earnings before interest, tax, depreciation and amortisation at ~11.6 billion also were below estimates of ~13.6 billion. Likewise, net profit (down 11 per cent y- o-y to ~3.77 billion) was also lower than estimates of ~4.24 billion.

Binod Modi at Reliance Securities says that while operational performance has been subdued mainly led by higher power and fuel costs, higher power consumption was due to maintenance shutdown, rupee depreciation, higher custom duty and prices of petcoke.

The road ahead, however, may be better. Atul Daga, CFO of UltraTech, says costs are likely to have peaked during current quarter.

For the acquired assets, the profitability is improving and efforts on waste heat management systems will accrue more benefits moving forward. With demand firm, UltraTech as well as analysts expect cement price to rise post festive season.

Analysts at ICICI Securities had said that earnings downgrade cycle is expected to bottom-out with Q2FY19 results. The sequential recovery in average realisation is a key positive, adds Modi.

Should these hopes materialise, it would improve sentiment for the stock which has underperformed the Sensex in the past nine months and is down 20 per cent since August-end.