Weak volumes hurt UltraTech’s Q1

However, better realisations helped post strong profit

Subdued sales volume reported by UltraTech Cement impacted Street sentiment, with the stock slipping 2.57 per cent on the BSE on Thursday — a day that saw the best rally by leading indices in many months.

Sales volume of India’s largest cement maker grew by a mere 2 per cent year-on-year (YoY) to 17.86 million tonnes (mt) in the AprilJune quarter (first quarter, or Q1).

Considering the organic and inorganic capacity expansions undertaken by UltraTech, the Street was expecting higher volume growth despite elections impacting cement demand during the seasonally strong June quarter. For instance, HDFC Securities had pegged UltraTech’s sales volume at 18.5 mt during Q1.

On the positive side, strong realisations helped drive the company’s revenues and operating performance. Per-tonne cement realisation witnessed a sharp improvement of 13.5 per cent YoY and 12 per cent sequentially to ~5,037, according to analysts’

calculations.

ACC and Ambuja Cements had seen realisations improve up to 9 per cent YoY in the June quarter. UltraTech’s pan-Indian reach helped it score on this front. Notably, UltraTech scored over peers on volumes too.

ACC, the company’s panIndian peer, had reported flat volumes, while Ambuja Cements (a parent of ACC) — a regional player largely focused on west and north regions — saw volumes decline 9 per cent during the quarter. As a result, UltraTech’s standalone sales grew 14.7 per cent YoY to ~9,795 crore and were a shade above consensus analysts’ estimates of about ~9,730 crore, as indicated by Bloomberg.

Better realisations also drove operating performance, with the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) growing 57 per cent YoY to ~2,550 crore. The per-tonne profitability came at ~1,428, much better than ACC and Ambuja Cements’, which reported pertonne Ebitda of ~934 and ~1,086, respectively.

Analysts say higher realisation growth with soft volumes validates channel check findings that UltraTech offered relatively less incentives or discounts to dealers, compared to peers during the quarter at the cost of volume. Consequently, while volumes suffered, it was able to report superior profitability.

The net profit at ~1,199 crore thus, was visibly ahead of analysts’ estimate of ~1,103 crore.

Meanwhile, the company continues moving ahead on integration of the acquired capacities to drive future growth. With major overhauling of the plant and completion of quality upgradation, UltraTech Nathdwara Cement (earlier a Binani Cement facility) has been fully integrated with UltraTech’s systems and processes. The company highlighted it has achieved break-even at the profit before tax level within two quarters of its acquisition.

The 21.2 mt per annum of cement capacities acquired from Jaiprakash Associates (Jaypee) in June 2017 are also operating in line with the existing plants of UltraTech. The management highlighted that the acquisition has now become earnings accretive. However, the Bara Grinding Unit associated with these capacities is scheduled for commissioning during the third quarter of 2019-20 due to some technical delays.

On the whole, analysts remain positive on the company despite the lower-than-expected volumes in Q1. Binod Modi at Reliance Securities says while operating expenses and volumes were key negatives, a substantial improvement in realisation drove overall operating performance.

Jaypee assets turning earnings accretive in the quarter was also a key positive and Binod Modi maintains his positive recommendation on the stock.

Even analysts at IDBI Capital maintain their positive rating, while those at Sharekhan see UltraTech as their preferred pick in the sector, with its timely expansions and increasing profitability of acquired units in the shortest possible time.

The cement demand scenario, however, continues to remain soft in the ongoing quarter. With the monsoon season under progress and construction activities getting impacted, it is also weighing on realisations.

Though analysts expect a revival in rural cement consumption and government’s spending on infrastructure and housing projects to push up demand after monsoons, thereby driving cement volumes, investors need to be watchful on volume trends and realisation improvement before taking exposure to cement stocks.