Ideas for Profit: UltraTech posts healthy volume growth in Q1, accumulate on dips

There was no significant change in cement realisations for the quarter gone by. However, EBITDA per tonne dipped to Rs 928 per tonne as operating costs inched up. Prices of raw materials (up 8 percent YoY), power and fuel (up 18 percent YoY) and freight expenses (up 9 percent YoY) have put downward pressure on margins compared to the previous year. Margins remained flat on a sequential basis.

Capacity utilisation in Q1 stood at 77 percent compared to 78 percent YoY.

Consolidating market presence
With the commissioning of its second plant at Dhar, UltraTech has added 1.75 million tonne grinding capacity, taking its total cement capacity to 92.5 million tonne.

It had earlier acquired the cement assets of JPA having a capacity of 21.2 MT. In May, UltraTech announced the acquisition of cement assets (11.4 mtpa integrated capacity and 2 mpta grinding unit) of Century Textiles through a share swap agreement. This transaction is expected to complete by FY19-end. This should propel overall capacity to more than 100 mtpa and aid market share growth which currently stands around 20 percent.

The company has also secured a limestone block in Madhya Pradesh with reserves in excess of 54 tonne. UltraTech is setting up a new 62MW waste heat recovery (WHR) plant. The in-house capacity, once complete, would be sufficient to meet around 15 percent of its internal power requirements.

Capex for the quarter gone by stood around Rs 330 crore. The same for the full year is estimated around Rs 2,000 crore.

High exit prices to support realisation in the coming quarter
Cement prices firmed up in western and central markets. However, prices in eastern markets remained mute. Exit prices at June-end was higher than the quarterly average. Higher exit prices should support realisations ahead of a weak monsoon season.

Amid rising cost pressures, the company continues to focus on optimising cost structure by improving operational efficiencies of thermal power plants and waste heat recovery systems. The management is trying to reduce fuel costs through alternative measures. Q1 also witnessed a 6 percent reduction in average lead distance over the previous year.

The company also expects some margin improvement from the reduction in the cost differential between JPA’s cement assets and UltraTech. Rationalisation of cost structures should reduce the differential to Rs 110 per tonne from Rs 160 per tonne at present.

Outlook and recommendation
The management has indicated 8-10 percent volume growth for the industry. A number of large scale projects such as Mumbai airport, bullet train, Bharatmala, Mumbai metro and low income housing should propel cement demand across geographies. A third consecutive year of a bountiful monsoon should also boost demand from the rural segment.

UltraTech is a proxy for India’s economic growth. Although the company has strong market position, current valuations appear little stretched from a medium term perspective. We therefore recommend accumulating the stock on dips.

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