UltraTech Cement: rains dampen volume growth


UltraTech Cement Ltd’s profitability improved in the September quarter but slower-than-expected cement volume growth surprised investors. Its shares were under pressure on Monday ahead of the earnings announcement, perked up after they were released but ended lower by 0.74%.

Net profit increased by 25% from a year ago to Rs601 crore, partly aided by higher other income. Ebitda (earnings before interest, taxes, depreciation and amortization) rose by 19% and Ebitda margin improved by 389 basis points to 24.14%.

The significant improvement in Ebitda was mainly due to petroleum coke (petcoke) inventory acquired at a lower cost.

While its profitability is in good shape, what did not go down well with investors was subdued volume growth. Though the September quarter is a seasonally weak one for the cement industry, a growth of a mere 1% year-on-year to 11.18 million tonnes in sales volume (including export) was unexpected. After all, as some analysts pointed out in a post-earnings conference call, industry volume growth was nearly 2-3% in the quarter. The management clarified that volume was hit by normal monsoon across India.

What is worrying analysts is that though there are expectations of a revival in cement demand in the second half of the year, volume growth in the December quarter may be tepid because of a prolonged monsoon.

Meanwhile, UltraTech’s consolidated net sales fell 2.53% on a year-on-year basis and realizations slipped 3% at Rs4,829 per tonne year-on-year. Falling realizations also disappointed. The firming up of petcoke and international coal prices will mean that the benefits seen in profitability of lower petcoke prices may wane in future quarters. Higher input costs can pose a risk to margins but if demand improves, the firm can hike prices to compensate for it.

On the positive side, the outlook for rural growth is brighter. Rural markets contributed nearly 38% to overall sales, according to the company’s earnings presentation. Overall volumes can get a boost when urban demand picks up. Surplus inventory in urban real estate has slowed down the pace of new construction.

Shares of UltraTech Cement have outperformed the Sensex over a year and on a year-to-date basis and trade at a rich valuation of 34.38 times. Going ahead, investors will be watching for the completion of the acquisition of cement assets from the Jaypee Group, which is expected to be completed in a couple of months. A successful integration of this business could provide the next trigger for valuations.