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Improving demand, high prices augur well for UltraTech

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ET Intelligence Group: Ultra-Tech Cement, which commands valuations similar to those at consumer companies, beat Street estimates of operational performance in the March quarter, pointing to further gains at the leading manufacturer that acquired stressed assets to plug supply gaps in India’s highly regional cement market. Against Bloomberg’s earnings per share (EPS) estimates of Rs 29.7, UltraTech returned Rs 37.7 in EPS in the three months under review. Sales volumes climbed 16 per cent and net revenues rose 17 per cent to Rs 10,739 crore.

UltraTech had net debt repayment of Rs 2,205 crore, which reduced its interest costs by 24 per cent.

Furthermore, benign raw material prices helped net profit more than double to Rs 1,013 crore in the March quarter. And UltraTech may not be done just yet.

Higher cement prices, raised in the first week of March, have not been fully captured in the company’s March performance.

In a conference call with analysts, UltraTech said that prices are trading higher than the average for the just-concluded fourth quarter, meaning that the full revenue-enhancing impact of high prices may well be visible in the future. As the leader in the world’s second-biggest market for the primary building material, Ultra-Tech has significant advantages.

First, the demand cycle has improved and prices have revived.

This situation is likely to sustain in the coming quarters. The demand-supply equation is also favourable for the industry.

In FY20, there will be incremental capacity addition of 12MT.

By contrast, the industry is expected to generate cement demand of 38 MT.

Besides infrastructure and low-cost housing, demand for cement is rising from two key segments.

There has been a pronounced improvement in housing demand in rural areas.

Also, there is more construction activity in industrial and commercial segments.

This is reflected in double digit bank credit growth and increasing office space development. UltraTech’s acquired assets — JP and UltraTech Nathdwara (erstwhile Binani Cements) — have successfully integrated with the company.

UltraTech Nathdwara is operating at an average capacity utilization of 62 per cent, which the company plans to take to more than 80 per cent in the coming quarters. Also, JP’s assets are operating at 82 per cent capacity utilization.

On the whole, UltraTech is operating at 90 per cent of capacity.

So, cash flows in FY20 are likely to be robust.

This fiscal year, the company’s focus is to deleverage its balance sheet and bring its net debt to EBIDTA below 2.

At the end of March, UltraTech’s net debt to EBIDTA stood at 2.71. For FY20, the company has scheduled debt repayment of Rs 500 crore.

It is only in FY22 that the company has scheduled repayment of Rs 2,300 crore.

This means that for at least two years, in a rising demand and firm prices environment, UltraTech would be able to generate cash flows that can help repay some debt and finance the acquisition of Century’s cement assets. Considering one-year forward earnings, UltraTech is trading at EV/EBIDTA of 14.5, compared with its five-year average forward EV/EBIDTA of 15.04.




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