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Investors betting on India’s infra play can add UltraTech

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Ultra-Tech’s chief financial officer Atul Daga made two important observations in the quarterly earnings call that suggest the impact of a broader slowdown may now leave a more concrete imprint on India’s cement industry, the world’s second biggest. First, Daga said that he was a bit surprised by the 2-2.5 per cent decline in demand even though he had budgeted for some shrinkage in sales in the second quarter, which coincides with India’s annual monsoon rains.

Traditionally, the quarter is considered a bit tepid for cement companies. Second, the finance head at India’s biggest manufacturer of the primary building material acknowledged that 6 per cent demand growth for the broader industry would be rather difficult to achieve in FY20. Against this backdrop, Ultra-Tech’s financial performance fell shy of analysts’ estimates in the September quarter.

Against Bloomberg’s net profit estimates of ₹716 crore, the company recorded a net profit of ₹639 crore.

This gap is directly connected to a string of macro-economic factors affecting cement sales nationally. Demand from individual homebuilders and the National Highway Authority of India (NHAI), and shortage of cash in several pockets beyond the metros have caused the pace of construction to slow.

Flooding also halted construction activities in parts of peninsular India, exacerbating the impact on sales volumes in a traditionally sluggish quarter.

Consequently, UltraTech’s revenue rose at 5 per cent to ₹9,129 crore in the three months under review, in comparison with the same quarter last year. In such tough times, UltraTech is following a strategy expected of a sector leader.

It has added capacity (organic) of 3.4 MT in the eastern region.

According to the company’s management, in times of peak capacity utilisation, the company had noticed shortfall in supplies.

Besides this, by the end of the December quarter this year, 12.6 MT of the 14.6 MT acquired cement assets of Century Textiles will be rebranded as UltraTech Cement.

In the coming quarters, analysts believe that these assets can contribute ₹15-25 to the company’s EBITDA on selling each tonne of cement. In the quarter under review, the company’s EBIDTA per tonne, thanks to the low base of last year, climbed 34 per cent to ₹1,145. On the valuation front, considering its one-year forward earnings, the company’s stock is trading at EV/EBIDTA of 14.5.

This amounts to a discount of 27.6 per cent to its five-year average EV/EBITDA of 20.1.

For investors who are keen on cashing in on India’s infrastructure growth story, UltraTech should remain the preferred investment given its size, timely capacity addition and lean balance sheet.




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