Diving Entry Fees May Ease Ultratech Q3 Pain

The December quarter performance remained weak for Ultratech Cement Ltd, a pan-Indian focused cement maker. Consolidated sales volume (grey and white cement) in Q3FY22 decreased 3% year-over-year (yoy) to 23.13 million tons. Except in the north, demand in other markets remained subdued, impacted by cyclones in the east and south, and demand for cement from the infrastructure segment in the central region declined.

In addition, higher input costs caused the consolidated operating margin to shrink sharply to 20%, from 28% in the same period last year. In Q2FY22, the margin was 24%.

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Weak volumes

Despite weak performance, Ultratech shares were up about 3% on NSE on Monday. “Ultratech’s third quarter results were disappointing in terms of volumes and margins due to weak demand in November. However, investors took comfort in management’s optimistic comments on demand and lower costs. This is likely to impact Ultratech’s valuations as earnings improve in a seasonally strong Q4,” said Mangesh Bhadang, institutional equity research analyst at Nirmal Bang Securities Ltd.

In the quarter, Ultratech’s logistics costs increased 4% yoy, energy costs increased 39% and raw material costs increased 7% yoy. In a post-profit conference call, management said the third quarter was a challenging quarter with an unexpected drop in demand in November and the resulting impact on prices. Unusual rainfall in some areas, labor shortages and sand availability, and a construction ban in the National Capital Region were factors that weighed on demand in November. However, demand was back on track in December, with occupancy rates improving for the month to around 84%, compared to 75% in the quarter as a whole, signaling better demand. Management also said the fourth quarter started positively with an improvement in demand and prices. Urban housing is growing rapidly and new government infrastructure projects should support demand in the March quarter, management said.

Management said the prices of the main inputs, petroleum coke and international coal, are beginning to fall from their peak, but continue to rise yoy. The benefits of the recent cost reduction should begin to meaningfully begin to reflect from Q1FY23.

Meanwhile, in CY21, Ultratech beat closest competitor Shree Cement Ltd by a wide margin, up 44% in equities compared to the latter’s 12% return.

“Our estimates for FY23 show that Ultratech stocks are trading at an EV/Ebitda of about 14 times. As debt decreases, we see the gap with Shree Cement (FY23 EV/Ebitda of 17 times) narrowing. Another problem with Shree is its relatively high exposure to the east, which has to do with oversupply. As such, Shree Cement stock may continue to underperform Ultratech at least in the near term,” said Bhadang. EV is enterprise value. Ebitda is earnings before interest, taxes, depreciation and amortization.

Ultratech would incur a capex of 965 crore for modernization and expansion of white cement capacity in phases. It has also commissioned its Line II of the Bara Grinding Unit in Uttar Pradesh, which has a cement capacity of 2 million tons per year (mtpa). As planned, Ultratech has commissioned 3.2 million tons of new cement capacity in FY22, bringing production capacity to 114.55 million tons per year.

In addition, the company has also managed to reduce its debt. On a consolidated basis, net debt decreased by approximately 190 crore consecutively 6,147 crore with improvement in net debt versus EBITDA from 0.55 in the March quarter to 0.49 times in the December quarter. Continued debt service can benefit the stock’s performance.

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