UltraTech Q4 net down 39% on one-offs, but core performance surprises

Higher volumes, realisation, improving capacity utilisation of JP's assets drive profitability

The country’s largest cement producer, UltraTech, on Wednesday reported a 39 per cent year-on-year decline in consolidated net profit for the March quarter, mainly due to one-offs or exceptional items. Adjusted for the provision for stamp duty on acquired assets and impairment of assets (in West Asia and Oman) to the tune of Rs 3.15 billion, the net profit at Rs 7.24 billion came close to Rs 7.26 billion reported in the year-ago quarter despite rising depreciation and interest costs.

At the standalone level (for domestic operations), adjusted net profit at Rs 6.77 billion, too, was comparable to Rs 6.88 billion a year ago. Notably, these were substantially higher than consensus estimates of Rs 5.37 billion indicated by Bloomberg. 

       

The company delivered better-than-expected operational performance. While the realisation improvement of 5 per cent year-on-year (2 per cent sequentially) was better than expectations, acquired Jaiprakash Associates’ (JP) cement assets, too, saw higher-than-expected average plant utilisations of 75 per cent. Analysts at Motilal Oswal Securities had anticipated acquired assets to operate at 70 per cent utilisation and blended realisations per tonne to increase by 2.3 per cent year-on-year (0.1 per cent sequentially) during the quarter. 

Therefore, despite the surge in fuel and transportations costs, UltraTech’s earnings before interest, taxation, depreciation and amortisation (Ebitda) at Rs 18.09 billion was much ahead of analysts’ consensus estimates of Rs 14.78 billion. The margins at 20 per cent, too, improved from 17 per cent reported in the previous quarter, though they were lower than 23 per cent in the year-ago quarter prior to the completion of the acquisition. JP's assets yield lower margins, so the year-on-year drop in margins is not a major surprise.

 

UltraTech saw domestic sales volumes at 17.64 million tonnes (MT), up 32 per cent year-on-year, as exports and other sales improved 15 per cent. Overall sales volumes improved 31 per cent year-on-year to 18.47 MT.

With strong improvement in volumes and realisation, the company’s standalone revenues came in at Rs 88.81 billion, a 37 per cent gain year-on-year, again, ahead of the consensus estimate of Rs 85.43 billion. Consolidated revenues at Rs 92.98 billion, too, grew 34 per cent year-on-year.

Boosted by the strong performance, the company’s share price closed up 0.27 per cent to Rs 4,135.90 on the BSE. According to analysts, UltraTech’s performance is likely to aid sentiment for the sector as a whole.

Going forward, all eyes will be on improvement in realisation, since demand already remains healthy. Housing demand is improving, while infrastructure demand is driving cement sales. With better demand, an improvement in realisation is necessary to take care of cost pressures. Pet coke prices have increased 20 per cent year-on-year to $104 per tonne in the March quarter. For UltraTech, per tonne fuel costs rose 17.5 per cent, while logistic costs were up 6 per cent year-on-year during the quarter. The company, too is working on cost optimisation and plans of shifting more capacities from pet coke to coal.

UltraTech is also hopeful that the acquired cement assets will break-even at the profit before tax (PBT) level before June 2019. In its presentation to investors, the company said it will look to bring down costs for these assets, enlarge its dealer and retail network, expand UltraTech’s building solutions to newer markets and ensure synergy existence between current and acquired assets. The company has spent Rs 161.89 billion in the biggest cement deal in the country so far to acquire JP’s and Jaypee Cement Corporation's cement assets in 2017. The company has achieved a cash break-even for the acquired assets and an average capacity utilisation of 75 per cent, while overall capacity utilisation came at 80 per cent in the March quarter, UltraTech added. 

The Jaypee assets have exited the March quarter at more than 80 per cent utilisation levels and hence average utilisation of assets is set to improve further in the June quarter.

On its debt levels, the company achieved a net debt reduction of Rs 10.50 billion in the March quarter. “Net debt/EBITDA improved at 1.85 times over the peak of 2.10 times in the second quarter,” the company said in its presentation.

Analysts, including Binod Modi at Reliance Securities, said that though EBITDA/tonne at Rs 857 improved in the fourth quarter, it still appears soft and is expected to improve further in the coming quarters with the recovery in realisation and faster ramp up in utilisation of acquired units, and making it cash break three months earlier. UltraTech’s operational performance is set to improve further in the ensuing quarters owing to the recent spike in realisations, he added. 

Analysts at Sharekhan, too, have upgraded their rating to “buy”, given the strong volume growth outlook backed by low capex capacity expansion and improvement in profitability of acquired assets. Any positive news on UltraTech's bid to acquire the cement assets of Binani group should aid investor sentiment further.