Demand concerns to weigh on UltraTech

Strong Q3 operating profit positive, but stock gains capped unless volume and realisation improve

UltraTech's operating performance for the quarter ended December (Q3) was impressive. Despite rising prices of inputs, sustained efforts on operating efficiencies and cost controls led to the firm topping estimates on profitability front. The stock gained 1.4 per cent on Monday to close at Rs 3,518. But, with worries over demand (volume growth) and realisation continuing, further gains may be capped.

With note ban impacting volumes and realisation, Q3 saw industry capacity utilisation levels decline to 60 per cent compared to 75 per cent in FY16. Adding to woes were rising input costs as those of coal, pet coke, and some others. UltraTech, too, saw its domestic volumes at 11.01 million tonnes (mt), a decline of two per cent year on year. Realisations were down about a per cent sequentially and two per cent year on year. Thus, standalone revenues at Rs 6,372 crore declined two per cent year on year. 

Reduction in logistics costs and improved energy efficiency helped UltraTech cut its operating costs by 100 basis points even as raw material costs grew four per cent. Domestic operations' operating profit came in at Rs 1,210 crore compared with Rs 1,204 crore in the year-ago quarter, and was way ahead of Bloomberg consensus estimate of Rs 981 crore. Net profit at Rs 563 crore (up 6.6 per cent year on year) came 18 per cent ahead of expectation of Rs 477 crore. 

While the company has been able to control costs despite higher raw material costs, realisation has to improve to support profitability. And, this may not improve further unless demand picks up. Although UltraTech has been seeing good push from rural market (which contributed 38 per cent to volumes in December quarter) and expects continuing government spending on infrastructure, development of smart cities, and interest rate cuts supported by interest subsidy schemes for housing, to be the key demand drivers, the Street is worried.

 

Analysts remain cautious on volume growth and demand on note ban. Analysts at Reliance Securities continue to like UltraTech owing to its consistent cost reduction and constant outperformance of the industry, but have cut their operating profit estimates by 9-12 per cent for FY17, FY18, and FY19 to factor in impact of demonetisation on individual house-building segment (volume cut by three-five per cent year on year) and a subdued realisation environment.

Those at Emkay Global have lowered their operating profit estimates by six-eight per cent for the three financial years, due to weak realisation, while downgrading the stock to hold (on stretched valuations; target price Rs 3,583). Analysts at IDBI Capital are concerned on delay in execution, surplus inventory in urban real estate, and on valuations.