Most cement stocks, including India’s largest cement player UltraTech Cement delivered stellar returns in 2012. However, after scaling to their 52 week highs in October, most of them have corrected-UltraTech’s is down 7.2%. This recent weakness is due to soft realisations in the December 2012 quarter as demand has been subdued on account of slowing construction activity during festival season, election in some states and severe cold in North India. This is also reflecting in UltraTech’s December 2012 quarter performance.
Positively, though UltraTech’s profits are down 2.6% year-on-year in December quarter, it has still managed to post better than expected results on Saturday, which helped its stock close with 0.8% gains on Monday at Rs 1,924.90 compared to Sensex’s 0.3% rise.
Going ahead, some analysts see rich valuations to be near-term overhang on the stock. But, as FY13 ends, the market will start discounting future (FY14 & FY15) earnings, and valuations will become comfortable, feels Amit Srivastava at Nirmal Bang. The optimism has increased on demand catching up post the festival of Makar Sakranti.
The cement players of late have also hiked price to offset higher costs. In this light, analysts advice that the current correction can by utilised by investors with medium to long term outlook for accumulating UltraTech, which has a pan-India presence, 9.2 million tonnes (MT) of new capacity coming on stream in FY14 and presence in high-margin white cement business.
Q3: Decent show
Net sales at Rs 4,857 crore grew 6.4% year-on-year basis (up 3.4% sequentially) and came 3% above Bloomberg consensus estimates. This was helped by better blended realisations (Rs 4,892 a tonne up 9.5% year-on-year) in spite of total cement demand remaining subdued. Domestic cement sales growth of grey cement remained flat at 9.62 MT while wall care and putty grew to 0.262 MT (0.246 MT in December 2011 quarter).
Though global coal prices remained at sub $100 levels, the gains for UltraTech were limited thanks to rupee depreciation—per tonne power and fuel costs was down 35 basis points. This along with increase in realisation helped UltraTech hold on to EBIDTA margins at 21.1% year-on-year, despite diesel piece hikes and transportation costs increasing.
Other income at Rs 96.5 crore was lower than Rs 144 crore in the year ago quarter, hence net profit fell by 2.6% year-on-year.
Hopes of better March quarter
The trend of improving realisations quarter after quarter that had led to cement stocks running up on the bourses saw a pause during the December 2012 quarter. Though prices are up year-on-year, average cement price of Rs 289 per bag in December 2012 quarter was 3.7% lower than Rs 300 a bag seen in the September 2012 quarter.
However, as the severity of cold in North India starts declining post festival of Makar Sakranti and auspicious days also start, construction activity is expected to revive.
Analysts at Edelweiss Securities, in their 16th January report, suggest that cement prices have already increased by Rs 3-25 a bag in trade and by Rs 5-50 a bag in the non-trade category across regions. In the last one week, sharp recovery is witnessed in Delhi-NCR region (Rs 5-30 a bag). In the East, too, price hikes of around Rs 5-20 per bag are seen across region. Analysts add that demand has improved in some regions and is expected to recover soon in rest of the markets helping further uptick in cement prices. They thus maintain their positive view on the sector and expect cement prices to increase by Rs 5-15% bag in the coming weeks.
Capacity boost
UltraTech’s planned capex for increasing its cement capacity by 9.2 MT with a 120 MW captive power plant is on track and their completion is expected in first half of FY14. This will increase overall cement capacity to 62 MT. Ravi Sodah at Elara Capital observes that capacity additions are expected to drive volume growth from second half of FY14. He adds, at Rs 1,909, UltraTech’s stock trades at Enterprise Value per tonne of $137 on FY15 estimated capacity, a 23% discount to Ambuja Cement despite strong visibility on volume growth for the next few years.
