UltraTech’s stock hit a 52-week high of Rs 1,280.50 on Monday, led by slightly better than expected results for the December 2011 quarter (Q3), which the company announced on Saturday. The stock, which has been continuously outperforming the Sensex, has gained six per cent during the December quarter versus an equal fall in the Sensex. The outperformance is aided by increasing cement realisations, helped by sustained price rises. And, Q3 was no different.
However, the demand scenario has still not shown marked improvement and cement capacities continue outpacing demand. Cost pressure has also been increasing, with the rupee depreciation raising the cost of imported coal. Coal India’s new pricing regime also means a rise in prices of coal procured through linkages and e-auction. While most companies, including UltraTech, have been raising realisations to offset cost pressures, their ability to increase it further (besides volumes and Ebitda, the operating profit) is being questioned by analysts.
| GROWTH MAY SLOW DOWN IN FY13 | |||
| In Rs crore | Q3’ FY12 | FY12E | FY13E |
| Net sales | 4,572 | 18,000 | 20,193 |
| Y-o-Y change (%) | 23.1 | 31.5 | 12.2 |
| Ebitda | 965 | 3,820 | 4,417 |
| Ebitda (%) | 21.1 | 21.2 | 21.9 |
| Net profit | 617 | 1,960 | 2,308 |
| Y-o-Y change (%) | 93.4 | 43.4 | 17.7 |
| EPS (Rs) | 22.5 | 71.3 | 84.7 |
| PE (x) |
- | ||
“Due to the busy season, cement prices are likely to firm up in the near term, but we see the same as unsustainable in FY13 due to the low industry capacity utilisation of 75 per cent,” said Edelweiss analysts in their report. The pricing power, though, may sustain if demand picks up visibly.
Meanwhile, with cement stocks doing well since July 2011, valuations are not cheap. Milind Raginwar, analyst at SBI Caps, notes in his report, “At the CMP of Rs 1,214, the stock trades at an enterprise value per tonne (EV/tonne) of $151 on FY13 capacities, which we believe is expensive. Hence, despite operationally strong performance in Q3’ FY12, we maintain a ‘Reduce’ with a revised price target of Rs 1,079.” In fact, many analysts maintain a ‘Hold’ or ‘Sell’ rating on the stock, even as they remain watchful of an improvement in environmental dynamics.
Realisation boost
Price increases undertaken by cement companies after the monsoons resulted in an all-India average price rise to Rs 268 a bag (of 50 kg) during the December quarter; it was up Rs 21 a bag over the September quarter and by Rs 30 a bag compared to the year-ago period. Says Ravindra Deshpandey at Elara Capital, blended Ebitda per tonne improved to Rs 931, as compared to Rs 614 in Q2’ FY12 and Rs 712 in Q3’ FY11. The volumes, at 10.11 million tonnes, grew though by just 3.2 per cent year-on-year; they were up 10.8 per cent up sequentially, thanks to the seasonally lean monsoon period. All this helped UltraTech clock 23.1 per cent year-on-year growth in revenues, the highest in the current financial year. Profits also got help from other income (which almost doubled) and interest cost (which fell 64 per cent) due to Rs 38.4 crore of subsidies related to the State Investment Promotion Scheme, thereby boosting net profit.
Demand
The year-on-year volume growth of just three per cent in Q3 indicates overall demand is still not that robust. For the industry, too, year-to-date volume growth is languishing at just five per cent (0.5 per cent for UltraTech), observe analysts at Emkay. They add that aggregate demand momentum is yet to pick up, as private capex remains sluggish, with infrastructure spending at a standstill. With no structural drivers in place for a solid demand pick-up, the analysts maintain a ‘neutral’ stance on the sector.
Vineet Hetamsaria, vice-president at PINC Research, also observes that they have reduced cement volume estimates for 2011-12 and 2012-13 by four per cent and seven per cent, respectively, considering the lacklustre scenario for cement demand across the key sectors of infrastructure and housing.
On the flip side, analysts at Motilal Oswal Securities feel demand will pick up from the March quarter. They say UltraTech is the largest cement company with pan-India presence, having potential to increase throughput without incurring major capex by increasing utilisation and blending, along with locational advantage, giving it the flexibility to either export or sell in the domestic market. Thus, revival in demand will be a key catalyst for the stock.
Cost pressure
Cost pressure was also clearly evident as power, oil and fuel costs increased 17.5 per cent sequentially and 24.3 per cent over the December 2010 quarter. Coal costs were higher on account of the domestic price increase and depreciation of the rupee has impacted imported coal costs. An increase in rail surcharges in October also led to freight costs increasing 11 per cent year-on-year to Rs 830 a tonne. So far, price rises have helped.
With Coal India shifting to a costlier pricing formula, costs for cement players are likely to be up by 28 per cent, estimate analysts at Emkay. Even if Coal India does review prices, as it says it would for certain grades, the final increase is likely to be 15-20 per cent. Analysts at Emkay (factoring in a 20 per cent increase in coal prices) have thus cut their 2012-13 earnings estimates by 3.9 per cent to Rs 80.8.
