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UltraTech Cement’s performance for the quarter ended September fell much short of Street expectations. The impact of low cement demand and realisations was visible on the performance — net profit was Rs 264 crore, a fall of 52 per cent year-on-year and 33.3 per cent below the Bloomberg consensus estimate of Rs 396 crore.
While cement and clinker sales, at 9.1 million tonnes (mt), were marginally higher than 9.06 mt a year ago, realisations took a toll on the revenue and profit. At Rs 279/50-kg bag, average cement prices in the country during the quarter were lower than Rs 288/bag in the June quarter and much lower than Rs 300/bag a year ago. Apart from south, which saw prices decline Rs 11/bag, the rest of India saw prices fall Rs 22-25/bag year-on-year, according to channel checks by Emkay Global.
Net sales at Rs 4,502 crore declined 4.2 per cent year-on-year, though slightly lower than Street estimates of Rs 4,545 crore. The benefits of lower imported coal costs were negated by the rupee’s depreciation and, therefore, cost pressures continued. At Rs 717 crore, operating profits declined 33.3 per cent year-on-year, which Religare analysts say was partly due to higher expenses on plant maintenance.
With the monsoon season gone, the Street is betting on a demand revival in the cement sector. Recently, companies had announced rises of Rs 26/bag in the south; prices increased Rs 15 and Rs 10 a bag in the west and north, respectively. This bodes well for companies such as UltraTech, which have a pan-India presence. With the impetus given by the rises and in anticipation of a demand recovery, the stock (as well those of others) has risen sharply.
However, experts say there are no clear signals of a demand recovery. In fact, with the festive season starting, the shortage of labour would mean the demand recovery might not be swift. Analysts at Morgan Stanley say, “Prices should be volatile, given the demand uncertainty. More, the likely recovery is factored into consensus, which leaves limited room for earnings estimate revisions and stock performance.”
The benefits of a good summer crop should help rural demand, but it is expected this would be visible from December. Thus, near-term prospects of cement makers are likely to remain weak. In a press release after its results were announced, the company said, “The outlook continues to remain challenging. Demand growth in FY14 is likely to be five per cent; in the long term, it is likely to be eight per cent.”
Of the 21 analysts polled by Bloomberg after the results, nine have a buy/accumulate rating; six hold/neutral; another six sell/underperform. The consensus target price is Rs 1,985. From here, the risk is if demand doesn’t live up to expectations, it could mean limited pricing power for the sector when capacity utilisation levels are near multi-year lows.
IDFC analysts say utilisation levels are likely to remain low and pricing power limited, as demand continues to remain weak, while supply pressure persists. While they estimate earnings to grow at a compounded annual rate of two per cent through FY13-15, they add there are downside risks to estimates, as JP Associates’ Gujarat plant (being acquired) is integrated in FY14. Analysts at Kotak Securities say though they remain positive due to a strong balance sheet and the ability to benefit from a volume and pricing increase, they would advise investors to look at declines to buy the stock.
