Ultratech Cement

UltraTech Cement continues to be a preferred exposure within the cement sector due to the advantages of operating in the West, which is showing high demand growth, and relatively low new capacity additions in FY-10.

The company’s ability to expand margins by saving on fuel costs and additions to captive power capacity are also in its favour. At Rs 567, enjoying seven times trailing earnings, the stock valuation remains reasonable and is at discount to ACC which trades at nine times.

Though all-India cement despatches have grown by a stronger-than-expected 8.2 per cent in FY-09, the bunching up of fresh capacities in 2009-10 make the current year a challenging one for the sector.

A total of 50 million tonnes of capacities are estimated to be added in FY-10. The pace at which demand will grow to absorb these supplies is something to watch out for.
West, a strategic location

At 5.3 million tonnes, UltraTech’s sales volume recorded a robust 11 per cent growth in the March quarter.

Its peers, ACC and Ambuja Cements, saw a lower growth at 6.1 per cent and 5.8 per cent. Being positioned in the West, the company made the best out of the higher demand in this region in recent quarters.

Year-to-date till March, the western region has shown the highest growth in despatches at 11.74 per cent growth compared to the all-India average of 7.96 per cent.

Further, of all the pockets in the country, the West will be seeing the least capacity expansion in FY-10. Of the total 50 million tonne of capacity expected to be added in FY-10, over 80 per cent will be in the North and Southern pockets . This is likely to safeguard the region from excess supplies and Ultra Tech from a sharp price correction.

With the commissioning of two grinding units of 1.2 million tonnes per annum (mtpa) each in the March quarter, UltraTech’s capacity stands at 21.9 million tonnes. This is expected to rise to 23.1 million tonnes by June 2009, with the commissioning of a grinding unit, work for which has already begun. Interest expenditure in the March quarter stood higher by 60 per cent over the previous year on borrowings for the capex.

However, the interest coverage stands at a comfortable 14 times. Further, for the full year FY-09, cash profits were higher on higher depreciation (up 36 per cent) on additions to the cement and captive power capacity. Cash profit for FY-09 was Rs 1,481 crore against Rs 1,228 crore for FY-08.
High realisation builds hope

The strong cement offtake in the region saw prices increasing by Rs 7 per bag in March to Rs 255 per bag.

But, however, this is much lower than the prices in the South where a 50 kg bag is sold at Rs 270-75; this could mean leeway for further increases.

In the March ‘09 quarter, however, the company’s overall realisations came down by Rs 8 per bag on substantial decrease in export realisations of clinker.
Saving in cost

The addition of 192 MW to the captive power capacity may lead to further savings in costs in the quarters to come. With this, UltraTech’s captive power would meet 80 per cent of its total requirements.

Also, the sharp decline in thermal coal prices in the international markets has already begun to reflect in the March quarter numbers with power-fuel expenses declining by 23 per cent sequentially and operating profit margins expanding by 230 basis points to 30 per cent.

Coal prices continue to hover at low levels. From $78 per tonne in December ($190 per tonne in 2008), prices have now fallen to $66 per tonne and there is scope for some further saving on fuel as sea freight rates also linger at low levels. (The company imports nearly 40 per cent of its coal requirements.)

In the March ’09 quarter, UltraTech’s sales was up 15.5 per cent supported by strong despatches growth.

Aided by sales, net profit too leaped higher by 9.4 per cent. However, the margins were wringed on high cost opening inventory (stock adjustment charges were higher by 190 per cent), higher raw material expenses (up 16 per cent) and higher power-fuel costs (up 10 per cent). The operating profit margins contracted by 1.9 per cent points.