UltraTech Cement's Q2FY19 results (Outperformer) - Cost pressures impact profitability
Q2FY19 result highlights
- Adj PAT fell 9.4% yoy to Rs3.91bn: on sustained cost pressures.
- Strong volume traction with +20% yoy to 15.7mt: led by ramp up of JPA plants. Ex-JPA, volumes grew ~10% yoy. Demand improved across regions led by infra, affordable housing and uptick in rural demand.
- Realisations strong: with +3% qoq (+1% yoy) led by hikes across regions except West. Moreover, the company is working on reducing the price gap between trade & non-trade which boosted realisations.
- Cost pressures drive down EBITDA/t: by 22% yoy to Rs767 (-Rs81 qoq). Costs/t +7% yoy led by higher P&F costs (+18% yoy) on higher petcoke prices (Q2FY19 avg US$114 vs spot of US$108). Freight costs +4.5% yoy on higher diesel prices, partly offset by lower leads (-5% yoy) & benefits of higher axle load (+7% savings)
Conf call highlights: (1)JPA cost/t higher by Rs135 than UTCEM (Rs100 structural on royalty, logistics; Rs30/t to be plugged by 2HFY19); on track for PBT breakeven by 1Q20; (2) 26MW WHRS capacity added and plan to add 36MW WHRS by FY20; 30% of power reqmt to be met by renewable and AFR by FY22 (currently at 11%); (3) Higher axle load and lower lead distance to offset impact of higher diesel costs, (4) Launched premium products in East (5) Demand momentum is strong and price hikes to be seen in Nov-18, post Diwali, with utilisations inching up, particularly for clinker (6) Century cement acquisition to be completed by 4Q19 (7) Bara plant commissioning delayed to 1QFY20
Key positives: Robust volume growth
Key negatives: Cost pressures
Impact on financials: FY19/20 EPS cut by 10% and 8.5% to Rs102/144
Valuation and view
UTCEM has focussed on enhancing the utilisation and profitability of the JPA assets by higher realisations and cost efficiencies. On the other hand, UTCEM continues its efforts towards cost efficiencies (higher WHRS share, lower consumption norms and lead distances, etc) to restrict the impact of rising input costs. With cost pressures peaking out, demand-supply gap reducing, we believe price hikes should accelerate. Accordingly, we expect UTCEM to see 32% earnings CAGR over FY18-20E. Considering, the earnings momentum, scale and efficient operations, we believe valuations are attractive (12.5x FY20E EV/EBITDA US$152 on EV/t). Outperformer.
UltraTech Cement Limited is engaged in the business of cement and cement-related products. The Company manufactures a range of products that cater to construction needs from foundation to finish, including Ordinary Portland Cement (OPC), Portland Blast Furnace Slag Cement (PSC), Portland Pozzolana Cement (PPC), white cement and white cement-based products, ready mix concrete, including specialty concrete, building products, such as aerated autoclaved concrete (AAC) blocks and joining mortars and a host of others in retail formats. Its geographical segments include India and Rest of the World. The Company focuses on various areas, including alternative fuels, waste heat recovery systems, carbon dioxide emission reduction, waste management, water re-cycling and bio-diversity management. It has over 10 integrated cement units, approximately 10 grinding units, a white cement unit, a wall care putty, over five bulk terminals and over 100 ready mix concrete units.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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