Government’s housing, infra push to boost UltraTech numbers

A pan-India presence and relatively lighter balance sheet may find favour with investors

ET Intelligence Group: Shares of UltraTech Cement, India’s largest cement company by capacity, gained 4.4% on close of trade on Monday to touch Rs.4,144, as investors cheered the company’s better-than-expected March quarter results.

In comparison with Bloomberg’s consensus net profit estimate of Rs.632 crore, the company recorded earnings of Rs.726 crore in the quarter under review. There are a few factors which have contributed to this performance. Firstly, there has been reasonably good cement demand from the low-cost housing segment, which to a certain extent made up for the degrowth in cement demand in the other segments.

According to the company’s management, cement consumption in low-cost housing increased by 40% from FY16 to 20 MT in FY17. Secondly, cement demand from the infrastructure segment improved in s;elect pockets such as the eastern and the southern regions. In these regions, demand was led by the irrigation and roads segments. Thirdly, due to rising input costs, such as pet coke and coal, which increased cost of cement production, the company increased prices, which aided growth in its revenue in the March 2017 quarter. Hence, despite the fact that the company’s cement volumes have grown at a meagre 1% on a year-on-year comparison, its revenue in the quarter grew by 2.59% to Rs.6,922 crore.

In the March quarter, higher power and fuel (up close to 12.7% YoY) and interest costs (up close to 30% YoY), the company’s net profit declined by 11% to Rs.726 crore YoY. From a year ago, pet coke prices grew by 108% to $92 per tonne. As a result, UltraTech’s net profit declined by 11.2% to Rs.726 crore in the quarter on a YoY comparison. Also, the cost of manufacturing one 50-kg cement bag went up in the range of Rs.10 to Rs.15.

Consequently, companies had to increase cement prices in the quarter. In the coming quarters, cement companies will be able to maintain pricing discipline, given the increasing cost of production. With the government’s focus on affordable housing, demand from low-cost housing is expected to be stable.

According to government data, 82,048 houses have been constructed under the Pradhan Mantri Awas Yojana - Urban (PMAY Urban), a housing-for-all initiative, as on March 20, 2017. Under the initiative, a total of 1,642,685 houses had been sanctioned at the end of March 2017.

Being the largest cement company, UltraTech is well placed to benefit from any significant improvement in cement demand in the coming quarters. Its capacity will increase to 95 MT, from 69 MT at present, after including acquisition of Jaypee’s cement plants and organic expansion. Its current capacity utilisation is at 82%.

On the valuation front, the UltraTech stock is trading at an EV/EBIDTA of 13.7 on FY19 estimates. Its past three-year average EV/EBITDA is 19.8. Given its pan-India presence and relatively lighter balance sheet (debt to equity ratio of less than 1), investors may want to hold on to the company’s shares.