Ultratech Cement: High costs mar show, but future prospects bright

Ultratech Cement's subdued performance in the fourth quarter was in line with street estimates. A minor improvement in blended realisations, coupled with higher costs, led to a nearly 100 basis points contraction in operating margins. 

A seasonally strong fourth quarter failed to lift demand for cement, leading to sales volume decline of 4% year on year to 11.13 million tonnes (MT). However, better realisations of
value-added products helped blended realisations to improve marginally by 5% to Rs 4,842 per tonne. As a result, the top line remained flat on a y-o-y basis. 

Escalation in costs was pervasive across cost centres barring power and fuel. Higher input costs of gypsum, slag and limestone increased the per-tonne raw material costs by 13% to Rs 754 per tonne. 

Additionally, higher railway freight and an increase in diesel prices increased 
transportation cost by nearly 10% on a yearly basis. Softening of international coal prices offered respite to the company, resulting in an 8% decline in per-tonne power and fuel costs. 

A higher surcharge proposed in the current budget resulted in a higher effective tax rate of 33.3%, putting pressure on the bottom line. This, combined with a 30% fall in other income, led to a decline in net profit by 16.3% to Rs 726 crore. 

The company is in line with its expansion guidance and will witness the commissioning of its new plants (9 MT) in Karnataka and 
Chhattisgarh in the second half of the current fiscal. The new capacities are expected to reach 40% utilisation levels by the end of the fiscal. 

Increased capacity will help Ultratech cater to any increase in demand and this will, in turn, improve the utilisation levels of the company, thereby giving it an advantage of positive operating leverage. 

The cement major's stock has declined by 1.2% in the last three months against the Sensex's fell of nearly 5%. At the current price, the stock is trading at an 
enterprise value(EV) by EBITDA (earnings before interest, taxes, depreciation and amortisation) of 13, which is superior to its peers such as Ambuja (9) and ACC (9.3). 

The valuation appears to be fair in view of the company's plans to expand capacity, its strong balance sheet and a committed management. 

The demand for cement may increase in the second half of FY14 due to likely higher spending with polls around the corner. 

The long-term prospects of the company remains strong and any correction in prices due to short-term factors can be a good entry point for an investor.