UltraTech Cement : Hold

UltraTech Cement continues to be preferred exposure within the cement sector due to the advantages of operating in the East, 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 the plus points. At Rs 577, enjoying seven times trailing earnings, the stock valuation remains reasonable and is at discount to ACC which trades at seven times.

Though all-India cement despatches have grown by a stronger-than-expected 9.2 per cent in FY-09, the bunching up of fresh capacities in 2009-10 make the current year a challenging one for the sector.

At 6.3 million tonnes, UltraTech’s sales volume recorded a robust 12 per cent growth in the March quarter.

Its peers, ACC and Ambuja Cements, saw a lower growth at 6.2 per cent and 6.8 per cent. Being positioned in the West, the company made the best out of the higher demand in this region in recent quarter.

Year-to-date till March, the western region has shown the highest growth in despatches at 12.74 per cent growth compared to the all-India average of 7.95 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 60 million tonne of capacity expected to be added in FY-10, over 85 per cent will be in the North and Southern pockets.

With the commissioning of two grinding units of 1.1 million tonnes per annum (mtpa) each in the March quarter, UltraTech’s capacity stands at 23.9 million tonnes. This is expected to rise to 24.1 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 61 per cent over the previous year on borrowings for the capex.

However, the interest coverage stands at a comfortable 15 times. Further, for the full year FY-09, cash profits were higher on higher depreciation (up 33 per cent) on additions to the cement and captive power capacity. Cash profit for FY-09 was Rs 1,581 crore against Rs 1,228 crore for FY-08.

But, however, this is much lower than the prices in the South where a 50 kg bag is sold at Rs 271-75; this could mean leeway for further increases.

In the March ‘09 quarter, however, the company’s overall realisations came down by Rs 8.6 per bag on substantial decrease in export realisations of clinker.
Saving in cost

The addition of 191 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 81 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 24 per cent sequentially and operating profit margins expanding by 210 basis points to 30 per cent.

Coal prices continue to hover at low levels. From $77 per tonne in December ($190 per tonne in 2008), prices have now fallen to $65 per tonne and there is scope for some further saving on fuel as sea freight rates also linger at low levels.

In the March ’09 quarter, UltraTech’s sales was up 15.6 per cent supported by strong despatches growth.