Ultratech Cement’s Q4 earnings beat expectations (Ebitda Rs 13.5 bn, +3% y-o-y) as strong volume growth (+15% y-o-y) and lower energy costs (-25% y-o-y) helped offset the pricing decline (-9% y-o-y). On the analyst call, management sounded fairly confident of a rebound in demand growth with visible traction seen in infrastructure spending and South markets (new state creation). Notably, UTCEM has been gaining market share, surpassing the industry growth for the last two years, and we expect this trend to continue. Price recovery seen over the last two months seems to be holding up. On the cost side, however, tailwinds seem to be fading. Recent run-up in stock price (+25% since mid-Jan) is supported by improving industry fundamentals after a gap of seven years. Looking ahead, news flow around pricing trends and progress on monsoons (aids rural demand) will be the key stock catalysts we believe.
Strong volume growth ahead of industry trend. Benefit of pricing recovery yet to flow through Domestic cement volumes at 13.6MT are up 15% y-o-y in March quarter as against industry demand growth of 11.5% y-o-y. Pick-up in Q4 has been driven by increased infrastructure activity and demand improvement from the South. Overall F16 volume growth for UTCEM is 8% y-o-y, while industry growth stood at around 4%. Management expects industry demand growth to improve to 7-8% in F17 and we think UTCEM should outperform this. Average realisations at R4.6K/ton were down 9% y-o-y in Q4. Prices have seen a sharp rebound from end Feb onwards and hence Q4 exit price is meaningfully better than the quarterly average.
Lower P&F costs drives down operating costs. However, cost tailwinds are now diminishing: Power and fuel costs declined by a sharp 25% y-o-y and 17% q-o-q to ~Rs 750/ ton largely driven by lower pet coke prices (down 40-50% y-o-y). The company’s initiatives around improving fuel mix, waste heat recovery investments, and efficiency improvements are also yielding positive results. Freight costs remained largely stable q-o-q. Pet coke accounts for 70% of the fuel mix, while WHRS accounts for 6% of the power capacity. We note that pet coke and diesel prices have seen an uptick from their lows, indicating that much of the costs decline is now behind us. Any sharp reversal here-in is a key risk to costs for UTCEM and the industry going ahead.
JPA Transaction Update: MMDR Amendment expected soon. Deal financing tied up on attractive terms —Ultratech’s board has signed a definitive agreement for the acquisition of 21.2MT of JPA plants for EV of Rs 159 bn ($2.4 bn). The company will now initiate the required regulatory approvals and expects the deal to consummate by Mar-17. MMDR amendment is expected to come through by April end and is key to progress on JPA deal. Notably, the company has tied up long-term low-cost loan for financing the deal.
Earnings review: Q4 standalone Ebitda at Rs 13.5 bn, up 3% y-o-y, came in marginally ahead of expectations (JPMe-Rs 13.1 bn). Benefit of strong volume growth and lower costs was partly offset by lower prices. Ebitda/ton stood at Rs 996, which is lower than last year’s Q4 (Rs 1,100/ton) due to weak pricing trends. PAT for the quarter at Rs 6.8 bn is up 11% y-o-y. For the full year, Ebitda at Rs 46.2 bn is up 10% y-o-y, Ebitda/ton stood at Rs 945 (vs. Rs 920 LY) and Ebitda margin stood at 19.2% (+90bps y-o-y). Balance sheet is very strong with consolidated net debt at Rs 36 bn (down R16 bn y-o-y, Net D/E- 0.2x) and it should reach zero debt by end F17e (before JPA acquisition), thanks to strong cash generation. Capex for F17 is expected to be Rs 15 bn, primarily for maintenance and regulatory/environmental compliance.
—J P Morgan