UltraTech’s despatches were flat y/y in Q1 on weak demand across except East belying our and Street forecasts of a 3-5% rise. Still, the 7% rise in realisations lifted unit EBITDA 10% higher despite cost pressures. Margins could dip, though, as the lower margin JPA units ramp-up from the current 15% utilisation. Cash break on JPA appears at least a year away. Rich valuations and near-term margin dilution remain concerns. Retain HOLD preferring Dalmia instead. Ultratech has received all the required approvals for JPA acquisition effective from June 29, 2017. With these assets, Ultratech is a top-2 player in all the 5 regions and gets strong foothold in the central region where it had lesser presence. Of the 21.2 mt being acquired, all plants are operational except 4 mt at Bara which will be commissioned in 2 stages of 2 mt each in mid-FY19 and end-FY19.
Capacity utilisation for JPA assets has declined to sub-15% due to lack of funds, sharp contrast to 40-50% couple of quarters back. Management expects utilisation to ramp up to 60% by FY18-end and 70% by FY19-end. Operationally, JPA assets have Rs 5-20 per bag lower realisation compared to Tier A brands and reported Rs 400 EBITDA per tonne last quarter. Management expects gradual ramp up here with cash break even in 4 quarters. We have taken realisation alignment by FY18-end but higher cost structure to normalise by FY19-end. Ultratech has reported negligible growth for the last four quarters. Management highlighted weak demand scenario in north due to sand/aggregate shortage, in south due to drought in Tamil Nadu and in west due to low sand and water availability. Only East remains relatively insulated with continuous improvement in rural markets, housing segment and infrastructure.
EBITDA per tonne improved to Rs 1,145 from Rs 1,040 y-o-y largely due to 7% improvement in realisation. Raw material cost increased 4% due to higher use of additives. Energy costs saw a steep 32% jump due to 2x increase in pet coke prices which overshadowed improvement in power consumption and higher WHR share. Logistics cost increased 3% y-o-y due to efficiency improvement being more than offset by 9% increase in diesel prices. Overall business margins improved from 22% to 23% in Q1FY18.