Ultratech Cements Ltd (Q4 FY14)

• Volume push dents realizations; Supply issues in Northern market arrest further dip in realization

• Margin improved sequentially by ~5ppts better than our estimate on back of saving in power cost

• PBT meets estimate at Rs9.7bn (down 10% yoy); higher tax provision in previous quarter translates into lower tax outflow

• Downgrade to SELL with a revised 9-month price target of Rs1,722

Volume push dents realization; revenue meet estimate

Ultratech Cements Ltd (UCL) revenues stood at Rs58.3bn meeting our estimate. Volume growth of 9%yoy was higher than our expectation of 3%yoy. However, we believe UCL took cuts in pricing to boost volumes during the quarter as average realization stood at Rs4,662/ton down 2.8%qoq on sequential basis against our expectation of a 3% improvement. Other operating income jumped 54%yoy and 306%qoq basis.

Saving in power and other overhead led to ~5ppts sequential jump in OPM

Lower realizations impact was partially offset by jump in other operating income reducing its impact at operational earnings level. OPM for Q4 stood at 21.3% (our estimate of 19.1%), as savings in power and fuel costs (Rs1,092/ton as against Rs1,121/ton previous quarter largely on account of currency appreciation) and other overhead (Rs742/ton as against Rs840/ton in Q3 FY14) boosted margins. Personnel cost stood at Rs188/ton lowest level in previous eight quarters (average personnel cost for last eight quarter stood at Rs243/ton).

Depreciation and interest outgo was higher on back of commencement of new cement capacity and CPP units. PBT stood at Rs9.7bn down 10%yoy, however, higher tax provision in previous quarter translated into lower tax outflow leading to a 15%yoy jump in earnings.  

Construction activity has slowed down Pan-India, impacting realization of all major players (barring north-based players as Binani Cement plant shutdown translated into supply crunch, thereby, improving realization). Cement sector is going through tough times as significant slowdown in demand and supply surplus in most regions are impacting realization negatively. Slackening demand in the peak construction season makes us believe that industry may go through weak phase for the next 2-3 quarters. The sector could possibly see a revival post H1 FY15 on back of a) resumption of investment cycle, post general election b) softening of interest rate and c) demand revival.

We believe current valuations for UCL are stretched considering that slowdown has started to impact margin (FY15 OPM is expected to be at 20% against 5yr average of 24%, thereby, impacting earnings and return ratio). Rupee appreciation along with lower international coal prices could have its limited impact on operational efficiency in the near term. However, UCL at CMP trades at 21x PER FY16E EPS of Rs103, downgrade stock to SELL with a 9-mnth price target of Rs1,722