UltraTech expects slow demand recovery
Institutional investors are unlikely to change their view on UltraTech Cement, India’s largest cement company by capacity, in the near term. A key reason for this is the sentiment reflected in the management’s conference call which painted a subdued picture for the sector in the near-term due to structural challenges.
The management pointed to demand de-growth of 2 per cent in the housing segment, which consumes about 70 per cent of the cement produced. Due to this, cement demand is likely to improve slowly. Even institutional investors will be keeping their stance on the company’s shares unchanged. Besides fund crunch and slow growth in sales, the housing segment is also impacted with the implementation of RERA (Real Estate Regulatory Act), which according to analysts, gives better pricing power to big builders as they will dictate prices to cement manufactures. As a result, cement manufacturers would be unable to record higher margins in the next two quarters. In the June quarter, growth in volumes was flat at 13.2 million tonnes as against Bloomberg’s estimate of 13.9 million tonnes.
But all is not gloomy for the sector. Analysts point out that the improvement in execution of infrastructure projects, especially government awarded ones, should create reasonably good demand for cement manufacturers from the third quarter of the current fiscal. As regards UltraTech Cement, investors need to bear in mind two factors. First, by FY19, the company plans to enhance capacity utilisation of its acquired JP plants to 70 per cent from 15 per cent at present.
Besides, it plans to achieve cash breakeven of JP plants by FY19. For this, it needs to record an EBIDTA of Rs 1,300 crore.
This is quite possible in the next two years, given stable demand for cement in the central and coastal Andhra regions where these plants are located.
The second factor is the valuation of the company. At present, on FY18 estimates, the company is trading at a price to earnings multiple of 35.1, which is at 53 per cent premium to its five-year average price to earnings multiple of 22.8. This is quite expensive. Given this, retail investors are advised to hold on to the company’s shares.
In the June 2017 quarter, the company beat the Street’s revenue estimates by 3-4 per cent and recorded growth of 6.8 per cent to Rs 7,034 crore on a year-on-year comparison. Its net profit grew by 15 per cent to Rs 897 crore in the June quarter in comparison with last year’s June quarter.