UltraTech Cement shares open strong as Q2 net profit doubles, but fail to hold gains; should you buy?

UltraTech Cement’s share price zoomed 2.2% on Thursday’s opening bell, but soon slipped to trade with losses, while the benchmark S&P BSE Sensex was trading in red. Investors were reacting to the strong quarterly numbers posted by the cement manufacturer where its net profit jumped more than doubled from the year ago period to Rs 1,234 crore as against Rs 579 crore. Analysts say that the strong growth was aided by better than expected performance across various parameters such as volumes, realizations and costs. Stock of the firm has gained over 22% in the last one month and now trades at Rs 4,563 per share.

Strong financial performance

Revenue from operations was at Rs 10,354 crore a jump of 7.7% from the previous year when it was at Rs 9,615 crore. Operating profit too was over 40% higher than the year-ago period due to reduction in cost per tonne and helped by lower fuel prices. . Earning before interest tax and depreciation and amortization (EBITDA) margins came in at 26%. Volume was up 7.6% and realizations were up as well. “Company reported volume growth in the regions of North, Central, Gujarat and East. Whereas, volume de-grew in the regions of South and Maharashtra,” said Keshav Lahoti – Associate Equity Analyst, Angel Broking while adding that he is bullish on the company.

To go debt free?

Debt of the company was also trimmed by Rs 2,500 crore from the previous quarter. Brokerage firm Motilal Oswal highlighted in a note that the reduced debt is now at 12,100 crore implying a 1.22x TTM EBITDA which now down from the peak of Rs 22,100 crore 3x EBITDA back in March 2019. This was driven by a strong FCF and the divestment of the non-core China plant, acquired as a part of the Binani deal,” the report said. A strong pan-India distribution network and being a preferred supplier for key infrastructure projects, UltraTech Cement is well placed to tap into the expected growth in cement demand.

The decline in net debt has impressed analysts at Kotak Securities. “We expect UltraTech Cement to become debt free by FY2023E led by strong operational cash flows and limited capex. With 5-6% FCF yield in FY2021/22E, net debt/EBITDA would reduce to 0.3X by FY2022E from 2X in FY2020 and become net cash in FY2023E,” they said. However, despite the strong performance, they believe cost inflation to impact margins and see limited upside from current levels, downgrading the stock from Buy to Add with a fair value of Rs 4,900 per share.

Costs to increase

Management said that the utilization level in September was more than 68% despite Covid-19 led pressure on demand. Costs were helped by the usage of low cost pet coke that increased to 74% of the overall mix in the second quarter from 73% in the previous quarter. UltraTech Cement highlighted that in the July-September prices were down 2-3% on-quarter primarily due to seasonality. Exit prices in October were stable and rather strengthening in some regions. The company expects prices to increase further with improvement in demand and restart of government projects. Kotak Securities estimates that cement prices will increase in the current quarter in almost all regions across the country.

Meanwhile, analysts at Motilal Oswal expect 13%/27% CAGR in consolidated EBITDA and PAT over financial year 2020 to 2023 helped by 5% CAGR in volumes. “The valuation is reasonable at 11.7%FY22E EV/EBITDA and USD177/t capacity, a 25% discount to its past five year average and ~15% discount to its past 10-year average,” Motilal Oswal said. With a ‘Buy’ rating the brokerage has a target price of Rs 5,600 per share.