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UT's costs rose sharply both qoq (11%) and yoy (21%) basis, largely offsetting the 24% yoy rise
in cement prices. 2QFY12 EBITDA at Rs5.81bn was in-line. We expect volatility in cement
margins to persist for the next 4-6 quarters due to surplus conditions, and, at current valuations,
the risk reward is unfavourable
2QFY12 earnings in-line with expectations
UT has reported revenue growth of 21.6% yoy which was driven by a 1.8% drop in cement
sales, but a 23.8% rise in cement realisations yoy. However, cement realisations declined by
5.2% on a qoq basis, reflecting pricing pressure which was largely driven by seasonal factors
(monsoons).
UT reported EBITDA of Rs5.81bn which was marginally lower than the Rs5.88bn which we
were expecting. The EBITDA/mt at Rs650.6/mt was sharply lower than the Rs1,255.9/mt
achieved in 1QFY12 but better than the Rs448.1/mt achieved in 2QFY11. We estimate that a
large portion of the EBITDA/mt improvement in the margins has come from UT southern
region sales which actually faced sharply lower margins in 2QFY11.
The cement price in 2QFY12 was lower on a qoq basis in most regions by 7-8% as per our
estimates, while it was flat in the southern region. This ensured that UT qoq pricing decline
remained lower at 5.2%, as UT sells around 30% of its cement volumes in South India.
Cost pressures mounting, but industry so far has been passing through
In 2QFY12, UT faced a cost increase of 14% on the variable cost front. This was driven by a
30% rise in domestic coal prices and diesel price hikes effected in June 2011 leading to
escalation in freight costs.
UT's raw material cost escalation was due to high inward freight costs in moving clinker.
Since, it has been operating its cement plants at lower utilisation rates of 70-72%, but it is
bearing maintenance cost for the entire 50mmt of cement capacity leading to higher stores
and spares expenses.
Post 2QFY12, there has been a further escalation in the freight costs by Indian Railways
which has raised the busy season surcharge by 15%. This we believe will increase UT's costs
by 2% in 2H2012.
Industry so far has been sustaining largely healthy margins, but risks remain
Despite operating at 70-72%, the Indian cement industry has been able to sustain largely
healthy margins in 1HFY2012. UT reported an EBITDA/mt of Rs961/mt which has been better
than the Rs731/mt achieved in FY11. Costs have been rising, but the industry has been able
to raise prices by around 20% in 1HFY2012 on a yoy basis.
Clearly, the possibilty of the current discipline between cement manufacturers of ensuring
good margins could sustain, we believe given that this needs to sustain for nearly two years,
we believe there exists possibility of volatility in prices.
Weakness in the cement demand growth at just 3-4% in 1HFY12 is also concerning, given
that some of the industry players have high debt levels to service which could force them to
raise production levels to recover fixed costs.
Overall, in our view, UT's financial position remains strong and valuations at US$125 EV/mt
are not too expensive, but we remain cautious given the risk to earnings in the medium term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UT's costs rose sharply both qoq (11%) and yoy (21%) basis, largely offsetting the 24% yoy rise
in cement prices. 2QFY12 EBITDA at Rs5.81bn was in-line. We expect volatility in cement
margins to persist for the next 4-6 quarters due to surplus conditions, and, at current valuations,
the risk reward is unfavourable
2QFY12 earnings in-line with expectations
UT has reported revenue growth of 21.6% yoy which was driven by a 1.8% drop in cement
sales, but a 23.8% rise in cement realisations yoy. However, cement realisations declined by
5.2% on a qoq basis, reflecting pricing pressure which was largely driven by seasonal factors
(monsoons).
UT reported EBITDA of Rs5.81bn which was marginally lower than the Rs5.88bn which we
were expecting. The EBITDA/mt at Rs650.6/mt was sharply lower than the Rs1,255.9/mt
achieved in 1QFY12 but better than the Rs448.1/mt achieved in 2QFY11. We estimate that a
large portion of the EBITDA/mt improvement in the margins has come from UT southern
region sales which actually faced sharply lower margins in 2QFY11.
The cement price in 2QFY12 was lower on a qoq basis in most regions by 7-8% as per our
estimates, while it was flat in the southern region. This ensured that UT qoq pricing decline
remained lower at 5.2%, as UT sells around 30% of its cement volumes in South India.
Cost pressures mounting, but industry so far has been passing through
In 2QFY12, UT faced a cost increase of 14% on the variable cost front. This was driven by a
30% rise in domestic coal prices and diesel price hikes effected in June 2011 leading to
escalation in freight costs.
UT's raw material cost escalation was due to high inward freight costs in moving clinker.
Since, it has been operating its cement plants at lower utilisation rates of 70-72%, but it is
bearing maintenance cost for the entire 50mmt of cement capacity leading to higher stores
and spares expenses.
Post 2QFY12, there has been a further escalation in the freight costs by Indian Railways
which has raised the busy season surcharge by 15%. This we believe will increase UT's costs
by 2% in 2H2012.
Industry so far has been sustaining largely healthy margins, but risks remain
Despite operating at 70-72%, the Indian cement industry has been able to sustain largely
healthy margins in 1HFY2012. UT reported an EBITDA/mt of Rs961/mt which has been better
than the Rs731/mt achieved in FY11. Costs have been rising, but the industry has been able
to raise prices by around 20% in 1HFY2012 on a yoy basis.
Clearly, the possibilty of the current discipline between cement manufacturers of ensuring
good margins could sustain, we believe given that this needs to sustain for nearly two years,
we believe there exists possibility of volatility in prices.
Weakness in the cement demand growth at just 3-4% in 1HFY12 is also concerning, given
that some of the industry players have high debt levels to service which could force them to
raise production levels to recover fixed costs.
Overall, in our view, UT's financial position remains strong and valuations at US$125 EV/mt
are not too expensive, but we remain cautious given the risk to earnings in the medium term.
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