Rising demand in South, west Asia points to better days for Ultratech

Ultratech Cement’s, which has a large presence in the south, performance in the March 2010 quarter was adversely impacted by a near 5.7% y-o-y fall in its realisations to Rs 3,845 per tonne. The company’s despatches increased 8.7% y-o-y to 5 million tonnes in the fourth quarter.

Weak realisations resulted in the company’s operating profit margin that declined by 750 basis points y-o-y to 21.6% in the quarter under review. The stock declined 5.2% to end at Rs 1018.6 on Thursday. Earlier, for an all-India player ACC, consolidated operating profit margin also had declined 190 basis points y-o-y to 28.8%.

To Ultratech’s credit, it has kept a tight check on its key operational costs in the quarter, at a time when its operating environment was difficult. For instance, its power & fuel costs declined 17.7% on a y-o-y basis to Rs 730 per tonne in the quarter and this was in contrast to the situation with other leading players. In the case of Ultratech, reduced power cost per tonne is attributed to greater use of captive power.

Ultratech has also acquired UAE based ETA Star Cement for an enterprise value of around Rs 1700 crore. The company has total production capacity of 3 and 2.3 million tonnes of cement and clinker respectively, at its facilities in UAE, Bahrain and Bangladesh.

The acquisition values the overseas player’s cement capacity at nearly Rs 5,666 tonnes (approximately $126). This is lower than the valuation of leading cement makers in India. For instance, Ultratech assets are currently valued at around Rs 6,750 per tonnes ($150 per tonne) while ACC is valued at Rs 6,455 per tonnes ($143).

Senior company officials at Ultratech pointed out that due to the financial turmoil in UAE, assets are available at attractive prices. Also, demand is expected to be robust in West Asia in the medium term, as per various estimates.

Meanwhile, cement prices in south and other parts of the country have shown signs of recovery, but players are also grappling with higher input costs like freight and coal prices. Ultratech is awaiting necessary regulatory approvals for merger of Samruddhi Cement with itself, as part of the restructuring of the Aditya Birla’s cement business. At Rs 1018.6, Ultratech trades at nearly 11.6 times on a trailing basis and we are neutral on the stock.