Ultratech announced its Q1 FY23 results on Friday, and managed to outperform the consensus estimates at a time when the industry is facing cost inflation.

The volumes grew 16 per cent Year-on-Year to 25.04 million tons with a revenue growth of 28 per cent YoY to ₹ 15,007 crore, comfortably beating consensus estimates by 5.4 per cent.

The EBITDA for the quarter was ₹3,204 which is around 20 per cent higher than the consensus estimate (Bloomberg estimate) of ₹2,666 crore.

The PAT was at ₹ 1,584 crore versus consensus of ₹ 1,451 crore. The company has achieved 83 per cent capacity utilisation in June 2022, higher than the 72 per cent utilisation reported in Q1 FY22. In addition, the product mix of premium segment grew 3.2 per cent to 17.4 per cent.

Margins under pressure

Despite its decent volume growth, profitability is getting impacted due to cost inflation. This is mainly due to volatility in energy prices.

The EBITDA margin declined by 8.6 percentage points over the same quarter last year and settled at 21.35 per cent in Q1 FY23 from 30.02 per cent in Q2 FY22.

The company, however, registered a marginal growth of 100 basis points QoQ. The PAT margin also declined 4.03 percentage points during the reporting period and came down to 10.55 per cent from 14.55 per cent in Q1 FY22.

The power and fuel cost rose to 26.7 per cent of sales in June 2022 from 20.7 per cent in June 2021.

The raw material cost as a percentage of sales remained around 13 per cent during Q1 FY23 as well as Q1 FY22.

The logistics cost, too, as a percentage of sales remained flat around 22 per cent.

The price of imported coal is near a multi-year high at $409.2 per tonne in Q2FY22; the highest price was $428 per tonne (May 2022).

The price of Brent seems to have cooled a bit and is trading at $101.88 per barrel, in contrast to around $120 in June 2022. According to a report by ICICI securities, the price of international petcoke was around $287 per ton in Q1 FY23 which is cheaper than coal.

The company has been maintaining fuel mix of 52 per cent petcoke, 37 per cent imported coal, and 5 per cent domestic coal and others. Higher petcoke consumption may have helped deal with fuel costs to some extent.

Valuation

Ultratech cement has had around 22 per cent fall from its peak in November 2021. However, the Q1 results were decent enough for the street to take interest in it again.

Although, the company has managed to beat expectations this time, cost pressures seem to be a cause of concern in the upcoming quarters.

Ultratech is trading at a one year forward P/E of 27.3x (5-year average 29.8x), while ACC is trading at a forward P/E of 23.5x (5-year average is 21.5x), Ambuja Cements is trading at 25.9x (5-year average is 22.2x) and Shree cements is trading at 32.7x (5 year average is 36.8x).

Outlook

On the positive side, the demand growth prospects in the coming months look relatively good.

The growth is expected to be led by the infra segment which accounts for nearly 25 per cent of demand and the increased government capex is also expected to drive demand for cement companies.

In addition to these, retail housing projects, including rural housing, are expected to pick up.

On the other hand, while Ultratech is trading at a discount to its historical average, and results have been received positively by investors.

Overhang of cost pressures and concerns on spill over effects of global slowdown on India will remain headwinds for the stock. Hence, we continue to maintain withour hold recommendation given in our BL Portfolio edition dated March 6, 2022.

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