Acquired assets and rising prices may trigger investor interest in UltraTech
After a long time, cement manufacturers have not only been able to increase prices.
This is exactly the case with India’s largest cement manufacturer by capacity, UltraTech Cement. In the three years through this January, the stock had underperformed the Nifty50 index. In the past one month, however, the trajectory has changed and it gained 12.6 per cent against a 1.2 per cent rise in the Nifty.
This new interest in UltraTech can be attributed to three main factors: improving prices, gains from the assets it acquired in the recent past and cost savings.
After a long time, cement manufacturers have not only been able to increase prices, but also sustain it. This is a favourable sign as analysts believe the industry is entering a demand cycle wherein manufacturers would be able see improvement in price realisations at improved utilisation levels. This should boost their operating profit (EBITDA) per tonne in the coming quarters.
In light of these facts, and post-acquisition of key cement assets, UltraTech’s operations are geared to make the most of the improving cement prices and stable demand from infrastructurerelated and slightly improved construction activities in real estate (largely low-cost housing). In a recent communication with analysts, the company’s management presented information about its acquired cement assets and cost-savings measures.
The company said its subsidiary, Ultratech Nathdwara (erstwhile Binani Cement with a capacity of 6.25 mt, which it acquired in November last year) has shown improvement in realisations and capacity utilisations. The unit’s realisation since the acquisition has improved to Rs 600 per tonne from Rs 100 and utilisation to 60 per cent from 50 per cent. This is largely because of the rebranding of Binani Cements’ assets.
UltraTech is likely to fully integrate another asset it acquired, Century Cement (14.6 MT), by the first quarter of FY20. At present, there is a gap Rs 10-15 per kg between the cement price of Century Cement and UltraTech. The company has stated that the EBITDA per tonne generated by Century’s asset was likely to improve by Rs 300-400 per tonne from Rs 367 when UltraTech acquired it. Also, the fall in crude oil prices should boost savings for Ultra-Tech that operates multi-fuel plants. In all, the company is expected to save cost by Rs 60-70 per tonne. In times when demand is improving and price hikes are sustaining, the improved performance of its acquired assets and cost savings should boost UltratTech’s earnings.
Analysts estimate UltraTech's EBIDTA per tonne to improve to Rs 940 by the end of FY20 from the estimated Rs 870 this fiscal year. On a one-year forward basis, the stock is trading at an EV/EBIDTA of 14.7, which is a 1.5 per cent discount to its five-year average.