Corporate analysis: rise in input costs dents UltraTech's Q1FY15 profitability

Industry leader UltraTech Cement has underperformed the market by posting a seven-per cent decline in net profit for the quarter ended 30 June 2014 (Q1FY15).

Analysts had been expecting a flat to a modest 1-4-per cent rise in net profit for Q1FY15. 

The operating margin of the company declined 262 basis points (bps), significantly higher than the 106bps fall expected by cement sector analysts.

They expect volume growth for most cement firms in Q1FY15 on a low base and delayed monsoons. All-India average cement prices  inched up, rising 2 per cent, both on Q-o-Q and Y-o-Y basis. However, due to the increase in cost of production, which led to a fall in margins, net profits could witness a marginal dip.

UltraTech did well in terms of net sales growth due to a 15-per cent rise in sales volumes, aided by amalgamation of JP Gujarat during the quarter. Net sales in Q1FY15, however, moved at a slower pace of 13.9 per cent, largely due to a marginal decline in realisation per tonne.

The realisation declined marginally to Rs4,725 per tonne (down 1.1 pr cent Y-o-Y) on higher input costs due to an increase in petroleum (pet) coke prices and higher freight costs. Power and fuel costs were up 22 per cent, freight and forwarding expenses up 20.7 per cent and costs of materials consumed rose 15.5 per cent.

Going ahead, the company expects to contain its power and fuel costs as it commissioned a captive 25MW thermal power plant at its Karnataka plant, and another 6.5MW waste heat recovery system in Maharashtra in Q1FY15.

Analysts at IDFC Securities say that the impact of a price increase of Rs40-80/bag in south India in June-14 was beneficial for only a month in the quarter. Prices in north and west remained stable quarter on quarter post the sharp rise in 4QFY14.

Shares of UltraTech moved down by over 6 per cent in three trading session after the company announced its weaker than expected Q1FY15 results on 19 July 2014. Though most analysts have put its shares on the "buy" list with a target price of Rs2,750-2,945, Kotak Securities, Emkay and IDFC Research have put it on their "sell" rlist.

Earnings per share (EPS)

Analysts estimates

 TP(Rs)*

FY14

FY15E

FY16E

Karvy

2,837

74.7

94.6

126.7

Sharekhan

2,868

74.7

97.8

112.4

Emkay

2,400

74.7

97.4

116.1

IDFC Research

2,200

74.7

84.8

114.2

Prabhudas Lilladher

2,750

74.7

90.1

125.8

Kotak securities

2,292

74.7

89.8

115.2

* TP = target price for FY15-16