Following a run of lower profits by its peers, Ultratech’s fiscal 2016 second-quarter results offered a positive surprise, with profits up on improving cost efficiency.
Adjusted earnings per share grew by 3% year over year to Rs 15.5, while the EBITDA margin increased by 2% to 18.4% (after adjusting for prior-period levies). We stay committed to a positive midterm view on Ultratech, despite the current demand downturn in the cement sector that has led to low capacity utilisation (about 68% for Ultratech, versus less than 65% industrywide) and subdued organic volume growth.
While we lower our five-year average earnings growth estimate to 25.8% from 26.2%, owing to weaker cement prices this year, our intact midterm view leads to an unchanged fair value estimate of Rs 2900 per share and a narrow moat rating. At the current price, the better performance is baked in, and Ultratech shares are near its fair value estimate. The improved profit comes from cost-efficiency measures, a 2.8% volume growth (largely driven by acquisitions) and a 1.2% year-on-year rise in its average selling price per ton, with strong cement prices in South India benefiting Ultratech.
The commissioning of the new waste heat recovery plant (contributing a 0.3% increase in margins) and higher usage of cheaper petcoke, along with the upscaling of acquired Jaiprakash brand to the higher-priced Ultratech brand, helped Ultratech to buck the industry’s weaker profits in the quarter ending September. We expect the weakness in North Indian cement demand seen in the past two quarters to diminish, and we think the recent uptick in North India cement prices by 15%-30% and the commissioning of an additional 3.2 million metric tons per year in grinding capacities point to better fiscal second-half profits.
India’s planned public spending on housing and infrastructure underpin our expectation for a gradual EBITDA margin recovery to a midcycle level of 23% by 2020, up from 18.4% in 2015.
