It is time to review the quarterly results declared in the last few weeks. We have tried to focus on the top three cement producers to study the numbers declared by them.
UltraTech´s Q4 surprised positively on account of high volumes and cost savings. Results beat our estimates by 8 per cent and consensus by 10 per cent on the EBITDA front. We were the highest on the Street on EBITDA estimates. The company has played on the advantage on cost savings in Q4. The absence of realisation improvement in Q4 is the only negative.
Soon, UltraTech will feel the need for increasing cement prices to sustain margins as volumes taper and incremental cost savings appear limited.
The UltraTech management sounds extremely positive on demand revival. This revival is driven by infrastructure demand. However, rural traction to demand support is still missing. The company admits that the volume growth numbers will taper down to realistic levels (~8 per cent). In our opinion, this will bring back the much-needed price support to cement prices. Incremental savings on cost is limited, given that fuel prices have started increasing. All efforts are on to consolidate Jaypee assets by Q1FY18. However, drought will be a worry in specific pockets like Maharashtra if monsoons fail to help. The company does not rule out further organic/inorganic opportunities. The focus will remain to gain on market share in the long term.
UltraTech has a structural long term support to earnings because of its thrust to gain market share through capex/consolidation. But we believe for the next leg of valuation re-rating, improvement in profit margins is a must. At this juncture, it appears that recovery in cement prices is the only rescue and that call will soon be taken, as incremental cost savings appear limited. UltraTech remains the best structural fit in the industry and will gain the maximum with improvement in cement prices.
As far as Ambuja Cement is concerned, operating results in Q1CY16 were in-line with our estimates. However, this was again because cost savings helped Ambuja to compensate on realisation loss and deliver on operating profits. Absence of q-o-q savings on power & fuel was a negative surprise though Ambuja is the only major to not to see this savings.
EBITDA/tonne at Rs 710 was in-line with our estimates. Like other peers like UltraTech & ACC, Ambuja has also played only on the advantage of cost savings in Q1. In our opinion, incremental cost savings appear low and the trend should reverse Q2 and onwards and hence the industry needs to look back at realisations.
Surprisingly, none of the cement majors in Q1 reported a better realisation trend. Given the consistent delay in the consolidation proceedings, we now rule out the possibility of execution of the restructuring proposals for Indian entities of LafargeHolcim as proposed in July 2013 and value Ambuja on a standalone basis. ACC´s volume growth was in line with expectations. However, no recovery in realisations was a disappointment. Improvement in cost efficiencies, driven by increased usage of pet coke, was a positive surprise.
The company has surprised positively on cost savings in Q1. This is driven by 43 per cent y-o-y and 33 per cent q-o-q increase in pet coke usage, which was unexpected. Renegotiation in slag prices and reduction in landed cost of fly ash and gypsum helped y-o-y raw material cost savings.
This article has been authored by Vaibhav Agarwal, Vice President - PhillipCapital (India) Pvt. Ltd.