Better-than-expected achievements and tight cost reductions helped UltraTech Cement Ltd’s earnings performance in a quarter marred by restrictions driven by covid. The pan-Indian cement maker saw its achievements peak several quarters in an otherwise seasonally weak quarter due to firm cement prices. On a per tonne basis, its average achievement was ??5,157 in Q1FY22, up approximately 7% sequentially.
Operating costs remained high during the quarter, primarily due to higher transportation costs. However, input costs per tonne have declined sequentially, due to UltraTech’s energy mix strategy and its growing reliance on green energy. As a result, Ebitda / tonne improved to ??1,536 at T1FY22 from ??1,416 at T1FY21 and ??1328 to T4FY21. EBITDA is the abbreviation of earnings before interest, taxes, depreciation and amortization.
However, for investors in this stock, UltraTech’s debt reduction frenzy is more comforting as the company aims to free itself from net debt by fiscal 23. Its net debt has fallen further by. ??733 crores in Q1FY22.
In a post-earnings conference call, management said the covid impacted cash flow in the first quarter and there was an increase in working capital requirements of ??600-700 crores. Working capital increases in the first quarter due to inventory accumulated for the monsoons and then gradually decreases, management explained.
Management expects the cash flow path to remain strong. UltraTech prepaid long-term loans of ??5,000 crore this month and its Net Debt to Ebitda ratio is now less than 0.5 times, he added.
“UltraTech’s cash flow generation from operations has been quite healthy in recent years, mainly supported by steady realization and cost deflation, which has allowed the company to significantly deleverage its balance sheet. Therefore, we expect its Net Debt to Ebitda ratio to reach 0.27 times in FY22 and -0.21 times in FY23, ”said Binod Modi, Head of Strategy at Reliance Securities Ltd.
Obtaining debt-free status should boost UltraTech’s valuations and close the gap with its counterpart Shree Cement Ltd. The latter is debt free and is the most expensive listed Indian cement share. On a one-year futures enterprise value / Ebitda basis, the former trades at a valuation multiple of 13 times and the latter at 16 times, according to Bloomberg data.
“UltraTech’s volume growth is expected to beat the industry due to its huge capacity addition and upward movement in inventories contributing to this positive. We believe the next trigger for action would come from the cash flow trajectory and the timely achievement of its debt reduction target, ”said an analyst from a national brokerage under the guise of anonymity.
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