Cementing gains

After underperforming the broader index during the year, the Kumar Mangalam Birla-owned UltraTech Cements’ stock has surged 17% from its year’s low of Rs.3,616 on June 21 to Rs.4,300 on August 9, on the back of a robust Q1FY19 and the bid for Binani Cement.

Cashing on the rally, promoter-owned investment vehicles, Trapti Trading & Investment, and Turquoise Investments and Finance, sold 517,147 shares worth Rs.2.16 billion between July 30 and August 7, marking the first sale in FY19. In the previous fiscal, the two investment vehicles had sold stock worth Rs.2.32 billion. While their cumulative holding dropped to 0.08% from 0.18%, the overall promoter holding continues to be around 62%.

In the first quarter of FY19, the company reported a strong volume growth of 32.6% (YoY) to 17.5 MT, led by an increase in utilisation of Jaypee assets, better sand availability and higher infrastructure demand. The management expects healthy demand in the coming quarters owing to a sustained pickup in infrastructure and rural demand.

Surging operating and interest cost are a cause for concern though. The company’s operating margin was adversely impacted due to 35% (YoY) increase in pet coke prices and 20% increase in diesel prices. As a result, operating margin fell 478 basis points (YoY) to 18.8%.

While the acquisition spree will consolidate its position as a national leader, rising debt is expected to increase its interest outgo, which is up from Rs.6.4 billion in FY17 to Rs.12.3 billion in FY18 as total debt jumped from Rs.62.71 billion in FY17 to Rs.174.20 billion in FY18.

But despite the high operating cost and weak cement prices, analysts are bullish. “The company is likely to witness healthy growth in operating profit in the current fiscal, aided by the full impact of the ramp-up of acquired capacity and growth in other markets,” states a report by Motilal Oswal Securities. ICICI Securities, too, expects the company to benefit from higher infra demand and revival in the rural economy.

However, institutional investors are exhibiting mixed emotions. Mutual funds increased their stake from 2.62% in March 2018 to 2.85% in the June quarter while FIIs pared their holding from 22.27% to 21.19%. The stock is currently trading at a one-year forward EV/Ebitda of 15.9x compared with 10.3x for ACC.