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The key takeaway from the June quarter earnings of Ultratech Cement Ltd was the reduction in its debt. A greater deal with on working capital and durable money flows led to web debt reduction of ₹2,209 crore, in comparison with debt of ₹16,860 crore within the March quarter.
In a post-earnings convention name, the corporate’s administration mentioned, for its India operations, it goals to cut back the online debt/Ebitda ratio from the present 1.44 occasions to 1 time going forward. Ebitda is brief for earnings earlier than curiosity, tax, depreciation and amortisation.
Analysts say, with rising deal with debt reduction, the valuation gap between Ultratech and shut competitor Shree Cements Ltd, ought to begin narrowing. Bloomberg’s estimates present that on a one-year ahead EV/Ebitda foundation, the previous trades at a a number of of 14occasions. The latter is the most costly inventory within the sector, with a valuation a number of of 20 occasions. EV is brief for enterprise worth. Obviously, it helps that Shree Cements is debt-free.
Meanwhile, the opposite vivid spots in Ultractech’s Q1 outcomes have been a lower-than-expected drop in web revenue and revenues. As for volumes, volumes of India operations have been down by 32% y-o-y on a comparable foundation to 13.94 million tonnes. Earlier, ACC Ltd and Ambuja Cements Ltd had reported a 33% and 28% drop in volumes respectively for the June quarter.
Ultratech’s working margins additionally improved by 4 proportion factors, aided by strict price management measures. Ultratech had initiated an overhead price reduction program with a 10% price reduction goal, mentioned its investor presentation. On a y-o-y foundation, the corporate’s fastened price declined 21% and the corporate noticed a Rs105/tonne price reduction over the March quarter of fiscal 12 months 2020, the presentation added.
Overall, the corporate scored higher than estimates. The firm’s shares have now risen over 9% previously two buying and selling periods. Peers ACC and Ambuja Cements had introduced higher than anticipated outcomes, particularly on the revenue margins entrance, and even Ultratech shares had risen forward of the ends in anticipation. But within the latter’s case, the debt reduction has come as an added bonus.
After Tuesday’s sharp rally, analysts see restricted upside within the Ultratech inventory from the present stage, until the sector’s demand state of affairs meaningfully improves. The inventory now trades at round Rs4130, and is about 13% decrease in comparison with its excessive of Rs4754 earlier within the 12 months. At one level in March, the inventory had fallen round 40% from its highs, which reveals that buyers are pricing in a reasonably negligible influence on the corporate owing to the pandemic.
While the debt reduction ends in a greater valuation, the stress on volumes maybe should be higher mirrored in valuations of cement shares. Cost cuts can help earnings solely to an extent, and buyers ought to brace for earnings disappointment going ahead, until demand bounces again.
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