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Home Markets Financial debt reduction might help bridge Ultratech’s valuation gap with Shree Cements

Financial debt reduction might help bridge Ultratech’s valuation gap with Shree Cements

The key takeaway from the June quarter earnings of Ultratech Cement Ltd was the reduction in its credit card debt. A improved handle on working capital and durable cash flows led to web financial debt reduction of ₹2,209 crore, in comparison to personal debt of ₹16,860 crore in the March quarter.

In a publish-earnings conference call, the company’s administration mentioned, for its India functions, it aims to lower the internet debt/Ebitda ratio from the existing 1.44 moments to 1 time going ahead. Ebitda is short for earnings prior to interest, tax, depreciation and amortisation.
Analysts say, with expanding focus on personal debt reduction, the valuation gap involving Ultratech and close competitor Shree Cements Ltd, must start out narrowing. Bloomberg’s estimates display that on a 1-year forward EV/Ebitda basis, the former trades at a multiple of 14instances. The latter is the most highly-priced inventory in the sector, with a valuation various of 20 moments. EV is short for organization value. Definitely, it aids that Shree Cements is financial debt-no cost.
Meanwhile, the other shiny places in Ultractech’s Q1 benefits were being a reduce-than-envisioned fall in net profit and revenues. As for volumes, volumes of India operations had been down by 32% y-o-y on a similar basis to 13.94 million tonnes. Before, ACC Ltd and Ambuja Cements Ltd experienced described a 33% and 28% drop in volumes respectively for the June quarter.
Ultratech’s functioning margins also improved by four percentage details, aided by rigid cost control steps. Ultratech had initiated an overhead cost reduction plan with a 10% price reduction goal, claimed its investor presentation. On a y-o-y basis, the company’s fastened charge declined 21% and the organization saw a Rs105/tonne expense reduction more than the March quarter of fiscal year 2020, the presentation extra.
General, the corporation scored far better than estimates. The company’s shares have now risen in excess of 9% in the past two buying and selling sessions. Friends ACC and Ambuja Cements experienced introduced better than anticipated success, primarily on the profit margins front, and even Ultratech shares had risen ahead of the benefits in anticipation. But in the latter’s case, the debt reduction has appear as an added bonus.
Soon after Tuesday’s sharp rally, analysts see confined upside in the Ultratech inventory from the current level, unless the sector’s demand circumstance meaningfully enhances. The stock now trades at all around Rs4130, and is about 13% lower in contrast to its high of Rs4754 previously in the year. At one particular point in March, the inventory had fallen about 40% from its highs, which exhibits that investors are pricing in a fairly negligible effects on the firm owing to the pandemic.
Even though the financial debt reduction results in a superior valuation, the force on volumes probably have to have to be superior mirrored in valuations of cement stocks. Cost cuts can support gains only to an extent, and investors ought to brace for earnings disappointment heading forward, except demand bounces back.

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