Ultratech Q1FY23 result review –Margins sustained at the level close to last five-year (FY16-20) average margins of ~20%.

What's Buzzing:  

Ultratetch’s Q1FY23 performance was marked by positive surprise on margins front amidst challenging cost environment. 

Context:  

After initial moderation in the demand during April-May due to inflationary pressure, demand again pricked up in June on pre-monsoon construction activity. Hence, company managed to improve its sales volume by 19% YoY with capacity utilization of 83% vs 73% last year. Cost pressure remained at elevated levels with the prices of international coal, pet coke further increasing by 40% and 45%, respectively sequentially due to international supply chain bottlenecks. However, with better fuel inventory management, increased share of WHRS and alternative fuels, the power & fuel cost (ie. ~25% of total cost) of the company increased by only 10.7% as against average increase of ~28% reported by comparable peer companies so far on sequential basis. This restricted overall cost increase to only 5.4% while average realization grew by 6% that was supported by North and Central region witnessing a double-digit growth in the realizations. East and West also saw cement price increase of 5-7% while South saw sequential flat realization. With full pass on of the cost pressure led by better cost management, co’s operating margin improved sequentially by 50bps (down 773bps YoY) to 19.9% vs our expected margin of 16.4%. Overall, despite severe cost pressure, the margins profile of the company has still been maintained at the level close to last five-year average margins of ~20% (pre-covid levels).  

Our Perspective:  

While the next quarter still looks challenging due to ongoing monsoon led weakness in the demand, we hope the margin curve to improve from H2FY23 onwards on sustained basis as the benefit of recent 10% correction in the pet coke price would start getting reflected in the performance from Q3 onwards. Also, from long-term perspective, the company's strategic growth plan (target to become 154MT player by 2025, 200MT player by 2030, ie at 7.2% CAGR), prudent approach in generating higher cash flows to capex with IRR target of +15% for the new capex while maintaining strong balance-sheet would continue to keep the company ahead in the league. Hence, we remain constructive on the company.