UltraTech Cement has conducted a conference call on 24th January 2019 to discuss the financial performance for the third quarter ended December 2018 and way forward. Mr. Atul Daga, Chief Financial Officer of UltraTech Cement, addressed the conference call.

Highlights of the Concall

• SECTORAL UPDATE: Cement industry grew by 9-10% YoY in Q3FY19, while all-India utilizations stood at 70%. Construction ban in the state election and festive season led to moderation in demand. Infrastructure and low-cost housing projects like Pradhan Mantri Awaas Yojana (PMAY) are driving growth. Prices in south dropped by 2-3%, while those in east dropped by 1-2% in 3QFY19. There was a marginal reduction in prices in western and central India and a marginal improvement in northern India.

• Demand from Housing Contracted to 55%: Improved demand from the infrastructure segment resulted in contraction in demand proportion of housing to 55% from 60% earlier. However, PMAY is major supporting factor for the housing segment, which is contributing >45% to total housing demand currently.

• The Company reported 15% slide in consolidated net profit to Rs 390.43 crore in-spite of 19% growth in top line to Rs 9,389.62 crore for the third quarter ended December 2018, due to higher power & fuel costs, coupled with rupee depreciation. Additionally, interest costs too jumped due to the higher loans raised for the acquisition of UltraTech Nathdwara Cement Limited (UNCL).

• Key factors for Q3FY19 performance - 1) No meaningful increase in cement prices and major market witnessed drop in prices over Q2FY19. 2) Logistics costs increased following applicability of the 15% busy season surcharge by the Indian Railways. Diesel prices average consumption rate increased ~ 3% over Q2. 3) Pet coke consumption at peak material prices. Impact of peak exchange rates (INR / USD). 4) Maintenance costs increased following one-time improvement initiative for an acquired plant in Central India. Annual Maintenance for additional 11 clinker lines.

• The company logistics costs, which account for 32% of overall expenses, rose 4% from a year earlier to Rs 1,169 a tone, due to increased diesel prices and poor availability of rakes reduced share of rail dispatches. Energy costs, which account for 30% of overall expenses, rose 16% to Rs 1,105 a tonne due to higher prices of petroleum coke and impact of currency depreciation against USD. Raw material costs, which account for 13% of overall expenses, rose 3% to Rs 491 a tonne. Increase in costs was partly offset with enhanced efficiencies. Moderation in pet coke and crude prices should benefit Q4FY19 onwards.

• The Company sales composition in trade segment reduced to 64% from 66% in previous quarter, while non-trade sales increased to 36% following strong demand from the infrastructure sector. This, as well as higher volume push, will continue to keep cement prices under pressure in the next couple of quarters. However, the composition of demand tilting towards non-trade segment has impacted pricing. The pricing difference in trade non-trade segment was ~Rs30-40/tonne.

• The Company 65% of the fuel requirement is met through the domestic route. Pet-coke usage continues at 70%. Imported pet-coke prices increased by 8% in Q3FY19. The maintenance costs were higher because of 11 kilns undergoing shutdown for repairs/maintenance.

• The Company combined domestic cement and clinker sales volume increased 13.2% to 17.10 million tonnes (mt), while realization increased by 4.9% to Rs 5491 per tonne.

• The Company expects an upward movement in demand continues with higher spends on infrastructure and government sponsored housing program.
• The Company expects to incur annual maintenance capex of Rs 1300-1400 crore per annum; Additionally, management expects to incur Rs 500 crore to be spent over a couple of years on Century assets

• Update on Binani -- The Company has successfully completed the acquisition of Binani Cement Limited (BCL) on 20th November, 2018. BCL has been re-named as UltraTech Nathdwara Cement Limited (UNCL), from 13th December, 2018. The acquisition provides the Company access to large reserves of high quality limestone. It consolidates the Company's leadership in the fast growing Northern and Western markets in the country. The Company is confident of turning around the operations at the acquired plants, which will benefit all stakeholders and also result in synergies from optimisation of costs and improved realisations. UNCL Assets are operating at 60% capacity utilisation; 0.1 mt of cement was sold from UNCL assets. Ultratech has commenced the contract manufacturing of cement for Ultratech at Binani Cement on a cost plus basis; integration expected to be completed by Q1FY20. Ultratech infused Rs 3400 crore of equity through internal accruals and Rs 4500 crore has been raised through borrowing of which Rs 2700 crore is on the books of UNCL. Revaluation of the assets will be done on the consolidated financials of Ultratech and accordingly, depreciation will be charged. The Company expects to realise the benefits on account of – i) price improvement of Rs 25-30/bag; ii) synergies on account of logistics savings, power and fuel costs savings (improvement of petcoke usage in kilns).

• Update on JP acquisition - JPA assets are operating at 75% capacity utilization. The cost gap between the older plants and the acquired assets has been bridged. Plants' operational parameters at par or better than UltraTech's existing plants standard.

• Update on Century – Cement assets -- Admission of petition in NCLT is to be done on 13Feb'19, post which a hearing is expected after a month. The Company expects likely closure of acquisition by Q1FY20

• The Company has successfully integrated the 21.2 mtpa cement capacity acquired in 2017. With substantial improvements carried out, these plants are now operating in line with the existing plants of the Company and have achieved a stable capacity utilisation of ~ 75%. One of the plants in the Central region underwent a major overhauling during this quarter and has achieved cost improvements, from which the Company will derive benefits from Q4. The acquisition is generating incremental earnings as planned, which are growing month on month