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    UltraTech Cement Vs JP Associates – Stock Analysis


    Two powerhouses of India’s cement story. Two big borrowers of money. One Undisputed Champ.

    Yes, this one is about debt as well! If you have been through this writer’s last few posts, you might have already come to the conclusion that “a debt gone wrong” can wreak havoc, not just over the repayment capacity of the individual but the hard built reputation too goes for a toss.

    The objective of the piece is not to simply report on the finances of the Companies, but to offer an analysis on the debt profile, earnings of the entities and to draw a future roadmap. Head to head are UltraTech Cement Limited (will be referred as ‘UT’) and Jaiprakash Associates Limited (will be referred to as ‘JP’).


    UltraTech Cement Limited (BSE: 532538) is India’s biggest cement company based out of Mumbai. It is a part of Aditya Birla Group with an annual production capacity of 64 million tonnes. UT accounts for 30% of total country’s total cement exports. A subsidiary of Grasim Industries, UT has created a niche for itself in a highly complex cement industry.

    Jaiprakash Associates (BSE: 532532), is a highly diversified infrastructure conglomerate with business interests ranging from Engineering & Construction to Cement, Power, Real Estate. Cement, as a segment accounts for more than 45% of its revenue and 25% of capital employed. The Company has a capacity to produce more than 40 million tonnes a year.

    Though both of the Companies survived the Global Financial Crisis of 2008, a lot has since happened. Take a look below to see the movement in the prices of the stocks since 2007.

    Note: The stock prices have been adjusted for Dividend and Bonus.

    Do you notice something unusual? While one stock has jumped more than 217% (from Rs 885 to Rs 2,803 a share), the other one has gone down to become almost worthless – presently quoting at Rs 12 a share, a decline of 94% since its peak in late 2007.

    The stock which has touched new highs is UT and the one seeing the downfall is JP.

    This is where the debt component has hurt one company the hardest. Why, you say? Simply, because of its inability to manage the borrowed funds and blind-folded splurge of other people’s money, at least this is what the lenders have observed.

    Take a look at a snapshot of the Balance Sheet and Statement of Income of the two companies.

    Highlight: The Debt component in JP has gone up by almost 7 times while the net worth has risen only by about 3 times. In case of UT, though the debt has increased by almost 4 times, the equity portion has multiplied by almost than 10 times.

    Highlight: The sales and operating expenses of both the Companies are almost in sync with each other. But JP’s EBITDA has witnessed 50% more growth in EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) than of UT. Another standout is the Interest Component which has gone up more than 14 times for JP, while in UT it has gone up by almost 6 times.

    Take Away:

    JP’s EBITDA profitability has outgrown that of UT’s, still JP’s stock price doesn’t reflect this achievement. Rather, it has been beaten down badly to the point it can no longer be considered strong scrip to invest in.

    This is because, the cost of servicing the debt taken by the Company is so huge, that the increase in topline doesn’t flow down to the bottomline . On the other hand, though UT’s EBITDA has grown less in comparison to JP’s EBITDA still there is an increase in its Profit After Tax (PAT) by 167% against a decline of 412% in JP.

    We’ll go deeper to understand how the increased borrowings have impacted the profitability of the Company.

    We will check the Companies on 4 broad parameters –

    1) Debt-Equity Ratio (DE) and Interest Coverage Ratio (ICR)

    2) Operating Margin (OM)/ EBIT Margin, Net Profit Margin (NPM) & Return on Equity Analysis

    3) Sales, EBITDA & PAT movement

    4) Earnings Per Share & Book Value per Share


    1) Debt-Equity (DE) and Interest coverage ratio (ICR) –

    A DE ratio simply informs about the amount of borrowings undertaken by the Company for every rupee invested by the shareholders. The greater the DE Ratio, the greater leveraged is the Company.

    The ICR, helps to judge a Company’s interest servicing ability by dividing its operating income by the interest cost, Higher the ratio, the better it is.

    As can be clearly seen, while UT’s DE has remained almost the same since 2007, that of JP has moved up by 2.4 (from 3.9 to 6.3). The ICR shows, that the JP’s earnings now fall short than its interest cost, with earnings able to cover just 71% of the finance cost. Nothing can be more severe for a Company than to start defaulting on its debt obligations.

    And, we haven’t even yet  thought about repayment of principal amount!

    2) Operating Margin (OM)/ EBIT Margin, Net Profit Margin (NPM) & Return on Equity Analysis –

    The operating margins of both the Companies are strong with UT’s ranging from 15%-20% and JP’s from 25%-40%. But again, this huge profitability margin doesn’t flow down to the Net Profit as can be seen from Net Profit Margin over the years. Return on Equity (ultimate return for the owners of the business) too validates, the picture presented by the NPM analysis.

    3) Sales, EBITDA & PAT movement –

    Though there is a healthy growth in the topline as reflected in sales for both the Companies, the organisations haven’t been able to take advantage of the rising sales, with EBITDA and PAT relatively flat since 2011, with the exception being  2012 for UT. Rather, JP has moved to a negative territory in PAT.

    4) Earnings Per Share & Book Value per Share –

    The EPS reflects the earnings generated by the Company for equity share issued by it. Book value per share refers to the Net Asset Value (Total Assets less borrowed funds and preference share capital) per equity share of the Company. It means the amount of assets in the Company for each equity share issued.

    Naturally, higher the EPS and BVS, the better it is.

    While the EPS of UT has been steadily rising, JP’s losses have led to a negative EPS, implying that the Company’s expenses are exceeding the income generated.

    The BVS of UT has witnessed an exponential growth from Rs 389 in 2011 a share to Rs 694 a share in 2015. JP’s has remained relatively constant and declined in the last two years.


    Conclusion –

    Understanding the impact of debt is essential in appreciating its consequences. Debt portion in overall capital employed acts as a double edged sword. On one hand, it helps to take home a greater share of earnings through financial leverage and a lower total cost of capital; on the other hand however, during times of weak business scenarios, it can make you go head over heels.

    The consequences of a debt trap can never be overestimated. The game is over once the amount required to service the debt exceeds the operating profit.

    So, which one to Choose ?

    Even though the information above isn’t sufficient in many respects, still you are now equipped to form an idea and judge as to which one is better suited to repay its debts (and by extension don’t go bankrupt). Due to lack of investment in infrastructure and a weak domestic demand over the past few years; the cement sector was bound to face a slowdown. But still, one Company managed to survive the drought and shall come out stronger when growth picks up.

    My recommendation, go long on UT. However, at a PE Multiple (Market Price/ EPS) of 36.5, it may be a bit too overpriced.

    Sources: Companies’ Financials, Capitalmarket.com, Moneycontrol.com


    Views presented in the article are those of the author and not of ED.

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