Accounting Practical

Ultratech Cement

Masters in Finance, Batch of 2021

Anand Khismatrao
19-MF-21
 1. Executive Summery

UltraTech Cement Ltd. is the largest manufacturer of grey cement, Ready Mix Concrete
(RMC) and white cement in India. It is also one of the leading cement producers globally. It
has a white cement plant with a capacity of 0.56 MTPA and 2 WallCare putty plants with a
combined capacity of 0.8 MTPA.
It manufactures ordinary portland cement commonly used in dry–lean mixes, general–
purpose ready–mixes, and even high strength pre–cast and pre–stressed concrete. Market
Share is the largest Cement Player in the Country with Market Share of 23%. Strengths and
weaknesses of the firm are analysed and are compared with the competitors.
Business Analysis, Accounting Analysis, Liquidity Analysis, Efficiency Analysis, Profitability
Analysis, Solvency Analysis and Stock market performance is calculated with respect to its
competitors and Industry Standards. Final conclusion is drawn out of findings in financial
analysis.

2. Business Analysis

History
Ultratech Cement was incorporated in 2000 as Larsen & Toubro. Later it was demerged and
acquired by Grasim and was renamed as Ultra Tech Cement in 2004. Today Ultratech
cement a part of Aditya Birla group, is the country’s largest exporter of cement clinker.
UltraTech Cement Limited has an annual capacity of 52 million tonnes. It manufactures and
markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland
Pozzalana Cement. It also manufactures ready mix concrete (RMC). All the plants have
received ISO 9001 certification.

The company has 11 integrated plants, one white cement plant, one clinkerisation plant in
UAE, 15 grinding units 11 in India, 2 in UAE, one in Bahrain and Bangladesh each and five
terminals, four in India and one in Sri Lanka.

The export markets span countries around the Indian Ocean, Africa, Europe and the Middle
East.

Narmada Cement Company Limited was amalgamated with UltraTech in May 2006, while
Samruddhi Cement Limited was amalgamated with UltraTech Cement Limited in July 2010.

UltraTech Cement Middle East Investments Limited, a wholly owned subsidiary of the
Company acquired management control of ETA Star Cement together with its operations in
the UAE, Bahrain and Bangladesh in September, 2010
UltraTech's other subsidiaries are Dakshin Cements, Harish Cements, UltraTech Ceylinco (P)
and UltraTech Cement Middle East Investments.

Products

It manufactures ordinary portland cement commonly used in dry–lean mixes, general–

purpose ready–mixes, and even high strength pre–cast and pre–stressed concrete.

It produces Portland blast furnace that has features like lighter colour, better concrete
workability, easier finishability, higher compressive and flexural strength, improved
resistance to aggressive chemicals and more consistent plastic and hardened consistency. It
also manufactures portland pozzolana cement.

Ultratech cement exports over 2.5 million tonnes per annum which accounts for 30% of
country’s total exports. It exports to countries like Africa, Europe and the Middle East.

Shareholder Pattern

Market Share
Largest Cement Player in the Country with Market Share of 23%

Strengths and Weaknesses

Strengths are:

1. It is India’s biggest cement company.

2. It is the largest exporter of cement clinkers.

 3. It is a part of the prestigious Aditya Birla Group that helps the brand.

4. It has an annual capacity of 60+ million tones.

5. UltraTech accounts to about 30% of the total Indian Exports.

6. Most of the plants have ISO 9001, ISO 14001 and OHSAS 18001 certification.

7. UltraTech Cement Limited has integrated plants, white cement plant and many
grinding units in India.

Weaknesses are :
1. Although UltraTech provides various other construction products and services, but
the brand is associated with Cement only, so it has to work on positioning the brand
as a construction materials brand, which can be achieved by implementing branding
activities.

2. It is not operating /exporting in US market which is a huge market for Cement

industry.

3. Brand awareness of Ultratech is lesser as compared to global players.

Industry Analysis

1. Barriers to Entry(high)
• RAW MATERIAL -Cement being a high bulk and low value commodity, outward freight
accounts for close to one fifth of the total manufacturing cost. In addition, for every
tonne of cement produced, close to 1.7 tonnes of raw material is transported.
• LOCATION-In this scenario, the location of the cement plant becomes crucial. While
deciding on the plant location, there is a trade-off between proximity to raw material
sources and proximity to markets. Access to limestone reserves (key input) also acts as a
significant entry barrier. It is necessary to locate the plant close to the mineral deposits,
so as to minimise raw material assembly costs. Given that 1.4-1.5 tonnes of limestone
are required per tonne of clinker, locating the plant along the limestone deposits is the
logical corollary.
• COMPETITION- High level of competition in the cement industry. The Indian cement
industry is weakly oligopolistic in nature on a national level with top 6 firms among more
than 100 firms capturing 55% of the cement market. This nature has been consistent
through the years.
• COST- High capital costs and long gestation periods. a new cement works producing
1m tonnes a year, the smallest worth building, costs around $200m. It is much cheaper
for an incumbent to expand
2. Buyer Power(low)
This refers to the effect customers can exert on a particular industry. In the cement
industry, the bargaining power buyers is low because the majority of buyers are bulk
buyers. For example, big construction firms, corporate who want to build their own
offices, etc. These buyers can bargain with the cement companies. Moreover, one
potential bargaining power with the buyers is the threat of importing cement. However,
this threat is limited to an extent as the cost of import will increase the overall cost of
the project.. Pure buyer power exists when only one buyer exists in the market. In the
cement industry, facts suggest that this effect is minimal. The power of consumers is
limited due to the lack of substitutes, the small number of cement firms , and the
demand that consumers have for the product
3. Supplier power(moderate)
In this industry, the suppliers exert a very high power. This is so because the raw
materials form a very large part of the process in the manufacturing of cement. Shortage
in supply of raw materials can cripple the whole plant and can lead to huge losses. When
the suppliers demand something, the negotiations have to be completed quickly and the
result is more or less in favour of suppliers. But since all the raw materials are natural
resources, they are under the Government’s control. Companies have to buy rights from
the government to set-up the cement plant. Hence the suppliers power is moderate.
4. Inter firm rivalry(high)
Cement industry is one of the highly competitive markets in India. Many players in this
industry are large scale players with huge capital invested in setting up the production
units. This factor raises the exit barrier for the companies. Hence, they stay in the
industry and start aggressive competition. Also, the differentiation in types of cement is
marginal, hence the switching cost to customers is not high, so firms compete intensely
to gain market share. Also, sometimes problem of overcapacity comes into play. This
leads to a price war and competition intensifies.
5. Threat of substitutes (low)
No product exists to date that can substitute effectively for cement. While construction
firms can use less cement in exchange for using other materials that have some
cementitious quality, that substitution effect is negligible on the market price of cement
The choices are virtually non-existent to cement consumers, hence the threat of
substitutes is very low. In India, cement is the ultimate material used for almost all type
of construction work. Bitumen is one of the substitutes of cement but these days cement
is even replacing bitumen. Another substitute for cement is engineering plastic. This also
cannot replace cement in many areas of work. Hence, there is practically no material to
substitute cement.
 3. Accounting Analysis

1. Revenue recognition
Discounts, incentives, rebates etc. § Revenue is measured net of discounts, incentives,
rebates etc. earned by customers on the Company’s sales. Due to the Company’s
presence across different marketing regions within the country and the competitive
business environment, the estimation of the various types of discounts, incentives and
rebate schemes to be recognised based on sales made during the year is material and
considered to be complex and judgmental. Therefore, there is a risk of revenue being
misstated as a result of faulty estimations over discounts, incentives and rebates. §
Given the judgement required to estimate the amount of provisions, this is a key audit
matter.
Revenue is recognized on the basis of approved contracts regarding the transfer of
goods or services to a customer for an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services.
Revenue is measured at the fair value of consideration received or receivable taking
into account the amount of discounts, incentives, volume rebates, outgoing taxes on
sales. Any amounts receivable from the customer are recognised as revenue after the
control over the goods sold are transferred to the customer which is generally on
dispatch/delivery of goods.

2. Depreciation
Depreciation for the year at 2,010 crores is higher by 246 crores over the previous year,
mainly on account of the full year impact of the acquisition and capitalisation of new
capacity.
Depreciation on additions is provided on a pro-rata basis from the month of installation
or acquisition and in case of Projects from the date of commencement of commercial
production. Depreciation on deductions/disposals is provided on a pro-rata basis up to
the month preceding the month of deduction/disposal.
3. Inventories
• Raw materials, fuel, stores & spare parts and packing materials: Valued at lower of cost and
net realisable value (NRV). However, these items are considered to be realisable at cost, if the
finished products, in which they will be used, are expected to be sold at or above cost. Cost is
determined on weighted average basis which includes expenditure incurred for acquiring
inventories like purchase price, import duties, taxes (net of tax credit) and other costs incurred
in bringing the inventories to their present location and condition.

• Work-in- progress (WIP), finished goods, stock-in-trade and trial run inventories: Valued at
lower of cost and NRV. Cost of Finished goods and WIP includes cost of raw materials, cost of
conversion and other costs incurred in bringing the inventories to their present location and
 condition. Cost of inventories is computed on weighted average basis. Notes to Standalone
Financial Statements (Continued) UltraTech Cement Limited 118 Annual Report 2018-19

• Waste / Scrap: Waste / Scrap inventory is valued at NRV. Net realisable value is the estimated
selling price in the ordinary course of business, less the estimated costs of completion and the
estimated costs necessary to make the sale.

4. Financial Analysis

1. Liquidity Analysis

a) Current Ratio : Current asset/Current liabilities : 0.914

Median Ratio of the industry is 1.48 hence Ultratech is below Median Value of
Industry hence It is less Liquid when it is compared with Other competitors such as
Birla, Ramco, Ambuja.

b) Quick Ratio : CA-Inventories / CL = 0.635

Median Ratio of the industry is 0.77. Ultratech is little below this mark. firm's
capacity to pay off current obligations immediately is little less than the industry
Standard.

c) Cash Ratio : CA + marketable Securities / CL = 0.15

Median Ratio of the industry is 0.077 hence Ultratech has really good Cash Ratio
when it comes to Industry Median. Hence company can pay off its obligations by
cash more easily than its rivals.

2. Efficiency Analysis

a) Inventory Turnover : Sales / Avg. Inventory = 10.54

Median Ratio of the industry is 7.54. Hence cash is tied up in the cycle of being used
to purchase raw materials or a finished product for sale through to selling the
product is little in line with Industry Median.

Days Inventory Outstanding : 360/ Inventory Turnover = 34.15

Median Ratio of the industry is 52.63. Hence as it is less than Median value We can
say Company holds Inventory up less days than other rivals before selling it.

b) Receivables Turnover : Sales/ Avg Receivables = 14.82

Median Ratio of the industry is 14.82 which is the value of Ultratech Cement hence
we say that it is standard for the company to have this value.
 Average Collection Period : 360/ Receivables Turnover = 24.29
Median Ratio of the industry is which is the value of Ultratech Cement hence we say
that it is standard for the company to have this value.

c) Operating Cycle : DIO + ACP = 58.44

Median Ratio of the industry is 95.84. Hence the the time required for a company's
cash to be put into its operations and then return to the company's cash account is
little less than median value hence we can say Ultratech has an edge here.

d) Payable Turnover : Purchases / Avg Trade Payables = 1.69

Payable Deferral Period : 360 / Payable Turnover = 213.01

Median Ratio of the industry is 185.28 Hence we can say Ultratech takes little more
than to do Payables which needs to be improved.

e) Cash conversion cycle : Days Inventory Outstanding + Average Collection Period -

Payable Deferral Period = -154.57
Median Ratio of the industry is -78.15. If a company has a negative cash conversion
cycle, it means that the company needs less time to sell its inventory (or produce it
from raw materials) and receive cash from its customers compared to time in which
it has to pay its suppliers of the inventory (or raw materials).

f) Total Asset Turnover : Sales / Total Assets = 0.58

Median Ratio of the industry is what Ultratech has. Hence we can say it is in line with
Industry Standards and expectations.

g) Fixed Asset Turnover : Sales / Fixed Assets = 0.71

Median Ratio of the industry is 0.84. Hence Company has less Fixed assets than
Median Value in order to produce sales.

3. Profitability Analysis

a) Margins :

EBITDA Margin : EBITDA/Sales x 100 = 20

Operating Margin : EBIT/Sales x100 = 18.57

Net Margin : EAT/Sales x100 = 7

 Median Ratio of the industry are 16.82, 11.79, 7 respectively. All three margins are
above the median value hence we can say Ultratech has good hold over its profit
margins hence are healthy to give out cash out of its profit margins.

b) Return on Assets : EAT/Total Assets x100 = 4.2

Median Ratio of the industry is What Ultratech has hence we can say Analysts and
Investors can believe that Management is using its Assets at its best to generate
Profits.

c) ROCE : EAT/ Shareholder funds + non current Lib x 100 = 10

Median Ratio of the industry is 7.74 As Ultratech value is more than the median we
can say Management is using Liabilities very efficiently in order to maximize earnings
for investors.

d) ROE : EAT/ Shareholders Funds x 100 = 9.12

Median Ratio of the industry is 4.53. Ultratech value is double than what Median is.
Hence this signifies that Investors get better returns than their rivals.

4. Solvency Analysis

a) Debt Ratio : Total Liab/Total Assets = 0.55

Median Ratio of the industry is 0.53 Hence Ultratech is in line with the
competitors when it comes to leveraging Debt.

b) Debt Equity Ratio : Total Lib/ Shareholders Funds = 0.65

Median Ratio of the industry is 0.57 Hence Ultratech is in line with the
competitors when it comes to leveraging Debt.

c) Interest Coverage Ratio : EBIT / Interest Expenses = 3.5

Median Ratio of the industry is 3.5 Hence Interest expenses of the
organization are in line with Industry performance.

5. Stock Market Performance

a) P/E Ratio : MPS/EPS = 50.36
Median Ratio of the industry is 19.1 Where Ultratech value is much higher
than the median hence we can say Ultratech Share price can be overvalued
wrt industry.

b) BVPS : MPS/ BookValue Per Share = 4.32

Median Ratio of the industry is 158.1 Where Ultratech value is much lower
than the median. Share is at little premium.
 c) Price to Sales : MPS/ Sales Per Share = 33.85
Median Ratio of the industry is 3.37 Where Ultratech value is much higher
than the median hence we can say Share price of the share is much higher
than the sales per share hence this can be average investment for any
investor.

d) Price to Cash flow : MPS/Cash Flow per Share = 29.3

Median Ratio of the industry is 7.8 where Ultratech value is much higher
than the median hence we can say firm is trading at a high price but is not
generating enough cash flows to support the multiple. Sometimes this can be
okay considering the Industry.

5. Conclusion

Company is positioned well with the 23% of market share making it the leaders in the
industry. Promotors are holding around 60% of the stake in the company. It is offering
various products which are in line with the offerings of its competitors. Strength of the
firm is that it is a part of the prestigious Aditya Birla Group that helps the brand. Also It
has an annual capacity of 60+ million tones.

Revenue is recognized on the basis of approved contracts regarding the transfer of

goods or services to a customer for an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services.
Depreciation for the year at 2,010 crores is higher by 246 crores over the previous year,
mainly on account of the full year impact of the acquisition and capitalisation of new
capacity.

Inventories include Raw materials, fuel, stores & spare parts and packing materials,
Waste, Scrap, WIP materials etc.

When it comes to financial Analysis, Company holds up to the expectations of the

industry with the median of all competitors taking as the benchmark.

In the Liquidity position of the company, Ultratech is little below this mark. firm's
capacity to pay off current obligations immediately is little less than the industry
Standard. However Company can pay its obligations more easily by Cash than its
Competitors.

When it comes to the Efficiency of the company, a company has a negative cash
conversion cycle, it means that the company needs less time to sell its inventory (or
produce it from raw materials) and receive cash from its customers compared to time in
which it has to pay its suppliers of the inventory (or raw materials). Asset Turnover is in
line with the median value.

When it comes to the Profitability, All three margins are above the median value hence
we can say Ultratech has good hold over its profit margins hence are healthy to give out
cash out of its profit margins. ROCE and ROE are better in the Industry hence investors
can have an edge.

When we consider Solvency, Hence Ultratech is in line with the competitors when it
comes to leveraging Debt and paying of Interest Expenses.
When we consider Stock market Performance, Ultratech Share price can be overvalued
wrt industry. Share is at little premium. Share price of the share is much higher than the
sales per share hence this can be average investment for any investor.
All in all, Company holds good position in the market with great value to its promotors
and shareholders, as profitability and liquidity are at par with the industry Expectations.
Share market performance is also at par, however Price of the share is little overvalued.
Hence company is little less productive while producing sales with respect to its market
price.