Driving Sustainable Growth Through Value Based Management at Ultra Tech

As part of our MBA assignments, we were supposed to take a company to be showcased for shareholder value creation. While studying the financial performance of several companies, we came across this one company called Ultra Tech Cement, which has maintained a consistent record of profitability and growth, is driven by its strong market position, efficient operations, and strategic expansion initiatives. The company has consistently generated healthy revenue and earnings, even during challenging market conditions.

Value-based management (VBM) is a management philosophy that focuses on creating and maximizing shareholder value. It is a framework that helps companies make decisions that will increase the value of the company for its shareholders. VBM is based on the idea that the value of a company is ultimately determined by its future cash flows.

Source: https://www.sketchbubble.com/en/presentation-value-based-management.html

The key principles of VBM are:

• Focus on long-term value creation: VBM companies focus on making decisions that will create long-term value for shareholders, not just short-term profits.
• Use of financial metrics: VBM companies use financial metrics, such as EVA and MVA, to measure their performance and make decisions.
• Alignment of incentives: VBM companies align the incentives of their employees with the creation of shareholder value.

Reasons to choose Ultra Tech Cement:

• Ultratech Cement is the largest manufacturer of grey cement, ready mix concrete (RMC), and white cement in India. Founded in 1983 and headquartered in Mumbai, it has an installed capacity of 119.95 million tonnes per annum (MTPA) of grey cement. Ultratech has 22 integrated manufacturing plants, 27 grinding units, and 7 bulk packaging terminals across India.

• For FY22, Ultratech reported consolidated revenues of ₹80,884 crores and net profit of ₹5,816 crores. Revenue has grown at a CAGR of 10% over the last 5 years. Profitability remains healthy, with EBITDA margins around 27%. Ultratech has a strong balance sheet with a AAA credit rating. Its total debt stands at ₹19,154 crores with a debt/equity ratio of 0.58x. Return on capital employed (ROCE) is 18.2%, reflecting efficient capital allocation. Cash from operations grew at 13% CAGR over FY18-22.

• Ultratech is the market leader in the cement industry, with 21% market share in terms of installed capacity. It has a well-diversified capacity presence across India, giving it strategic advantages in key markets. Ultratech enjoys higher pricing power and higher profitability compared to regional competitors. Key competitive advantages include a strong brand image, extensive distribution network, efficiencies in logistics, and cost structure.

• Expanding its capacity reach to tap growing cement demand across regions. Added 20 MTPA capacity in FY22.Leveraging strong balance sheet and cash flows for organic and inorganic growth opportunities. Focus on increasing market share by entering new regions and increasing brand equity. Driving efficiencies through integrated plants, WHR systems, waste recycling, and digitization initiatives.

• Demand growth is expected to be robust, driven by housing and infrastructure spending. Ultratech is well positioned to capitalize on it. However, rising energy and input costs could create margin pressure in the short term. Ultratech is diversifying into new product lines, which will aid revenues. Inorganic growth to remain a priority.

 UltraTech Cement is a leading cement manufacturer in India and a strong advocate of VBM. The company has adopted a comprehensive VBM framework that encompasses all aspects of its business, from strategy to operations to performance measurement.

Explanation to the VBM Calculations:

EVA: UltraTech Cement's EVA has been negative for the past five years, indicating that the company has been destroying value for its shareholders. The company's EVA has also been declining at an alarming rate, falling from -711.60 in 2019 to -1738.20 in 2023. UltraTech Cement needs to make some major changes in order to improve its EVA performance. The company's management needs to develop a plan to address its underlying problems, and it needs to implement that plan as soon as possible.

Market Value Added: MVA rose substantially from 2019-2023 indicating increased shareholder wealth. Market cap growth driven by investor confidence in future outlook lifted MVA despite short-term value challenges. Uptrend signals market betting on capacity expansions, sector prospects and leadership. But Ultratech must convert potential into fundamental value and returns.

FGV: FGV rose substantially from 2019-2023 indicating market confidence in Ultratech's strong growth potential. Key driver is expected high earnings growth from capacity expansions and new investments. Market betting on significant volume, revenue and profit growth once new capacities stabilize. Increase in FGV signals belief that investments and leadership will enable robust future growth.

ROIC: ROIC peaked in 2021 before declining due to major capex for new capacities weighing on returns initially. Expansion efforts and acquisitions diluted capital returns and profitability in short-term. As new capacities stabilize at optimal utilization, focus on driving efficiency improvements to restore ROIC to peak levels. Need to ensure adequate returns on capital investments going forward.

TSR: TSR was 19.2% in 2022 indicating decent medium-term overall returns to shareholders via capital gains and dividends. Positive TSR shows market recognizes competitive position and growth strategies lifting valuations. While moderating recently, focus must remain on fundamental moves that boost future TSR through share price upside and steady dividend payouts.

Wealth added index: Wealth Added Index turned positive in 2022 indicating increased shareholder wealth generation last year. Signals Ultratech created tangible value in 2022 via share price gains and dividends. Though fundamental value creation varied recently, uptrend shows market recognition of growth strategies. Sustaining momentum depends on optimizing returns on investments going forward.

UltraTech Cement is a well-managed company with a strong track record of value creation for shareholders. The company's positive EVA, MVA, ROIC, TSR, and WAI are all indicative of a company that is creating value for its shareholders. VBM has been a key driver of UltraTech Cement's success. The company has consistently generated positive EVA and has a strong track record of value creation for shareholders. VBM has also helped UltraTech Cement to be more efficient, innovative, and customer-centric.

Overall, VBM is a valuable management philosophy that can help companies create and maximize shareholder value. UltraTech Cement is a leading example of a company that has successfully implemented VBM.