Case 052Earnings and resultsCore

Build a quarterly results preview for Tavirant Cement from volume, realisation and cost per tonne. What EBITDA do you expect, and which line is consensus most likely wrong on?

The situation

Tavirant Cement reports next week. From the company's monthly dispatch data and your dealer checks: volume for the quarter is 6.2 million tonnes, up 8% on the same quarter last year; realisation, the net price per tonne after discounts, is Rs 5,300, down 2% on last year and below the Rs 5,365 of the previous quarter because prices were cut in the last month.

Cost per tonne is Rs 4,300: power and fuel Rs 1,350, freight Rs 1,250, raw materials Rs 900, employees Rs 300 and other Rs 500. A year ago cost was Rs 4,450 a tonne. Consensus EBITDA for the quarter is Rs 660 crore.

Your task

Estimate the quarter's EBITDA, compare it with last year and with consensus, and name the line consensus is most likely to have wrong.

Quick check

Which 2% error in the preview moves EBITDA most?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

EBITDA of about Rs 620 crore: Rs 1,000 a tonne on 6.2 million tonnes, up about 13% on last year. That is Rs 40 crore below consensus of Rs 660 crore. The gap is almost exactly the last month's price cut: consensus implies a realisation near Rs 5,365, the previous quarter's level. Realisation is the line most likely wrong, because every rupee of price reaches EBITDA.

Step 1Why build the preview per tonne instead of in crore?

A tea stall owner does not think in monthly revenue. She knows a cup sells for Rs 15, the milk, tea and sugar cost Rs 9, and she sells 300 cups a day. Everything else follows. Cement is analysed the same way: price per tonne, cost per tonne, margin per tonne, then multiply by volume at the very end. Each per tonne number can be checked against dealer prices, fuel prices and freight rates, while a revenue number in crore cannot be checked against anything.

Forecast per tonne first, multiply by volume last5,300Realisation-1,350Power and fuel-1,250Freight-900Raw mat.-300Employees-500Other1,000EBITDA / tRs 1,000 a tonnex 6.2 million tRs 620 crorequarter EBITDA
Tavirant's Rs 5,300 realisation less Rs 4,300 of cost per tonne, led by power and fuel of Rs 1,350 and freight of Rs 1,250, leaves EBITDA of Rs 1,000 a tonne, which on 6.2 million tonnes is Rs 620 crore for the quarter.
Step 2How does the quarter compare with last year?

Rebuild last year from the growth rates. Volume was 6.2 divided by 1.08, 5.74 million tonnes. Realisation was 5,300 divided by 0.98, Rs 5,408. With cost at Rs 4,450, last year's EBITDA was Rs 958 a tonne and Rs 550 crore. EBITDA per tonne rises by about Rs 42 even though price fell, because cost fell further: Rs 150 a tonne of cost saving against Rs 108 of price lost. Add 8% more tonnes and EBITDA is up about 13%.

Per tonne unless statedLast yearPreviewConsensus implies
Volume, million tonnes5.746.206.20
Realisation, Rs5,4085,3005,365
Cost, Rs4,4504,3004,300
EBITDA per tonne, Rs9581,0001,065
EBITDA, Rs crore550620660
Holding volume and cost at the preview's levels, consensus EBITDA of Rs 660 crore needs a realisation of about Rs 5,365 a tonne, close to last quarter's Rs 5,365, while the preview uses Rs 5,300 after the late price cut.
Step 3Which line is consensus most likely to have wrong?

Work backwards from the consensus number. Rs 660 crore on 6.2 million tonnes is Rs 1,065 a tonne; with cost at Rs 4,300 that needs a realisation of about Rs 5,365. Consensus has almost certainly carried last quarter's price forward and missed the cut in the final month. Most forecasts are updated on quarterly results; a price cut inside the quarter only shows up in dealer checks.

A 2% miss on each line: what it does to quarter EBITDA, Rs croreVolume 2% off12.4 (0.124 mt x Rs 1,000)Cost per tonne 2% off53.3 (Rs 86 x 6.2 mt)Realisation 2% off65.7 (Rs 106 x 6.2 mt)Consensus at Rs 660 crore sits Rs 40 crore above the preview: about Rs 65 a tonne of price.
A 2% miss on realisation moves Tavirant's quarterly EBITDA by Rs 65.7 crore, a 2% miss on cost by Rs 53.3 crore and a 2% miss on volume by only Rs 12.4 crore, so price is the line where a preview is won or lost.

Each Rs 100 a tonne of realisation is Rs 62 crore of quarterly EBITDA. That is why sell-side cement notes lead with dealer price checks. The limitation: realisation also moves with mix, since trade sales to retail buyers fetch more than bulk sales to builders, so a stable list price can still hide a lower realisation. Ask for the trade share before you finalise.

Where candidates lose it

The common loss is forecasting revenue growth and a margin in per cent. It hides the one thing a cement preview needs, the price per tonne, and makes it impossible to say which assumption drives the miss.

The second is treating a volume miss and a price miss as equal. Volume costs only the margin on the lost tonnes; price costs the full rupee on every tonne.

What the interviewer asks next

  • Petcoke prices rise 20% next quarter. What happens to cost per tonne if power and fuel is 60% petcoke?
  • How would you check the Rs 5,300 realisation before results?
  • Tavirant beats on volume but misses on realisation. How would the stock likely read that?

Company names and figures are illustrative.