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Higher Fuel cost, lower prices offset volume gain

The Ramco Cements (TRCL) posted lower-than-expected EBITDA of Rs2.31bn (down 41% QoQ/42% YoY; CentrumE: Rs3.23bn), due to higher-than-expected increase in power & fuel cost and higher fall in realisation. TRCL pushed volumes in the weak market (volume was up 11% QoQ/15% YoY) at the cost of realisation. Average cement realisation dropped 2.4% QoQ. The sharp increase in coal/pet coke prices led power & fuel cost increasing by 31% QoQ/69% YoY. As a result, EBITDA/t fell to Rs768, down 47% QoQ/49% YoY. The outlook is improving with higher demand and prices coupled with softening of fuel prices. The commissioning of Kurnool plant is expected to provide 23% YoY volume growth in FY23. We value TRCL at 13x average of FY23E and FY24E EV/EBITDA and arrive at a target price of Rs994 (earlier Rs898). We upgrade the stock to ADD from SELL

Volumes improves, but adverse geographical mix hit realizations

TRCL’s volumes were up 11% QoQ/15% YoY to 3.01mt despite demand hit in eastern market and in Kerala amid heavy rains. Volume in South market grew 22% YoY and Odisha grew 30% YoY while market was weak in West Bengal. Volume mix was tilted towards East market where average realisation was ~Rs1,000/t lower than that of South market. TRCL continued to prefer higher volumes at the cost of prices which were down 2.4% QoQ/up 1.5% YoY at Rs5,113/t. As a result, net sales, at Rs15.4bn, were up 6.1% QoQ/16.3% YoY.

Sharp increase in Power & Fuel cost depresses EBITDA

Overall operating cost/t was Rs4,384, up 8.1% QoQ/21.6% YoY. Power & Fuel cost/t at Rs1,380, was up 31% QoQ (management earlier guided 15% increase) due to sharp increase in coal and pet coke prices. TRCL rolled back price hikes taken in October2021. Addition to this, blended cement realisation was lower due to higher sale in lower priced East market which hit profitability further. As a result, EBITDA/t fell by 47% QoQ/49% YoY to Rs768, lowest in last eight quarters. Higher volume provided cushion to EBITDA fall. EBITDA at Rs2.31bn, was down 41% QoQ/42% YoY. Management guided higher volume and prices coupled with lower fuel cost on a QoQ basis in Q4FY22.

At fag end of commissioning Kurnool plant; evaluating next phase of expansion

TRCL is in the last leg of commissioning its greenfield capacity at Kurnool (AP). A 2.25mtpa clinker unit is expected to be commissioned in February 2022 and 1mtpa grinding unit in midApril 2022. TRCL is also modernizing its RR Nagar plant by replacing old clinker kiln with new energy efficient kiln, which will lead to net addition of 0.35mtpa capacity by FY23-end. This capex also includes limestone beneficiation plant and two dry mix plants (one at R R Nagar). TRCL is looking out suitable land in Maharashtra to set up a grinding unit and is in the process of buying land to set up a grinding unit in Karnataka.

Outlook and valuation – upgrade to ADD

The outlook is improving with higher demand and prices coupled with softening of fuel prices in Q4FY22. Increasing utilization of existing assets (19.4mtpa) and incremental 1mtpa grinding unit in Q1FY23 will help TRCL to deliver ~23% YoY volume growth to 14.2mt in FY23. The stabilization of clinker units at Kurnool will help in enhancing margins. Given TRCL’s focus on capacity expansion, any major deleveraging of balance sheet is unlikely in FY23. We value TRCL at 13x average of FY23E and FY24E EV/EBITDA and arrive at a target price of Rs994. We upgrade the stock to ADD from SELL

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