Leverage surge on accelarated capex
We downgrade Ramco Cements’ to ADD from BUY earlier, as the sharp 30% stock price recovery in the past two months, limits upside on our TP of Rs 685 (12x FY22E EBITDA). Covid impact drove 11% vol decline in 4Q, leading to 9/14/13% fall in Rev/EBITDA/APAT. This slowed FY20 Rev/EBITDA/APAT growth to 4/10/18% YoY. As capex spend in FY20 spiked up towards ongoing expansions in east/AP, its net debt doubled and net Debt/EBITDA soared to 2.6x vs 1.4x YoY. This should cool off in FY22, once the expansions get completed by early FY22E. Avg int rate remains competitive at ~7.34%.
* Covid know down 4QFY20: Covid lockdown in Mar’20 reduced 4Q sales by ~0.4mn MT, leading to 11% YoY vol decline to 2.9mn MT. Price recovery in south and rising brand premiumisation drove 5/2% NSR gain QoQ/YoY. On cost front, surge in adv/promo exp (Rs 220/MT vs Rs180 QoQ and Rs63 YoY) offset the benefits of lower fuel cost, thereby opex stood flat YoY. Unitary EBITDA moderated 4% YoY to Rs 955/MT. The grinding expansions - 1mn MT each in WB (Sep’19)/Vizag (Mar’20) drove up int/dep by 68/9% YoY.
* Earnings recover in FY20: A weak 4Q further slowed FY20 vol growth to 1% YoY (and ~4% ex covid impact) as against 16% CAGR during FY16-19. Healthy pricing in 1Q/4Q drove 4% NSR rise in FY20. High adv/promo cost (Rs 152/MT vs Rs 87 YoY), and op-lev loss led to 2% opex rise. Unit EBITDA rose 10% YoY to Rs 981/MT and drove EBITDA/APAT up by 10/18% resp.
* Debt surge on accelerated capex: During FY20, Ramco sped up capex spend (+60% YoY to Rs 19.2bn) on its 4mn MT expansion in east/AP. This led to net debt doubling to Rs 29bn, and net debt/EBITDA soared to 2.6x vs 1.4x. Avg borrowing cost remains low at 7.34%. During FY21, Ramco is targeting commissioning of 1mn MT grinding each in Odisha (Aug’20E) and Vizag (Mar‘21E). Even its 3.75mn MT clinker expansions in AP/T are expected by Mar’21E. Thus, by 1QFY22, Ramco’s clinker/cement capacity will rise to 14.3/20.6mn MT resp. Additional Rs 13.8bn will be spent on these (including CPP, WHRS). We estimate net debt/EBITDA to fall to 1.4x in FY22E.
* Outlook and valuation: The co expects its adv/promo expense to fall back to below Rs 100/MT in FY21E. Further, Ramco’s profitability should also gain from cement price uptick in south and low fuel prices, which should offset covid-led 14% vol decline in FY21E, in our view. We expect vol to grow 25% in FY22E, on sales normalization and ramp-up from new capacities. We increase FY21/22E EBITDA est by 4% each factoring in cost tailwinds. We continue to value it at 12x FY22E EBITDA (~10 year mean), implying TP of Rs 685. As post the recent 30% run-up, the stock is trading at rich valuation, offering limited upside, we downgrade its rating to ADD from BUY earlier.
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