Published on 12/11/2019 10:09:31 AM | Source: Reliance Securities Ltd

Hold Ramco Cements Ltd For The Target Rs.810 - Reliance Securities

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Performance Beat led by Strong Volume

Exceeding our estimates, Ramco Cements (TRCL) has reported a strong performance mainly led by better-than-expected volume and pricing despite a challenging environment. EBITDA surged by 27% YoY to Rs2.6bn (-20% QoQ) exceeding our estimate of Rs2bn, while EBITDA/tonne stood at strong Rs958 as against Rs830 and Rs1199 in 2QFY19 and 1QFY20, respectively. Sales volume grew by a strong 10% YoY (1% QoQ) to 2.72mnT (a significant beat) despite slowdown in construction activities across pockets. Average realisation stood at Rs4,708/tonne (+2% YoY and -5.6% QoQ), which is ~Rs60/tonne higher than our estimate. PAT increased significantly by 47% YoY led by improved operating performance and lower ETR (under MAT). Its gross debt has increased by Rs8.2bn to Rs24.4bn in 1HFY20 due to ongoing capex, while it generated interest adjusted operating cash flow of Rs1.2bn during the period and capex incurred at Rs8.3bn. While Kolaghat (WB) SGU started production from Sept’19, commissioning of Odisha 0.9mnT Greenfield SGU is delayed to Dec’19 due to heavy rains. We expect TRCL to continue with healthy volume traction in 2HFY20E led by pick-up in construction activities and recently launched premium products. Marginally tweaking our EBITDA estimates for forward years, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs810 (from Rs790 earlier).


Strong Volume outperforms Industry

Unlike muted growth registered by the industry, TRCL has surprised with 10.3% YoY growth in sales volume to 2.72mnT despite slowdown across pockets. Export volume registered a whopping 39% YoY growth to 0.13mnT in 1HFY20. We note that ongoing reconstruction activities in Kerala and decent traction in Tamil Nadu and Karnataka markets supported sales volume. Going forward, we assume TRCL to report 10% volume growth in 2HFY20E and 15.5% in FY21E.


Performance Beat on Benign Opex & Higher Sales Volume

Better-than-expected sales volume and pricing along with steady operating cost aided TRCL to deliver a superior performance. EBITDA grew by a strong 27% YoY to Rs2.6bn and EBITDA/ tonne stood at strong Rs958, which is ~Rs135/tonne higher than our estimate (Rs60/tonne due to realisation variance and Rs70/tonne opex variance). While input cost/tonne broadly remained flat on QoQ basis at Rs1,729, opex/tonne increased by just 1% QoQ led by significant 10% YoY and 5% QoQ decline in freight cost. Going forward, we expect TRCL’s operating performance to improve further led by recent reduction in fuel prices and likely recovery in realisation in its key markets.


Outlook & Valuation

A healthy improvement in sales volume and lower-than-expected decline in realisation were the key positive surprise. Capacity expansion of 4mnT without stretching its B/S much along with D/E ratio at 0.4x bodes well for TRCL. We maintain our long-term positive view on TRCL on the back of sustained volume growth and improving operating efficiency. Considering current valuations at 12.5x FY21 EBITDA, we do not see any meaningful upside from the current level. Hence, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs810


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