Production discipline driving pricing strength
Pricing in southern regionsurprises positively; capex delayed
* The Ramco Cements(TRCL)’s4QFY20 results surprised positively on better-than-expected realization. While cement EBITDA was down 14% YoY, it was 17% above our estimate as realization stood4% above estimate.
* We raise our FY21/FY22 EPS estimates and target price by ~5% to factor better pricing in the southern region. The commissioning timelines of ongoing expansions havealso been pushed ahead by three to ninemonths, which has loweredFY21 capex. The stock is currently trading at 12.9x FY22 EV/EBITDA and is pricing in the volume upside, in our view. Hence, we maintain Neutral.
Beat led by better-than-expected volumes and realization
* Reported revenue/EBITDA/PAT at INR13.9b/INR2.8b/INR1.5b was down 9%/ 13%/12% YoY,but came in 7%/17%/39% above our estimates.
* Sales volumesdeclined 11% YoY to 2.93mt (+3% QoQ) (our est.:2.85mt).Cement realization rose 5.8% QoQ to INR4,725/t (+2% YoY) and was 4% above our est. of INR4,541/t.
* Cost/t (incl. windmills) at INR3,788/t (+3% YoY, +0% QoQ) also came in 2% higher than our est.of INR3717/t asfreight cost and marketing spendswere higher.
* EBITDA/t declined 3% YoY to INR955/t (+34% QoQ), but stood 14% above our est. of INR845/t,driven by a beat on realization.
* The Wind Power segment reportedEBITDA loss of INR8mn v/sloss of INR25mn in 4QFY19 and loss of INR35mn in 3QFY20 due to lower generation seasonally.
Highlights from management commentary
* TRCL expectsslowdown in the Builder and Commercial segments,and remains cautious about the demand outlook. The company is well-positioned in the rural markets and expectsto reap the benefit of demand growth as rural markets look more promising thanurban markets.
* Advertisement and sales promotionswould be cut sharply in FY21 (had been increased 123% YoY in FY20) to save costs.
* Operating costs continue to remain under control in lightof benign fuel prices,such aspetcoke and coal.
* Capacity expansion update: The grinding unit in Vizag (1.05mt) was commissioned in Mar’20,and theOdisha grinding unit wouldbe commissioned by Aug’20. The commissioning of the Jayanthipuram 1.5mtpa clinker capacity has been pushed ahead by ninemonths to Mar’21. The integrated plant in Kurnool should get commissioned by Mar’21, as guided earlier.
* FY21 capex wouldbeat~INR8b, with the balance planned INR5.8b (out of INR13.8b remaining) being spent in FY22.Gross debt stood at INR30.24b as of Mar’20,with average cost at7.3% p.a.
* TRCL has been gaining market share in its operating regions of south/east, driven by aggressive marketing and new product launches. We expect volumes to grow above industry at a 4% CAGR in FY20-22E, led by expansions.
* The expansions would, however, result in leverage rising to 3x net debt / EBITDA in FY21E (from 1.5x in FY19).
* The stock trades at 12.8x FY22E EV/EBITDA, a 10% premium to its 10-year average and a significant premium to peers. On an asset valuation basis, it trades at USD114/t. We value the stock at 12x FY22E EV/EBITDA to arrive at TP of INR595. Maintain Neutral.
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