ADD The Ramco Cements Ltd. For Target Rs. 865 - Emkay Global Financial Services
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Focus on balancing growth and leverage
We recently met S Vaithiyanathan, CFO, and Satish Kumar, AVP-Treasury, of The Ramco Cements (Ramco) for a business update. KTAs: 1) Ramco targets maintaining market share with balancing leverage. 2) Management aims to increase current clinker/cement capacity, from 16mt/ 23mt to 19mt/26mt, respectively, by FY26. 3) Besides, it has potential to increase clinker capacity by 0.5mt in integrated plants and cement capacity by 2mt through debottlenecking at various locations. For future growth, Company may look to add more lines in Kurnool and a greenfield integrated project in Karnataka. 4) Capex is likely to be ~Rs25bn for FY25E-26E. 5) Timely monetization of noncore assets/investments (Rs5-6bn) is key to meet capex and keep net debt below Rs50bn. The stock has corrected ~25% in the past three months on pricing pressure in key markets and concerns about high leverage (FY24 net debt-to-EBITDA: 3x). We expect gradual demand and price recovery postelections. We retain ADD, with Mar25E TP of Rs865/sh, based on 12.5x EV/E.
Targets maintaining market share with increasing capacity by FY26E
Ramco’s current clinker/cement capacity stood at 16mt/23mt. The company is looking to i) commission line-2 clinker capacity of 3.15mt, cement capacity of 1.5mt, and WHRS of 15MW in Kurnool, at capex of Rs12.5bn; and ii) increase cement capacity by 1mt via debottlenecking, by FY26. Accordingly, it will increase its clinker/cement capacity to 19mt/26mt (~6% CAGR) by FY26E. Additionally, Company is in the process of establishing 10MW WHRS at its RR Nagar plant, to be commissioned by Mar-25, and the 18MW TPP and railway siding at Kurnool, to be commissioned by Jun-24 and Sep-24, respectively.
Capex revised down to Rs12bn for FY25; likely to spend Rs25bn in FY24-26E
The company has revised down its capex for FY25 to Rs12bn (earlier Rs17bn) to maintain its leverage position. Overall capex is broadly maintained at Rs25bn for FY24-26E. For future growth, Company has identified debottlenecking opportunities at various locations, totaling 2mt. Besides, considering the availability of limestone resources in Kurnool (a parallel can be drawn with Shree’s Ras/Beawer deposits), the company has potential to add more lines. Incremental line additions in Kurnool will have lower capex and can help boost profitability/return ratios for the company, in our view. Besides, it will continue to help service the Tamil Nadu market, as it is awaiting clarity on limestone auction in the state. The company is in the process of acquiring mining land in Karnataka and evaluating an option for bigger kilns, to have advantage of scale benefits.
High leverage remains a concern; timely monetization of non-core assets is key
The company’s net debt has increased by ~Rs19bn over the past three years to Rs48bn as of Mar-24 (net debt-to-EBITDA: 3x) owing to capacity commissioning, purchase of mining land from Prism Johnson, and declining industry profitability. Timely monetization of non-core assets/investments (Rs5-6bn) is key to balance the cashflow to meet capex and to keep net debt at the desired level of
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