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Volumes disappoint; margins stay firm…

About the stock: Ramco Cements is the dominant player in South India with cement capacity of 19.7 MT spread across Tamil Nadu, Karnataka, Andhra Pradesh, Odisha and West Bengal. In terms of sales, south contributes ~71% of sales while east contributes 24%, which is served via grinding units in WB (2 MT) and AP (2 MT).

* The company also has a windmill capacity of 125.95 MW, captive thermal power plants of 175 MW and 18 MW of WHRS

* Self-reliance on power, split grinding units near markets and focus on green power has helped the company to remain a cost efficient player in South India

Q1FY22 Results: The company reported a sharp drop in sales volumes due to stringent restrictions in the south. However, strong realisations kept margins firm.

* Clocked revenue of | 1,229 crore, down 24.6% QoQ, led by sales volumes de-growth of 33.3% to 2.14 MT. On a YoY basis, revenues were up 17.3%

* EBITDA/t was up 21.5% QoQ to | 1700/t (vs. last quarter EBITDA/t of | 1,399/t). EBITDA margin was at 29.6%, up 209 bps QoQ, 453 bps YoY

* PAT at | 169 crore, up 52.3% YoY, -21.2% QoQ vs. our estimate: | 152 crore)

What should investors do?

Long operational history, brand equity and cost efficiency has helped the company to raise debt at competitive rates.

* Post completion of major capex, debt levels would peak out with growth accelerating at revenue CAGR of 20%. Hence, we maintain BUY rating

Target Price and Valuation: We value Ramco at | 1,200 i.e.15x FY23E EV/EBITDA

Key triggers for future price performance:

* Incremental volumes from new units (1 MT Odisha GU, 1.5 MT & 2.25 MT clinker unit in Jayanthipuram & Kurnool) would help grow the business from H2FY22 onwards

* Expect sales volume CAGR of 18.5% during FY21-23E

* Debt levels are expected to peak out in FY22E; the company aims to become debt free in three years thereafter.

Alternate Stock Idea: Besides Ramco, in our cement coverage we also like ACC.

* It has a strong balance sheet with debt frees status. The company is focusing on cost reduction and also adding new capacities via internal accruals

* BUY with a target price of | 2,800/share

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