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Record high capacity utilisation rate drives outperformance…

About the stock: Ramco Cements is the dominant player in South India with cement capacity of 22 MT spread across Tamil Nadu, Andhra Pradesh, Odisha and West Bengal. In terms of sales, south contributes ~75% of sales while east contributes 25%, which is served via grinding units in West Bengal (2 MT) and Andhra Pradesh (2 MT).

* The company also has a windmill capacity of 166 MW, captive thermal power plants of 175 MW and 40 MW of WHRS

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

Q4FY23 Results: Ramco Cements’ Q4FY23 print was a strong beat on our and consensus estimates mainly driven by record high-capacity utilisation rates (85% vs. 66% in Q4FY22).

* Reported robust topline growth of 50% YoY to | 2572 crore mainly driven by volume growth of 47% YoY to 4.7 MT. With the pricing environment remaining soft especially in deep south markets (Chennai & Kerala markets), the company’s blended realisation declined by | 160/t (QoQ) to | 5473/t

* With positive operating leverage kicking in, EBITDA/t improved by | 83/t (QoQ) to | 876/t

* Finance cost and depreciation expense increased by 130% and 30% YoY, respectively, owing to commissioning of Jayanthipuram Line-3, integrated plant at Kolimigundla and Line-3 at RR Nagar. Subsequently, PAT grew 22% YoY to | 150.9 crore

What should investors do? The stock price of Ramco Cement in the recent times has been volatile owing to concerns regarding high debt levels (debt/EBITDA: 3.8x) and increased capex over the past two years (| 3600+ crore in FY22-23). With capex intensity reducing, going forward (FY24 guidance: | 892 crore) and the company generating higher OCF, we expect b/s deleveraging to pick up pace in FY24-25E.

* With key growth and margin levers intact, we believe in the medium-term company’s key focus area will be on consolidating the recently expanded capacities. We upgrade our rating from HOLD to BUY on the stock

Target Price and Valuation: We value Ramco at | 980 i.e. ~12x FY25E EV/EBITDA.

Key triggers for future price performance:

* We build in sales, volume growth of 16% and 8% YoY to 17.3 MT and 18.7 MT in FY24, FY25E, respectively

* With softening of fuel prices and other cost saving initiatives (installation of WHRS & railway siding at Kurnool) we expect overall COP to decline by | 300/t during FY23-25E and expect the company to clock in EBITDA/t of | 1157/t by FY25E

Alternate Stock Idea: Apart from Ramco, in our cement sector coverage we also like UltraTech. BUY with a target price of | 9000/share

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