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Elevated cost and high volume in the East weigh on margins

Volume spikes 15% YoY driven by new capacities

* The Ramco Cements (TRCL)’s 3QFY22 results reflect the cost pressures witnessed by the industry and the inability to pass on the cost increases due to demand constraint.

* TRCL’s variable cost rose 36% YoY leading to 22% YoY increase in opex/t. This negated the 15% YoY volume growth and OPM contracted 14.7pp YoY. EBITDA decreased 42% YoY, while EBITDA/t declined 49% YoY. Accordingly, PAT was down 59% YoY.

* Higher sales in the East and North East markets also impacted profitability, as the realization/profits in the Eastern markets are INR1,000/t lower than the Southern markets.

* Lower realization/higher costs led to 9%/6% drop in FY23E/FY24E EBITDA, which along with higher debt assumptions resulted in 20%/14% decline in profit estimates, respectively.

* Though, TRCL’s near-term outlook looks challenging due to higher fuel costs (INR570/t increase in 3QFY22 variable cost v/s FY21 average), we expect the company to benefit from commissioning of new capacities.

* The stock trades at 15.9x/12.9x FY23E/24E EV/EBITDA and USD165/t capacity. We value it at 14.5x FY24E (v/s Dec-23 earlier) EV/EBITDA (in line with its 7-yr average) to arrive at our TP of INR1,020. Maintain BUY.

Lower realization and higher opex lead to the miss on estimates

* TRCL’s standalone revenue/EBITDA/adjusted PAT stood at INR15.5b/ INR2.3b/INR0.8b (+16%/-42%/-59% YoY), which were +4%/-34%/-51% v/s our estimates, respectively. Sales volume rose 15% YoY and was 11% above our estimates.

* Cement realization was up 1% YoY to INR5,138/t (6% below our estimates), but declined 5% QoQ.

* Variable cost/t increased 31% YoY/21% QoQ due to a steep increase in coal/petcoke prices. Freight cost/t was up 10% YoY owing to higher diesel prices; while, other expense/t grew 19% YoY led by higher AD spends, packaging costs, etc. Overall, opex/t increased 22% YoY/8% QoQ in 3QFY22.

* Higher costs led to 14.7pp YoY decline in OPM, while EBITDA/t stood at INR774 in 3QFY22 v/s INR1,508/INR1,350 in 3QFY21/2QFY22, respectively.

* Depreciation/Interest cost rose 11%/58% YoY on commissioning of new projects. ETR was at 27.1% in 3QFY22 v/s 32.4% in 3QFY21.

* In 9MFY22, TRCL’s sales volume increased 16% YoY, whereas, realization improved 1% YoY. EBITDA declined 10% YoY led by 12% increase in opex/t. OPM slipped 7pp YoY to 23.1%. EBITDA/t was at INR1,258 v/s INR1,625 in 9MFY21. Adjusted profit decreased 15% YoY.

Highlights from the management commentary

* Demand in TRCL’s markets was impacted by higher rainfalls (the main market of Tamil Nadu got affected by extended monsoons in Oct/Nov’21, parts of Karnataka and Kerala too were impacted), cyclones and sand shortages. However, demand has started to improve from Jan’22.

* Higher sales in Eastern region impacted profitability, as realization/profits in the Eastern markets are INR1,000/t lower than the Southern markets.

* Cement prices have started to improve in the Southern and Eastern markets from Jan’22; however, sustainability of the increase needs to be seen. Prices have been hiked by INR20-25/bag in Odisha, INR30-40/bag in West Bengal and Kerala, and INR15-20/bag in Andhra Pradesh and Telangana markets.

* There has been a decline in pet coke price in Dec’21, which should lead to lower costs in 4QFY22. The company is not carrying higher coal inventory.

* TRCL’s capex during 3Q/9MFY22 was at INR4.86b/INR13.87b. Balance capex for approved projects was INR10.2b. INR2.5b will be spent in 4QFY22.

* TRCL’s gross debt stood at INR38.4b v/s INR37b in Sep’21 and INR31b in Mar’21. Net cash was at INR800-900m. Gross debt at FY22-end is expected to be INR39- 40b and debt reduction will happen only after two years.

Valuation and view: Expected fall in coal/petcoke costs to aid growth

* We expect TRCL to gain market share in its operating regions (Southern/ Eastern India), led by capacity expansions. Clinker capacity grew 15% (to 11.4mtpa) in Jun’21 and will further increase by 23% (to 13.65mtpa) in Mar’22E. We expect 11% sales volume CAGR during FY22-24.

* Earnings have been under pressure in FY22E led by higher energy costs and demand constraint in 3QFY22. We expect coal/petcoke costs to decline in CY22, which should help its EBITDA/EPS CAGR of 19%/21% over FY22-24.

* The stock trades at 15.9x/12.9x FY23E/24E EV/EBITDA and USD165/t capacity. We value it at 14.5x FY24E (v/s Dec-23 earlier) EV/EBITDA (in line with its 7-yr average) to arrive at our TP of INR1,020. Maintain BUY.

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