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Strong volumes & improving margins.

The Ramco Cements Ltd. (TRCL), the Ramco Group’s flagship company, is the 5th largest cement company in India with a total production capacity of ~22MT (South-19MT & East-3MT). TRCL has a captive thermal power capacity of 175MW and a windmill capacity of 126MW.

* We upgrade to BUY rating with a revised target of Rs. 1,030 (from Rs. 845), considering strong volumes and improving margins.

* TRCL reported robust revenue growth (+50%YoY) for Q4FY23, aided by strong volumes (+47% YoY), and stable realization (+2%YoY).

* EBITDA margin is improving sequentially due to declining input prices and the sharp decline (~25-30%) in recent months is expected to benefit from Q2FY24. EBITDA grew by 40%YoY, led by strong volumes.

* High capex during FY19-FY23 resulted in high debt level (Rs. 43.5bn vs. Rs. 10.3bn in FY19). However, Net debt-to-EBITDA is at 3.5x vs. 4.5x during last capex cycle. Deleveraging has already started (net debt was Rs. 47.4bn in Q2FY23) and expect more reduction post FY24.

* Cost reduction measures like adding Waste Heat recovery (WHR) and converting windmill power to captive consumption, will together save cost of ~Rs.130-180 per ton.

* TRCL trades at 14x 1Yr Fwd EV/EBITDA. We value TRCL at ~13.5x (5Yr avg=14) FY25E EBITDA, considering the strong demand outlook.

Strong volumes, and stable realisation.

TRCL reported robust revenue growth of 50%YoY, aided by strong volumes (+47%YoY) and stable realization (+2%YoY). Ramp up in new units aided by strong demand supported volumes. TRCL has commissioned 1MT of grinding capacity at R.R. Nagar (TN), and is adding 0.9MT in Odisha by FY24. Increased capacity would support future volumes while higher premium mix (targets of 30-35% in the next 2-3 years from current 25%) will support realization. TRCL expands the capacity of dry mix products, two plants commissioned in FY23 and another two by FY24. This product has ~25-30% margin and will contribute ~Rs. 80cr revenue per plant. The company has guided for strong volume growth of ~20% in FY24. We expect revenue to grow at 10% CAGR over FY23-25E.

Strong volumes & declining input prices aid margin improvement.

EBITDA margin contracted by 120bps YoY to 16% YoY due to elevated input costs. However, on a sequential basis, margins are improving due to declining input prices in recent quarters. The sharp decline of ~25-30% in recent months is expected to benefit fuels costs from Q2FY24. EBITDA improved by 40%YoY, aided by strong volumes and stable realization. EBITDA/ton improved to Rs.878 vs. Rs.797 YoY. TRCL’s cost efficiency measures like WHRS (Waste Heat Recovery Systems-12MW in south), an improvement in the premium mix and capacity increase in value added products will support margins. Currently, the green power mix is at 22% Vs 15% YoY). We expect EBITDA/Ton to improve in FY24 to Rs.1,025 (vs. Rs.787 in FY23/ Rs. 1,164 in FY22). Adverse price movements of cement, fuel and RM prices are the key risks.

Valuation & Outlook: Focus is shifting to deleveraging post major capex.

TRCL’s capacity expansions, coupled with GoI’s strong focus on Infra & Housing, will aid future volumes. Escalated debt and cost inflation were the main concerns in the recent time. Now, with declining input costs coupled with shifting focus to deleveraging post FY24 will support valuation. The stock currently trades at ~14x 1Yr Fwd EV/EBITDA. We value TRCL at ~13.5x FY25E EV/EBITDA (5Yr avg=14) and arrived at a revised target of Rs. 1,030 (Rs. 845 earlier), upgrade to BUY rating considering strong volumes and deleveraging.

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