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Expansion and product diversity a key to growth

Ramco Cements Ltd (TRCL) is the fifth-largest cement producer in India and the most popular cement brand in South India. The company is six decades old and manufactures ready mix concrete, dry mortar products and various grades of cement. It has a presence across ten states of India with four integrated plants and six grinding units. Apart from South India, it is growing its presence in East India, Sri Lanka and the Maldives.

Investment Rationale

* Cement sector is set to revive: Due to Covid, the cement sector faced challenging times and it witnessed a contraction of ~10-13% in demand during FY20-21. However, the scenario is witnessing improvement as cases are receding and the situation is normalizing. In the next 2-3 years, we believe the sector growth will be largely driven by improvement in demand on the back of government push towards infrastructure and housing, pick up in real estate and construction activity, upcoming festive season and increasing infrastructure activity in rural areas.

* Product diversity is the key: TRCL has experienced management team, strong products portfolio and R&D competencies which is constantly aiding growth. Going ahead, along with current products, the company plans to focus on manufacturing unique products, which would be used in waterproofing, repairing, flooring, etc. according to customers’ needs for infrastructure development like bridges, flyovers, tunnels, canals and nuclear power plants. This will benefit the company in differentiating its products from peers, improve margins and maintain a leadership position in South India by gaining market share.

* Capacity expansion will bring in growth: Due to pandemic, the company’s performance and its expansion plan got delayed. But in FY21, TRCL managed to expand its capacity and it added a new grinding unit in Odisha, Line III brownfield expansion at Jayanthipuram unit and railway sliding work at the West Bengal plant. As a result, the company's capacity of clinker, cement, waste heat recovery system (WHRS), thermal power plant (TPP) has increased to 11.4 MT, 19.4MT, 18MW and 175W respectively.

Over and above, the company will continue its expansion for the next 2 years wherein it has plans to add clinker capacity in Andhra plant (Kurnool) by F22 as well as add dry mortar plants in Tamil Nadu, Andhra Pradesh and Odisha by FY23. Consequently, additional capacity would augment well for future growth as it would benefit the company in catering demand from southern and eastern regions, improving sales and enhancing capacity utilization. In the meantime, debt levels increased to Rs 3,700cr in Q1FY22 but the company has plans to repay all its debt in the next 3- 5 years so improvement in the balance sheet will be positive for the growth.

Outlook & Valuation

We have a positive outlook given its strong brand name, leadership position in South India and product portfolio. In addition, its focus on expanding capacity, increasing utilization levels and cost-saving initiatives would further help in improving profitability. We estimate its Revenue/EBITDA/PAT to grow at a CAGR of 12%/13.5%/15.5% respectively over FY21-24E and have initiated a Buy on the stock with a target price of Rs 1,237.

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