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Strong realisation aided growth despite volume decline

The Ramco Cements Ltd (TRCL), the flagship company of Ramco group is the 5th largest cement company in India with a total production capacity of 19.8MT (South-16.6MT & East-3.2MT). TRCL has captive Thermal power capacity of 175MW and Windmill capacity of 126MW.

* We upgrade to Accumulate with a revised Target to Rs.1,060 (earlier Rs.880) considering strong margins and improving demand outlook.

* Q3FY21 revenue grew by 5%YoY. Volumes declined by 8% YoY (-28%/- 19%YoY in Q1FY21/Q2FY21) impacted by extended and above normal monsoon in South region. Realisation growth was strong at 13%YoY.

* EBITDA margin improved by 1370bps to 29.6% aided by strong realisation and lower costs. Sharp surge in fuel prices and normalization of discretionary spends likely to impact margins in the coming quarters.

* All the capacity expansion is about to complete by May 2021 (total capacity would be 20.8M) and FY23 would witness significant deleveraging supported by strong free cash flows.

* Demand outlook is positive given GoI’s strong focus on infra & housing in the Union budget. TRCL’s expansion to support volume growth.

* Currently, TRCL trades at 15.6x 1Yr Fwd EV/EBITDA. We roll over and value at ~15x FY23E EV/EBITDA.

Strong realisation supports revenue growth

TRCL reported revenue growth of 5%YoY mainly supported by strong realisation growth (13% YoY) despite volume declines (-8%YoY Vs -28% in Q1FY21 & -19% in Q2FY21) owing to extended and above normal monsoon in South region. The demand in the south region is picking up gradually. The higher mix of trade segment (90%) and premium cement (35% Vs 15% YoY and targets 40-50%) in the sales mix supported strong realisation. Further, re-branding measures in East, post commissioning of new capacity will support realisation going forward. We factor ~13%YoY decline in volumes in FY21 but strong double digit recovery in FY22E, supported by revival in economic activities coupled with market share gains through capacity expansion. Expect revenue to grow by 10%CAGR over FY20-23E.

Strong realisation & benign fuels costs leads to strong margins.

EBITDA margin improved by 1370bps YoY to 29.6% mainly aided by strong realisation and lower fuel costs. EBITDA on a per Ton basis improved to Rs.1,519 Vs Rs.713 YoY & Rs.1,997 QoQ. Fuel costs declined by -10% YoY, and other expenses by 18% YoY. We expect discretionary spends including ad-spends to normalise in the coming quarters. Additionally, prices of pet coke and coal have witnessed a sharp increase in the quarter, which is likely to have an impact on margins in coming quarters. However, company’s cost efficiency measures like implementation of WHRS (Waste Heat Recovery systems) in various plants will support margins going forward. TRCL commissioned 9MW WHRS in Jayanthipuram plant and another 18MW is commissioning this year. The full benefit is expected by Q1FY22, ~Rs.130/annum. Adverse price movements of cement, fuel and RM prices are the key risks.

Valuation & Outlook

Demand outlook is positive given GoI’s strong focus on infra & housing in the Union Budget. TRCL’s capacity expansion will support market share gains. With most of the capex completed, FY23 to witness significant deleveraging supported by strong free cash flows. The stock currently trades at 15.6x 1Yr Fwd EV/EBITDA. We roll forward and value at ~15x FY23E EV/EBITDA to arrive at a Target of Rs.1,060 (Rs880 earlier), and upgrade to Accumulate (from Hold) rating.

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