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Neutral The Ramco Cements Ltd For Target Rs.1,000

Strong margin delivery, but volumes falter

Maintain Neutral on valuation

* The Ramco Cements (TRCL)’s 1QFY22 result highlights the more pronounced impact of the second COVID wave in South v/s other regions, resulting in 33% QoQ decline in volumes to 2.14mt. However, strong production discipline in the region kept margins intact.

* We cut our FY22E/FY23E EPS estimate by 10%/7%, factoring in a weaker volume outlook for South. We retain our Neutral rating as we believe the valuation at 13.7x FY23E EV/EBITDA prices in the expected benefit of capacity expansion by TRCL.

Miss on estimates due to 20% miss on volumes

* Standalone revenue / EBITDA / adjusted PAT rose 18%/40%/54% YoY to INR12.3b/INR3.6b/INR1.7b, but missed our estimate by 17%/19%/33%.

* Volumes declined 33% QoQ to 2.14mt (+10% YoY), far worse than the 10– 20% QoQ decline reported by other cement companies thus far – due to stringent lockdowns in South v/s the rest of India.

* Cement realization was up 7% YoY to INR5,648/t (+11% QoQ) v/s our estimate of INR5,522/t.

* Blended realization rose 7% YoY to INR5,739/t (+13% QoQ) v/s our est. of INR5,580/t. Cost/t came in 4% higher v/s our est. at INR4,039/t (flat YoY; +10% QoQ) due to negative operating leverage and fuel cost inflation.

* Thus, EBITDA/t was up 27% YoY to INR1,700/t (+22% QoQ) v/s our estimate of INR1,680/t.

Highlights from management commentary

* Demand was severely impacted in South and Kerala is still under weekend lockdown. However, there are visible signs of demand recovery across states, which are supporting a better pricing environment (v/s FY21).

* Clinker utilization has improved, with utilization in July at 85–90%.

* The clinker expansion at Jayanthipuram (1.5mt) was commissioned on 28th Jun and is ramping up well.

* The clinker unit at Kurnool (2.25mt) is expected to be commissioned in 2QFY22. The 1.0mt grinding unit at Kurnool (along with railway sidings), 18MW TPP, and 12MW WHRS would be commissioned in FY23.

* It incurred capex of INR4.0b in 1QFY22 and has guided for total capex of INR8.0b in FY22 (excluding any outlay on the RR Nagar clinker modernization).

Valuation and view

* TRCL is expected to gain market share in its operating regions (South/East), led by capacity expansion. We expect a 14% volume CAGR over FY21–23E, supported by a low base and expansion.

* The stock trades at 13.7x FY23E EV/EBITDA and USD179/t capacity, at a significant premium to peers. We value it at 13x FY23E EV/EBITDA (in line with the 10-yr average) to arrive at TP of INR1,000. We maintain Neutral.

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