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Opex spikes; capex guidance raised

Debt to remain at elevated levels

* The Ramco Cements (TRCL)’s 2QFY23 performance missed our estimates on higher opex; though sales volume/realization beat our estimates. EBITDA was at INR1.8b (v/s est. INR2.2b) while blended EBITDA/t was at INR555 (v/s est. INR693). Net profit stood at INR115m (v/s est. INR466m) in 2QFY23.

* Continued rise in capex (guidance for FY23/24E now stands at INR17.2b/ INR8.9b v/s earlier guidance of INR8.6b/INR6.0b) is likely to result in higher debt going forward. We estimate TRCL’s net debt to be at INR51b/INR50b in FY23/FY24 (v/s earlier est. of INR41.1b/INR35.9b), respectively.

* We have cut our FY23/FY24 EBITDA estimates by 6%/3% on higher costs. Profit estimates are being reduced by 18%/22% for FY23/FY24 on higher interest/depreciation costs. We maintain our Neutral rating, valuing the stock at 12.5x Sep’24E EV/EBITDA (v/s 14x Mar’24E earlier).

Cost pressure offsets higher-than-estimated volume and realization

* TRCL’s revenue/EBITDA/PAT stood at INR17.8b/INR1.8b/INR115m (+20%/- 53%/-95% YoY and +9%/-15%/-75% v/s our est.), respectively. Cement realization was down 1.4% YoY (flat QoQ), 3% above our estimates.

* OPEX/t rose 19% YoY (6% above our est.), led by a 53% rise in variable cost. Freight cost declined 5% YoY due to reduction in lead distance. Other expense/employee cost/t declined 12%/16% YoY on higher volumes. OPM contracted 16pp YoY and EBITDA/t declined 62% YoY. Depreciation/interest expenses rose 23%/87% YoY, respectively. Net profit declined 95% YoY.

* In 1HFY23, revenue jumped 31% YoY led by 36.5% volume growth that was partly offset by lower realizations (down 4% YoY). Cost pressures (Opex/t up 15% YoY) led to 36% YoY decline in EBITDA to INR4.8b. OPM fell 14pp YoY to 13.6% and EBITDA/t declined 53% YoY to INR732. Adjusted PAT was down 68% YoY to INR1.2b. CFO stood at INR665m (v/s INR4.3b in 1HFY22).

Highlights from the management commentary

* TRCL’s capex for FY23/FY24E will be at INR17.2b/INR8.9b v/s earlier guidance of INR8.5b/INR6.0b, respectively. Higher capex is attributed to land acquisition for new projects, increase in grinding unit in Odisha, dry mortar capacity expansion, etc.

* Net debt rose INR47.4b (v/s INR37.5b as of Mar’22 and INR41.5b as of Jun’22). Debt should be at similar levels in Mar’23E.

* Fuel consumption cost is likely to decrease by USD10-15/t in 3QFY23E (USD199/t in 2QFY23); however, it can further increase by USD10-15/t in 4Q due to volatility in petcoke prices from Oct’22.

* There has been a rise in cement prices in a few markets in Oct/Nov’22. Volume growth for TRCL should be at ~30% in FY23E.

Higher leverage raises concern; maintain Neutral

* TRCL’s net debt spiked due to higher working capital requirement and increase in capex guidance. We now expect FY23/FY24 net debt/EBITDA ratio of 4.8x/3.3x (v/s 3.7x/2.3x earlier), respectively.

* At CMP, the stock trades at 14x FY24E EV/EBITDA (in-line with its 10-year average one-year forward EV/EBITDA). Continued increase in leverage is a key concern and profitability needs to improve significantly to generate historical return ratios (RoCE of 7% in FY24E v/s an average of 10% over FY12-22). We value TRCL at 12.5x Sep’24E EV/EBITDA (v/s 14x Mar’24E earlier) and maintain our Neutral rating with a revised TP of INR680 (v/s INR815 earlier).

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