Add The Ramco Cement Ltd For Target Rs. 960- Choice Broking Ltd
Return Ratios Not Commensurate With Rich Valuation
We maintain our SELL rating on The Ramco Cement Ltd (TRCL). The stock trades at rich FY27E EV/EBITDA, EV/CE, and PE multiples of 15.4x/3.0x/43.0x, respectively. At FY26E/27E/28E RoCE of 6.9%/8.8%/10.2% and RoE of 4.7%/6.9%/8.5%, RAMCO’s RoCE/RoE don’t cover its WACC & cost of equity at 11.6%/12.5% even under optimistic operational assumptions. In our view, TRCL’s capital structure is optimal with net debt at INR 33Bn (FY25 end), implying 2.7x Net Debt/EBITDA, leaving no optionality of shifting up the return profile with the help of additional leverage. Some investors may believe this level of debt for a cement company is excessive and makes the bottom line volatile.
Over FY25-28E, despite factoring in 1) Capacity increase of 5 Mnt, 2) Increasing green share from 39% to ~45%, 3) Volume CAGR of 7.0% and 4) Optimistic realisation assumptions, RAMCO’s return metrics don’t cover the cost of capital over the period.
We now incorporate a robust EV to CE (Enterprise Value to Capital Employed) based valuation framework (Exhibit 3), which allows us a rational basis to assign the right valuation multiple to value RAMCO.
We arrive at a 1-year forward TP of INR 960/share for TRCL. We now value RAMCO on our EV/CE framework - we generously assign an EV/CE multiple of 1.9 x/ 1.9 x for FY27E/ 28E. Although RAMCO’s ROCE is expected to expand from 4.5% in FY25 to 10.2% in FY28E, it doesn’t cover capital cost even in FY28E. We do a sanity check of our EV/CE TP using the implied EV/EBITDA multiple. On our TP of INR 960, FY27E implied EV/EBITDA multiple is 14.1x, which is quite demanding given its return profile. Risks to our Sell rating include stronger than expected sector tailwinds, lack of investor apathy towards its valuation multiples, and leverage.
Q1FY26 Results: Poor result then expectations
TRCL reported Q1FY26 Revenue and EBITDA of INR 20,701Mn (-0.9% YoY, - 13.5% QoQ) and INR 3,976Mn (+24.5% YoY, +23.9% QoQ) vs Choice Institutional Equities (CIE) estimates of INR 22,403Mn and INR 4,539Mn, respectively. Total volume for Q1 stood at 4.1 Mnt (vs CIE est. 4.5 Mnt), down 5.6%/22.3% YoY/QoQ.
Blended Realization/t came in at INR 5,027/t (+5.0% YoY and +11.4% QoQ), which was in-line with CIE’s est. of INR 5,032/t. Total cost/t came at INR 4,061/t (flat YoY and +3.9% QoQ). As a result, EBITDA/t came in at INR 966/t, up 233/t YoY and 360/t QoQ, but remains below market expectations.
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