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Strong volumes on capacity additions, margins to improve

The Ramco Cements Ltd. (TRCL), the Ramco Group’s flagship company, is the 5th largest cement company in India with a total production capacity of ~22MT (South-19MT & East-3MT). TRCL has a captive thermal power capacity of 175MW and a windmill capacity of 126MW.

* We maintain our BUY rating with a target price of Rs. 1,034, considering strong volumes and the expected improvement in margins.

* Revenue growth was strong at 26%YoY for Q1FY24, mainly aided by strong volumes (+28% YoY).

* However, operating profit grew by only 14%YoY as EBITDA margin declined by 170bps YoY to 15.2% due to elevated fuel prices. Recent decline in fuel prices will reflect in margins in the coming quarters.

* High capex during FY19-FY23 resulted in a high debt level (Rs. 44bn vs. Rs. 10.3bn in FY19). However, Net debt-to-EBITDA is at 3.7x vs. 4.5x during the last capex cycle. Deleveraging has already started (net debt was Rs. 47.4bn in Q2FY23) and expect more reduction post FY24.

* Cost reduction measures like Waste Heat recovery and converting of windmill power to captive, will save cost of ~Rs. 130-180 per ton.

* TRCL trades at 13x 1Yr Fwd EV/EBITDA. We value TRCL at ~14x (5Yr avg=14) FY25E EBITDA, considering the strong demand outlook.

Strong volumes aided by capacity additions

TRCL reported strong revenue growth of 26%YoY, mainly aided by strong volumes (+28%YoY) despite supply disruptions for 20 days due to rail accidents and weak prices in East. Ramp up in new units supported volumes. TRCL has recently commissioned 1MT of grinding capacity at R.R. Nagar (TN), and is adding 0.9MT in Odisha by the end of FY24. Increased capacity would support future volumes, while increasing premium mix (targets of 30-35% in the next 2-3 years from the current 27%) would support realization. TRCL expands the capacity of dry mix products with two plants commissioned in FY23 and another two (in AP & Odisha) by FY24. This product has ~25-30% margin and will contribute ~Rs. 80cr revenue per plant. The company has guided for strong volume growth of ~20% in FY24. We expect revenue to grow at a 12% CAGR over FY23-25E.

Strong volumes & declining costs will aid margin improvement.

EBITDA margin contracted by 170bps YoY to 15% YoY due to elevated input costs. However, operating profit improved by 14%YoY, aided by strong volumes. EBITDA/ton declined to Rs. 807 vs. Rs.907 YoY (Rs. 878 QoQ). The recent decline in fuel prices is expected to reflect in margins in the coming quarters. This, along with TRCL’s cost efficiency measures like WHRS (Waste Heat Recovery Systems-12MW in south), an improvement in the premium mix and capacity increase in value added products, will support margins in future. Currently, the green power mix is at 29% Vs 19% YoY, 23% QoQ). Windmill capacity of 133MW is shifting to captive use in phased manner and ~Rs.80/ton cost savings are expected. Higher finance & depreciation is on account of commissioning of new capacities. We expect EBITDA/Ton to improve in FY24 to Rs.1,042 (vs. Rs.787 in FY23/ Rs. 1,162 in FY22).

Valuation & Outlook: Focus is shifting to deleveraging post major capex.

TRCL’s capacity expansions, coupled with GoI’s strong focus on Infra & Housing, will aid future volumes. Now, declining input costs coupled with a shifting focus to deleveraging post FY24 will support valuation. The stock currently trades at ~14x 1Yr Fwd EV/EBITDA. We value TRCL at ~14x FY25E EV/EBITDA (5Yr avg=14) and arrived at a target price of Rs. 1,034, maintain BUY rating considering strong volumes and deleveraging.

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