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Strong volumes on capacity additions, margin improves

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. 1,119, considering strong volumes and improvements in margins in the quarter.

• Revenue growth was strong at 31%YoY, for Q2FY24, mainly aided by strong volumes (+37% YoY). The company has guided for ~20% volume growth for FY24E.

• Operating profit growth was robust at 117%YoY as EBITDA margin improved by 680bps YoY to 17.1% due to reduction in fuel prices and operating leverage. Further, TRCL focuses on cost reduction measures like Waste Heat recovery and has converted windmill power to captive.

• High capex during FY19-FY24 resulted in a high debt level (Rs. 50bn vs. Rs. 10.3bn in FY19). However, Net debt-to-EBITDA is at 3.3x vs. 4.5x during the last capex cycle. TRCL expects the maximum debt at current levels and D/E is at 0.7x. Deleveraging is expected post FY24.

• TRCL currently trades at 14x 1Yr Fwd EV/EBITDA. We value TRCL at ~15x FY25E EBITDA, considering the strong volume outlook.

Strong volumes aided by capacity additions.

TRCL reported strong revenue growth of 31%YoY, mainly aided by strong volumes (+37%YoY). Ramp up in new units supported volumes, while weak prices in both South and East along with conversion of wind energy to captive consumption instead of sale earlier, impacted realisation. 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 35% in the next 2-3 years from the current 30%) 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 strong volume growth of ~20% in FY24. We expect revenue to grow at a 12% CAGR over FY23-25E.

Higher volumes & lower costs aided margin improvement.

EBITDA margin sharply improved by 680bps YoY to 17.1% (15.2% in Q1FY24) mainly due to lower input costs and higher volumes. Operating profit improved by robust 117%YoY. EBITDA/ton improved to Rs. 879 vs. Rs. 555 YoY (Rs. 807 QoQ). Power & fuel price declined by 31%YoY on a per ton basis as average blended fuel consumption cost per ton declined to $148 vs. $199 YoY ($170 QoQ) along with other cost reduction measures. TRCL’s cost efficiency measures like additional WHRS (Waste Heat Recovery Systems), improvement in the premium mix and capacity increase in value added products, will support margins in future. Currently, the green power mix is at 38% Vs 22% YoY, 29% QoQ). Windmill capacity of 133MW has shifted to captive use since June 2023 and ~Rs.70/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.1,040 (vs. Rs.794 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, lower 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 ~15x FY25E EV/EBITDA and arrived at a target price of Rs. 1,119, maintain BUY rating considering strong volumes and deleveraging.

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