The Ramco Cements Ltd. share price target

20 June 2020 The Ramco Cements (TRCL)s 4QFY20 results surprised positively on better- than-expected realization. While cement EBITDA was down 14% YoY, it was 17% above our estimate as realization stood 4% above estimate. We raise our FY21/FY22 EPS estimates and target price by ~5% to factor better pricing in the southern region. The commissioning timelines of ongoing expansions have also been pushed ahead by three to nine months, which has lowered FY21 capex. The stock is currently trading at 12.9x FY22 EV/EBITDA and is pricing in the volume upside, in our view. Reported revenue/EBITDA/PAT at INR13.9b/INR2.8b/INR1.5b was down 9%/ 13%/12% YoY, but came in 7%/17%/39% above our estimates. Cement realization rose 5.8% QoQ to INR4,725/t (+2% YoY) and was 4% above our est.

We believe lockdown due to covid-19 will severely affect industry and TRCL's volume in Q1FY21E and FY21E. We like TRCL for its strong distribution (supports its industry leading volume growth) and healthy profitability metrics (despite turbulent south markets). Considering 25% run up in stock price during YTDFY21, we recommend Accumulate...

The Ramco Cement Ltd ( TRCL), the flagship company of Ramco group is the 5th largest company in India with a total production capacity of 16.69MT (South-12.49MT & East-4.2MT). TRCL has captive Thermal power capacity of 175MW and Windmill capacity of 126MW. The lockdown on account of COVID19 pandemic has impacted the industry volumes significantly due to lack of construction activities. April & May would be a wash out, and assuming gradual relaxation in lockdown and resumption of construction activities, we expect FY21E...

11 March 2020 Demand trends have been weak in south India over the past few quarters, particularly in Andhra Pradesh (due to the lack of new construction awards) where volumes are down by ~5% YoY. Demand in AP is likely to remain weak for another 6-9 months. Demand has picked up since Dec19, but TRCL would likely see only 5-6% volume growth in FY21 due to constraints on clinker capacity. In the longer term, TRCL is likely to continue delivering higher volume growth than the market. Prices in TRCLs operating markets of south and east have been muted in FY20, particularly with weak prices in AP impacting pricing in adjacent states. Prices in south have been trending down for the past 11 months and are lower by ~INR25/bag (7%) in FY20. Prices in east have also been weak and are lower by ~INR30/bag (8%) in the past 10 months.

We like Ramco Cements for its strong distribution (driving its industry leading volume growth), healthy profitability metrics (despite turbulent south markets) and balance sheet prudence. Thus, we continue to ascribe it premium valuation multiple of 13x Sep'21E EBITDA. Out TP is revised down to Rs 790 on earnings downgrade. Our TP implies EV of USD 149/MT. Ramco currently trades at 15/12.1x FY21/22E EBITDA and at an EV of ~USD 159/MT. We downgrade our rating to Neutral amid rich valuations. We downgrade Ramco Cements rating to Neutral with a revised TP of Rs 790 (13x Sep21E EBITDA). Our TP implies EV/MT of USD 149/MT.

Additional capacity to aid volume growth; margins to improve The company registered growth of 3.5% YoY amid a sluggish demand environment. This was supported by additional capacity. We expect the growth momentum to continue for Ramco led by ramping up of capacities, which would get operational later during the year. As the company increases its grinding capacity by 4 MT within a quarter or two, we expect volumes to grow at 11% CAGR in FY19-21E to 13.7 MT by FY21E. Improvement in capacity utilisation, expectation of a reduction in lead distance with the...

Cement EBITDA was down 6% YoY as (a) margin per ton declined 9% YoY (-27% QoQ) to INR714/t due to pricing pressure in the South/East, and (b) higher costs on additional freight/promotional expenses. We cut our FY20/FY21 EPS estimates by 7%/ 6% due to expectations of sustained higher promotion spends to push volumes. We maintain EBITDA at INR1.9b (-5% YoY, -32% QoQ) was 21% below est. INR2.5b, implying EBITDA/t of INR714/t (-9% YoY, -27% QoQ) 19% below est. Cement realization declined 5% QoQ to INR4,475/t (+2% YoY, est. INR4,528/t) due to weak pricing in both the South/ East. Cost/t at INR3,780/t (+4%YoY, +1% QoQ) also came in 3% higher than our est. INR3,660/t due to higher freight costs (as clinker was supplied to the new grinding unit started in the East) and higher promotion spends. Revenue at INR12.7b (+6% YoY, -3% QoQ) was also 3% below est.

We believe strong fundamentals attract premium valuation. We value TRCL at 12x FY22 EV/EBITDA and arrive at a target of Rs840, recommend Accumulate. Corporate tax cut to revive capex cycle...boost demand The Indian cement industry has been facing a demand-supply mismatch since FY11 due to over-supply and demand slowdown. Capacity utilisation declined to ~65% in FY17-FY18 but sharply improved to 72% in FY19 due to strong improvement in demand. Demand grew 13.6% in FY19 against supply growth of ~3%. However, many companies have announced capacity additions recently, ~58MT is expected over next two years Vs ~40MT in the last two years. We expect utilisation to come down to ~70% in FY20 and then improve to 72% in...

Maintain BUY: Owing to demand and pricing disappointment in 3Q, we trim our EBITDA est for FY20/21/22E by 6/7/2% resp. Thus, we estimate TRCL to deliver 20% EBITDA CAGR during FY19-22E. We remain bullish on TRCL owing to its strong distribution and cost efficiencies, robust profitability metrics and prudent balance sheet. We maintain BUY on the stock with a revised TP of Rs 850 (13x Sep 2021E EBITDA). The stock currently trades at 13.4/10.7x FY21/22E EBITDA and at replacement cost of ~USD 150/MT. We recently hosted Ramco Cements (TRCL) mgmt for a non-deal road-show. The co indicated persisting demand decline across south and east to mute TRCLs volume growth in 2HFY20 (vs +7% in 1H). Even realization is to remain under pressure across south and east (mainly in West Bengal and AP-T). The co remains efficient on opex and fuel cost tailwinds should offset the impact of weak demand YoY.

We like TRCL for its strong distribution (continued volume momentum), robust profitability metrics and prudent balance sheet. Thus, we continue to ascribe it premium valuations. We maintain BUY with a TP of Rs 880 (13x Sep'21E EBITDA, implying EV USD 179/MT. It currently trades at 12.6/10.9x FY21/22E EBITDA (EV ~USD 163/MT). We retain BUY rating with TP of Rs 880 (13x Sep21E EBITDA). Our TP implies EV/MT of USD 179/MT.