Ramco Industries - Despite subdued revenue growth, margins unaffected; Buy - Anand Rathi

8.1% sales growth. Ramco Industries reported Rs. 1.78bn revenues in 3QFY13 (up 8.1% yoy), 6% below our estimated Rs. 1.9bn. Growth was driven by increased sales in its textile business, which grew 75% (to Rs. 0.37bn) while its building products division declined 2% (to Rs. 1.36bn). Its ACS capacity operated at 86% utilisation in FY12 and is likely to reach optimum utilisation levels in FY13. We expect its domestic operations to post a 12% CAGR in revenue over FY12-15.

Textile division reported strong performance. Its textiles division recorded a 75% yoy rise in sales. Its EBIT margin has improved 1,514bps yoy, to 1.3%. This robust performance was backed by a slight increase in capital employed (to Rs. 828m, up 7%).

EBITDA margin at 12.4%, PAT up 31%. With strong sales growth, the EBITDA margin improved 5bps, to 12.4% yoy, but was down 271bps qoq, as raw material cost (as percent of sales) has risen 353bps. PAT was up 31% yoy; for 9MFY13, it climbed 15.2%.

Expanding in Sri Lanka. To cater to rising rural demand for ACS in Sri Lanka, Ramco set up, in Mar'12, another 0.12m tpa plant, taking total capacity there to 0.24m tpa. The Sri Lankan operation posted a 15% CAGR in revenue over FY06-12, which could rise to 25% in FY12-15.

Our take. Rising rural incomes on account of government schemes for the rural population would boost growth. We assign a 4x PE to FY14 EPS and value its equity investments at a steep discount to the present value to derive a price target of Rs. 93. At the ruling price, the stock trades at PE of 5.8x FY14 and 5x FY15e EPS. We believe the strong cash flows would take care of future expansions, keeping debt-equity in check. Risks. Rise in input costs and further deterioration in the cotton yarn business (contributing 15% to revenue.

Source : Equity Bulls

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