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Research
Ramco Cements - Cement Sector Update - Karvy
Posted On : 2013-12-29 20:14:33( TIMEZONE : IST )
Its 2QFY14 results -- one of the worst in more than a decade: Ramco Cements' 2QFY14 EBITDA decline of 62% YoY (& OPM of 13%) is one of the worst declines in its last 12 years of operations. Weak cement demand in the southern region amid heavy rainfalls resulted in sharp decline in its cement NSR as Ramco pushed volumes to gain market share (up 8% YoY, down 1% QoQ). Operating costs firmed up on higher input costs, increase in transport costs (rise in lead distance & diesel prices) & rise in dealers' discounts.
Profit decline to continue in 3QFY14 due to weak demand in Tamil Nadu & AP: We expect Ramco Cements' 3QFY14 sales off-take to remain subdued on account of the rainy season in the southern region as well as demand has not picked up in AP & Tamil Nadu (these account for 50% of Ramco cement sales) due to Telangana agitation in AP & non availability of sand in Tamil Nadu.
Ramco well placed to capitalize on demand recovery: With its strong brand presence in the retail markets, we expect Ramco's profitability should benefit the most as demand recovers in the southern region from 4QFY14 onwards. A good monsoon has improved the water availability for construction activities in the southern states. Cement demand should improve as sand availability in Tamil Nadu is expected to improve from Jan'2014 onwards. Additionally, Ramco has 100% captive power capability on its current utilization and it has increased usage of low cost pet coke which should further benefit its profitability.
Weak profitability during 9MFY14 would moderate its FY13-15E EBITDA CAGR to 6.5%. Further, its working capital has strained in FY14E on account of CCI penalty deposit, higher receivables & loans/advances thereby aggravating its FY14E PAT decline to 41% YoY. We expect improvement in its cash conversion cycle as well as debt reduction in FY15E which should aid its FY13-15E PAT CAGR of 17%.
Valuation & Recommendation: We maintain our "HOLD" recommendation on the stock as we await demand recovery in the southern region. We value the stock at 7x its FY15E cement EBITDA & 4x its FY15E power EBITDA.
