Ramco Cements - On solid footing; reiterate Buy - Rajesh Kumar Ravi and Vinay Menon - Centrum

Rating: Buy; Target Price: Rs840; CMP: Rs714; Upside: 18%

We maintain our Buy rating on Ramco Cements (TRCL) and revise our TP to Rs840. TRCL delivered 10% YoY volume growth in Q4FY17 driven by steady uptick in its east sales. During FY17, its east sales rose ~60% YoY and south sales by 8% thus driving 16% volume growth in FY17. While lower pricing, higher energy and promotional cost dented unitary EBITDA by 30% YoY to Rs1,052/MT in Q4FY17, we expect good demand outlook (across south and east), QoQ price recovery in Q1FY18 (in both south and east markets), operating leverage gains and TRCL's brand premiumisation in the east to all drive steady margin expansion during FY18/19, boosting cashflow. Amid low capex requirements, we expect TRCL to turn zero net D:E by end FY18/early FY19.

Q4FY17 - Strong 10% volume growth: TRCL's volumes increased 10% YoY driven by steady volume uptick in east markets. Amid muted/weak offtake in Tamil Nadu and Kerala, TRCL has been steadily increasing its sales in the eastern (Odisha and West Bengal) region and in AP/Telangana. The eastern markets accounted for 25% of its total sales in Q4FY17 vs 22% in FY17 and 16% in FY16. Average NSR dipped 5% QoQ/6% YoY led by weak pricing QoQ in the south as well as on account of an increase in east sales contribution (where NSR is lower vs TN/Kerala markets). In addition, rising energy cost, higher marketing expenses (by ~Rs73/MT) for the eastern markets and a one-off asset write off (~Rs26/MT) led to 30% YoY reduction in unitary EBITDA/MT to Rs1,052/MT and hence EBIDTA/PAT fell 23%/34% YoY in Q4FY17.

Strong volume and price outlook: The management indicated that volume outlook remains strong in the eastern region, and in AP/Telangana and Karnataka in the south region and these markets are expected to drive TRCL's volume growth over the next two years. Demand is expected to remain subdued in Tamil Nadu in FY18. Cement prices have improved by ~Rs10-30/bag QoQ across TRCL's markets in Q1FY18, which should more than offset the impact of rising fuel costs. Further, TRCL has been trying to increase its brand positioning in tier-1 category in the east region (thus recent increase in promotional expenses in Q4) which should also drive margin expansion in addition to volume growth.

Steady leverage reduction amid strong cashflow and low capex: TRCL delivered strong AOCF of Rs9bn/Rs10bn in FY16/17 driven by good pricing, cost reduction and volume growth. Amid low capex outgo of Rs2.5bn/Rs3bn during FY16/17, it reduced its gross debt by Rs5bn/Rs7bn in the same period and its net D:E currently stands at 0.4x vs 1x in FY15. Amid low overall utilisation of ~56% in FY17, TRCL's capex outgo will remain low at least for the next two years and hence free cashflow generation will surge, thus reducing net D:E to almost zero levels in FY18/19. TRCL would incur Rs2bn capex in FY18 towards annual maintenance and debottlenecking activities.

Reiterate BUY: TRCL delivered 16% YoY volume growth in FY17 driven by ~60% increase in its volume growth in the east and 8% volume growth in the south. We expect 10% volume CAGR for FY17-19 led by strong demand outlook for both east and south (ex-Tamil Nadu). We have cut our FY18E EBITDA estimates by 2% to factor in higher operating costs (energy and promotion cost increase) but we maintain our FY19 EBITDA estimate. TRCL delivered ~Rs1,300/MT of unitary EBITDA in FY17 and with better realisation and utilisation outlook, we expect the same to expand to ~Rs1,600/MT by FY19. Based on TRCL's strong outlook for south, plus its strong cashflow and industry leading return ratios, we increase our valuation multiple to 12x EV/EBITDA vs 11x earlier (in-line the average of 12x over the last five years. Thus, we maintain our Buy rating and raise our TP to Rs840 from our earlier TP of Rs770. Key downside risks: lower-than-expected demand and price growth and a sharp spike in energy and freight cost.

Shares of The Ramco Cements Limited was last trading in BSE at Rs.708.95 as compared to the previous close of Rs. 680. The total number of shares traded during the day was 30690 in over 1797 trades.

The stock hit an intraday high of Rs. 715 and intraday low of 677.55. The net turnover during the day was Rs. 21565410.

Source : Equity Bulls

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