Ramco Cements - Industry-leading profitability to sustain - ICICI Securities

Key takeaways from our recently hosted investors call with Ramco Cement (TRCL) CEO Mr. A.V. Dharmakrishnan include: i) higher trade sales and premium product sales coupled with better cost efficiencies led to sharp improvement in Q2FY21 profitability; ii) management remains optimistic on price sustenance and demand recovery in H2FY21; iii) low-cost fuel inventory, new grinding units (GUs) and WHRS would help contain overall cost escalations; iv) clinker lines at Jayanthipuram and Kurnool are likely to be commissioned by Feb'21; and v) company is targeting to become net debt free in the next three years. TRCL's capacity addition by 40% would drive market share gains and provide enough levers to sustain its industry- leading profitability, in our view. We maintain our FY20-FY23E estimates with the target price unchanged at Rs960/share based on 13x Sep'22 EV/E. Maintain BUY.

- Optimistic on demand recovery: Volume decline has been decelerating with likely low single-digit fall in Oct'20 aided by strong growth in East. While South remained impacted during the month owing to extended monsoon, demand is likely to gradually improve with lockdown relaxation and return of migrant workers. Overall, the management remains optimistic on demand recovery over coming months.

- Realisation increased 17% YoY and 4% QoQ in Q2FY21 owing to better market mix, higher trade sales and increasing sales of premium products. Trade sales mix has further improved to 85-90% vs 75% in earlier quarters. Premium products contribution stood at 20% of trade sales and the management is targeting it to double over coming years. TRCL aims to increase the share of trade sales in East as well. Management expects prices to improve in East given strong demand trends while the current high prices in South may sustain.

- Confident of sustaining industry-leading profitability: Railway sidings and local sourcing of fly-ash / slag at WB and Odisha GUs is likely to provide cost savings of Rs300-400/te (Rs80-100/te at company level); while commissioning of 27MW WHRS in H2FY21 would provide cost savings of Rs50/te from FY22E. Besides, TRCL plans to improve the blending ratio at GUs by increasing the share of slag cement. Also, ramping-up of capacities would provide operating leverage. Accordingly, management remains confident of sustaining industry-leading profitability.

- Targeting to become net debt free in next three years: TRCL incurred capex of ~Rs24bn (out of planned Rs33bn) till Sep'20-end and may spend another Rs5bn-6bn in H2FY21. It generated FCF of Rs750mn post capex spend of Rs6.9bn and working capital release of Rs1.2bn in H1FY21. Over the next 3-4 years, it has scope for brownfield expansion at Kurnool, Andhra Pradesh, and may add GUs in AP as well as Odisha, Karnataka and Maharashtra, thereby diversifying its market mix further. Management mentioned net debt has already peaked out at Rs29bn in FY20 and the company is targeting to become net debt free over next three years.

Shares of The Ramco Cements Limited was last trading in BSE at Rs.835.15 as compared to the previous close of Rs. 827.9. The total number of shares traded during the day was 24611 in over 1445 trades.

The stock hit an intraday high of Rs. 840 and intraday low of 821.9. The net turnover during the day was Rs. 20427314.

Source : Equity Bulls

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