Experts put a 'Buy' on fortified Ramco Cements

The analysts suggested a 'Buy' for Ramco Cements with a higher target price of Rs.1,038 (earlier Rs.940).

With the near-complete expansion, the company is set to cater to rising demand via greater operating efficiency and de-levering, according to analytical report by Anand Rathi Equity Research firm. A prolonged monsoon and softening prices q/q in its core operating region curbed Ramco's revenue growth. The operating performance, however, was good due to low-cost pet-coke stocks and optimised cost.

The prolonged and above normal monsoon in its core operating regions drove its volumes down 8 per cent y/y. Revenue, however, grew 4 per cent y/y to Rs.13bn on a 13.3 per cent y/y rise in realisation. With 90 per cent clinker capacity utilisation now, management expects Q4 volumes to grow slightly, but talked of outpacing industry growth on the new clinker unit commissioning in FY22.

We expect volumes/revenues to notch 13 per cent/ 14 per cent CAGRs over FY21-23. The greater savings in fuel costs due to low-cost pet-coke stocks and cost optimisation steps helped EBITDA grow 94 per cent and EBITDA/ton 111 per cent to Rs.1,464. On the commissioning of the clinker unit, the split GU in the East will run optimally, with various cost savings in terms of power& fuel/freight, etc. Further, the 39MW WHRS would saveRs.1.3bn p.a. with a 3.5-year payback period. We expect EBITDA to clock a 10 per cent CAGR over FY21-23, according to the report.

Ramco Management talked of maintaining capex of Rs.100m for FY22 along with Rs.5.37bn for the ongoing capacity expansion. With capex at the completion stage and aided by greater profits, the company is focusing on debt reduction; Rs8bn-10bn each would be repaid in FY21 and FY22. The D/E is likely to shrink to 0.2x in FY23 (from 0.6x in FY20) with de-levering, and higher return ratios, the analysts said in the report.

The valuation of the company has been made based on 15x FY23e EV/EBITDA. Risks perceived are: Demand slowdown; rise in pet-coke/diesel costs, the report added.

(Source: Anand Rathi Equity Research)