Downgrade to ADD on Ramco Cements - Leverage surge on accelarated capex - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.

Ramco Cements (Q4FY20): Leverage surge on accelarated capex. Downgrade to ADD
(TP Rs 685, CMP Rs 645, MCap Rs 152 bn)

We downgrade Ramco Cements' to ADD from BUY earlier, as the sharp 30% stock price recovery in the past two months, limits upside on our TP of Rs 685 (12x FY22E EBITDA). Covid impact drove 11% vol decline in 4Q, leading to 9/14/13% fall in Rev/EBITDA/APAT. This slowed FY20 Rev/EBITDA/APAT growth to 4/10/18% YoY. As capex spend in FY20 spiked up towards ongoing expansions in east/AP, its net debt doubled and net Debt/EBITDA soared to 2.6x vs 1.4x YoY. This should cool off in FY22, once the expansions get completed by early FY22E. Avg int rate remains competitive at ~7.34%.

Covid know down 4QFY20: Covid lockdown in Mar'20 reduced 4Q sales by ~0.4mn MT, leading to 11% YoY vol decline to 2.9mn MT. Price recovery in south and rising brand premiumisation drove 5/2% NSR gain QoQ/YoY. On cost front, surge in adv/promo exp (Rs 220/MT vs Rs180 QoQ and Rs63 YoY) offset the benefits of lower fuel cost, thereby opex stood flat YoY. Unitary EBITDA moderated 4% YoY to Rs 955/MT. The grinding expansions - 1mn MT each in WB (Sep'19)/Vizag (Mar'20) drove up int/dep by 68/9% YoY.

Earnings recover in FY20: A weak 4Q further slowed FY20 vol growth to 1% YoY (and ~4% ex covid impact) as against 16% CAGR during FY16-19. Healthy pricing in 1Q/4Q drove 4% NSR rise in FY20. High adv/promo cost (Rs 152/MT vs Rs 87 YoY), and op-lev loss led to 2% opex rise. Unit EBITDA rose 10% YoY to Rs 981/MT and drove EBITDA/APAT up by 10/18% resp.

Debt surge on accelerated capex: During FY20, Ramco sped up capex spend (+60% YoY to Rs 19.2bn) on its 4mn MT expansion in east/AP. This led to net debt doubling to Rs 29bn, and net debt/EBITDA soared to 2.6x vs 1.4x. Avg borrowing cost remains low at 7.34%. During FY21, Ramco is targeting commissioning of 1mn MT grinding each in Odisha (Aug'20E) and Vizag (Mar'21E). Even its 3.75mn MT clinker expansions in AP/T are expected by Mar'21E. Thus, by 1QFY22, Ramco's clinker/cement capacity will rise to 14.3/20.6mn MT resp. Additional Rs 13.8bn will be spent on these (including CPP, WHRS). We estimate net debt/EBITDA to fall to 1.4x in FY22E.

Outlook and valuation: The co expects its adv/promo expense to fall back to below Rs 100/MT in FY21E. Further, Ramco's profitability should also gain from cement price uptick in south and low fuel prices, which should offset covid-led 14% vol decline in FY21E, in our view. We expect vol to grow 25% in FY22E, on sales normalization and ramp-up from new capacities. We increase FY21/22E EBITDA est by 4% each factoring in cost tailwinds. We continue to value it at 12x FY22E EBITDA (~10 year mean), implying TP of Rs 685. As post the recent 30% run-up, the stock is trading at rich valuation, offering limited upside, we downgrade its rating to ADD from BUY earlier.

Shares of The Ramco Cements Limited was last trading in BSE at Rs.633.2 as compared to the previous close of Rs. 644.7. The total number of shares traded during the day was 22499 in over 1409 trades.

The stock hit an intraday high of Rs. 654.15 and intraday low of 624.5. The net turnover during the day was Rs. 14208736.

Source : Equity Bulls

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