Management Speak: Ramco Cement (Outperformer) - Volume growth momentum to sustain

We present key takeaways from our meeting with Ramco Cement’s management:

• Volume growth momentum continues in Q1FY19: Ramco continues to see strong traction in Q1FY19 volumes (Q4FY18 volume +20% yoy) due to continued demand momentum in Andhra Pradesh/Telangana (govt spending on roads, irrigation, low cost housing, etc) as well as pick up in Tamil Nadu (low base; improvement in demand from housing and infra as sand availability issues have receded). Demand in Karnataka too was robust, but Kerala saw muted demand, especially in June, due to heavy rainfall. Sustained momentum and deeper penetration in the east (~23-25% of FY18 volumes) is likely to further drive Ramco’s volumes. Accordingly, we estimate 15% growth in FY19E cement volumes.
• Rise in petcoke prices to impact with a lag: While petcoke prices continue to rise driving higher energy costs, Ramco will see the impact of the rise with a lag of a quarter, as the company carries low-cost inventory. Ramco presently uses 100% petcoke in kilns, as it is cheaper than coal on kcal basis. The company is also taking several initiatives to reduce energy costs, which includes plans to setup WHRS facilities at Jayantipuram and RR Nagar plants (likely to come up in 18-24 months). Such initiatives will help Ramco mitigate the impact of higher fuel costs and maintain cost leadership among peers.
• Muted realizations in near term; expect improvement in H2FY19: Cement prices were on a declining trend in core markets, and hence, realizations are likely to be muted in Q1FY19. However, the change in mix towards Tamil Nadu, where realizations are higher, can partly mitigate the muted realizations. We expect realizations to improve post monsoons, backed by robust demand momentum, which would be adequate to absorb any capacity additions.

Valuations and view

Ramco, a premium player in South India, has gained market share and undertaken cost-efficiency initiatives, which led to the sharp earnings growth momentum over last few years. While near-term headwinds in the form of weak cement prices and higher fuel prices exist, we believe long-term growth drivers are in place led by demand revival in the South on the back of investments in AP/Telangana and deeper penetration in the East. Ramco continues to focus on maintaining its cost leadership position and sustained free cash flow generation. The stock trades at 12x FY20E EV/EBITDA and US$125 on EV/t basis. Maintain Outperformer.