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

We met Ramco Cement’s management; below are key takeaways

• Marginal volume growth in 2QFY20: with industry decline at 1-2% yoy in July-Aug 2019. Muted demand is being led by cancellation of orders in AP, extended monsoons and festive season across regions. However, management expects demand to improve in November, post the festive season as construction activity sees an uptick on IHB demand and infra projects. Accordingly, Ramco is likely to see 8-9% yoy volume growth for FY20. 
• Weak pricing in 2Q20; likely improvement post festive season: Cement prices have dropped over Jul-Aug 2019 to 4QFY19 levels due to weak demand across South and East regions. While players have tried to take price hikes in Sept-19, but most of it has been rolled back (Rs15/bag taken in last week of Sept-19 has sustained). Prices are likely to remain volatile in Oct-19 due to weak demand on monsoons in Tamil Nadu and festive season across other states. Prices are expected to inch up once volume picks up post the festive season.
• Costs to remain benign: Petcoke prices have seen a gradual decline from US$100+ to current price of US$75/t. This will result in gradual decline in power cost once high cost inventory of petcoke is depleted. Freight costs for East plants will likely reduce once the East GUs and clinker plants in Jayanthipuram and Kurnool are commissioned. Moreover, mgmt. continues to work on internal cost efficiencies to reduce costs.
• Clinker capacities to be commissioned on priority: Considering the higher utilisation of clinker capacity, the priority is on commencing clinker units at Jayanthipuram (1.5mtpa) in 1HCY20 and Kurnool (2.3mtpa clinker, 1mtpa cement) by 3Q21. Accordingly, Ramco is likely to incur capex of Rs12bn in FY20 (incl maintenance capex). This is likely to result in increase in debt by ~Rs4-5bn by FY20 end (Rs16bn debt at FY19 end). Ramco’s capacity will rise to 20.7mtpa by FY21 end from the current 16.7mtpa.

Valuation and view

While Ramco’s markets (South and East) are seeing both demand and price pressures, Ramco continues to grow ahead of market led by its focus on sustaining cost leadership and capacity expansions (4mtpa by FY21E). The sustained volume growth, lower costs and improved realisations are likely to drive 39% earnings CAGR over FY19-21E. The stock trades at 11.6x FY21E EV/EBITDA and at US$130 on EV/t basis. Outperformer.