Ramco Cement's Q1FY19 results (Outperformer) - Higher costs impact earnings; volume traction strong

Q1FY19 result highlights

• Adj. PAT at Rs1.25bn (-19.8% yoy): as sharp rise in costs (notably P&F and freight) offset strong volume growth.
• Volumes growth strong at 21.6% yoy to 2.61mt: led by higher despatches to East. (+14% yoy; share of east at ~25%) as also robust growth across Southern markets on continued momentum in AP/Telangana, pick up in Tamil Nadu (normalization of sand availability, low base) as also steady growth in Karnataka. However, demand in Kerala was weak particularly during Jun-18 due to heavy monsoons.
• Realizations fell 1.5% yoy at Rs4,537 (-Rs34 qoq): Qoq decline was due to weak prices in South on absence of production discipline amongst players. Additionally, realizations were also impacted by poorer geographical mix (lower volumes in Kerala, higher share of East).
• Cost escalations impact cement EBITDA: EBITDA/t at Rs845, fell 29% yoy (-Rs155/t qoq) due to higher costs (+8% yoy; +3.3% qoq) offsetting benefit of positive operating leverage. Cost hike was largely due to higher P&F (+25.4% yoy; higher petcoke prices, higher clinker production as also exhaustion of low cost inventory) and freight (+20.7% yoy/+5.5% qoq; hike in diesel prices, increase in leads due to higher despatches to East).  Hence, cement EBITDA fell 14% yoy to Rs2.21bn.
• Wind Power EBITDA: declined 36% yoy to Rs141mn on lower volumes and higher costs. Hence, overall EBITDA fell 14.2% yoy to Rs2.16bn.

Key positives: Strong volume growth

Key negatives: Rise in P&F, freight costs

Impact on financials: FY19/20E EPS cut by 13%/8% to Rs25/33

Valuation and view

Ramco, a premium player in South India, has gained market share and undertaken cost efficiency initiatives, which has led to sharp earnings growth momentum over the past few years. While there are near term headwinds in form of high earnings base and higher fuel prices (likely to restrict near term earnings growth), we believe long term growth drivers are in place led by demand revival in the South, particularly in AP and Telangana as also deeper penetration into the East. Ramco continues to focus on maintaining its cost leadership position and sustained free cash flow generation. Stock trades at 13x FY20E EV/EBITDA and at US$127 on EV/t basis. Outperformer.