Ramco Cement's Q2FY20 results (Outperformer) - Strong performance in challenging environment

Q2FY20 result highlights

• Adj. PAT up 40% yoy to Rs1.69bn: led by strong volume growth.
• Strong volume growth: of 10.3% yoy to 2.72mt largely driven by market share gains in certain Southern states and 39% yoy growth in export volumes (1H20). East volumes were likely muted on monsoons & floods.
• Realizations +1.8% yoy: to Rs4720/t led by price hikes in South in Feb-19 and Apr-19. However, on qoq basis, realisations have dropped by Rs321/t (-6%) due to sharp price corrections in 2Q20 across Ramco’s key markets of South and East.
• Cost efficiencies drive 15% yoy growth in EBITDA/t: to Rs991 (-Rs276/t qoq). Costs declined by 1.3% yoy to Rs3745/t (-45/t qoq). Lower costs were largely driven by decline in freight costs by 9.5% yoy (-5% qoq) to Rs990/t on lower lead distances (lower East sales), lower diesel prices & higher axle load benefits. However, this was partially offset by 4% yoy increase in P&F costs (+Rs11/t qoq) due to use of higher priced petcoke inventory, +5.2% yoy in employee costs (provision for lower bond yields on retiral benefits) and +2.6% yoy in other expenses (higher ad & promotional costs). Hence, cement EBITDA increased 27% yoy to Rs2.71bn.
• Wind Power EBITDA fell 25% yoy to Rs257mn: on 4% drop in volumes and 18% drop in realisations. Overall EBITDA +20% yoy to Rs2.97bn.

Impact on financials: No change to FY20/21E EPS of Rs32.3/38.6

Valuation and view

Ramco, a premium player in South India, has demonstrated a strong performance in the quarter by witnessing ahead of industry volume growth and cost efficiencies, offsetting the decline in realisations. We believe demand will see gradual improvement led by uptick in govt projects and thereby prices. On the other hand, Ramco continues to grow ahead of market on back of its cost leadership. Upcoming capacity expansions of 3.75mtpa clinker and 4mtpa cement capacity in AP and East (2mtpa each) will drive sustained volume momentum. Overall, Ramco continues to focus on maintaining its cost leadership position and sustained free cash flow generation (capex via internal accruals). The volume growth, lower costs and improved realisations are likely to drive 33% earnings CAGR over FY19-21E. The stock trades at 11.5x FY21E EV/EBITDA and at US$134 on EV/t basis. Maintain Outperformer.