Ramco Cement's Q3FY20 results (Downgrade to Neutral) - Performance ahead of peers, valuations bake in positives

Q3FY20 result highlights

• Adj. PAT declined 2% yoy to Rs992mn: due to sluggish volumes and higher costs.
• Muted volume growth: at 3.5% yoy to 2.84mt weak demand in core markets on monsoons and slower project execution. However, East saw an uptick in demand towards the end of the quarter. However, Ramco grew ahead of industry led by market share gains as also higher exports (+21% yoy).
• Realizations +1.9% yoy: to Rs4487/t led by price hikes in 1HCY19. However, on qoq basis, realisations dropped by Rs234/t (-5% qoq) due to sharp price drop (~Rs20/bag) in South and East.
• Higher costs (+4.2% yoy) impact EBITDA/t: to Rs726 (-Rs270/t qoq). Cost escalations were largely due to 11% yoy increase in RM costs, 21% increase in inter-unit clinker transfer costs and 17% increase in other costs (sustained mktg spend). This was partially offset by 8% yoy decline in P&F costs to Rs911/t driven by lower petcoke prices and 2% yoy decline in freight costs to Rs996/t (lower lead distances & diesel prices). Hence, cement EBITDA fell 5.5% yoy to Rs2.06bn.
• Wind Power EBITDA loss of Rs34mn: vs Rs44mn in 3Q19 on 57% yoy drop in volumes. Overall, EBITDA fell 5.2% yoy to Rs2.03bn.
• Capex on track, debt rises: Capex for capacity expansions are on track, with Rs18.4bn incurred of the Rs35.3bn capex (see page 2 for details). Accordingly, debt has increased from Rs24.4bn at end of 2QFY20 to Rs26.8bn at the end of 3QFY20.

Impact on financials: Cut FY20/21E EPS by 7.5% and 5% to Rs27/33

Valuation and view

Despite weak industry dynamics on both demand and price, Ramco has delivered a decent performance, ahead of industry, driven by deeper distribution and reach efforts and sustained cost leadership. Both South and East markets are seeing improvement in demand trajectory, with positive movement in prices (East +Rs10/bag in Jan-20). This would bode well for Ramco, which is expanding its capacity by 3.75mtpa clinker and 4mtpa cement capacity in AP and East (2mtpa each) over FY20-21E. Accordingly, sustained volume growth coupled with cost efficiencies are likely to drive 23% earnings CAGR over FY19-21E. However, the valuations at 14x FY21 EV/EBITDA and US$143 on EV/t basis are factoring in all the positives. Hence, we downgrade the stock to a Neutral with a 12-month price target of Rs785.