Ramco Cement's Q4FY18 results (Outperformer) - Strong volume traction

Q4FY18 result highlights

• Adj. PAT at Rs1.37bn (+2.2% yoy): on higher volumes partly offset by higher costs. Reported PAT at Rs1.09bn (Rs288mn tax provisions).
• Volumes grew 20.2% yoy to 2.74mt: led by higher despatches to East. (+33% yoy; share of east at ~24%) as also robust growth across Southern markets on continued momentum in AP/Telangana, pick up in Tamil Nadu (on improved sand availability) as also steady growth in Karnataka.
• Realizations grew 2.7% yoy at Rs4571 (-Rs35 qoq): Qoq decline was due to weak prices in South on absence of price discipline among players.
• Cost escalations impact cement EBITDA: EBITDA/t at Rs1000, fell 13% yoy (+Rs4/t qoq) due to higher costs (+8.2% yoy; -1.1% qoq) offsetting higher realisations and benefit of positive operating leverage. Cost hike was largely due to higher P&F (+31% yoy; higher petcoke prices) & freight (+18% yoy/+7% qoq; hike in diesel prices).  Hence, cement EBITDA +4% yoy to Rs2.74bn. Wind Power EBITDA saw Rs43mn loss for 4Q18 (Rs20mn loss in 4Q17). Overall EBITDA growth was at 4% yoy to Rs2.68bn.
• Higher East despatches drive FY18 volume growth: by +11.5% yoy to 9.31mt (East +28%yoy; South +7.5%yoy). EBITDA/t fell 18% yoy to Rs1093 on weak realizations (flat yoy) and higher input costs/t (+8% yoy; higher P&F, freight). Hence, EBITDA fell 9.4% yoy to Rs10b. PAT -13% yoy to Rs5.6b.
• Addition of clinker capacity at Jayantipuram: of 1.5 mtpa at a cost of Rs6.8 bn (US$68/ton), likely to be completed by FY20E.

Key positives: Strong volume growth

Key negatives: Rise in P&F, freight costs

Impact on financials: No change – FY19/20E EPS at Rs30/38

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, weak south demand 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 led by investments in both 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 13.4x FY20E EV/EBITDA and at US$170 on EV/t basis. Outperformer.