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MOSL: THE RAMCO CEMENTS: Cost under control; volume growth surprises

.  THE RAMCO CEMENTS: Cost under control; volume growth surprises

(TRCL IN, Mkt Cap USD2.2b, CMP INR752, TP INR785, 4% Upside, Downgrade to Neutral)

Aims at 15% volume growth in FY23; downgrade to Neutral from Buy

• Strong volume growth (up 55% YoY and 13% above our estimate), along with controlled costs (variable cost up a mere INR75/t QoQ), aided the significant beat from our estimate. EBITDA and OPM stood at INR3b and 17% (est. INR2.4b and 15%), respectively. Profit stood at INR1.1b (est. INR0.7b).
• The management expects volume growth of 15% in FY23 and a decline in energy costs from 3Q after an increase of 5-6% in 2Q. We raise our FY23/FY24 EBITDA estimate by 7%/8% on higher volumes. We raise our FY23/FY24 profit estimate by 18%/10%.
• Net debt is expected at INR41.5b/INR36.6b in FY23/FY24 v/s INR37.3b in FY22. Valuation at 13.9x EV/EBITDA factors in an earnings recovery in FY24E. We downgrade our rating to Neutral from Buy earlier.

Increased share of volumes in East India, blended EBITDA/t at INR908

• Revenue/EBITDA/PAT stood at INR17.7b/INR3b/INR1b (+44%/-17%/-34% YoY and 11%/25%/56% above our estimate). Cement realization fell 6% YoY and 1% QoQ (2% below our estimate).
• OPEX/t rose 10% YoY (4% below our estimate), led by a 38% rise in variable cost. Other expense/employee cost per tonne declined by 13%/33% YoY on higher volumes.
• EBITDA fell 17% YoY on lower realization and higher costs, with a 12.7pp contraction in OPM. Cement EBITDA/t fell 47% YoY and 7% QoQ to INR867 (est. INR782). Depreciation/interest expenses rose 11%/95% YoY. Net profit declined by 34% YoY.

Highlights from the management commentary

• Volume growth was led by higher sales in East India (over 30% of total sales volumes v/s ~20% in 4QFY22). Cement prices remained volatile in South India. Increased competition is restricting price increases.
• The company is carrying four months of coal inventory. There could be 5-6% rise in energy costs in Jul-Aug'22, but it should start falling from Sep'22.

Valuation appear rich; downgrade to Neutral

• Cement prices have remained under pressure in South India, despite cost pressures. We expect prices to recover only in 4QFY23.
• The debt increase has been higher than our earlier estimates. We now expect a FY23/FY24 net debt/EBITDA ratio of 3.8x/2.4x v/s 1.9x/2.9x in FY21/FY22. Capex in FY23 is estimated at INR8.6b v/s INR6.5b indicated in May'22.
• Valuation at 13.9x FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 14x) appears rich. Profitability needs to improve significantly to generate historical return ratios (RoCE of 7% in FY24E v/s an average of 10% over FY12-22). We value the stock at 14.5x FY24 EV/EBITDA and downgrade our rating to Neutral from Buy with a TP of INR785 (upside of 4% from its CMP), as we await a better entry point.