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Ramco Cements 3QFY14 results update

February 13, 2014, Thursday, 17:31 GMT | 12:31 EST | 22:01 IST | 00:31 SGT
Contributed by Nirmal Bang


The Ramco Cements’ (TRCL) 3QFY14 net sales at Rs8.4bn were 2% above our estimate but 2% below Bloomberg (BBG) consensus estimate, while EBITDA at Rs1.3bn was in line with our estimate but 5% below BBG consensus estimate. Net cement realisation witnessed a sharp uptick on sequential basis, up 8.8% at Rs4,440/tn. However, sales volume declined 11% QoQ at 1.95mt following weak demand. Cost inflation of Rs130/tn was primarily because of higher raw material prices and increase in employee cost. PAT at Rs260mn was above our estimate of Rs150mn led by higher sale of merchant power and incentive from the West Bengal government. We have retained our estimates and target price of Rs231 with a Buy rating on TRCL considering cost efficiency, premium pricing and being the largest beneficiary of traction in the southern region apart from attractive valuation.
 
Higher realisation, but weak volume: TRCL reported a decline in net sales by 6.9% QoQ (down 3.4% YoY) at Rs8.4bn, primarily because of lower sales volume. Sales volume declined 11% QoQ at 1.95mt on weak demand because of the extended monsoon season and the impact of ban on sand mining in Tamil Nadu. However, over the past one month, cement demand has shown some uptick and is expected to improve further in the coming months, being the beginning of the peak season. Cement realisation witnessed a sharp uptick up 8.8% QoQ (down 2.3% YoY) at Rs4,440/tn (Rs210/tn above our estimate). Cement prices are stable and we expect a rise considering the likely improvement in demand in 4QFY14.
 
Lower operating performance, but in line with expectation: EBITDA fell 36% YoY at Rs1.3bn, EBITDA margin declined 780bps at 15.4% and EBITDA/tn slipped 37.6% YoY at Rs664 because of lower realisation on YoY basis, negative operating leverage following lower sales volume and cost inflation. Employee costs rose 16.8% YoY at Rs299/tn, raw material costs increased 18.7% YoY at Rs740/tn following the import of basic products like gypsum and fly ash. Power and fuel costs declined 5.5% YoY at Rs989/tn, led by the fall in imported coal prices and fuel mix comprising imported coal-49%, pet coke-32% and domestic coal-19%. Overall expenses were up by Rs130/tn against a decline in realisation by Rs106/tn. Hence, EBITDA/tn fell by Rs400 at Rs664/tn.
 
Net profit declines, but above estimate: Following weak operating profit, net profit declined 69% at Rs260mn, but was above our estimate of Rs150mn led by higher other operating income. Other operating income of Rs259mn (against our estimate of Rs150mn) includes income from merchant sale of power, incentive from West Bengal government and sale of scrap.
 
Retain Buy rating on the stock: TRCL’s stock trades at P/E multiple of 7.4x, EV/EBITDA multiple of 5.2x and EV/tn of US$55 on FY16E earnings, which is at a significant discount to its historical average and large-cap stocks’ valuation. Our target price of Rs231 is based on 7xFY16E EV/EBITDA, which is at a ~25% discount to its past 10 years’ average multiple. We have retained our Buy rating on TRCL considering cost efficiency, premium pricing, better operating performance and likely deleveraging of the balance sheet.