The Ramco Cement Ltd - Improved Realization Supports Profitability; Result Update Q2FY15 :: Edelweiss, PDF link

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Ramco Cements Ltd. (RCEM) reported topline of INR 956.5 cr for Q2FY15, up 3.9% YoY on account of 16.0% YoY growth in realizations even though volumes registered a 11.3% YoY decline. Although revenues were 4.6% lower than our estimate, higher realization helped the company surprise positively on the operating front. Operating margin improved by 513bps QoQ despite higher freight costs on account of restriction on overloading and increasing lead distances. Sequential increase in operating margins helped RCEM beat our PAT estimate by 65.3% (INR 91.7 cr vs our expectation of INR 55.5 cr). The company remains hopeful of revival in domestic cement demand going forward, as the end of AP political logjam and a stable Central Government would lead to improvement in the investment cycle. We believe that being the most cost-efficient cement player would be a key advantage for RCEM during an upturn in the investment cycle.

Realization improvement supports topline growth

RCEM’s topline at INR 956.5 cr was up 3.9% YoY, as a higher-than-expected realization growth of 16.0% QoQ more than offset a 11.3% YoY decrease in volumes. Demand pressure in the company’s key markets persisted during Q2FY15, as construction activity remained muted in most sectors despite positive overall sentiment. However, going forward, a stable Central Government and resolution of the AP political issue would help revive the prospects for the infrastructure sector, consequently fueling incremental demand for cement.

Higher margins offset cost increase

RCEM’s margins in Q2FY14 expanded by 848bps YoY to 23.0%, mainly on the back of higher realizations off-setting cost increases on employee, freight and raw materials front. Freight costs increased on account of restrictions on overloading and higher lead distances. Further, the other expenditure also increased during the quarter even though the company has stopped transfer to the promoter trust and doesn’t foresee any more requirements for the same.

Emphasis on debt reduction and tapping of newer geographies

RCEM remains committed to reducing debt levels going forward and intends to fund all capex requirements from its internal cash flows. But, the current scenario of subdued demand would in the short term impact RCEM’s plans of reducing debt significantly. While we expect margins to improve going forward in line with the anticipated improvement in cement demand and prices, there will be a delay in debt repayment in the short term given the sluggish economic recovery. The company plans limited capex of INR 350 cr for the Vizag grinding unit while INR 50 cr will be spent on the de-bottlenecking of 3 thermal power plants of 6MW each (to help expand thermal capacity by 18MW), which is expected to come on stream by the end of FY15E. Going forward, we believe RCEM would be able to generate enough cash flows to repay its debt owing to the impending improvement in profitability.

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https://www.edelweiss.in/research/The-Ramco-Cement-Ltd--Improved-Realization-Supports-Profitability;-Result-Update-Q2FY15/10005174.html