Ramco Cements: Buy

The Ramco Cements (Ramco), formerly Madras Cements, is a large cement player in the South with a strong brand and cost-efficient business operations. Its stock, which has corrected 30 per cent in the past one year on cement demand concerns, seems a good pick now.

Its current enterprise value of $75/tonne is at a considerable discount to the replacement cost ($140/tonne), and also to that of other cement players in the north ($90-130/tonne).

At ₹185, the stock trades at 14 times estimated per share earnings for 2014-15. The stock has traded in the 8-25 times band in the last three years.

The company has been on the backfoot in the recent past with sales in the nine months ending December 2013, falling 4.5 per cent and profit slipping 67 per cent. But with expectations of a revival in the sector, Ramco should be among the key beneficiaries. Its low-cost operations and 100 per cent captive power capacity should help in the turnaround.

A few factors can drive growth. The good rains last year should stoke demand for housing in rural areas. This, in turn, will aid cement demand.

From the 4.5 per cent growth recorded last calendar, cement demand is expected to grow at least to 6-6.5 per cent in 2014. Also, a new Government, post-elections in April, is expected to act swiftly on project clearances. These apart, Government-led infrastructure activities in Tamil Nadu, strong housing demand in Kerala and an uptick in real estate activities in Bangalore should help Ramco’s volumes.

Also, with the Telangana issue settled, infrastructure and housing projects are expected to get back to focus in Hyderabad and cities in Seemandhra.

Demand recovery should give cement prices a leg-up. Currently, the all-India average cement price is ₹280 for a 50-kg bag, down from ₹300 for a 50-kg bag in the same time last year.

Ramco has a capacity of 12.5 million tonnes (mt) in clinker, but 15 mt in grinding. This excess grinding capacity, put up in strategic market places, has helped the company grow volumes at a faster rate than peers in the last three years. The company expanded volumes at an annual average rate of 7 per cent while the southern market itself grew by only 3.5-4 per cent.

Also, the company is now trying to make inroads into the Eastern market — where demand is high and prices highest in the country. It is setting up a grinding unit in Vizag (one million tpa).

On the margin front, too, Ramco fares better than peers. This is primarily because the entire cement requirement of the company is met by captive power. The company has 157 MW of thermal power capacity and 160 MW of wind power. In fact, it sells some of the excess power to the state grid. The in-house power (thermal) generation saves the company almost ₹2-2.5/unit. With short supply in most states leading to high cost of grid power (₹6.69/unit in 2012-13 in Tamil Nadu), the company benefits significantly from its power generation capacity. For the first nine-months of FY14, the company’s operating margin stood at 18 per cent versus the industry average of 12-15 per cent.

Ramco’s revenue in the December quarter was down three per cent year-on-year to ₹843 crore. This was due to lower realisation (down six per cent) and flat volumes. The company’s net profit was down almost 70 per cent (to ₹26 crore). While power and fuel costs were reined in, higher expenses on transportation and raw materials took a toll on profit. Raw material costs as a percentage of sales rose to 18.7 per cent from 13.6 per cent a year back. High price of fly ash in Tamil Nadu and higher coal costs, too, proved a drag.

That said, higher cement prices in the December quarter compared with the September quarter brought some relief and hope. The December quarter realisation was higher by 7 per cent (at ₹3,056/tonne) on a sequential basis. Prices should improve further with rising demand.