ICICI Direct is bullish on Ramco Cements has recommended buy rating on the stock with a target price of Rs 750 in its research report dated January 31, 2019.
ICICI Direct's research report on Ramco Cements
Ramco Cements’ Q3FY19 results were a mixed bag. Revenues increased 14.6% YoY to Rs 1,210.4 crore (below I-direct estimate of Rs 1,241.5 crore) mainly driven by volume growth of 20.8% YoY to 2.75 MT (above I-direct estimate of 2.65MT). Blended realisations were at Rs 4406/t (below I-direct estimates: Rs 4686/t), down 5.1% YoY EBITDA margins declined 460 bps YoY to 17.7% (vs. I-direct estimate of 20.8%) due to ~31% YoY increase in power & fuel cost per tonne to Rs 987/t (mainly led by higher pet coke and coal prices) and lower realisations per tonne (down 5.1% YoY) Power & fuel costs remained higher YoY due to usage of high cost pet coke and coal. However, prices of pet coke and coal have softened now. The benefit of the same should reflect in the coming quarter Net profit declined 17.7% YoY to Rs 101.1 crore (vs. I-direct estimate of Rs 121.4 crore) mainly due to lower operating margins.
Apart from higher penetration in the east, we expect the southern region to witness an upturn mainly led by higher government spending on low cost housing, irrigation in AP & Telangana and revival in the Kerala market (that was impacted by floods in Q2). With this, coupled with capacity expansion, we expect revenues to grow at a CAGR of 15.6% in FY18-20E. In addition, we expect the EBITDA margin to improve from Q4FY19 onwards mainly led by a fall in input costs (benefit of ~Rs 108/tonne). We also expect prices in south to improve by Rs 35-50/bag resulting in healthy traction in margins. The company is currently trading at attractive valuations post recent correction. Hence, we maintain our BUY rating on the stock with an SOTP based target price of Rs 750 (i.e. 14x FY20E EV/EBITDA).
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