Buy Ramco Cements; target of Rs 550: Motilal Oswal

Motilal Oswal's research report on Ramco Cements

Strong volume show as expected; PAT beat led by lower tax: On the back of strong spurt in southern demand, TRCL’s volume growth revived to positive zone after seven quarters. 4QFY16 volume was in-line at 2.09m tons (+11% YoY, +28% QoQ). Realization declined 3.7% QoQ (lower than our estimate). Revenue was INR 9.8b, up 2% YoY (in line). Lower tax (reversal-led) drove strong PAT beat – more than doubling to INR 2b. Continued pricing discipline in the South resulted in 59% growth in FY16 EBITDA and 130% growth in FY16 PAT despite flattish revenue. Industry-leading profitability gets further boost from cost savings: Blended EBITDA/ton stood at INR 1,484 (+17% YoY, -1% QoQ). Cement EBITDA was INR 1,493/ton (-2% QoQ, +15% YoY). Dip in realization was offset by 8% QoQ drop (16% YoY drop) in unitary cost to INR 3,211/ton, which got the benefits of (a) lower fuel prices, and (b) positive operating leverage. Margin expanded 1.5pp QoQ to 31.6%.

TRCL offers a strong play on southern recovery, given (a) superior brand, (b) cost efficiencies, aiding industry-leading profitability, and (c) visibility of deleveraging (stared in FY16). Our assumption of 8% volume CAGR (early sign of southern recovery) and 3% price CAGR (already disciplined base) over FY16-18 would drive 14-15% EBITDA/PAT CAGR. The stock trades at an EV of 9.1x FY18E EBITDA and USD118/ton. We maintain Buy, with a target price of INR 550 (valuing Cement business at an EV of USD130/ton or 10x FY18E EBITDA) – 12% upside.For all recommendations, click here Disclaimer: