Motilal Oswal's research report on Ramco Cements
The management is optimistic on long-term cement demand and expects the industry to grow 7-8% in FY17. During the first two quarters of FY16, the southern markets declined 12%. However, demand in AP and Telangana picked up in 2HFY16, leading to 8% growth. For FY16, the decline was 5%. FCF in FY16 was INR8.3b. With no immediate expansion plans, the visibility of deleveraging is strong. In FY16, TRCL reduced borrowings by INR5.1b, leading to net D/E of 0.7x versus 1x in FY15. FY16 saw cost moderation of 8%, led by lower power, fuel and freight costs, which was partially offset by higher limestone cost. TRCL commissioned the 6MW thermal power plant project at Ariyalur in 4QFY16. With this, the aggregate capacity of its thermal power plants has gone up from 157MW to 163MW. Capital efficiencies (RoIC/RoE) were up 6.1bp/10bp, largely driven by strong volume boost in the third and fourth quarters. TRCL offers a strong play on southern recovery due to (a) superior brand, (b) edge on cost efficiencies, aiding industry-leading profitability, and (c) visibility of deleveraging (started in FY16). The stock trades at an EV of 9.6x FY18E EBITDA and USD129/ton. We maintain Buy with a TP of INR625 (valuing the cement business at an EV of USD144/ton and 11x FY18E EBITDA) – 12% upside. TRCL offers a strong play on southern recovery, given (a) its superior brand, (b) capacity of 13m tons, (c) cost efficiencies, aiding industry-leading profitability, and (d) visibility of deleveraging (started in FY16).
We expect demand to sustain and pricing to gradually improve in 2HFY17. Slowing capacity additions and increasing consolidation in the industry would support longterm cement prices. Our assumptions 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 9.6x FY18E EBITDA and USD129/ton. We maintain Buy, with a target price of INR625 (valuing the Cement business at an EV of USD144/ton or 11x FY18E EBITDA) – 12% upside.
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