Ramco Cement. Rating: Target price: EPS: Rating CMP. Target BUY. Rs.415. Rs. 360

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1 : price: EPS: How does our one year outlook change? We maintain our positive stance on s (TRCL). The company is one of the largest cement producers in South and remains among the best plays on Southern market demand recovery. We expect EBITDA margins to recover from 18.4% in FY15 to 26% in FY16E led largely by realisation growth and lower cost inflation. We expect TRCL to generate cumulative free cash flows (FCF) of ~Rs. 7-8bn over FY16-17E. With minimal capex over the next two years, we expect TRCL to continue to reduce debt. Net debt to equity to trend down from 1x in FY15 to 0.5x in FY17E. The company has commissioned its 1mt grinding capacity at Vizag, Andhra Pradesh in March This will aid volume growth and logistics cost savings going ahead. We believe company has multiple earnings lever heading into FY16 led by (1) sustenance of cement prices in South led by tight production discipline; (2) volume recovery from 2HFY16E led by pick up of demand in Andhra Pradesh; and (3) cost savings from lower imports of limestone and decline in fuel prices. The stock trades at 8x FY17E EBITDA vs. last seven year average of 7.5x. Given improving profitability and deleveraging, we attribute premium valuations of 9x FY17E EBITDA. Maintain with a TP of Rs. 415/share. How does our 3 year Outlook change? We remain positive on the prospects of the South Cement industry over a three year outlook. With bifurcation of Andhra Pradesh and a stable government at the centre, we anticipate strong demand recovery from FY17E onwards. Despite expectations of a strong demand recovery and lower capacity additions over the next few years, utilizations will increase to ~6 by FY18E from the current 5 levels, leading to lower pricing power for the cement producers. In our view, cement prices in the South will continue to be driven by production discipline which in turn will be led by cost inflation. TRCL with a capacity of 13.5mt will be one of biggest beneficiary from the revival of the South cement industry. Financial summary Year 1QFY16 Update Promoters 42.3 Institutions 38.5 Public 19.2 (%) 1m 3m 12m TRCL Sensex Key estimate revision Revenues (Rs. mn) FY16E EBITDA (Rs. mn) PAT (Rs. mn) EPS FY17E Old New Change Old New Change Revenues 39,606 39, ,946 46, EBITDA 10,167 10, ,335 12, Margin % 25.7% 25.7% 26.3% 26.3% PAT 5,458 5, ,764 6, PAT margin % 13.8% 13.8% 14.4% 14.4% EPS All figures in Rs. mn, except EPS, which is in Rs. Bloomberg Shares o/s Market Cap 7 Aug, 2015 TRCL IN 238mn Rs. 87bn 52-wk High-Low Rs m Avg. Daily Vol Rs. 56mn Index BSE 200 EV/EBITDA (x) EV/t (Rs/t) FY14 36,321 5,116 1, ,656 FY15 35,939 6,622 2, ,489 FY16E 39,606 10,167 5, ,600 FY17E 46,946 12,335 6, ,266 GIRISH CHOUDHARY girish@sparkcapital.in VIJAYARAGHAVAN SWAMINATHAN raghavan@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

2 Quarterly Financial Statements s - Standalone financial results Rs. mn \ Period 30-Jun Jun-14 yoy Growth 31-Mar-15 qoq Growth FY15 FY16E yoy Growth Revenues 9,225 9, % 9, ,939 39, % Material cost 1,830 1, % 1, ,773 6, % Employee cost % % 2,287 2, Freight costs 1,830 2, % 1, % 7,958 8, % Power & Fuel costs 1,457 1, % 1, ,040 6, % Other expenditure 1,257 1, , % 5,259 5, % Adj. EBITDA 2,230 1, % 2, % 6,622 10, % Margins 24.2% 14.8% 24.8% 18.4% 25.7% Other income % ,379 1, % Interest % ,938 1, % Depreciation % % 2,499 2, % PBT 1, % 1, % 3,564 7, % Tax % % 1,141 1, % Effective tax rate 29.2% 40.1% PAT % % 2,424 5, % Margins 10.6% 3.9% 9.7% 6.7% 13.8% EPS (Rs.) % % % Page 2

3 3,601 3,679 3,773 3,699 3,798 3,839 3,846 4,001 4,007 4,323 4,090 4,236 4,588 4,570 5,121 5,021 Quarterly Focus Charts Volume trends Realisation trends % % 2.2-4% % % % -15% % -5% -1-15% 5,000 4,500 4,000-14% -3% -2% 1% 15% 6% 25% 19% ,500-2 Volumes (mt) % Y-o-Y growth Realisation (Rs./t) % Y-o-Y growth Total Cost/t trends EBITDA/t trends 4,000 3,800 3,600 6% 7% 9% 7% 5% 9% 2% 4% 1 8% 6% 4% 2% 1,400 1,200 1, ,281 1,175 3,400 0 Total Cost (Rs./t) % Y-o-Y growth EBITDA (Rs./t) Page 3

4 Financial Summary Abridged Financial Statements Key metrics Rs. mn FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E Profit & Loss Operational metrics Revenues 36,321 35,939 39,606 46,946 Sales volumes (mt) EBITDA 5,116 6,622 10,167 12,335 Realisations/tonne 4,100 4,564 5,021 5,196 Other Income 1,371 1,379 1,421 1,468 EBITDA/tonne ,268 1,348 Depreciation 3,063 2,499 2,560 2,570 Growth ratios EBIT 3,425 5,502 9,028 11,233 Revenues -4.1% -1.1% 10.2% 18.5% Interest 1,881 1,938 1,751 1,571 EBITDA -46.9% 29.4% 53.5% 21.3% PBT 1,543 3,564 7,278 9,662 PBT -73.8% 130.9% 104.2% 32.8% Exceptionals loss/(income) PAT -65.9% % 23.9% Tax 166 1,141 1,819 2,899 Margins Ratios PAT after exceptionals 1,377 2,424 5,458 6,764 EBITDA 14.1% 18.4% 25.7% 26.3% Balance Sheet PBT 4.2% 9.9% 18.4% 20.6% Networth 24,821 26,452 31,357 37,290 PAT 3.8% 6.7% 13.8% 14.4% Total Debt 29,288 27,119 24,119 21,119 Performance Ratios Deferred Tax 7,374 8,271 8,271 8,271 Net Debt to Equity (x) Total Networth & Liabilities 61,482 61,841 63,746 66,680 RoAE (%) 6% 9% 19% 2 Gross Block 66,754 72,005 74,755 77,505 RoCE (%) 6% 7% 12% 14% Net Block + CWIP 49,953 51,382 51,571 53,251 Gross Asset Turnover (x) Investments 2,834 3,558 3,558 3,558 Valuation metrics Net working capital (ex cash) 8,249 6,283 7,562 8,814 Shares Outstanding (mn) 238 Cash ,055 1,056 Market Cap (Rs. mn) 85,708 85,708 85,708 85,708 Net working capital 8,695 6,901 8,617 9,870 Core Enterprise Value (Rs. mn) 1,08,109 1,06,023 1,02,523 98,022 Total Assets 61,482 61,841 63,746 66,680 EV/EBITDA (x) Cash Flows Core EV/t (Rs) 8,656 8,489 7,600 7,266 Cash flows from operating 4,781 9,417 8,490 9,652 P/E(x) Cash flows from investing (5,405) (5,065) (2,750) (4,250) P/B (x) Cash flows from financing 528 (4,179) (5,304) (5,401) FCF yield % -2.9% 2.8% 4.7% 4.5% Free Cash Flows after interest (2,506) 2,413 3,990 3,831 Dividend yield (%) 0.3% 0.4% 0.6% 0.8% Page 4

5 Recommendation History 450 Ramco cement Aug-12 Jan-13 Jun-13 v-13 Apr-14 Sep-14 Feb-15 Jul-15 Historical Report Date (Rs.) TP (Rs.) Recommendation 09/Jul/ Buy 01/Jun/ Add 16/Mar/ Add 06/Feb/ Add 06/v/ Add 28/Jul/ Add 23/May/ Add 21/Mar/ Buy 12/Feb/ Buy 12/Dec/ Buy 23/Oct/ Add 30/Jul/ Buy Report Date (Rs.) TP (Rs.) Recommendation 01/Jul/ Buy 31/May/ Buy 28/Mar/ Add 13/Feb/ Buy 05/v/ Buy 20/Sep/ Add 08/Aug/ Add 04/Aug/ Add 02/Jul/ Reduce Page 5

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