Event Update The Ramco Cements 21 December 2018 Reuters: TRCE.BO; Bloomberg: TRCL IN Capacity Expansion To Boost Its Presence In Andhra & Telangana The Ramco Cements (TRCL) has announced 3.15mt cement capacity greenfield expansion in Kurnool district of Andhra Pradesh (AP) in South India. This is in addition to the satellite grinding units that will be commissioned in FY20 (see details below). The integrated unit in Kurnool will have a clinker capacity of 1.8mt. This will help TRCL in addressing the clinkerconversion mismatch and also boost its presence in the strong markets of AP and Telangana. TRCL is addressing its key power requirement for the new capacity by adding 18MW captive power unit and ~20MW of waste heat recovery system. Further, the unit is backed by a railway siding that will help control logistics cost. TRCL is progressing smoothly in commissioning its new grinding unit at Jajpur in Odisha (0.9mt by 2HFY20), expansion of Kolaghat (West Bengal) grinding unit to 2mt (by 1QFY20) and adding 1mt capacity at its Vizag grinding unit (by 4QFY20). After this entire capital expenditure, TRCL s cement capacity will jump to 24mt (with 13.4mt clinker capacity). The capex that will be incurred on new capacity addition (3.15mt) in AP is ~Rs15bn. This, along with the pending capex announced earlier (grinding units) and expansion of clinker facility at Jayantipuram (AP),implies a total capex of ~Rs35bn till FY20E/FY21E. The capex will be largely funded by internal accruals. We have, however, assumed a debt component of Rs7bn to complete the capex. We have factored in only a marginal impact of the earlier capex in FY20E, but factored in the same in FY21E. We are factoring only a limited impact of the new capex at Kurnool in FY21E (largely to the extent of benefits of clinkerisation) as we factor in some delay in completion and additionally higher gestation period for the greenfield project to stabilise. Hence, our FY21 estimates have been marginally revised upwards. We have retained Buy rating on TRCL with an target price of Rs741 ( from Rs680 earlier). Gaining sizeable presence in AP/Telangana: TRCL is steadily gaining a greater presence (proportion in total volume by capacity) in the strong AP/Telangana markets where relatively it had a weak presence (22% in FY16). With the grinding unit Vizag and new capacity addition in Kurnool, TRCL will gain a sizeable presence (37% in FY21E) in AP and Telangana markets. Additionally, it will also address clinker requirement in the eastern region at a rationalised logistics cost as compared earlier. Steadily moving towards a balanced clinker conversion ratio: TRCL had announced the clinker expansion earlier at Jayantipuram (AP) by 4QFY20. The new capacity addition at Kurnool is also expected to get completed at the same time. With incremental 3.3mt (1.5mt at Jayantipuram and 1.8mt new greenfield capacity) clinker capacity, TRCL will address clinker shortage in a major way in the strong growth markets. Further, this will also help TRCL to increase its presence in the eastern region with the help of higher utilisation of its grinding units with better cost management (reducing the inward logistics cost of clinker). Capex funding largely through internal accruals: TRCL plans to fund ~Rs35bn capex largely through internal accruals. With annual cash generation of ~ Rs10bn (in FY19E) and a steady growth rate, the capex can be funded without debt. However, assuming the worst-case scenario, we have factored in a debt of Rs7bn for capex completion. This will only marginally impact the debt- equity ratio from 0.15x to 0.3x in FY20E/FY21E. Further, with the strong interest coverage ratio (~8x/10x) the additional debt (based on our assumption) is unlikely to impact the balance sheet health in a major way. Limited earnings accretion in FY21E, full impact post FY21E: Though the intended capex is expected to be completed by FY20 factoring in the delay and higher stabilisation for the greenfield project, we have taken only a marginal contribution from the new capacities in FY21E (we have already factored in the contribution from new grinding units in our FY20/FY21 estimates). Hence we have maintained our FY19/FY20 earnings estimates and only marginally revised upwards our FY21 EPS estimate to Rs37.5 (from Rs36.3 earlier) factoring in lower operational benefits and the impact of interest cost/depreciation. We have valued TRCL at a replacement cost of Rs9.4bn/mt assigned it to average operating cement capacity of 18.7mt (based on expanded clinker capacity in September 2020E)) and excess grinding capacity (5mt) at Rs2.5bn to arrive at a target price of Rs741 (revised from Rs688 earlier). We believe TRCL s performance largely correlates with its home markets like Tamil Nadu and Kerala which are reviving and help TRCL to outperform its peers. Further, it is adding structural strength by focusing on regional diversification (eastern region) and cost-tightening measures. The current performance (because of a combination of tepid realisation and escalated costs) is expected to recover as demand from core markets revives. We have retained Buy rating on TRCL. At our target price of Rs741, the stock trades at EV/EBITDA of 13.3x September 2020 estimated earnings. BUY Sector: Cement CMP: Rs633 Target Price: Rs741 Upside: 17% Milind Raginwar Research Analyst milind.raginwar@nirmalbang.com +91-22-6273 8172 Key Data Current Shares O/S (mn) 235.6 Mkt Cap (Rsbn/US$bn) 148.2/2.1 52 Wk H / L (Rs) 879/546 Daily Vol. (3M NSE Avg.) 272,191 Price Performance (%) 1 M 6 M 1 Yr The Ramco Cements 0.2 (8.7) (20.7) Nifty Index 1.5 0.1 3.0 Source: Bloomberg
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Exhibit 1: Financial key data Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net sales 39,302 43,851 48,220 54,367 68,105 growth (%) 10.7 11.6 10.0 12.7 25.3 EBITDA margin (%) 29.4 24.5 22.5 23.9 23.0 Adjusted net profit 6,493 5,525 6,317 7,626 8,835 versus consensus - - 16.7 10.2 (2.4) EPS (Rs) 27.3 23.3 26.8 32.4 37.5 growth (%) 19.8 (14.5) 14.9 20.7 15.9 P/E (x) 23.2 27.1 23.6 19.6 16.9 P/B (x) 4.1 3.7 3.2 2.8 2.5 EV/EBITDA (x) 13.9 14.8 14.5 12.7 10.5 D/E (x) 0.3 0.2 0.1 0.3 0.2 RoE (%) 19.2 14.4 14.6 15.5 15.6 RoCE (%) 17.3 14.8 14.6 15.9 15.9 Dividend yield (%) 0.5 0.5 0.5 0.5 0.5 Source: Company, Nirmal Bang Research Exhibit 2: Prudent capacity addition aided TRCL s performance in the past (MnT) 30 Capacity Vs Production 25 20 15 10 5 0 Cement Capacity (MnT) Cement Produced (MnT) Source: Company, Nirmal Bang Research Exhibit 3: Presence in strong AP and Telangana markets improving steadily alongside markets in eastern region Capacity across regions before proposed expansion 2% 22% 6% East Capacity across regions post proposed expansion 1% 12% East Tamil Nadu 37% Tamil Nadu AP AP 70% Karnataka 50% Karnataka Source: Company, Nirmal Bang Research 2 The Ramco Cements
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Exhibit 4: Timely capacity addition helped TRCL to improve its presence in home market and add new markets 3.50 New capacity addition 3.00 2.50 2.00 1.50 1.00 Target Markets 0.50 0.00 Source: Company, Nirmal Bang Research Exhibit 5: Our revised earnings estimates (Rsmn) Old New Change (%) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Net sales 48,435 53,991 62,864 48,220 54,367 68,105 (0.4) 0.7 8.3 Operating profit 10,856 12,720 14,538 10,851 12,990 15,696 (0.0) 2.1 8.0 Net profit 6,320 7,622 8,552 6,317 7,626 8,835 (0.1) 0.1 3.3 EPS (Rs) 26.8 32.4 36.3 26.8 32.4 37.5 (0.1) 0.1 3.3 Target price (Rs) 680 741 Rating Buy Buy Source: Company, Nirmal Bang Research 3 The Ramco Cements
Apr-08 Aug-08 Jan-09 Jun-09 Nov-09 Mar-10 Aug-10 Jan-11 Jun-11 Oct-11 Mar-12 Aug-12 Jan-13 May-13 Oct-13 Mar-14 Aug-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Dec-16 May-17 Oct-17 Mar-18 Jul-18 Dec-18 Apr-08 Aug-08 Jan-09 Jun-09 Nov-09 Mar-10 Aug-10 Jan-11 Jun-11 Oct-11 Mar-12 Aug-12 Jan-13 May-13 Oct-13 Mar-14 Aug-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Dec-16 May-17 Oct-17 Mar-18 Jul-18 Dec-18 Exhibit 6: One-year forward EV/EBITDA (Rs) 1,000 800 600 400 200 0 Source: Company, Nirmal Bang Research Price 8 10 12 14 Exhibit 7: One-year forward EV/tn (Rs) 800 600 400 200 0 Price $80 $100 $120 $140 $160 Source: Company, Nirmal Bang Research 4 The Ramco Cements
Financials Exhibit 8: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net sales 39,302 43,851 48,220 54,367 68,105 Growth (%) 10.7 11.6 10.0 12.7 25.3 Operating expenses (27,731) (33,101) (37,369) (41,378) (52,409) EBITDA 11,571 10,750 10,851 12,990 15,696 Growth (%) 10.2 (7.1) 0.9 19.7 20.8 Depreciation & amortisation (2,655) (2,922) (2,746) (2,614) (3,514) EBIT 9,537 8,407 8,722 11,022 12,857 Other income 621 579 616 646 676 Interest paid (1,035) (592) (524) (1,016) (1,129) Extraordinary/\exceptional items PBT 8,501 7,815 8,198 10,006 11,728 Tax (2,009) (2,290) (1,882) (2,379) (2,893) Effective tax rate (%) (23.6) (29.3) (23.0) (23.8) (24.7) Net profit 6,493 5,525 6,317 7,626 8,835 Minority interest 0 0 0 0 0 Reported net profit 6,493 5,525 6,317 7,626 8,835 Non-recurring items 0 0 0 0 0 Adjusted net profit 6,493 5,525 6,317 7,626 8,835 Growth (%) 19.8 (14.9) 14.3 20.7 15.9 Source: Company, Nirmal Bang Research Exhibit 10: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Cash & bank balances 1,181 1,194 910 754 881 Other current assets 14,392 13,387 16,362 19,170 24,024 Investments 1,483 1,539 1,393 1,394 1,394 Net fixed assets 52,395 54,155 57,584 70,652 75,272 Goodwill & intangible assets 638 575 815 1,055 1,295 Other non-current assets 0 0 0 0 0 Total assets 70,088 70,850 77,064 93,025 102,867 Current liabilities 14,731 12,783 15,313 16,283 18,025 Borrowings 11,496 10,117 7,767 15,467 15,067 Other non-current liabilities 7,281 7,597 8,097 8,597 9,097 Total liabilities 33,509 30,496 31,177 40,346 42,188 Share capital 238 236 236 236 236 Reserves & surplus 36,341 40,171 45,652 52,443 60,443 Shareholders' funds 36,579 40,354 45,888 52,679 60,679 Minority interest 0 0 0 0 0 Total equity & liabilities 70,088 70,850 77,064 93,025 102,867 Source: Company, Nirmal Bang Research Exhibit 9: Cash flow Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Pre-tax profit 8,501 7,815 8,198 10,006 11,728 Depreciation 2,347 2,556 4,224 4,284 5,857 Chg. in working capital 102 (1,197) (2,599) (2,336) (3,625) Total tax paid (1,882) (1,975) 422 (1,382) (1,879) Other operating activities 0 0 0 0 0 Operating CF 9,068 7,199 10,245 10,572 12,080 Capital expenditure (2,625) (4,254) (7,893) (17,593) (10,718) Chg. in investments (42) (56) 145 (1) 0 Other investment activities 0 0 0 0 0 Investing CF (2,667) (4,309) (7,748) (17,594) (10,718) FCF 6,401 2,890 2,497 (7,021) 1,363 Equity raised/(repaid) 0 (56) 53 0 0 Debt raised/(repaid) (5,358) (1,380) (2,350) 7,700 (400) Dividend (incl. tax) (757) (598) (484) (835) (835) Other financing activities (13) (843) 0 0 0 Financing CF (6,128) (2,876) (2,781) 6,865 (1,235) Net chg. in cash & bank bal. 273 13 (284) (156) 127 Closing cash & bank bal. 1,181 1,194 910 754 881 Source: Company, Nirmal Bang Research Exhibit 11: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Profitability and return ratios (%) EBITDAM 29.4 24.5 22.5 23.9 23.0 EBITM 24.3 19.2 18.1 20.3 18.9 NPM 16.5 12.6 13.1 14.0 13.0 RoE 19.2 14.4 14.6 15.5 15.6 RoCE 17.3 14.8 14.6 15.9 15.9 RoIC 13.8 11.0 11.7 12.5 12.3 Per share data (Rs) O/s shares 238.1 236.9 235.6 235.6 235.6 EPS 27.3 23.3 26.8 32.4 37.5 FDEPS 27.3 23.3 26.8 32.4 37.5 CEPS 38.4 35.7 38.5 43.5 52.4 BV 153.6 170.4 194.8 223.6 257.5 DPS 3.0 3.0 3.0 3.0 3.0 Valuation ratios (x) P/E 23.2 27.1 23.6 19.6 16.9 P/BV 4.1 3.7 3.2 2.8 2.5 EV/EBITDA 13.9 14.8 14.5 12.7 10.5 EV/Sales 4.1 3.6 3.3 3.0 2.4 Other key ratios D/E (x) 0.3 0.2 0.1 0.3 0.2 DSO (days) 52 37 41 42 43 DuPont analysis - RoE NPM (%) 16.5 12.6 13.1 14.0 13.0 Asset turnover (x) 0.6 0.6 0.7 0.6 0.7 Equity multiplier (x) 2.1 1.8 1.7 1.7 1.7 RoE (%) 19.2 14.4 14.6 15.5 15.6 Source: Company, Nirmal Bang Research 5 The Ramco Cements
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 2018 Buy 796 887 24 May 2018 Buy 798 894 6 June 2018 Buy 746 894 3 August 2018 Buy 679 813 31 October 2018 Buy 596 688 21 December 2018 Buy 633 741 Rating track graph 900 850 800 750 700 650 600 550 500 Not Covered Covered 6 The Ramco Cements
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