Ramco Cements Cementing Future Growth With High Capex
Ramco Cements is the flagship company of the Ramco Group, a well -respected business group in South India. The company is the country’s fifth-largest cement producer. Ramco Supergrade is one of the most popular cement brands in South India. The company also produces ready mix concrete (RMC) and dry mortar products and also operates one of the largest wind farms in the country.
The company’s main product is Portland cement and is manufactured in the company’s eight production facilities that includes integrated cement plants and grinding units with a current total production capacity of 16.45MTPA (out if which satellite grinding units capacity is 4MTPA.)
Ramco Cements enjoys a strong presence is southern and eastern India. The company has a high presence in the retail segment and enjoys premium position in the southern market. The company enjoys strong brand recognition among IHB customers because of its deep rural penetration in Tamil Nadu and Kerala compared to its competitors. The company’s brand is considered a Tier-1 brand in Tamil Nadu and Kerala, whereas it is considered a Tier-2 brand in Andhra Pradesh. The company has a new capacity coming up in Kurnool district of Andhra Pradesh which will take its grinding capacity to 18.65MT in South India.
Industry
India is the second-largest cement producer in the world behind China. India’s cement industry is a vital part of the company’s economy and provides employment to over a million people, both directly or indirectly. Indian cement industry has attracted huge investments both from Indian and foreign investors ever since its decontrol in 1989.
The housing and real estate sector is the biggest demand driver for the cement industry and accounts for about 65 percent of the total consumption in India. Public infrastructure is also a key demand driver accounting for 20 percent of total consumption, followed by industrial development at 15 percent.
India’s cement production capacity stood at 502 million tonnes per annum (MTPA) in 2018. The industry is currently producing 280MT in order to meet the domestic demand and 5MT for exports requirement.
India’s cement industry is dominated by a few players with the top 20 companies accounting for 70 percent of the total cement production in the country. 210 large cement plants account for an installed capacity of 250 million MT and smaller plants account for the rest. Of these large 210 plants, 77 are located in Tamil Nadu, Andhra Pradesh and Rajasthan.
The government's initiatives like 'Housing for All' by 2022, combined with opportunities in dedicated freight corridors, ports and other infrastructure projects will aid cement demand in the country. The cement industry is largely regional and its growth prospects depend on consumption demand in key micro-markets, as the addition of capacity pan-India makes it difficult to predict national pricing trends.
The industry is expected to add about 65MT of capacity in the next two years which underlines the importance of regional leadership. The companies with strict cost discipline, healthy balance sheets and judicious expansion plans stand to benefit.
Growth Drivers
South India, from where Ramco Cements gets 70 percent of its volumes, is expected to see an uptick in cement demand aided by irrigation projects in Telangana, Andhra Pradesh, Amravati development, improved sand availability in Tamil Nadu and Kerala. These developments augur well for the company.
The company recently announced one of its biggest capital expenditure programmes worth Rs.3430 crore in a greenfield cement unit in Andhra Pradesh and in brownfield expansion across two states over 24 months. These capacity increases will take the total production capacity of the company to 10MTPA in the state, making it the largest cement producer in the state. The capex will be funded by both internal accruals and debt. When evaluated in the context of demand in southern and eastern regions, Ramco Cements’ capacity additions have been in the regions which do not have concerns of oversupply.
Over the next two years, the company plans to add 4.5MT capacity, which would take its total potential output to 21MT. Almost two-third of the total capacity is integrated, meaning the plant is involved in the entire cement value chain, from mining to cement bagging. For an integrated unit, the funds required to put up a greenfield factory is US$120 for each tonne of capacity. Of the total 4.5MT capacity addition, Ramco will add 2MT in the eastern region and the balance in Andhra Pradesh. The company is currently supplying cement to Odisha via sea. However, the company will commission a new grinding unit in Odisha of 1 MT which will help reduce freight costs.
The Pradhan Mantri Awas Yojana (PMAY), the government’s low-cost housing scheme, has seen only approximately 15 percent of the homes being built in the southern and eastern region. If this number were to increase, Ramco Cements would be in an advantageous position.
The input costs like pet coke and diesel have reduced from their highs and the company will also benefit from the axle load norms with more than 40 percent of the company’s volumes being despatched via roads. This is expected to benefit Ramco by approximately Rs.108/ tonne. The prices of cement are expected to improve in South India by Rs.35-50 per bag, which should lead to margin improvement. The company has a clean balance sheet with a debt-equity ratio of 0.3 having reduced its debt by 50 percent in the last three years.
Challenges
The cement industry will have to gear up to meet new challenges in the future, such as upgrading its technologies for carbon capture and storage. The GHG emissions cannot be brought down to targeted level by only making blended cement.
Worldwide, the cement industry is facing challenges in conserving energy and material resources. The cement companies are striving to increase energy efficiency and use of alternative raw materials and fuels. In a modern cement plant, 60 percent of the CO2 emitted by cement plants is due to limestone, 30 percent from combustion of fuels in the kiln and the remaining 10 percent from other downstream plant operations.
Any unexpected increase in raw material costs could hurt margins for the company and industry. Inaccurate estimation of demand and delay in the beginning of private capex cycle could lead to oversupply.
On March 1, Ramco Cements pledged 21 lakh shares to the disappointment of shareholders. Also, if a new government comes to power in the upcoming general elections, any adverse policy change could hamper the company’s growth prospects.
Financials
On a standalone basis, Ramco Cements reported a total income of Rs.1216.99 crore for the quarter ended December 2018, up 14.64 percent from Rs.1061.52 crore in the corresponding quarter last year. This was on account of increased sales volume of 27.47 lakh tonnes compared 22.74 lakh tonnes a year ago. The company’s net profit for the quarter ended December 2018 stood at Rs.101.07 crore, as against Rs.122.74 in the same period last year. The EBITDA margin for the quarter came in at 17.7 percent, registering a decline of 460 bps YoY from 22.3 percent.
"The industry is expected to add about 65MT of capacity in the next two years which underlines the importance of regional leadership. The companies with strict cost discipline, healthy balance sheets and judicious expansion plans stand to benefit."
On a QoQ basis, the company’s total income came in at Rs.1216.99 for the quarter ended December 2018, registering a growth of 2.31 percent from Rs.1189.45 crore in the previous quarter. The company’s net profit declined 11.54 percent to Rs.101.07 crore in the quarter ended December 2018 from Rs.114.47 crore in the previous quarter.
On the annual front, the company reported consolidated sales of Rs.4456.48 crore in FY18 as against Rs.4007.27 in FY17, registering a growth of 11.20 percent. The company’s consolidated total income came in at Rs.560.22 crore, down 14.36 percent from Rs.654.21 crore in FY17. The PBT came in at Rs.791.28 crore, down 7.65 percent YoY from Rs.856.91 crore.
Conclusion
Ramco Cements has strong presence in the southern region and has a healthy balance sheet and a track record of good operational efficiency. The government's initiatives like 'Housing for All' and increased infrastructure spending augur well for the cement industry. The prices of cement are expected to improve in South India by Rs.35-50 per bag, which should lead to margin improvement for the company.
Ramco Cements huge capacity addition in Andhra Pradesh and deep rural penetration in Tamil Nadu and Kerala are positive signs for growth to return. The recovery of PSU banks after their NPA provisioning will help revive private capital expenditure. By virtue of the above factors, we recommend a HOLD.
