For Ramco Cements, demand worsens as woes rise

Heavy rainfall, cyclones and festive holidays in key markets of south and east India impacted demand. Photo: Bloomberg
Heavy rainfall, cyclones and festive holidays in key markets of south and east India impacted demand. Photo: Bloomberg

Summary

Pricing pressures dampened realizations in Q3FY24 and the outlook provides little comfort.

The cement sector is currently being characterized by weak demand and subdued pricing trends. Adding to this, The Ramco Cements Ltd is facing other challenges as well.

To begin with, in the December quarter (Q3FY24), sales volume at 4 million tonnes (mt), rose 10% year-on-year, but fell sequentially, missing estimates. Heavy rainfall, cyclones and festive holidays in key markets of south and east India impacted demand. For Q4FY24, sales volume is seen at 5 mt and 19-20 mt in FY25.

Pricing pressures dampened realizations in Q3FY24 and the outlook provides little comfort. Currently, cement prices in key markets remain under pressure due to muted demand, and may be better in mid-February/March, the management said.

Even so, no fireworks are expected on the margin front. While fuel cost deflation is likely to continue in Q4FY24, margin is expected to remain rangebound, as sequentially weaker prices in Q4 should be offset by operating leverage and softer energy prices, said analysts at Kotak Institutional Equities.

 

 

The broking firm estimates Ebitda per tonne of 948 and 1,037 in FY24 and FY25, respectively, from 991 in Q3FY24.

But Ramco’s specific issues are particularly worrying. Increased thrust on capital expenditure (capex) is feared to keep debt elevated. Capex guidance for FY24 has been revised upwards to 2,000 crore. The management has attributed the rise to the debottlenecking of the Kolimigundla plant and accelerated land acquisition efforts.

For FY25, capex is pegged at 1,700 crore mainly for brownfield expansions. These measures are expected to boost long-term volume growth, but could spell trouble for its balance sheet strength in the short-term, thus prompting earnings downgrades.

In Q3FY24, Ramco’s net debt further increased to 4,993 crore and the average cost of borrowing rose to 7.8% for the first nine months of FY24 from 6.2% in the same period last year. The management believes that net debt at 5,000 crore has peaked and future expansion will predominantly be funded through internal accruals. A key leverage metric – the net debt/Ebitda stood at 3.2x in Q3FY24.

But caution prevails. Yes Securities Ltd notes that Ramco's capex guidance for FY24 and FY25 leaves no room for deleveraging in the near-future. “Therefore, our profit after tax estimates eroded by 2/6/14% for FY24/25/26E over higher interest outgo and the net debt/Ebitda to remain at ~3x till FY26E," said the broking firm.

Ramco’s shares have fallen by over 9% in the past two trading sessions. Bloomberg data shows the stock trades at FY25 EV/Ebitda of nearly 13 times. In the current backdrop, valuations aren’t appealing.

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