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Ramco Cem: Sluggish cement demand in South India - Views on News from Equitymaster
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Ramco Cem: Sluggish cement demand in South India
Feb 9, 2015

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the quarter ended December 2014. The company's sales and net profits have reported a decline of 6.7% YoY and 10.3% YoY respectively during the third quarter of FY15 (3QFY15). Here is our analysis of the results:

Performance summary
  • Net sales decline by 6.7% YoY during the quarter ended December 2014 (3QFY15).
  • The fall in operating profits was steeper as operating margins contracted from 15.3% in 3QFY14 to 12.7% in 3QFY15.
  • At the bottomline level, net profit declined by 10.3% YoY during the quarter.

Performance Snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 8,426 7,861 -6.7% 27,078 26,325 -2.8%
Expenditure 7,133 6,860 -3.8% 22,643 22,089 -2.4%
Operating profit (EBITDA) 1,293 1,001 -22.6% 4,435 4,236 -4.5%
EBITDA margin 15.3% 12.7%   16.4% 16.1%  
Other income 274 317 15.6% 742 1001 35.0%
Depreciation 767 626 -18.3% 2,290 1,877 -18.0%
Interest 464 485 4.6% 1386 1465 5.7%
Profit before tax 337 206 -38.8% 1,500 1,895 26.4%
Tax 81 (24) NA 373 406 8.9%
Effective tax rate 24.1% NA   24.8% 21.4%  
Profit after tax 256 230 -10.3% 1,127 1,489 32.1%
PAT margin 3.0% 2.9%   4.2% 5.7%  
Extraordinary gain/(loss) - -   - -  
Net profit 256 230 -10.3% 1,127 1,489 32.1%
Net profit margin 3.0% 2.9%   4.2% 5.7%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         7.3  
P/E (times)*         46.6  
*trailing twelve month earnings

What has driven performance in 3QFY15?
  • During the quarter ended December 2014 (3QFY15), The Ramco Cements reported a drop in topline growth owing to muted sales and lower realisations.

  • Barring Power and Fuel expenses, all major cost heads witnessed an increase. As a result, the company's operating (EBITDA) margins contracted from 15.3% in 3QFY14 to 12.7% in 3QFY15.

    Operating Cost break-up
    (Rs m) 3QFY14 3QFY15 Change
    Raw Material Consumption 1,333 1,178  
    Change in Inventory (29) 89  
    Total Raw Material Cost 1,304 1,267 -2.8%
    % of net sales 15.5% 16.1%  
    Employee Cost 582 567 -2.6%
    % of net sales 6.9% 7.2%  
    Power Fuel 1,787 1,572 -12.0%
    % of net sales 21.2% 20.0%  
    Transportation Handling 2,207 2,150 -2.6%
    % of net sales 26.2% 27.3%  
    Other Expenditure 1,253 1,304 4.1%
    % of net sales 14.9% 16.6%  
    Total operating expenditure 7,133 6,860 -3.8%
    % of net sales 84.7% 87.3%  

  • Other income increased by 15.6% YoY during the quarter.

  • While depreciation charges declined by 18.3% YoY, interest expenses grew by 4.6% YoY.

  • As against tax expenses of Rs 81 million during 3QFY14, there was net tax credit of Rs 24 million during the current quarter. As a result, the fall in the bottomline was not as steep as the fall in the operating profit. Net profit decreased by 10.3% YoY. Net profit margin contracted from 3% in 3QFY14 to 2.9% in 3QFY15.
What to expect?
The subdued performance during the quarter reflect the overall sluggish demand environment in the company's key markets of South India. During the nine month period ended December, there was a 2.8% drop in the topline. However, profits during the period went up by 32.1% YoY.

Over the long term, the company stands to benefit from the expected boost to infrastructure activities on account of the bifurcation of the state of Andhra Pradesh and the likelihood of revival in construction activity owing the new central government's thrust on housing and infrastructure development. Once the demand cycle revives and capacity utilization rates improve in the region, it will also result in better cement realisations and margins.

At the current price, the stock is trading at 46.6 times its trailing twelve month standalone earnings. We maintain our Sell view on The Ramco Cements.

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