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Ramco Cem: A dismal end to the year - Views on News from Equitymaster

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Ramco Cem: A dismal end to the year
Jul 18, 2014

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the quarter and year ended March 2014. The company's sales and net profits have reported a decline of 0.3% YoY and 61% YoY respectively during the fourth quarter of FY14 (4QFY14). Here is our analysis of the results:

Performance summary
  • Net sales remain flat during the quarter ended March 2014 (4QFY14) on account of sluggish cement demand.
  • Operating profits decline by 51.5% YoY owing to lower realisations and steep hike in costs.
  • Operating margins contract from 15.2% in 4QFY13 to 7.4% in 4QFY14.
  • Other income increases by 86.7% YoY, while depreciation and interest expenses increase by 33% YoY and 61.5% YoY respectively.
  • At the bottomline level, profit after tax plunges by 61% YoY during the quarter.
  • During the full financial year 2013-14 (FY14), sales and profits decline by 4.1% YoY and 65.9% YoY respectively.

Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 9,272 9,244 -0.3% 37,884 36,321 -4.1%
Expenditure 7,866 8,562 8.8% 28,254 31,205 10.4%
Operating profit (EBITDA) 1,407 682 -51.5% 9,631 5,117 -46.9%
EBITDA margin 15.2% 7.4%   25.4% 14.1%  
Other income 337 630 86.7% 842 1371 62.8%
Depreciation 581 773 33.0% 2,806 3,063 9.2%
Interest 307 495 61.5% 1,785 1,881 5.4%
Profit before tax 857 44 -94.9% 5,882 1,543 -73.8%
Tax 215 (206) -195.8% 1,846 166 -91.0%
Effective tax rate 25.1% NA   31.4% 10.8%  
Profit after tax 642 250 -61.0% 4,036 1,377 -65.9%
PAT margin 6.9% 2.7%   10.7% 3.8%  
Extraordinary gain/(loss) - -   - -  
Net profit 642 250 -61.0% 4,036 1,377 -65.9%
Net profit margin 6.9% 2.7% 4.2% 10.7% 3.8%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         5.8  
P/E (times)*         48.2  
*trailing twelve month earnings

What has driven performance in 4QFY14?
  • During the quarter ended March 2014 (4QFY14), The Ramco Cements reported a flat topline, marginally lower by just 0.3% YoY. The company has not provided volume details for the quarter.

  • While the topline growth remained flat, operating expenses increased by 8.8% YoY during the quarter. All major cost heads witnessed inflationary pressures. Raw material costs and power & fuel costs witnessed sharp increases. As a result, the company's operating (EBITDA) margins declined by 7.8 percentage points from 15.2% in 4QFY13 to 7.4% in 4QFY14.

    Operating cost break-up
    (Rs m) 4QFY13 4QFY14 Change
    Raw Material Consumption 1,570 1,796  
    Change in Inventory (39) (1)  
    Total Raw Material Cost 1,531 1,795 17.3%
    % of net sales 16.6% 19.4%  
    Employee Cost 508 559 10.0%
    % of net sales 5.5% 6.0%  
    Power & Fuel 1,939 2,260 16.6%
    % of net sales 20.9% 24.5%  
    Transportation & Handling 2,245 2,301 2.5%
    % of net sales 24.2% 24.9%  
    Other Expenditure 1,643 1,646 0.2%
    % of net sales 17.7% 17.8%  
    Total operating expenditure 7,866 8,562 8.8%
    % of net sales 84.8% 92.6%  

  • Other income increased by 86.7% YoY during the quarter.

  • Depreciation charges and interest expenses increased by 33% YoY and 61.5% YoY respectively during the quarter.

  • Owing to poor topline performance and higher operating and non-operating expenditure, net profit declined by 61% YoY. Net profit margins contracted from 6.9% in 4QFY13 to 2.7% in 4QFY14.

  • During the full year FY14, net sales and net profits declined by 4.1% YoY and 65.9% YoY respectively.
What to expect?
During the full year FY14, the company's cement production increased marginally by 1.4% YoY to 8.59 million tonnes. The capacity utilisation rate improved from 67.9% in FY13 to 68.8% in FY14. The company's cement capacity remains unchanged at 12.49 million tonnes. Cement sales during the year increased by 2.8% YoY from 8.36 million tonnes in FY13 to 8.60 million tonnes in FY14. However, cement sales realisations were lower by 10% YoY.

The cement sector has been impacted by the general slowdown in the economy and the infrastructure sector in particular. In Southern India, construction activity has been impeded by factors such as the political tensions in Andhra Pradesh and scarcity of raw materials.

On the cost front, diesel prices increased of 14% YoY, thereby substantially increasing logistics cost. Higher railway freight costs are set to further increase the cost burden. The company also witnessed a significant rise in the cost of import of materials such as coal, pet coke, gypsum, etc. owing to the rupee depreciation.

The company's finance costs were also higher on account of higher interest rates as well as increase in borrowing for expansion.

The company is setting up its fourth grinding unit at Vizag with a capacity to grind 1 million tonnes per annum. The cost of the project is Rs 3,600 m. The project is currently in progress. Once this grinding unit is commissioned, it will help in increasing market share in the Vizag region as well as in the states of Odisha and Chhattisgarh.

With the new business-friendly government coming to power at the Centre, the economy is expected to pick up in the coming times. However, several challenges in the form of high inflation and poor rainfall could impede the recovery. The medium term challenges, notwithstanding, the long term prospects for the Indian economy and the cement sector appear positive.

At the current prices of Rs 279 the stock is trading at 48.2 times its trailing twelve month earnings. We are currently in the process of revising our future estimates for the company, and will thereafter share our latest view and target price for the stock soon.

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