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Ramco Cem: Slack sales, poor margins - Views on News from Equitymaster

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Ramco Cem: Slack sales, poor margins
Aug 5, 2014

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the quarter ended June 2014. The company's sales and net profits have reported a decline of 3.7% YoY and 47.3% YoY respectively during the first quarter of FY15 (1QFY15). Here is our analysis of the results:

Performance summary
  • Net sales decline by 3.7% YoY during the quarter ended June 2014 (1QFY15) on account of sluggish cement demand.
  • Operating profits decline by 30.4% YoY owing to muted realisations and higher costs.
  • Operating margins contract from 20.4% in 1QFY14 to 14.8% in 1QFY15.
  • Other income increases by 27.1% YoY.
  • While depreciation charges declined by 17.2% YoY, interest expenses increase by 11.1% YoY.
  • At the bottomline level, profit after tax plunges by 47.3% YoY during the quarter.

Standalone Financial Performance Snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 9,601 9,243 -3.7%
Expenditure 7,640 7,878 3.1%
Operating profit (EBITDA) 1,961 1,365 -30.4%
EBITDA margin 20.4% 14.8%  
Other income 289 367 27.1%
Depreciation 757 627 -17.2%
Interest 450 500 11.1%
Profit before tax 1,043 605 -42.0%
Tax 355 243 -31.5%
Effective tax rate 34.0% 40.1%  
Profit after tax 689 363 -47.3%
PAT margin 7.2% 3.9%  
Extraordinary gain/(loss) - -  
Net profit 689 363 -47.3%
Net profit margin 7.2% 3.9%  
No of shares (m) 238.0 238.0  
Diluted EPS (Rs)*   4.4  
P/E (times)*   62.3  
*trailing twelve month earnings

What has driven performance in 1QFY15?
  • During the quarter ended June 2014 (1QFY15), The Ramco Cements reported 3.7% YoY dip in the topline as cement volumes declined by 3.9% YoY from 2.214 million tonnes in 1QFY14 to 2.127 million tonnes in 1QFY15. Cement prices remained under pressure on account of the slackness in the cement demand.

  • Barring Power and Fuel expenses, all major cost heads witnessed inflationary pressures. Raw Material costs and Transportation and Handling expenses increased by 2.3% YoY and 1.8% YoY respectively, as a percentage of net sales. As a result, the company's operating (EBITDA) margins declined by 5.7 percentage points from 20.4% in 1QFY14 to 14.8% in 1QFY15.

    Operating cost break-up
    (Rs m) 1QFY14 1QFY15 Change
    Raw Material Consumption 1,616 1,865  
    Change in Inventory 88 52  
    Total Raw Material Cost 1,704 1,917 12.5%
    % of net sales 18.4% 20.7%  
    Employee Cost 539 583 8.2%
    % of net sales 5.6% 6.3%  
    Power & Fuel 2,116 1,978 -6.5%
    % of net sales 22.0% 21.4%  
    Transportation & Handling 2,049 2,143 4.6%
    % of net sales 21.3% 23.2%  
    Other Expenditure 1,232 1,257 2.0%
    % of net sales 12.8% 13.6%  
    Total operating expenditure 7,640 7,878 3.1%
    % of net sales 79.6% 85.2%  

  • Other income increased by 27.1% YoY during the quarter.

  • Depreciation charges declined by 17.2% YoY. It must be noted that the company revised the depreciation rate on certain fixed assets during the quarter in accordance with the depreciation methodology stated in the Companies Act, 2013. As a result, depreciation for the quarter is lower by Rs 154.1 m.

  • Interest expenses increase by 11.1% YoY during the quarter.

  • The effective tax rate increased from 34% in 1QFY14 to 40.1% in 1QFY15 owing to higher quantum of deferred tax during the period.

  • Owing to poor topline performance and higher expenditure, net profit declined by 47.3% YoY. Net profit margins contracted from 7.2% in 1QFY14 to 3.9% in 1QFY15.
What to expect?
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. 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. The project is currently in progress and is expected to be commissioned in the second quarter of current fiscal year.

In addition, the company is in the process of increasing the capacity of its thermal power plants at Alathiyur and Ariyalur by adding one more turbine of 6 MW each. This would take the total capacity of the thermal power plants to 169 MW.

The company's poor cement volumes sales reflect sluggish demand in its key markets of South India. At the same time, persistent cost pressures and muted cement prices have severely eroded the profitability. The company also faced challenges on the logistics front on account of poor availability of lorries for transportation.

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 to the new central government's thrust on housing and infrastructure development.

At the current prices of Rs 275 the stock is trading at 62.3 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.

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