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Ramco Cem: Volumes dip; margins recover - Views on News from Equitymaster
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Ramco Cem: Volumes dip; margins recover
Aug 7, 2015

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the quarter ended June 2015. While the company's sales remained almost flat, net profits reported a sharp rise of 168.9% YoY during the first quarter of FY2015-16 (1QFY16). Here is our analysis of the results:

Performance summary
  • Net sales remain nearly flat during the quarter ended June 2015 (1QFY16).
  • Operating margins witness a sharp improvement as most major cost heads witness a decline.
  • Driven by the higher operating profit, bottomline level rises by 168.9% YoY during the quarter.

Standalone Financial Performance Snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 9,243 9,225 -0.2%
Expenditure 7,878 6,996 -11.2%
Operating profit (EBITDA) 1,365 2,230 63.3%
EBITDA margin 14.8% 24.2%
Other income 367 302 -17.7%
Depreciation 627 668 6.5%
Interest 500 488 -2.5%
Profit before tax 605 1,377 127.4%
Tax 243 402 65.5%
Effective tax rate 40.1% 29.2%  
Profit after tax 363 975 168.9%
PAT margin 3.9% 10.6%  
Extraordinary gain/(loss) - -  
Net profit 363 975 168.9%
Net profit margin 3.9% 10.6%  
No of shares (m) 238.0 238.0  
Diluted EPS (Rs)*   12.8  
P/E (times)*   28.7  
*trailing twelve month earnings

What has driven performance in 1QFY16?
  • During the quarter ended June 2015 (1QFY16), The Ramco Cements reported flat topline growth. As can be seen in the table below, there has been a sharp decline in cement sales volume. The flat topline, therefore, can be attributed to better cement realisations.

    Cement Sales Volume
    (million tonnes) 1QFY15 1QFY16 Change
    Domestic 2.091 1.782 -14.8%
    Exports 0.036 0.031 -13.9%
    Total 2.127 1.813 -14.8%

  • Major cost heads such as Power & Fuel and Transportation & Handling witnessed a significant decline. The key reasons for the decline in operating costs are the softening of fuel prices as well as the company's cost reduction measures. As a result, the company's operating (EBITDA) margins recovered from 14.8% in 1QFY15 to 24.2% in 1QFY16.

    Operating cost break-up
    (Rs m) 1QFY15 1QFY16 Change
    Raw Material Consumption 1,408 1,278  
    Change in Inventory 52 165  
    Total Raw Material Cost 1,459 1,442 -1.2%
    % of net sales 15.8% 15.6%  
    Employee Cost 583 621 6.4%
    % of net sales 6.3% 6.7%  
    Power & Fuel 1,978 1,457 -26.3%
    % of net sales 21.4% 15.8%  
    Transportation & Handling 2,600 2,218 -14.7%
    % of net sales 28.1% 24.0%  
    Other Expenditure 1,257 1,257 0.0%
    % of net sales 13.6% 13.6%  
    Total operating expenditure 7,878 6,996 -11.2%
    % of net sales 85.2% 75.8%  

  • Other income decreased by 17.7% YoY during the quarter.

  • While depreciation charges increased by 6.5% YoY, interest expenses declined as the company's debt burden has declined.

  • Owing to the improved operating margins, the bottomline grew by 168.9% YoY. Net profit margin expanded from 3.9% in 1QFY15 to 10.6% in 1QFY16.
What to expect?
The June 2015 quarter results display quite a contrast. There was a sharp jump in profitability aided by lower fuel prices. But the severe drop in sales volume reflects the sluggish demand scenario in the cement industry.

The weak recovery in the economy and the prolonged slowdown in the housing and infrastructure sector have marred the recovery prospects of the cement industry for the short to medium term. Over the long term, however, 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.

At the current price of Rs 366, the stock is trading at 28.7 times its trailing twelve month standalone earnings. We are currently in the process of reviewing and updating our forecasts for FY18. We will soon be able to share our latest view and target price on the stock.

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