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Ramco Cem: Profit before tax down 94%
Oct 23, 2013

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the second quarter of the financial year 2013-14 (2QFY14). The company's sales and net profits have reported a decline of 8.4% YoY and 86.3% YoY, respectively during the quarter. Here is our analysis of the results:

Performance summary
  • Net sales decline by 8.4% YoY during the quarter ended September 2013 (2QFY14) on account of sluggish cement demand.
  • Operating profits decline by 62.4% YoY owing to lower realisations and steep hike in costs.
  • Operating margins contract from 31.8% in 2QFY13 to 13% in 2QFY14.
  • Other income increases by 111.8% YoY, while interest expenses decline by 6.9% YoY.
  • At the bottomline level, net profits plunge 86.3% YoY during the quarter.
  • During the first half of the financial year 2013-14 (1HFY14), sales and profits decline by 5.5% YoY and 66% YoY respectively.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 9,885 9,050 -8.4% 19,733 18,652 -5.5%
Expenditure 6,746 7,870 16.7% 13,527 15,510 14.7%
Operating profit (EBITDA) 3,139 1,180 -62.4% 6,206 3,141 -49.4%
EBITDA margin 31.8% 13.0%   31.5% 16.8%  
Other income 84 179 111.8% 162 468 188.6%
Depreciation 749 767 2.3% 1530 1524 -0.4%
Interest 507 473 -6.9% 1050 923 -12.1%
Profit before tax 1,967 120 -93.9% 3,788 1,163 -69.3%
Tax 638 (63) -109.9% 1,229 291 -76.3%
Effective tax rate 32.4% -52.8%   32.4% 25.1%  
Profit after tax 1,329 183 -86.3% 2,559 871 -66.0%
Net profit margin 13.4% 2.0%   13.0% 4.7%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         9.9  
P/E (times)*         17.5  
*trailing twelve month earnings

What has driven performance in 2QFY14?
  • The Ramco Cements reported 8.4% YoY decline in the topline during the quarter ended September 2013 (2QFY14). The company has not provided volume details for the quarter.

  • Against a declining topline, operating expenses increased by 16.7% YoY during the quarter. All major cost heads witnessed significant inflationary pressure. Raw material costs, power & fuel expenses, and transportation & handling witnessed sharp increases. As a result, the company's operating (EBITDA) margins declined by 1,872 basis points (18.7%) from 31.8% in 2QFY13 to 13% in 2QFY14.
    Operating cost break-up
    (Rs m) 2QFY13 2QFY14 Change
    Raw Material Consumption 1,448 1,676  
    Change in Inventory  (148) 140  
    Total Raw Material Cost 1,300 1,816 39.7%
    % of net sales 14.4% 20.1%  
    Employee Cost   514 538 4.7%
    % of net sales 5.2% 5.9%  
    Power & Fuel 1,934 2,161 11.8%
    % of net sales 19.6% 23.9%  
    Transportation & Handling 1,719 1,977 15.0%
    % of net sales 17.4% 21.8%  
    Other Expenditure 1,279 1,378 7.8%
    % of net sales 12.9% 15.2%  
    Total operating expenditure 6,746 7,870 16.7%
    % of net sales 68.2% 87.0%  

  • Other income increased by 111.8% YoY during the quarter.

  • While depreciation charges increased marginally by 2.3% YoY, interest expenses declined by 6.9% YoY during the quarter.

  • Owing to the weak operating performance, profit before tax plunged 93.9% YoY.

  • The fall in the company's net profits was slightly lower at 86.3% YoY owing to MAT credit entitlements worth Rs 103.8 m. Net profit margins declined by about 1,142 basis points (11.4%) from 13.4% in 2QFY13 to 2% in 2QFY14.

What to expect?

The company reported de-growth in cement sales during 2QFY14. Construction activity in general remains muted during the September quarter due to the rains. However, this year's prolonged monsoon compared to last year's delayed monsoon resulted in a year-on-year decline. Moreover, the weakening economic scenario has further impacted cement demand.

Lower cement realisations coupled with persistent inflationary pressures on input, power and logistics expenses have adversely impacted margins during the quarter. Given the excess capacity scenario in South India, slowdown in demand and consistently high inflation, the outlook for the cement sector remains bleak over the medium term. However, given that cement is a critical building material, the long term prospects of the sector remain stable owing to the huge demand for housing and infrastructure in the country.

At the current prices of Rs 173 the stock is trading at 17.5 times its trailing twelve month earnings. We reiterate our 'Hold' view on the company from a 3-year perspective.

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