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Ramco Cem: Volume sales down; margins up - Views on News from Equitymaster

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Ramco Cem: Volume sales down; margins up
Nov 22, 2014

The Ramco Cements Ltd (formerly known as Madras Cements Ltd) has announced its financial results for the quarter ended September 2014. The company's sales and net profits have reported a rise of1.9% YoY and 391% YoY respectively during the second quarter of FY15 (2QFY15). Here is our analysis of the results:

Performance summary
  • Net sales rise marginally by 1.9% YoY during the quarter ended September 2014 (2QFY15) on account of slump in cement sales volume.
  • However, operating profit margins expand by over 700 basis points owing to improvement in cement realizations and lower costs.
  • At the bottomline level, profit after tax surges by 391% YoY during the quarter.

Standalone Financial Performance Snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 9,050 9,221 1.9% 18,652 18,463 -1.0%
Expenditure 7,870 7,351 -6.6% 15,510 15,228 -1.8%
Operating profit (EBITDA) 1,180 1,870 58.5% 3,141 3,235 3.0%
EBITDA margin 13.0% 20.3%   16.8% 17.5%  
Other income 179 318 77.6% 468 685 46.4%
Depreciation 767 624 -18.6% 1,524 1,251 -17.9%
Interest 473 480 1.6% 923 980 6.2%
Profit before tax 120 1,084 806.0% 1,163 1,689 45.3%
Tax (63) 187 NA 291 429 47.3%
Effective tax rate NA 17.2%   25.1% 25.4%  
Profit after tax 183 897 391.0% 871 1,260 44.6%
PAT margin 2.0% 9.7%   4.7% 6.8%  
Extraordinary gain/(loss) - -   - -  
Net profit 183 897 391.0% 871 1,260 44.6%
Net profit margin 2.0% 9.7%   4.7% 6.8%  
No of shares (m)       238.0 238.0  
Diluted EPS (Rs)*         7.4  
P/E (times)*         46.5  
*trailing twelve month earnings

What has driven performance in 2QFY15?
  • During the quarter ended September 2014 (2QFY15), The Ramco Cements reported muted topline growth as cement volume sales declined by 11.4% YoY from about 2.2 million tonnes in 2QFY14 to 1.9 million tonnes in 2QFY15. Despite the significant decline in volume sales, the marginal rise in the topline suggests improvement in cement realisations.

  • Barring Transportation and Handling expenses, all major cost heads witnessed some moderation. As a result, the company's operating (EBITDA) margins expanded by 7.3 percentage points from 13% in 2QFY14 to 20.3% in 2QFY15.

    Operating cost break-up
    (Rs m) 2QFY14 2QFY15 Change
    Raw Material Consumption 1,676 1,705  
    Change in Inventory 140 (71)  
    Total Raw Material Cost 1,816 1,635 -10.0%
    % of net sales 20.1% 17.7%  
    Employee Cost 538 534 -0.7%
    % of net sales 5.9% 5.8%  
    Power & Fuel 2,161 1,852 -14.3%
    % of net sales 23.9% 20.1%  
    Transportation & Handling 1,977 2,027 2.6%
    % of net sales 21.8% 22.0%  
    Other Expenditure 1,378 1,303 -5.5%
    % of net sales 15.2% 14.1%  
    Total operating expenditure 7,870 7,351 -6.6%
    % of net sales 87.0% 79.7%  

  • Other income increased by 77.6% YoY during the quarter.

  • Depreciation charges declined by 18.6% YoY. It must be noted that the company has revised the depreciation rate on certain fixed assets in accordance with the depreciation methodology stated in the Companies Act, 2013. As a result, depreciation for the quarter is lower.

  • Owing to the sharp improvement in operating margins, net profit increased by 391% YoY. Net profit margins expanded from 2% in 2QFY14 to 9.7% in 2QFY15.
What to expect?

As we have mentioned earlier, the company is setting up its fourth grinding unit at Vizag with a capacity to grind 1 million tonnes per annum. While in the latest Annual Report, the company had pegged the cost of the project at Rs 3,600 million, the same has now been escalated to Rs 4,750 million. It must also be noted that there has been a delay of 3 months in the implementation of the project schedule. There was a further delay of 3 months on account of damages caused by the cyclone Hudhud which hit the Vizag coast in October 2014. As such, the commissioning of the project has been postponed to March 2015 as against September 2014 earlier.

In addition, the company is in the process of increasing the capacity of its thermal power plants at Alathiyur, Ariyalur and Jayanthipuram by adding one more turbine of 6 MW each. This would take the total capacity of the thermal power plants to 175 MW.

The company's poor cement volumes sales reflect sluggish demand in its key markets of South India. However, the improvement in profitability is a welcome sign. 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, the stock is trading at 46.5 times its trailing twelve month standalone earnings. We maintain our Sell view on The Ramco Cements.

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