The cement sector is currently characterized by weak demand and weak price trends. Adding to this, The Ramco Cements Ltd faces other challenges as well.
Initially, in the December quarter (Q3FY24), sales volume at 4 million tonnes (mt), rose 10% year-on-year, but fell sequentially, missing estimates. Heavy rainfall, cyclones and festive holidays in key markets of south and east India affected demand. For Q4FY24, sales volume is seen at 5 mt and 19-20 mt in FY25.
Pricing pressures dampened realizations in Q3FY24 and the outlook provides little comfort. Currently, cement prices in key markets remain under pressure due to muted demand, and may improve by mid-February/March, management said.
Even so, no fireworks are expected on the marginal front. While fuel cost deflation is likely to continue in Q4FY24, margin is expected to remain range-bound as sequentially weaker prices in Q4 should be offset by operating leverage and softer energy prices, analysts at Kotak Institutional Equities said.
The trading company estimates Ebitda per ton of ₹948 and ₹1,037 in FY24 and FY25, respectively, from ₹991 in Q3FY24.
But Ramco’s specific issues are particularly troubling. An increased push on capital expenditure (capex) is feared to keep debt elevated. Capex guidance for FY24 has been revised upwards to ₹2,000 crores. The management attributed the increase to the debottlenecking of the Kolimigundla plant and accelerated land recovery efforts.
For FY25, capex is pegged ₹1,700 crore mostly for brownfield expansions. These measures are expected to boost long-term volume growth, but could spell trouble for its balance sheet strength in the short term, thus prompting revenue declines.
In Q3FY24, Ramco’s net debt further increased to ₹4,993 crore and the average cost of borrowing rose to 7.8% during the first nine months of FY24 from 6.2% in the same period last year. The management believes that net debt at ₹5,000 crore peaked and future expansion will be primarily funded through internal accruals. Key leverage metric – the net debt / Ebitda stood at 3.2x in Q3FY24.
But caution prevails. Yes Securities Ltd notes that Ramco’s capex guidance for FY24 and FY25 leaves no room for drawdown in the near future. “Consequently, our profit after tax estimates eroded by 2/6/14% for FY24/25/26E on higher interest and the net debt/Ebitda to remain at ~3x until FY26E,” the trading firm said.
Ramco’s stock is down more than 8% in the past two trading sessions. Bloomberg data shows the stock trades at FY25 EV/Ebitda of 14 times. In the current background, valuations are not attractive.