Markets
Elevated debt levels put Ramco Cements on shaky ground
Summary
According to Ramco, sales volume could have been better last quarter if it had not been impacted by non-availability of sand in Kerala, supply disruption due to rail accidents in Orissa and West Bengal and active monsoon in the North East. As such, sales volume had declined sequentially.The Ramco Cements Ltd’s results for the quarter ending June (Q1FY24) were discouraging on many counts. This is even though volume growth stood at a robust near 30% year-on-year to 4.3 million tonnes. Growth was largely aided by stabilization of new capacities.
Ramco’s volume growth in Q1FY24 was significantly higher than the industry average of 19%, said a Nomura Financial Advisory and Securities (India) report. According to Ramco, sales volume could have been better last quarter if it had not been impacted by non-availability of sand in Kerala, supply disruption due to rail accidents in Orissa and West Bengal and active monsoon in the North East. As such, sales volume had declined sequentially.
Higher input costs and muted realizations in key markets of south and east hurt profitability. Thus, Q1 Ebitda at ₹341.5 crore fell short of expectations. The company is yet to fully exhaust its high-cost inventory, but the management expects power and fuel cost to ease ahead. Moreover, the increased chase for volumes and market share has kept the industry’s near-term pricing outlook subdued.
Amid this, Ramco’s elevated debt levels are a bother for investors. Net debt rose by 1% sequentially to ₹4,406 crore as of 30 June. Given Ramco’s ongoing expansion plans, there may not be much respite from higher debt levels at least in FY24. In Q1, Ramco incurred a capex of ₹284 crore for slated capacity expansions at its Andhra Pradesh and Odisha plants.
“We expect upward revision in capex guidance (earlier ₹800-850 crore) in FY24, factoring in the announced land acquisition deal from Prism Johnson. Accordingly, we expect net debt broadly to remain in a similar range till FY25 (net debt-to-Ebitda at 2.0x-2.5x)," said Emkay Global Financial Services in a report.
Further, the company’s average cost of interest-bearing borrowings for the Q1FY24 has increased to 7.95% from 6.66% in FY23. An elevated debt could dampen growth prospects, especially at a time when competition is likely to intensify further. “The Ramco Cements net debt/Ebitda of 3.6x (in Q1FY24) restricts aggressive capacity expansion plans, placing a cap on volume growth from FY2025E versus peers," said a Kotak Institutional Equities report.
Meanwhile, so far in 2023, Ramco’s shares have risen by 21%, largely on the back of a healthy volume growth trajectory expected in FY24. Bloomberg data shows the stock trades at 12x the FY25 estimated EV/Ebitda. In the current backdrop, that appears pricey.
