Ramco reported a good set of numbers in 2QFY18 with 6 % y-o-y volume growth despite low demand in Tamil Nadu. Realisations improved sequentially leading to slight improvement in EBITDA per tonne even after sharp increase in energy costs (pet coke) and freight cost (due to diesel). We have revised FY18-19 estimates by taking down realisations and assuming higher costs, which have been offset by roll over to September 2019. Maintain Hold.
As highlighted by other players in the sector, south India reported sluggish cement demand in 2QFY18. Ramco was majorly impacted due to severe draught and shortage of river sand in Tamil Nadu along with RERA impact. Kerala market has also been benign. Together these two states are 50 % in sales volume. However, this was partly offset by growth in eastern markets, leading to 6% y-o-y volume growth in 2QFY18.
Ramco reported 36 % y-o-y growth in energy costs as the benefit of low cost inventory has finished and current market prices of imported coal and per coke are significantly higher y-o-y.
Freight costs have also increased 11% due to increase in diesel prices. We have adjusted the other expenses for reversal of provision of Rs 77 million for contribution to the district mineral fund. Realisation improvement by 4 % q-o-q is difficult to understand given the regions have seen a q-o-q decline. Our guess is change in sales mix between clinker and cement as well as change in terms of contract with customer from ex works to FOR. However, this did lead to 11% beat on EBITDA per tonne and 17% beat on EBITDA.
Given the poor cement demand in southern states, high demand base impact, all India highest prices, we have taken our realisation estimates down by 1-2 % for FY18-19 and taken up our energy and freight cost estimates, leading to 7-13% cut in EBITDA. However lower tax rate assumptions led to reduced impact on EPS of 1/-11%. The stock is reasonably valued, trading at 11.5x Sep-19 EV/EBITDA. We have rolled over our TP to September 2019 and slightly increased our multiple due to better sector outlook, offsetting most of EPS impact. Maintain Hold with a revised TP of Rs 661. Risks: Strong pickup in demand in southern states, costs continue to rise.