Broker's call: Ramco Cements (Buy)

CMP: ₹754.35

Target: ₹920

In the Q1 FY20 fuel mix, 42 per cent was pet-coke (60 per cent a year ago). Freight cost/tonne contracted 7.4 per cent y-o-y, and power & fuel cost was flat y-o-y. Further, through cost optimisation measures, raw material cost was only slightly up 1.9 per cent y-o-y. This pulled up the Q1 FY20 EBITDA/tonne about 44 per cent y-o-y to ₹1,190. The focus on cost optimisation and the increasing exposure to the eastern market would help to an EBITDA/ton of ₹1,191 by FY21.

Outlook and valuations: After the ongoing expansions, Ramco Cements would become a 20 mtpa company by FY20. The average cost of interest on borrowings is 7.62 per cent, with gross debt of ₹20bn at end-Q1 FY20. Lower costs (cost-optimisation and falling pet-coke prices), likely stable cement prices (with perhaps a marginal drop during the monsoon) and the benefits of the ongoing expansion plans would result in a better performance.

We expect PAT to clock a 37 per cent CAGR over FY19-21. We have a Buy rating on the stock, with an unaltered target price of ₹920, based on 14x FY21e EV/ EBITDA.

Risks: High pet-coke/diesel costs and falling cement prices.