The Ramco Cements: Sell. On weak ground

Those invested in The Ramco Cements can book profits on the stock. From our buy recommendation a year ago, the stock is up 80 per cent with valuations rising sharply.

At ₹301, the stock discounts its estimated earnings for 2015-16 by 20 times, very close to the valuation of larger peers. Given the absence of triggers for earnings to grow in the near term, the stock seems expensive.

With its base in the South and focus in the Tamil Nadu market where cement demand is weak and capacity utilisations are low, the company is in an unfavourable position.

In the December quarter, cement demand in Tamil Nadu was down 10 per cent. Demand revival in the region may take about 12-15 months, say industry experts.

If demand is weak, cement prices may fall and push down profit margins. Already, margins are under pressure due to rise in cost of inputs.

In the December quarter, the company recorded 7 per cent drop in sales, and net profit was down 10 per cent.

Operating margin at 16.5 per cent was down from 23.5 per cent in the September quarter and 18.3 per cent in the same quarter a year ago, due to increase in cost of raw materials.

The Ramco Cements has a total capacity of 13 million tpa with three cement units in Tamil Nadu (of total capacity of over 7.5 mtpa) and one each in Andhra Pradesh (Jayanthipuram- 3.65 mtpa) and Karnataka (Mathodu). It is now in the process of establishing a one-mtpa grinding unit in Vizag, Andhra Pradesh.

The situation in the cement market of South India is quite different from that in the North. While in the North, cement demand has picked up and the supply-demand gap may narrow significantly in the next one-two years, this remains a concern in the South. Though companies have been expecting demand recovery for a year now with Andhra Pradesh building its new cities, there has been no pick up in demand, say cement dealers.

While all-India cement demand growth in the nine months of 2014-15 is 7.9 per cent, cement players in the South, including The Ramco Cements, have seen a drop in sales in the period.

In the first nine months of 2014-15, the company has reported a 3 per cent fall in sales with sales volume down 9 per cent. With the Telangana government drawing up plans to build the Hyderabad-Warrangal industrial corridor, develop industrial townships and finish the metro rail project in the scheduled time, cement demand in the southern region should pick up.

But this may take time, say industry observers, as the government clearance for the projects could be long-drawn. In Tamil Nadu, on the other hand, demand is weak, say dealers, with slowdown in orders from infrastructure projects.

Of the 200 and more mega projects identified under the TN Government’s Vision 2023 programme, which promises to spend ₹1.34 lakh crore on road and port infrastructure, many are only in the preliminary stage.

A weak demand environment may see producers lose their pricing power. Cement prices in the South increased in the December 2014 quarter though there was no significant demand pick up.

In Hyderabad, for instance, prices increased from about ₹298/bag in September to ₹321/bag in December. But if demand continues to be weak, then cement prices may not hold. A drop in cement prices will suppress margins.

Though on the fuel front there is some relief in costs due to fall in price of imported coal, cost pressure may increase due to hike in rail freight charges.

Rail freight for cement was hiked by 2.7 per cent while that for coal was hiked by 6.3 per cent in the Railway Budget.

This means an increase of about ₹1/bag of cement in cost of production for players. Also, as the rupee is weakening against the dollar now, some of the benefit from a drop in imported coal prices may go.