Why analysts are bullish on Ramco Cements
Business prospects of Ramco Cements have improved because the demand remains strong in its key market—South India. While Tamil Nadu that accounts for around 60% of Ramco’scapacity will remain a key contributor to its volume growth in the coming years, additional growth is expected from Andhra Pradesh.
Cement demand in Andhra Pradesh is expected to jump by around 12%-14% per annum in the next 2-3 years due to activities related to the setting up of its new capital.
Though realisation is lower compared to southern India, Ramco is making efforts to increase penetration in the eastern region for geographical diversification. In fact, contribution from its eastern region has increased to 25% from 10% a year ago, while that from southern region has fallen to 75% from 90% .
Of the new 4.5 metric tonne planned capacity expansion, two metric tonne will be in the east—one metric tonne each in Bengal and Odisha. These new capacities should help Ramco increase its eastern market share further. This continued market share gain in the eastern region will be a key trigger for this counter.
The cement industry is now faced with cost pressures because of the surge in diesel and fuel prices. However, cost saving efforts—usage of lignite in its Alathiyur (TN) and Mathodu (Karnataka) plants—should reduce this pressure for Ramco Cements. The Ebitda per tonne is on a decline mode for Ramco Cements for the past two years, but it is not a major concern as the focus of the management is on increasing absolute Ebitda by increasing volume. Ebitda stands for earnings before interest, tax, depreciation and amortisation.
Around 25% correction during the last five months has brought down Ramco Cement’s valuation to reasonable levels and this is another reason why analysts are getting bullish on this counter now.