Capacity addition in key markets to boost Ramco


India’s cement industry would remain largely regional, with its prospects defined by consumption demand in key micro-markets, as the addition of capacity countrywide makes predicting national pricing trends a difficult task.

The industry, the world’s second biggest after China, would add about 65MT of capacity in the next two years, underscoring the importance of cementing leadership credentials regionally. The additions would put a premium on operational excellence: Those with strict cost discipline, judicious expansion plans, and debt light balance sheets stand to benefit.

One such company is Ramco Cements. In the next two years, Ramco plans to add 4.5MT capacity, which would take its total potential output to 21MT. About two-thirds of the total capacity is integrated, meaning the plant is involved in the entire cement value chain – from mining to cement bagging. The rest of the capacity involves split or grinding units, which grind clinker made at the integrated units and bring the cement plant closer to the consuming markets.

For an integrated unit, the replacement value – or the funds needed to put up a greenfield factory – is about $120-130 for each tonne of capacity. For a split unit, it is about $80 a tonne.

The global metric for cement replacement value is calculated in dollars for each tonne of capacity.

Of the 4.5MT incremental output, Ramco would add 2MT in the eastern region and the remaining 2.5MT in Andhra Pradesh. This expansion will be funded through internal accruals, indicating that the company is careful about adding debt to its books.

This expansion, when judged in the context of demand in the southern and eastern regions, indicates that Ramco Cements is boosting capacity in pockets that remain largely insulated against oversupply concerns. There are two important revenue-enhancing factors at work at these sites.

The Pradhan Mantri Awas Yojana (PMAY) is the federal government’s flagship programme for low-cost housing. Of the houses sanctioned under the PMAY scheme, only 14-18 per cent of the homes have been built in the southern (2.1 million) and eastern (0.92 million) regions. This would provide significant scope for a midsized player like Ramco, which has a strong presence in both regions.

Furthermore, an increasing number of irrigation projects in Andhra Pradesh and the revival of the Kerala markets after the devastating floods should ensure steady demand. The southern region should add an additional 14-20MT of demand in the next two years. Ramco should also benefit from the easing of sand supplies in Tamil Nadu.

Ramco Cements has debt to equity ratio of 0.3, having halved its debt in the past three years. According to analysts, revenues are expected to expand in the range of 15-16 per cent for the next two years, while its peers in the midcap space are expected to record 9-11 per cent growth.

The company is trading at an EV/ EBIDTA of 12 based on its FY20 earnings, which is attractive when compared to its past three-year average EV/EBIDTA of 13.3.


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