Ramco Cements’ capex drive to keep debt elevated

In a report dated 28 February, analysts at Motilal Oswal Financial Services Ltd said that over the past four-five years, the company’s capex appears to have increased compared with capacity additions. 

“Higher capex is attributed to infrastructure development across plants, which allows The Ramco Cements Ltd to scale up operations with higher operating efficiencies,” added the Motilal Oswal report.

The domestic brokerage house expects the company’s FY24 net debt/Ebitda to be at 3.2 times versus an average of 1.8 times over FY16-22. Ebitda is short for earnings before interest, tax, depreciation and amortisation.

Yes, the company posted robust earnings performance in Q3FY23 with cement volumes rising 19% year-on-year and 8% sequentially to 3.57 million tonne, thus indicating market share gains. Even so, at a time when cement prices have failed to see a meaningful uptick, higher debt does not bode well for investors’ confidence towards the stock.

“Elevated costs and muted pricing trends remain an overhang on profitability. Profitability needs to improve significantly to generate historical return ratios (RoCE of ~6% in FY24E v/s an average of 10% over FY12-22),” added the Motilal Oswal report.

Note that the company’s management has said that to fund future capex it may liquidate surplus land assets worth Rs300-400 crore in upcoming quarters.

In a report published in early February, analysts at ICICI Securities Ltd had pointed out that the company’s capex guidance is aggressive. “Net debt declined around Rs190 billion sequentially to Rs4,560 crore owing to likely release of working capital. The Ramco Cements is likely to generate around Rs1200 crore of operating cash flow in FY24E against a capex of around Rs900 crore (excluding Karnataka capex) which may restrict material deleveraging in FY24,” said the ICICI report.

Meanwhile, in the last one year, the stock of Ramco Cements fell around 6% on the National Stock Exchange.