In the ever-evolving landscape of the cement industry, Ramco Cements has been steering a strategic shift to navigate its financial challenges. The company’s aggressive capacity growth, largely funded by debt, resulted in a dip in the interest coverage ratio. This was a direct outcome of a lower profitability triggered by increasing energy costs and stagnant cement prices. However, the management has already initiated corrective measures such as the offloading of non-core assets to alleviate the debt burden. Investors, though, are advised to remain cautiously optimistic until the company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) registers a positive uptick, directly affecting its interest coverage ratio.
The cement industry, over the last decade, has been largely unyielding with price trends remaining flat. This stagnation has been most pronounced in South India, where the brunt of excess capacity is borne. The cement prices per bag have seen a meager increase of 1.7% CAGR over the past ten years, an increase that falls significantly short of the average inflation rate for the same period. However, the consolidation among the major industry players and the early signs of price recovery could signal a potential turnaround for Ramco Cements, a dominant player in the southern region.
The company’s stock, currently trading near its 2017 peak, provides ample reasons to delve deeper into the company’s prospects. From FY21 to FY24, Ramco Cements has more than doubled its cement volumes, from 8.3 million metric tonnes to 18.0 million metric tonnes. This surge drove the company’s revenue from Rs 5,303 crore to Rs 9,483 crore. Despite the increased volumes, EBITDA margins slid from ~29.8 percent in FY21 to ~15 percent in FY22 due to a rise in global coal, petcoke, and diesel prices, which increased faster than the selling prices in South India.
However, by FY23, an improvement in energy costs helped the margins to recover to around 15 percent, with revenue climbing to Rs 8,172 crore. In FY24, the company’s volumes reached the 18 MMT mark, and the revenue peaked at Rs 9,483 crore, with EBITDA margins at around 16 percent.
This industrial narrative of Ramco Cements presents an interesting case study of resilience and adaptability. The strategic shift from debt-funded aggressive growth to a more balanced approach of reducing debt burden through non-core asset sales indicates a pragmatic approach. The company is not only addressing its immediate financial challenges but also positioning itself to take advantage of the anticipated price recovery in the cement industry. As the cement industry continues to consolidate and the signs of price recovery become more pronounced, Ramco Cements might just be on the brink of a significant turnaround.
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