South’s cement maker Ramco Cements Ltd is dealing with a high leverage position. Increase in working capital requirements and guidance on its capital expenditure (capex) 1,700 crores and 900 crores for FY23 and FY24 respectively, which would mean some relief on the debt front.
In a report dated February 28, analysts at Motilal Oswal Financial Services Ltd said that over the past four-five years, the company’s capex appears to have grown in comparison to capacity addition.
The Motilal Oswal report said, “The higher capex is attributed to infrastructure development at the plants, which allowed Ramco Cements Ltd to scale up operations with higher operating efficiencies.”
The domestic brokerage house expects the company’s net debt/Ebitda to trade at 3.2 times in FY24 as against an average of 1.8 times in FY2016-22. EBITDA is short for earnings before interest, taxes, depreciation and amortization.
Yes, the company registered a strong earnings performance in Q3FY23, with cement volumes growing by 19% year-on-year and 8% sequentially to 3.57 million tonnes, thus indicating increased market share. Still, at a time when cement prices have failed to see meaningful growth, higher debt does not bode well for investor confidence in the stock.
Motilal Oswal said, “High costs and muted pricing trends have been a drag on profitability. To generate historical return ratios (ROCE of ~6% in FY24E vs ROCE of 10% on average in FY2012-22) There is a need to significantly improve profitability.” Report.
Note that the company’s management has said that it may liquidate surplus land assets worth Rs 300-400 crore in the coming quarters to fund future capex.
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 reduced sequentially by approximately Rs 190 billion to Rs 4,560 crore due to potential release of working capital. Ramco Cements to generate approximately Rs 1200 crore of operating cash flow of approximately Rs 900 crore (excluding Karnataka capex) in FY24E May restrict material deleveraging in FY2024,” the ICICI report said.
Meanwhile, in the last one year, the stock of Ramco Cements fell nearly 6% on the National Stock Exchange.
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