The Ramco Cements Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Worst quarter in a decade: EBITDA hit a 10-year low as cement prices fell while fuel costs surged, with pet coke rising from US\$ 164 to US\$ 199 per tonne sequentially. Management urged investors not to judge the company's ability to meet obligations on one quarter.
• Volume engine running hot: First-half volumes jumped 37% YoY, and full-year volume growth is guided at 30%, driven by stronger-than-expected infrastructure inquiries from NHAI and other projects.
• Capex bill is rising, and the explanation is partial: The capex plan swelled to INR 1,717 crores from an earlier INR 850 crores, with management citing Kurnool preparatory works, R.R. Nagar modernization pulled forward, and a limestone beneficiation plant not previously board-approved. Analysts pressed for a full reconciliation and did not get one.
• Balance sheet is stretched but not alarming, per management: Net debt stands at INR 4,700 crores and is expected to stay there through March, with next year's capex run-rate dropping to INR 700–800 crores. Management pointed to its 2010–2015 deleveraging track record as evidence of comfort.
• What to watch next quarter: Whether fuel costs actually decline the guided US\$ 10–15 in Q3, whether the 30% volume target holds without price erosion, and whether the capex-to-cash-flow math improves enough to keep net debt flat.

Profitability: The Margin Squeeze

• Cement price versus fuel cost: The quarter's pain came from cement price weakness colliding with a sharp fuel cost increase. Pet coke consumption cost moved from US\$ 164 in Q1 to US\$ 199 in Q2, while blended fuel cost per kilo cal inched from INR 2.65 to INR 2.70.
• Forex amplified the hit: Power and fuel cost per tonne was roughly INR 500 higher than in Q4 FY22 despite the same US\$ 199 pet coke price, because the rupee depreciated more than 12% and the OPC/PPC cost changed due to change in mix.
• Fuel cost outlook is volatile: Management sees Q3 pet coke costs potentially dropping US\$ 10–15, but expects Q4 to rise again, and stressed that the trend can change tomorrow. The company is switching between pet coke and imported coal depending on availability and price, while conserving pet coke inventory.
• Inventory build-up added working capital pressure: Working capital rose because pet coke prices tripled, increasing the value of inventory held. The company is deliberately building inventory amid supply uncertainty, including a one-month BPCL maintenance shutdown that disrupted sourcing.
• One-off clinker movement: Clinker was moved from Andhra Pradesh to Tamil Nadu as a one-off item, while two Tamil Nadu plants took maintenance simultaneously to avoid losing market share in Tamil Nadu and Kerala.

Management: "Do not take this quarter. This quarter is one of the worst quarter in the last 10 years. Kindly check what my EBITDA was before. Based on one quarter, do not judge the ability to meet the obligations."

Volume Growth & Market Strategy

• Volume is the bright spot: First-half volumes rose 37% YoY, and full-year growth is guided at 30%, with next year at 23%. The confidence rests on strong NHAI and infrastructure project inquiries that management says are much higher than expected.
• Infrastructure pivot underway: The company, previously concentrated on trade, is now actively pursuing non-trade and infrastructure projects. Management stated that Karnataka's infrastructure market alone would absorb its expansion.
• Non-trade economics: Margins in non-trade are almost the same as trade, with the advantage coming from logistics cost savings, no stocking requirement, no post-discounts or gold schemes, and fully realizable pricing.
• Odisha is profitable, just less so: The Odisha plant achieved 100% capacity utilization with many inquiries from infrastructure projects. Management acknowledged it is not as profitable as the South but emphasized it is not loss-making, pushing back on an analyst's concern about new capacity entering the East.
• Premium products ambition: Revenue from premium products is projected to reach 30–35% of topline over the next two to three years, with management arguing the brand mileage from application-specific cement drives faster overall growth than peers.

Management: "More than the asset turnover, you would see the brand image. Nobody gives cement for different applications. That gives us a lot of mileage in the brand also. That is why our growth is much faster than other companies are."

Capex: The Rising Bill

• Capex plan swelled: The current plan stands at INR 1,717 crores, up from an earlier INR 850 crores guidance. Management attributed the increase to three items: preparatory works at Kurnool for a second line (silos, railway siding, common facilities), R.R. Nagar modernization, and a limestone beneficiation plant that was not board-approved when the earlier guidance was given.
• Analysts wanted a full bridge and did not get one: When pressed to reconcile the INR 800–900 crore increase, management pointed to the R.R. Nagar and beneficiation plant items but did not provide a detailed breakdown that closed the gap. Separately, an analyst asked how much of the incremental INR 1,200 crores is for the Kurnool second line and received only a reference to INR 650 crores in the annual report, not a specific allocation to the incremental amount.
• Second line at Kurnool is being prepped, not yet approved: Enabling facilities are being built so the second line can be completed quickly once the board approves and cash position improves. Environmental clearances are already in place.
• Next year's capex drops sharply: With current cash flow and board-approved projects, next year's capex is projected at INR 700–800 crores, well below the current run-rate. Management said the annual run-rate will not be INR 1,500–2,000 crores.
• Odisha grinding expansion approved: The board approved doubling Haridaspur grinding capacity by 0.09 crore tonnes per annum at a cost of INR 130 crores, with commissioning expected in 9–12 months. Spare clinker from Jayanthipuram, freed up as Kurnool supplies Andhra Pradesh, will feed this unit.
• Karnataka grinding unit on hold: An area has been identified but the timing is under consideration because cash position weakened in the last two quarters. Capex could be lower than INR 300–350 crores depending on facilities and future expansion plans.
• Bommanahalli project initiated: An application was submitted to the Karnataka government just last week. The state procedure requires government approval even before land acquisition. The project, including INR 350 crores in land acquisition, must be completed within four years.

Management: "Dharmesh ji, please go through your reports every day. What are all the expansions announced by other competitors, please go through that. What is announced by us also you can go through that, whether we are conservative, or we are very aggressive, you also can put it in your report."

Balance Sheet & Debt

• Net debt expected flat through March: Net debt currently stands at INR 4,700 crores and management broadly expects it to remain at that level by FY23 end, implying free cash flow will cover working capital and capex outflows without adding leverage.
• Management calls the level comfortable, not alarming: The company drew a parallel to 2010, when it carried INR 3,000 crores in borrowing for 0.7 crore tonnes of capacity and became zero-debt by 2014–2015. It cautioned, however, that uncertainties demand carefulness.
• Working capital driven by fuel value, not volume: The increase in working capital reflects the tripling of pet coke prices inflating inventory value, not a build-up in physical volumes. Management also cited supply uncertainty and the BPCL shutdown as reasons for holding more inventory.
• Capex versus cash flow tension: An analyst questioned the wisdom of spending on a second Kurnool line in an inflationary environment with high debt. Management deflected by asking the analyst to compare Ramco's expansion pace with competitors and judge for himself whether it is conservative or aggressive.

Operational Updates

• Kolimigundla plant commissioned: The greenfield cement plant in Kurnool district with 0.15 crore tonnes grinding capacity began commercial production in September 2022. Ramp-up costs are already in the numbers because clinker production started in June.
• R.R. Nagar modernization: Scheduled for commissioning before March 2023, the project was taken up one year ahead of schedule because the Kurnool project was delayed.
• Jayanthipuram limestone mine: A large mining lease of almost 10 crore tonnes of limestone reserves was secured 10–15 km from the plant. A 10-year agreement with railways provides a 50% concession in railway freight for limestone transport, with loading and unloading facilities to be created at the mines.
• Dry Mix products: Two plants in Tamil Nadu are ready for commissioning with market trials underway. Two more plants are under construction and will be commissioned next year. Each plant contributes around INR 80 crores in revenue. The remaining two units in Andhra Pradesh and Odisha will be commissioned during FY 2023–24.
• Mathodu revival: The old Mathodu plant has been revived as a grinding unit and is now dispatching 1,000 tonnes. Plans exist to increase capacity to 2,000 tonnes with minimum capex of INR 10–15 crores, though the company is deliberating whether to expand there or elsewhere.
• Discounts are GST-adjusted: All discounts given are net of GST, so the company does not lose GST on discounts.

Risk & Uncertainty

• Margin pressure from industry dynamics: Management flagged that continuing cement industry consolidation combined with fresh capacity additions could increase the appetite for market share among players, putting pressure on margins, especially given fuel price uncertainty.
• Fuel and macro headwinds: Further pet coke price surges, continuing fuel price volatility, faster rupee depreciation, and hardening interest rates are all identified as worrisome factors that could adversely affect margins in coming quarters.
• Visibility is unusually poor: Management noted that short-term business visibility, normally clearer, is now the opposite, and the uncertain situation may continue for a few quarters.
• Unanswered questions linger: Analysts pressed on the full reconciliation of the capex increase, the like-for-like power and fuel cost disconnect versus Q4 FY22, the blended fuel cost per kilo cal, and the capital allocation rationale for the Kurnool second line.

P.R. Venketrama Raja: "Usually, the short-term visibility of the business are much clearer. But this time, it is the other way around. The situation may continue for a few quarters, considering the prevailing uncertainties."

Guidance & Commitments

Key Metrics