The current section of the “Analysis” series covers Ramco Industries Ltd, a part of the Ramco group containing companies like The Ramco Cements Ltd, Ramco Systems Ltd etc. Ramco Industries Ltd is one of India’s largest manufacturers of building materials like fibre-cement sheets and boards, Calcium Silicate boards etc. Apart from these building materials, the company also has a significant presence in the textile-yarn segment.
Please note that to get maximum benefit from this article; an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of diverse types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.
Ramco Industries Ltd: Detailed Fundamental Analysis
Apart from operations within Ramco Industries Ltd, the company has investments in various subsidiaries both within India and abroad as well as investments in many associate companies, which are a part of the Ramco group. As a result, Ramco Industries Ltd reports both standalone as well as consolidated financials.
On March 31, 2023, the company had three subsidiaries (>50% shareholding) and 6 associate companies (> 20% shareholding) that were included in its consolidated results. Q4-FY2023 results’ announcement, page 18:
Subsidiaries:
- Sudharsanam Investments Limited
- Sri Ramco Lanka (Private) Limited, Sri Lanka
- Sri Ramco Roofings Lanka (Private) Limited, Sri Lanka
Associates
- The Ramco Cements Limited
- Ramco Systems Limited
- Rajapalayam Mills Limited
- Ramco Industrial and Technology Services Limited
- Madurai Trans Carrier Limited
- Lynks Logistics Limited
We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of a company present such a picture. Therefore, if a company reports both standalone as well as consolidated financials, then the investor should prefer the analysis of the consolidated financials of the company.
As a result, while analysing the past financial performance of Ramco Industries Ltd, we have analysed its consolidated financials.
Further recommended reading: Standalone vs Consolidated Financials: A Complete Guide
With this background, let us analyse the financial performance of Ramco Industries Ltd.
Financial and Business Analysis of Ramco Industries Ltd:
In the last 10 years (FY2014-FY2023), the sales of Ramco Industries Ltd have increased at 7% year on year, from ₹785 cr in FY2014 to ₹1,458 cr in FY2023. During this period, the sales of the company have increased almost consistently, year on year except in FY2020 when sales declined by 6% to ₹974 cr from ₹1,037 cr in FY2019.
However, over the years, the operating profit margin (OPM) of Ramco Industries Ltd has seen highly cyclical fluctuations. The OPM was 8% in FY2014 and then increased to 13% in FY2017. Thereafter, OPM declined to 11% in FY2020. However, in FY2021, OPM increased to 16%. Recently, OPM has declined to 10% in FY2023.
Moreover, in FY2014, the company reported a net loss of ₹3 cr.
To understand the reasons for such cyclically fluctuating financial performance of Ramco Industries Ltd, an investor needs to read the publicly available documents of the company like its annual reports from FY2000 onwards, credit rating reports by CRISIL and ICRA and its corporate announcements submitted to stock exchanges.
The above-mentioned documents show that the following key factors influence the business of Ramco Industries Ltd, which are critical to understand for any investor analysing the company.
1) Poor pricing power due to the commodity nature of building material and textile yarn products of Ramco Industries Ltd with many substitute products:
Both the business segments of Ramco Industries Ltd: building materials i.e. fibre cement sheets, boards etc. as well as textiles are commodities in nature where a customer can easily replace products from one supplier to another without suffering a lot of problems in functionality.
Apart from sourcing products from competitors, customers can also switch to substitute products. For example, for fibre cement sheets used in roofing, customers can use galvanized iron (GI) steel sheets, for fibre cement board used in furniture, customers can use wood or medium-density fibreboard (MDF) etc.
Credit rating report by CRISIL, May 2017:
Furthermore, AC roofing manufacturers also face stiff competition from manufacturers of galvanised iron (GI) roofing sheets, which has emerged as a viable alternative for AC roofing as the same is easily transportable and on account of price decline of GI sheets in recent years.
Along the same lines, for textiles (cotton yarn), customers can use clothes made of synthetic yarn.
Therefore, the products made by Ramco Industries Ltd do not provide it with any technological superiority where its customers are bound to use its products and can easily replace it as a supplier. As a result, Ramco Industries Ltd does not have a high negotiating/bargaining power over its customers.
Credit rating report by ICRA, October 2019, page 2:
threat of substitute products such as GI steel sheets limits the company’s pricing flexibility to pass on the fluctuations in raw material prices.
Due to a lack of pricing power, Ramco Industries Ltd is not able to pass on the increase in the costs of its raw materials to its customers. Therefore, during periods of increasing raw material prices, its profit margins are hit.
For example, in FY2004, the company’s profit margins were impacted because the increase in cotton prices could not be fully passed on as increased yarn prices.
FY2004 annual report, page 7:
Yarn price improved marginally but not enough to absorb the increase in Cotton prices
Even after the progression of the business for about a decade, in FY2014, Ramco Industries Ltd faced the same situation of a low pricing power while passing on increases in raw material costs to its customers, both in building materials as well as textile segments. Ramco Industries Ltd reported a net loss in FY2014.
FY2014 annual report, page 16:
Margins are under pressure as the market could not absorb the increase in operational costs such as material costs (due to Indian Rupee depreciation), power cost, etc.
cotton prices are currently ruling high at uneconomical levels. Due to sluggish demand for yarn, the Spinning Mills are not able to increase the yarn prices in line with the increased cotton cost. While the cost of major inputs are increasing steeply, the yarn prices are falling
Even in recent years, in FY2023, after many decades, Ramco Industries Ltd is not able to pass on increasing raw materials costs to its customers. This low pricing power has led to a sharp decline in its OPM in FY2023 to 10% from 15C% in FY2022.
Credit rating report by CRISIL, January 2023:
operating profitability is expected to range between 9-11%, mainly due to higher asbestos fibre costs, and lower pass-on of the same to customers, due to intense competition from substitute products.
Substitute products have a significant impact on the demand and prices of Ramco Industries Ltd. For example, in 2022 when steel prices increased, which impacted the prices of GI steel sheets, then Ramco Industries Ltd could also increase its prices of fibre cement sheets and earn a higher revenue.
Credit rating report by CRISIL, January 2022:
Revenue growth was supported by healthy demand from rural markets, and substitution demand, with the price of steel products (substitute) also registering a sharp increase.
FY2022 annual report, page 19:
Strong correlation in sales was noticed when the prices of substitutes went up.
The low pricing power of Ramco Industries Ltd was also visible in FY2013 when it intimated to its shareholders that its profit margins have declined because govt. incentives are no longer available and it cannot increase prices to maintain its profitability.
FY2013 annual report, page 10:
The drop in Profitability is due to the full utilization of the incentives of the Government of West Bengal.
Also read: How to do Business Analysis of a Company
2) Low entry barriers and intense competition faced by Ramco Industries Ltd puts pricing pressure:
Ramco Industries Ltd faces intense competition from its peers in both building materials as well as textile segments due to low barriers to entry for fresh players.
Credit rating report by ICRA, October 2019, page 1:
ratings, however, remain constrained by stiff competition in the industry, characterised by low entry barriers and ease of capacity expansion
In the building materials segment, 19 players compete for customers’ orders leading to intense competition as manufacturers of GI sheets also add to the competition.
Credit rating report by CRISIL, January 2023:
faces stiff competition from peers given the modest growth and the presence of 19 players in the industry. Furthermore, AC roofing manufacturers face stiff competition from manufacturers of galvanized iron (GI) roofing sheets
The textile industry is highly fragmented containing both organized and unorganized players. Therefore, the textile segment of Ramco Industries Ltd also faces fierce competition, which puts pressure on its profit margins.
Credit rating report by ICRA, October 2019, page 2:
In addition, the company witnessed moderation in margins in the textile segment owing to higher raw material prices and intense competition from fragmented and established players.
A combination of commodity products and intense competition from peers usually leads to price-based competition where all the players start to cut each other’s prices to gain business from customers. As a result, Ramco Industries Ltd has continuously faced pricing pressure since the early part of its existence.
In FY2004 annual report, the company intimated to its shareholders that its product prices are expected to be low due to intense competition.
FY2004 annual report, page 6:
selling prices are expected to be under pressure due to severe competition.
In FY2007, due to pricing pressure from competitors, the profit margins of the company declined leading to a decline in profits despite an increase in sales.
FY2007 annual report, page 7:
Due to sharp increase in raw material costs and lower realization due to acute competition, the Sheet Division’s Profits have come down
Similarly, in FY2012, the price war between cotton mills lead to a sharp decline of more than 30% in yarn prices.
FY2012 annual report, page 7:
The mounting pressure of inventory with Indian Mills and their eagerness to get rid of their inventory before the arrival of new cotton, virtually pushed the global yarn prices down by more than 30 per cent within a month.
The credit rating agency, CRISIL, highlighted that intense competition in the fibre-cement sheets segment was the main reason for the suboptimal performance of this business of Ramco Industries Ltd in FY2014-FY2016.
Credit rating report by CRISIL, May 2017:
Weak demand scenario and intense competition limited players ability to pass on input price increases to end users, resulting in subdued operating performance of RIL’s AC roofing business in the past three years
The impact of competition on the pricing ability of Ramco Industries Ltd is so much that it is able to charge a higher price to the customers only when all the competitors increase the prices.
FY2019 annual report, page 10:
Realisation also improved marginally compared to last year due to stiff pricing policies by competition.
Also read: How to analyse New Companies in Unknown Industries?
3) Cyclical nature of the business of Ramco Industries Ltd:
Both key business segments of Ramco Industries Ltd: building materials, as well as textiles, face alternate periods of boom and bust. There are a few factors that lead to this cyclicity in the business performance of the company.
The first factor is a dependence of the building material division on the real estate sector as well as the textile sector, which is dependent on the general economic cycle in the country.
During upcycle phase of the economy, people have a higher surplus of money, which increases demand for both building materials (new houses and home improvements) as well as textiles. Whereas during the downcycle phase of the economy, people postpone their expenditure on homes as well as on textiles.
For example, in FY2011, Ramco Industries Ltd faced a reduced demand for products in its division: building materials and textiles. As a result, it had to curtail its production of fibre cement sheets. Similarly, a lower demand for textiles leads to an oversupply of yarn and lower prices.
FY2011 annual report, page 7:
Considering the prevailing market condition, production of Fibre Cement (F.C) Sheets during the year 2010-11 was regulated with an intent to avoid stock build-up. Hence the actual production was lower
Current Year working may not be encouraging as there is a glut in Yarn Market throughout India. Prices of Yarn has come down and practically no enquiries
In the past, during FYFY2002-FY2003, Ramco Industries Ltd faced similar pressures on its business performance due to a downcycle in the general economic scenario.
FY2002 annual report, page 3:
profit margins were under considerable pressure due to lower realizations.
FY2003 annual report, page 6:
there was considerable drop in the selling prices of FC Sheets…The lower production was due to reduced demand in International market for the Cotton Yarn.
In fact, in the recession around the IT bubble of FY2000, the demand for one of the company’s products: fibre cement pipes suffered so much that for almost 4 years it did not have any sales and the company had to shut down this division and it gave its plant on lease to another pipe manufacturer.
FY2002 annual report, page3:
there had been practically no production of Pipes over the last 4 years. M/s. Kanoria Sugar and General Manufacturing Co. Limited, one of the major producers of Pressure Pipes, evinced interest to take on licence our Pressure Pipe production facilities
Along similar lines, in FY2023, the textile segment of the company suffered due to a decline in demand from the US and European markets.
Credit rating report by CRISIL, January 2023:
Demand in textile segment has also moderated in current fiscal due to recessionary environment in Europe and US markets and the cotton yarn spreads have come down, thereby affecting the profitability in textile segment as well.
The dependence on the general economic scenario for the demand for products results in alternating periods of good and subdued business performance of the company, which is seen in its cyclical operating profit margins (OPM).
Another factor leading to cyclicity in the performance of the company is its dependence on rural markets for the demand for its products. Demand in rural markets is linked to monsoon, which is unpredictable and generally leads to alternating periods of good and poor monsoon that impact the performance of Ramco Industries Ltd.
Credit rating report by ICRA, April 2023, page 2:
Vulnerability of demand to cyclicality in rural markets
In FY2014, when Ramco Industries Ltd reported net losses, then one of the key reasons for the mediocre performance was low demand from rural markets due to extended monsoon.
FY2014 annual report, pages 15-16:
Sale of FC Sheets has dropped by 19% compared to last year. Lower Offtake from the market is due to unseasonal and extended monsoon during the year
In FY2016, the country faced poor monsoons leading to a decline in demand for products of Ramco Industries Ltd.
FY2016 annual report, page 14:
Decrease in volume could be attributed to poor monsoon in the year resulting in lower demand in retail sales.
Along similar lines, when there is an upsurge in rural demand, then Ramco Industries Ltd shows good business performance. For example, during Covid in FY2021, when there was a reverse migration of labour from large cities to rural areas, then the demand for building materials increased sharply in rural areas. As a result, in FY2021, Ramco Industries Ltd reported its best profit margins in the last decade.
Credit rating report by CRISIL, January 2021:
The strong pent up demand for asbestos roofing products mainly due to reverse migration of rural population led to better average realizations and consequent improvement in profitability to 18.1% compared to 11.2% last year.
Later on, as the economy opened up and the migrant labour returned to cities, the sharp upsurge of rural demand declined and in FY2023, the operating profit margin (OPM) of the company declined to 10%.
Recommended reading: How to do Financial Analysis of a Company
4) Attempts by Ramco Industries Ltd to increase its operating efficiency:
While operating in a commodity business with low switching costs for customers and intense price-based competition, only companies with a low-cost structure are able to survive and grow. Therefore, over the years, Ramco Industries Ltd has taken multiple steps to reduce its operating costs.
4.1) Installation of windmills:
After facing a strong recession following the IT bubble, in FY2003, Ramco Industries Ltd started investing in windmills to reduce its power costs.
FY2003 annual report, page 7:
We have commissioned 3 nos. of windmills aggregating a capacity of 2.5 MW in Tirunelveli Dist., Tamil Nadu
Thereafter, it quickly increased its windmill capacity to 14.90 MW by FY2006.
FY2006 annual report, page 9:
Company commissioned new Wind Mills with an aggregate capacity of 8.65 MW…As on 31.03.2006, the position regarding Wind Mills is as follows: – Total capacity installed 14.90 MW
The company reaped the benefits of installing windmills in FY2012 when Tamil Nadu faced a power crisis and the state govt. restricted the power that companies could draw from the grid to only 25% of their requirements. During this period, having its own source of cheaper power helped the company.
FY2012 annual report, page 7:
The power cut in Tamil Nadu has worsened during the year…power availability was only 25% from March 2012…Timely decision taken by your Directors to install Windmills in previous years and purchase of power from Third Party have helped the Company to tide over the power crisis.
Currently, the company has 15 windmills with a total power generation capacity of 16.73 MW (FY2022 annual report, page 20).
To counter the power crisis, in FY2014, the company invested ₹1 cr in Cauvery Power Generation Chennai Private Limited (CPGCPL) so that it could get cheaper power under its group captive power arrangement. However, it did not result in desired results and Ramco Industries Ltd sold off its investment in CPGCPL later.
FY2014 annual report, page 86:
During the year, the Company made an investment of ₹ 100.00 lakhs in the Equity Shares of Cauvery Power Generation Chennai Private Limited in order to enable the company to purchase electricity from them under Group Captive arrangement…The Company has not renewed the power purchase agreement beyond March 2014 and hence sold the above investment
4.2) Strategic decisions for units working poorly:
Whenever any business unit of Ramco Industries was not working well, then it took strategic decisions so that either it starts to contribute meaningfully to the profitability or at least stop hurting the business due to its losses.
As discussed earlier, one such example was the shutting down of the fibre cement piping division when it did not produce anything for four consecutive years until FY2002. Then, Ramco Cement Ltd shut down this unit and leased it to another pipe manufacturer and started earning lease income.
Later, when the demand for these pipes declined so much that the lessee was not able to pay reasonable rent, then in FY2023, it sold the assets of the pipe division altogether (Q4-FY2023 results, page 5).
Let us see another such example when Ramco Industries Ltd took strategic steps to reduce its costs and add to its profitability.
In FY2006, the company installed a cement clinker grinding plant in Kharagpur, West Bengal for backward integration.
FY2006 annual report, page 9:
Cement Clinker Grinding Plant with a capacity to produce 600 Tonnes of Cement Per Day (both OPC and PPC) was commissioned at Kharagpur, West Bengal and production was taken in March, 2006. While OPC is meant for captive consumption for the manufacture of FC sheets, PPC is being sold in the market.
However, soon, the plant started facing troubles because the company was unable to source clinker to use in the plant.
FY2008 annual report, page 10:
Due to non-availability of Clinker, the production of Cement was lower in 2007-08.
As low-capacity utilization was putting pressure on the company’s profit margins, it entered a deal with Ultratech Cement, the largest cement manufacturer in India. Under the deal, the company started acting as a processor for Ultratech where Ultratech provided the clinker and bought the cement produced from the plant.
FY2009 annual report, page 7:
To overcome this difficulty, in October 2008, the Company entered into Agreements with M/s Ultratech Cement…for continuous supply of Clinker to the CCG plant and also for sale of PPC / OPC from the plant to ULTRATECH.
As a result of this deal, the cement plant that we previously becoming a drag on its profitability due to low utilization, now, started contributing to its profitability with improved cement production.
In FY2009, within 6 months of the deal, the cement production increased to 54,487 MT from 6,668 MT in FY2008 (FY2009 annual report, page 7). In FY2010, cement production increased to 105,320 MT (FY2010 annual report, page 7).
Later, in FY2018, the company sold this cement clinker grinding plant to its promoter-group company, The Ramco Cement Ltd (FY2018 annual report, page 135).
On another occasion, when Ramco Industries Ltd realized that it is not able to make desired profits from its plastic storage tank division, then it shut it down in FY2010 even though it had to take a loss of about ₹1 cr due to the closure.
FY2010 annual report, pages 7 and 57:
Directors have taken a conscious decision to exit from the production and sale of the Plastic Storage Containers, considering the lower profit margin available in this type of operation.
Impairment loss written off – Plastic storage tank 99,74,514
4.3) Voluntary retirement scheme for its employees:
In FY2015, Ramco Industries Ltd launched a voluntary retirement scheme (VRS) for its employee in its attempts to rationalize its workforce and optimise its employee expenses.
FY2015 annual report, page 98:
The Company had announced Voluntary Retirement Scheme (VRS) for the employees of Arakkonam Manufacturing Division during the year under review. A sum of ₹ 336.34 (lac) (Previous Year ` Nil) has been paid during the year
4.4) Entry into high-margin product segments:
To improve its profit margins, Ramco Industries Ltd is focusing to increase the share of segments like calcium silicate board (CSB), which has a comparatively higher profit margin than fibre cement sheets and board.
Credit rating report by CRISIL, January 2023:
Calcium Silicate Board (CSB) segment (~15% of total revenues in fiscal 2022) will partially mitigate the impact on margins as CSB segment commands higher margins.
Recommended reading: How to do Financial Analysis of a Company
5) High regulatory risk in the business of Ramco Cement Ltd:
The company faces a significant regulatory risk in its business due to the following factors.
5.1) Usage of asbestos as raw material in fibre cement sheets and boards:
One of the key raw materials to make fibre cement boards and sheets is asbestos, which has many adverse health-related consequences.
Asbestos mining and usage are banned in many countries. In India, mining of asbestos is completely banned whereas usage of only white asbestos is permitted. The usage of blue and brown asbestos, which are quite harmful is banned.
Credit rating report by CRISIL, May 2017:
In India, only white asbestos (known as crysotile) fibre is used, as blue and brown asbestos have been banned. Furthermore, all forms of asbestos mining are banned in the country.
Therefore, Ramco Industries Ltd has to import its entire requirement of asbestos from limited countries that still allow the mining of asbestos e.g. Russia, Kazakhstan etc. In the recent past, Brazil and Canada which used to allow asbestos mining have now banned it. It has further reduced the sources of asbestos available to Ramco Industries Ltd.
Credit rating report by CRISIL, January 2020:
company is exposed to the risk of a ban on mining and use of asbestos in Russia and Kazakhstan (which are the largest exporters of this mineral). Brazil and Canada, which were among the world’s largest producers, have already banned the mining and sale of asbestos in 2017 and 2018, respectively.
Due to these tight regulatory conditions related to asbestos, in FY2023, due to Russia Ukraine war, the availability and price of asbestos were sharply impacted. During 2023, the price of asbestos increased by about 30% and due to a lack of pricing power, Ramco Industries Ltd had to take a hit on its profit margins. Its OPM fell to 10% in FY2023 from 15% in FY2022.
Credit rating report by CRISIL, January 2023:
In the current fiscal, supplies of asbestos fibre from Brazil have been impacted due to a legal issue with the producer, while the ongoing Russia-Ukraine war, has resulted in cost of fibre from these markets going up…increase in asbestos base price by 30% in CY 2023
Even in FY2020, when the operating profit margin of Ramco Industries Ltd had declined, then one of the key reasons was an increase in asbestos prices, which it could not pass on to its customers.
Credit rating report by CRISIL, January 2020:
Also, one of the three global suppliers of asbestos shut operations after a mining ban, leading to a rise in the price of asbestos. Consequently, the operating profitability margin fell to 11.5% from 12.6%.
The health hazards related to asbestos mining, sales and processing continuously keep a very high regulatory risk on the business of Ramco Industries Ltd as overnight any adverse regulation may impact its business very significantly.
In the past, there have been public protests against asbestos in the markets where Ramco Industries Ltd operates like Bihar. Source: Bihar’s Singur? Stir over asbestos plant: Times of India
Ongoing public protests in Muzaffarpur over an upcoming asbestos plant have forced the district administration to impose Section 144 near the facility
To reduce the risk of a ban on asbestos, the company has started production of non-asbestos products like Greencor.
FY2020 annual report, page 15:
Greencor, Non-Asbestos roofing sheets have been well accepted in the market
5.2) Power-intensive operations:
The business of Ramco Industries Ltd consumes a significant amount of power. Therefore, it is exposed to govt. and regulatory changes related to the power sector.
For example, in FY2013 when due to a power crisis in Tamil Nadu, the govt. increased power prices sharply by 30% and also the wheeling charges i.e. tariff charged by govt. to deliver power from windmills locations to the factory, then despite having captive windmills, the profitability of the company suffered and its textile business segment reported losses.
FY2013 annual report, page 10:
The hike in electricity tariff rate by 30% by Government of Tamil Nadu and also hike in Wheeling and other charges imposed on Wind Mills have pushed up the cost of power very steeply.
FY2013 annual report, page 53:
In FY2014, the govt. put further tightened the terms for purchasing power from windmills and as a result, the company’s windmills were temporarily shut down leading to a loss of 6 million units costing about ₹3.5 cr leading to an increase in its power costs despite having captive windmill power plants.
FY2014 annual report, page 16:
unusual restrictions imposed by…(TANGEDCO) in evacuation of power generated by wind mills, which has resulted in loss in generation of power from wind mills to the extent of approximately 6 million units, which translated into ₹ 3.50 Crores in monetary terms. Due to shut-down of wind mills by TANGEDCO, the Company was forced to purchase the power…Due to this, the power cost during the year has gone up substantially
Subsequently, the company had to face other regulatory challenges related to power sourcing. For example, in FY2015, govt. mandated that companies that have captive power plants connected to the state grid must purchase a minimum of 0.5% of their power requirements from solar sources. This was irrespective of the fact that the captive power is windmill power. Otherwise, companies had to buy renewable energy certificates (REC) from the market or deposit the money with govt.
Ramco Industries Ltd challenged this regulation in court and got a stay.
FY2015 annual report, page 97:
Consumers owning grid connected captive power generating plants…are obligated to consume a minimum of 0.5% of their energy requirements from solar sources. The non-complainants are required to purchase Renewable Energy Certificates (REC) from markets @ 1 REC per 1,000 units of shortage or deposit an equivalent amount in a separate designated fund… approached the Honourable Chennai High Court and obtained an interim stay
Recommended reading: How to study Annual Report of a Company
6) Risks due to operations in Sri Lanka:
Ramco Industries Ltd has fibre cement sheet manufacturing operations in Sri Lanka via two subsidiary companies.
Originally, the company expected to derive significant benefits from its Sri Lankan operations. However, recently, its Sri Lankan has faced many problems one after another.
6.1) Political unrest:
In FY2019, the Sri Lankan operations of the company were impacted due to political unrest in the country.
FY2019 annual report, page 10:
Overseas operations of subsidiaries: There was a drop in volume due to political unrest last year.
The same situation continued in FY2020 and impacted the business of its subsidiaries (FY2020 annual report, page 10).
Moreover, in FY2022 and FY2023, due to the economic crisis in Sri Lanka, Ramco Industries Ltd faced challenges in receiving royalty payments from its Sri Lankan subsidiaries. Royalties of more than ₹23 cr were stuck for more than a year due to restrictions imposed by Sri Lankan central bank.
Q2-FY2023 results, October 2022, page 5:
Balance outstanding of Royalty amount is Rs. 2334 lakhs as on 30.09.2022, which is being received on part payments due to current status of repatriation restrictions imposed by the Central Bank of Sri Lanka
6.2) Foreign exchange fluctuations risk faced by Ramco Industries Ltd:
The company faces foreign exchange risk on multiple fronts. First, it must import a substantial portion of its raw material because its entire asbestos requirement needs to be imported. It exposes its business operations to the fluctuations of the Indian Rupee (INR) against various other currencies.
Second, its business operations in Sri Lanka add the risk of fluctuations of the Sri Lankan Rupee (LKR) against various other currencies and increase its forex risk.
In recent years, due to the economic crisis in Sri Lanka, LKR witnessed a sharp decline against all major currencies. As a result, Ramco Industries Ltd suffered substantial foreign exchange losses due to its Sri Lankan operations.
In FY2022, the company lost about ₹23 cr due to foreign currency fluctuations (FY2022 annual report, page 183).
In FY2023, the Sri Lankan operations of the company lost about ₹13 cr due to foreign exchange fluctuations.
Q4-FY2023 results, page 12:
Exchange fluctuation loss accounted in Sri Lanka subsidiary companies included in Other Expenses: ₹1,312 lac
Going ahead, an investor needs to closely monitor developments related to the Sri Lankan operations of the company to check whether the profitability improves.
The impact of global events on the business of Ramco Industries Ltd goes beyond its imports and Sri Lankan operations. Recently, it was significantly impacted by issues faced by sea trade especially due to the Russia-Ukraine war and global container shortages, which increased its transportation and handling costs.
In FY2022, it could not execute its orders due to high freight costs and container shortages.
FY2022 annual report, page 20:
There were a quite a few large volume orders which remained unexecuted due to very steep increase in freight costs, and also due to acute shortage in container availability.
Similarly, in FY2023, higher freight costs due to the Russia-Ukraine war and INR depreciation impacted its profit margins.
Credit rating report by CRISIL, January 2023:
Profitability moderation is due to elevated freight costs due to Russia-Ukraine crisis and effect of rupee depreciation on imports in fiscal 2023.
An investor should always keep in her mind the commoditised and cyclical nature of the business of Ramco Industries Ltd. She should remember that governments the world over are tightening their regulations on asbestos due to health hazards, which might leave a significant impact on the company at the stroke of a pen. Going ahead, she should closely monitor regulatory developments impacting Ramco Industries Ltd.
Over the last 10 years (FY2014-FY2023), the tax payout ratio of Ramco Industries Ltd has seen significant fluctuations. During the initial part, FY2014-FY2016, the tax payout ratio was low due to losses and using minimum alternate tax (MAT).
FY2015 annual report, page 100:
The Company has taxable income for the year computed under section 115JB of the Income Tax Act, 1961 (Minimum Alternate Tax).
Thereafter, from FY2017 to FY2022, the tax payout ratio has been in line with the corporate tax rate prevalent in India. The tax payout ratio stayed at 30% or above even after the announcement of the new reduced rate of corporate tax in FY2020 because the company decided not to opt for the new tax regime.
Q1-FY2023 results, July 2022, page 4:
The Company has not exercised this option based on current evaluation of the benefits available in existing tax regime.
In FY2023, the reduction in the tax payout ratio to 13% is because, from FY2023, Ramco Industries Ltd has opted for the new income tax regime and the deferred taxes have been recalculated as per the new regime. Due to this decision, the tax liabilities of the company declined by about ₹20 cr.
Q4-FY2023 results, May 2015, page 6:
Company has opted for shifting to new tax regime from FY 2022-23. Consequently, the Company has restated the net deferred tax liability as at 1-4-2022 in accordance with the reduced rate by crediting Rs.1986 Lacs to the Statement of Profit and Loss during the year.
Recommended reading: Deferred Tax Assets, Tax Payout (P&L vs. CFO): Queries Answered
Operating Efficiency Analysis of Ramco Industries Ltd:
a) Net fixed asset turnover (NFAT) of Ramco Industries Ltd:
Over the years, the NFAT of the company had stayed between 2 and 2.5. NFAT improved to 2.9 in FY2022, which was primarily due to pent-up demand post-covid and a surge in rural demand due to reverse migration of labour from cities to the hinterland. However, as economic activity has come back to normal post-covid, the NFAT of the company has also started declining to its long-term average levels.
Going ahead, an investor should monitor the NFAT of Ramco Industries Ltd to understand whether it is able to efficiently utilize its assets.
Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors
b) Inventory turnover ratio (ITR) of Ramco Industries Ltd:
Over the years, the ITR of Ramco Industries Ltd has been within 3 – 3.5 levels. It indicates that the company has maintained its efficiency of inventory management.
ITR has declined to 2.9 in FY2023, which is primarily due to the accumulation of asbestos inventory by the company in view of uncertainties of its availability due to the Russia-Ukraine war.
Credit rating report by CRISIL, January 2023:
RIL has increased the inventory levels of asbestos fiber stocks due to uncertainties in supply
Whenever any company accumulates significant inventory of any raw material whose price is volatile, then it may face inventory write-down/losses if the price of the raw material declines.
Ramco Industries Ltd faced losses of ₹2.4 cr on its cotton inventory in FY2020 and FY2021 when cotton prices declined sharply due to covid pandemic.
FY2020 annual report, page 174:
Mark to Market (MTM) Loss on Cotton inventory: Due to outbreak of Covid-19…the market price of Cotton had fallen by 5% due to poor market demand…During the month of April, 2020, the Cotton Corporation of India (CCI) has started selling the cotton by offering huge discount…and the market price of cotton had fallen by another 10% and the impact on cotton inventory was ₹ 238.29 Lakhs
Going ahead, an investor should monitor the inventory position of Ramco Industries Ltd to assess whether it is able to manage its inventory efficiently.
Further advised reading: Inventory Turnover Ratio: A Complete Guide
c) Analysis of receivables days of Ramco Industries Ltd:
Over the years, the receivables days of Ramco Industries Ltd have improved from 28 days in FY2015 to 19 days in FY2023. A reduction in receivables days shows that the company has collected its dues from customers in time.
Receivables days have increased to 33 days in FY2020 when covid related lockdown was announced. However, since then, receivables days have improved to 19 days in FY2023.
Going ahead, an investor should watch the trend of receivables days of Ramco Industries Ltd to assess whether it continues to collect its receivables on time.
Further recommended reading: Receivable Days: A Complete Guide
When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Ramco Industries Ltd for FY2014-FY2023, then she notices that over the years (FY2014-FY2023), the company has converted its profit into cash flow from operations.
Over FY2014-23, Ramco Industries Ltd reported a total net profit after tax (cPAT) of ₹1,706 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹824 cr.
It may seem that the company is not able to convert its profits into cash; however, an investor may note that the consolidated profit after tax of Ramco Industries Ltd contains a significant amount of “Share of Profit/(Loss) of Associates.” It relates to those companies where Ramco Industries Ltd has more than 20% but less than 50% stake. This represents the proportionate share of the company in their net profit, which may not be received in cash by the company. This is because the cash inflow from these associate companies will be in the form of dividend payments received by Ramco Industries Ltd from them. These dividend payments when received will be classified under cash flow from investing activities.
As a result, “Share of Profit/(Loss) of Associates” increases the net profit of the company over the years without a commensurate increase in cash flow from operating activities.
During the last 10 years (FY2014-FY2023), Ramco Industries Ltd reported a total of ₹977 cr as “Share of Profit/(Loss) of Associates”. Therefore, excluding it, the company had a net profit of ₹729 cr against which it had a cumulative CFO of ₹824 cr.
It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than PAT.
Further recommended reading: Understanding Cash Flow from Operations (CFO)
Learning from the article on CFO will show an investor that the following factors put a significant influence on cPAT and cCFO leading to a higher cCFO compared to cPAT excluding “Share of Profit/(Loss) of Associates”:
- Depreciation expense of ₹312 cr (a non-cash expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.
- Interest expense of ₹239 cr (a non-operating expense) over FY2014-FY2023, which is deducted while calculating PAT but is added back while calculating CFO.
- Other income of ₹269 cr (a non-operating income) over FY2014-FY2023, which is added while calculating PAT but is deducted while calculating CFO.
Going ahead, an investor should keep a close watch on the working capital position of Ramco Industries Ltd.
The Margin of Safety in the Business of Ramco Industries Ltd:
a) Self-Sustainable Growth Rate (SSGR):
Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company
Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.
Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.
An investor may calculate the SSGR using the following formula:
SSGR = NFAT * NPM * (1-DPR) – Dep
Where,
- SSGR = Self Sustainable Growth Rate in %
- Dep = Depreciation rate as a % of net fixed assets
- NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
- NPM = Net profit margin as % of sales
- DPR = Dividend paid as % of net profit after tax
(For systematic algebraic calculation of SSGR formula: Click Here)
An investor would notice that over the years, Ramco Industries Ltd had reported an SSGR in the range of 30-40% whereas, over the last 10 years (FY2014-FY2022), it has grown its sales at a rate of 7% year on year. As a result, the company has grown its sales within the levels that its business profits can sustain.
Therefore, over the years, Ramco Industries Ltd had no need to raise any additional capital. In fact, it has reduced its debt by ₹100 cr over the last 10 years from ₹408 cr in FY2014 to ₹308 cr in FY2015.
In addition, the company has paid out dividends of about ₹52 cr excluding dividend distribution tax to its shareholders and has invested a significant amount of money in its associate and group companies.
The investor gets the same conclusion when she analyses the free cash flow position of Ramco Industries Ltd.
b) Free Cash Flow (FCF) Analysis of Ramco Industries Ltd:
While looking at the cash flow performance of Ramco Industries Ltd, an investor notices that during FY2014-FY2023, it generated cash flow from operations of ₹824 cr. During the same period, it did a capital expenditure of about ₹416 cr.
Therefore, during this period (FY2014-FY2023), Ramco Industries Ltd had a free cash flow (FCF) of ₹408 cr (=824 – 416).
In addition, during this period, the company had a non-operating income of ₹269 cr and an interest expense of ₹239 cr. As a result, the company had a total free cash flow of ₹438cr (= 408 + 269 – 239). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.
As discussed earlier, Ramco Industries Ltd has used its surplus cash to reduce its debt, pay dividends to shareholders and invest in its associates and other promoter-group companies.
The cash and investments balance of the company has increased by ₹2,894 cr over the last 10 years from ₹237 cr in FY2014 to ₹3,131 cr in FY2023 primarily due change in accounting standards from GAAP to IndAS, which led to the recognition of its investments in shares of listed associate companies at market value.
During the transition period to IndAS, in FY2016, it had the major impact of an increase of about ₹1,740 cr.
Credit rating report by ICRA, October 2019, page 2:
as a part of adoption of Ind AS, due to fair value adjustments on investments in associates and other transition adjustments, the net worth for FY2016 was revised upwards by ~Rs. 1740.0 crore.
Going ahead, an investor should keep a close watch on the free cash flow generation by Ramco Industries Ltd to understand whether the company continues to generate surplus cash from its business and how it utilizes the same.
Further recommended reading: Free Cash Flow: A Complete Guide to Understanding FCF
Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of Ramco Industries Ltd:
On analysing Ramco Industries Ltd and after reading annual reports, credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.
1) Management Succession of Ramco Industries Ltd:
Ramco Industries Ltd is a part of the Chennai-based Ramco group. Currently, Mr P.R. Venketrama Raja, Chairman (age 64 years) and his son, Mr P.V. Abinav Ramasubramaniam Raja, MD (age 29 years) who are a part of the promoter family, are leading the company.
FY2022 annual report, page 120:
P.V. Abinav Ramasubramaniam Raja – Son of P.R. Venketrama Raja
The presence of two generations of promoters in the company at the same time indicates that the company has put in place a management succession plan in which the new generation of the promoter family is being groomed in business while the senior members of the promoter family are still active.
The presence of a well-thought-out management succession plan is essential in the case of promoter-run businesses as it provides for a smooth transition of leadership over the generations and provides continuity in the business operations of any company.
Further advised reading: How to do Management Analysis of Companies?
2) Project execution by Ramco Industries Ltd:
Over the years, the company has undertaken many capacity expansion projects, which it completed on time, which indicates good project execution skills by the company. Let us see examples of a few such projects.
In FY2000, immediately after its Sri Lankan subsidiary commissioned a fibre cement sheet plant of 45,000 MTPA, it announced further expansion by 50,000 MTPA. The company completed the additional expansion within a year (FY2001 annual report, page 4).
In FY2003, the company started work on a calcium silicate board (CSB) project in Arakkonam, Tamil Nadu and a fibre cement sheets project in Kharagpur, West Bengal with a timeline to complete it by September 2003 and January 2004 respectively (FY2003 annual report, page 7). Ramco Industries Ltd commissioned the CSB project in September 2003 and the FC sheet project in March 2004 (FY2004 annual report, page 6).
In FY2004, Ramco Industries Ltd started work on a fibre cement sheets project in Vijayawada with a timeline to complete it by March 2005 (FY2004 annual report, page 7). It commissioned this project in March 2005 (FY2005 annual report, page 9).
In FY2005, it started work on a fibre cement sheets project in Bhuj, Kutch, Gujarat and a new cotton yarn spinning unit at Rajapalaiyam, Tamil Nadu with a timeline to complete it by March 2006 (FY2005 annual report, page 10). The company commissioned the fibre cement sheet project ahead of schedule in January 2006 and completed the spinning mill project on time in March 2006 (FY2006 annual report, page 8).
In FY2005, the company started work on a cement clinker grinding project at Kharagpur with a timeline to complete it in the next year (FY2005 annual report, page 10). It commissioned this project in March 2006 (FY2006 annual report, page 9).
In FY2006, Ramco Industries Ltd proposed to enter the plastic storage tanks business (FY2006 annual report, page 5). The company completed its manufacturing plant in the next year itself and then it planned to expand its storage tank manufacturing capacity by making another plant in Maksi, MP (FY2007 annual report, page 7). It commissioned the plant at Maksi in the next year (FY2008 annual report, page 10).
In FY2007, it started to work to expand its cotton yarn capacity by adding 16,800 spindles with a timeline of August 2007 (FY2007 annual report, page 8). It commissioned this project in December 2007 (FY2008 annual report, page 10).
In FY2009, the company started work on a fibre cement sheets project in Gangaikondan, Tamil Nadu with a timeline to complete it by September 2010 (FY2009 annual report, page 5). It commissioned this project ahead of schedule in July 2010 (FY2011 annual report, page 7).
In FY2010, the company started work on a fibre cement sheets project in the Bhojpur district, Bihar (FY2010 annual report, page 7). It commissioned this project in May 2011 (FY2011 annual report, page 7).
In FY2011, it started work on its second unit of fibre cement sheets in Sri Lanka with a timeline to complete it in FY2012 (FY2011 annual report, page 8). It commissioned this project on March 30, 2012 (FY2012 annual report, page 8).
In FY2012, the company started work on a calcium silicate board (CSB) project in Kotputli, Rajasthan (FY2012 annual report, page 7). It commissioned the project in FY2014 (FY2014 annual report, page 16).
Therefore, the history of timely project execution by Ramco Industries Ltd indicates that it has good project management skills.
Now, in January 2023, the company has proposed to set up a new CSB plant in Madhya Pradesh with a timeline to complete it in 12-18 months.
Credit rating report by CRISIL, January 2023
RIL is also contemplating investing Rs.200 crores to set up a CSB plant in Madhya Pradesh…will take 12-18 months for completion.
An investor should monitor the developments related to this project to assess whether the company is able to complete it within the allocated cost and timelines.
Also read: Steps to Assess Management Quality before Buying Stocks
3) Related party transactions of Ramco Industries Ltd with promoter group companies/associates:
Over the years, Ramco Industries Ltd is involved in numerous transactions with its promoter group companies many of which are its associates i.e. it owns between 20-50% stake in those companies.
An investor always be cautious when she comes across transactions between a company and its promoter group companies because these transactions have the potential to shift economic benefits from public shareholders to promoters.
Let us analyse the related party transactions of Ramco Industries Ltd.
3.1) Commission paid to Raja Charity Trust, sole selling agent:
Ramco Industries Ltd has appointed Raja Charity Trust (RCT) as its sole selling agent for the company in India and it pays a 1% on sales to it.
FY2021 annual report, page 3:
M/s. Raja Charity Trust will be the Sole Selling Agent for the products of the Company in India…will be entitled to a commission of 1.00% (one percent) exclusive of taxes
RCT is a trust where the promoters (the chairman and the managing director) and one of the non-independent directors of the company are trustees.
FY2021 annual report, page 10:
Shri. P.R. Venketrama Raja, Shri Abinav Ramasubramania Raja and Sri.S S Ramachandra Raja, as the trustees of RCT
It may seem that the promoters in their personal capacity have formed an entity (RCT) and have garnered the sole selling agent contract from Ramco Industries Ltd and are earning commission on sales.
In the last 10 years (FY2014-FY2023), Ramco Industries Ltd has paid a commission of about ₹61 cr to Raja Charity Trust.
As it is the same people, the Chairman and the MD of Ramco Industries Ltd who have established RCT and are running the operations of RCT, then an investor questions why the same Chairman and MD could not create the same selling channel within Ramco Industries Ltd.
An investor is left confused why the company is effectively paying a commission to the Chairman and the MD for selling its products via their personal entity (RCT) when it is already paying them remuneration/salary in the Company for working to the best of their abilities to generate maximum returns for the shareholders.
Moreover, the company, apart from giving business to RCT is also providing loans to it so that RCT can run its operations smoothly.
FY2020 annual report, page 89:
Loan given to related party represents…loan given to M/s. Raja Charity Trust, an associate entity – ₹50 lakhs
Please note that promoters are acting as the sole selling agent of the company and earning a commission for very long. As per the earliest available annual report of the company (FY2000) available on BSE, page 5:
M/s. Raja Charity Trust, our Sole Selling Agents for Fibre Cement products in India, have been taking all efforts for marketing the entire production of the Company.
An investor may contact the company directly to understand why the Chairman and the MD could not create the selling infrastructure within Ramco Industries Ltd and they had to set up a separate entity (RCT) to act as a sole selling agent and the company had to pay a commission of ₹61 cr over last 10 years.
Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?
3.2) Investments by Ramco Industries Ltd in promoter group companies:
Ramco Industries Ltd has been investing money in other Ramco group companies for a long time. Out of many investments made by it in the promoter-group entities, the largest ones are in The Ramco Cements Limited (RCL, previously known as Madras Cements Ltd), Ramco Systems Limited (RSL) and Rajapalayam Mills Limited (RML).
To estimate the money invested by Ramco Industries Ltd in its promoter-group companies over the years, an investor may have to take the FY2016 balance sheet as the base because it is the last fiscal year when the balance sheet recorded investments on a cost basis.
As per FY2016 annual report, page 94, the company had invested more than ₹385 cr in other Ramco group companies. More than 99% of these investments were done in the three companies: RCL, RSL and RML.
Thereafter, in FY2019, it invested a further ₹10 cr in RCL by buying 148,000 shares from a promoter entity, Vishnu Shankar Mills (VSM).
Credit rating report by CRISIL, January 2019:
During the first half fiscal 2019, RIL has purchased 148,000 shares in Ramco Cements for Rs 10 crore from Vishnu Shankar Mills through related party transaction.
This transaction might be like giving an exit to VSM from RCL by purchasing these shares, which might have served the twin purpose of VSM getting the money and still, the ownership of these shares of RCL staying within the promoter Ramco group.
In FY2020, the company put in an additional ₹27.5 cr in shares of promoter group companies: ₹10 cr in RCL and ₹17.5 cr in Lynks Logistics Limited. (FY2020 annual report, page 166).
In FY2021, the company put in an additional ₹40.5 cr in shares of promoter group companies: ₹29.7 cr in shares of RCL by purchasing them from a promoter group company, Ramaraju Surgical Cotton Mills Limited and ₹10.8 cr in Lynks Logistics Limited. (FY2022 annual report, page 199, screenshot shown below).
In FY2022, the company put in an additional ₹61.3 cr in shares of promoter group companies: ₹50.6 cr in shares of RCL by purchasing shares worth ₹14.7 cr from the Chairman of Ramco Industries Ltd, ₹25.9 cr from his sister and shares worth ₹10 cr from RML. In addition, the company purchased shares of Lynks Logistics Limited for ₹9.51 cr and shares of RML for ₹1.21 cr (rights issue).
FY2022 annual report, page 199:
As mentioned earlier, purchasing shares of RCL for ₹50 cr by Ramco Industries Ltd is like giving an exit to the promoters (Chairman and his sister) and their company, RML. By this transaction, these entities got the money (₹50 cr) whereas the ownership of these shares of RCL stayed within the promoter Ramco group.
In FY2023, Ramco Industries Ltd invested ₹45 cr in shares of Ramco Systems Ltd (RSL) (page 2 of BSE announcement dated June 13, 2023: Disclosure of Related Party Transactions – Half Year ended 31.3.2023)
Therefore, in all, until FY2023, Ramco Industries Ltd has invested about ₹570 cr in shares of promoter group companies (=385 + 27.5 +40.5 + 61.3 + 45).
As per Q4-FY2023 results, page 9, on March 31, 2023, the market value of these investments is about ₹3,000 cr
Even though an investor may feel good that the money invested in promoter group companies has increased in value; however, she should always keep in her mind that when public companies enter such transactions with promoter group companies, then this money is no longer readily available to the company. Most of the time, these investments continue for decades, almost as permanent holdings by which promoters exercise their control on these entities.
For example, the investment of Ramco Industries Ltd in RCL (previously known as Madras Cements Ltd) and RML dates more than 20 years, at least before FY1999 as per the earliest annual report of the company for FY2000 available on the BSE website.
FY2000 annual report, page 17:
Moreover, we believe that such transactions/cross-holdings usually indicate the use of loopholes by promoters to inflate their shareholding in their group companies.
These steps are not illegal as there does not seem to be any law prohibiting the purchase of shares of group companies; however, as illustrated below, these steps benefit the promoters; that’s why promoters create such cross-holding structures of group companies.
Take an example of the shareholding of Ramco Industries Ltd (RIL) in The Ramco Cement Ltd (RCL). On March 31, 2023, the company owns about 21.36% stake in RCL. This stake is classified as promoter’s holding (i.e. Ramco’s holding) in RCL (check here: BSE).
However, on March 31, 2023, Ramco promoters have only 53.88% of Ramco Industries Ltd (RIL) (check here: BSE). The remaining 46.12% is owned by public shareholders. Therefore, out of the 21.36% stake of RCL owned by RIL, only 11.51% is owned by Ramco promoters (=21.36% * 53.88%) whereas the remaining 9.85% is owned by public shareholders (=21.36% * 46.12%).
As per the above calculation, ideally, via RIL, the stake of Ramco promoters in RCL should be only 11.51% instead of disclosed 21.36%. However, the promoters due to their majority shareholding in RIL, end up controlling the entire stake of 21.36% of RCL owned by RIL i.e. also the 9.85% stake of RCL ideally owned by the public shareholders of RIL.
I.e. by putting in 53.88% of the money (Ramco promoters’ stake in RIL), the promoters are able to control 100% of the ownership of RIL in RCL shares.
Along similar lines, Ramco promoters are effectively able to control a higher stake in RIL by owning this stake via other publicly listed group companies.
On March 31, 2023, out of the 53.88% stake in RIL owned by Ramco promoters, 15.40% is owned by The Ramco Cements Ltd (RCL where promoters have 42.29% stake and the rest is owned by the public) and 9.68% is owned by Rajapalayam Mills Limited (RML where promoters have about 55.43% stake and rest is owned by the public).
Therefore, out of the 53.88% stake owned by promoters in Ramco Industries Ltd (RIL), public-listed group companies own a 25.08% stake (=15.40 + 9.68) in which public shareholders also own a substantial stake. Therefore, by owning their stake in RIL via these public-listed group companies (RCL and RML), the promoters are able to control even that portion, whose money is effectively contributed by the public shareholders of RCL and RML.
Therefore, we believe that via these cross-holding structures, promoters are able to inflate their stake. If they own their stake in company A via another publicly listed company B (where they have a 50% stake), then for ₹1/- put by them in company B, they can control a stake worth ₹2/- in Company A, which is by using the equal stake of the public in company B.
In the past, Ramco promoters seem to have used another loophole of using intercorporate deposits to increase their shareholding in their group companies.
Let us see an example of it from FY2007 when effectively The Ramco Cements Ltd (RCL, previously called Madras Cements Ltd) gave an intercorporate deposit (ICD) of ₹4 cr to RIL, which RIL transferred to its wholly owned subsidiary, Sudharsanam Investments Limited (SIL), which then used it to buy shares of RCL.
In FY2007, Ramco Industries Ltd (RIL) bought additional shares of Madras Cements Ltd for about ₹17.4 cr as the cost value of RIL’s investment in Madras Cements Ltd on a consolidated basis increased from ₹38.9 cr in FY2006 to ₹56.3 cr in FY2007.
FY2007 annual report, page 48:
However, out of this investment of ₹17.4 cr, only ₹13.4 cr of shares were purchased in the name of Ramco Industries Ltd (RIL) because, in the standalone financials, the value of RIL’s investment in Madras Cements Ltd increased from ₹34 cr in FY2006 to ₹48.4 cr in FY2007.
FY2007 annual report, page 31:
Therefore, we may conclude that the remaining investment of ₹4 cr (=17.4 – 13.4) done by RIL in Madras Cements Ltd was done via its subsidiary, which is the difference between the increase in RIL’s stake in Madras Cements Ltd in consolidated and standalone financials.
To learn the source of money that was used by its subsidiary, Sudharsanam Investments Limited (SIL) to buy shares of Madras Cements Ltd, we read the FY2007 annual report in detail.
In the related party transactions section, we notice that in FY2007, Ramco Industries Ltd (RIL) had given an ICD of ₹4 cr to SIL and at the same time, Madras Cements Ltd had given an ICD of ₹4 cr to Ramco Industries Ltd (RIL).
FY2007 annual report, page 55:
As money is a fungible commodity; therefore, the above series of transactions indicate that Madras Cements Ltd gave an ICD of ₹4 cr to Ramco Industries Ltd (RIL), which then forwarded this ICD of ₹4 cr to its subsidiary Sudharsanam Investments Limited (SIL). SIL then used this ₹4 cr to buy shares of Madras Cements Ltd.
Therefore, in this case, effectively, by using the money lying with Madras Cements Ltd, the promoters could increase their control over Madras Cements Ltd by routing that money via RIL and then SIL into buying shares of Madras Cements Ltd.
₹4 cr originally lying with Madras Cements Ltd belonged to both promoters as well as public shareholders in proportion to their shareholding. However, now, after this series of transactions, the promoters have complete control of the shareholding of ₹4 cr of Madras Cements Ltd purchased using this money because this entire stake will reflect under “Promoters’ shareholding” in Madras Cements Ltd.
In FY2023, Ramco Industries Ltd (RIL) sold shares of HDFC Ltd worth ₹48 cr and out of this invested ₹45 in shares of Ramco Systems Ltd (RSL).
Q4-FY2023 results, page 11:
Sale proceeds of ₹48 cr belonged to all the shareholders of RIL i.e. 53.88% belonged to the promoters and 46.12% belonged to public shareholders. However, after investing ₹45 cr in shares of RSL, promoters will effectively control the entire shareholding of RSL purchased using this money.
Please note that these steps may not be illegal; however, they allow promoters to own a higher percentage of stake in their group companies than if they distribute this money to all shareholders (e.g. as dividends) and use only their share of money to buy shares of group companies.
To learn more about other loopholes used by promoters to inflate their shareholding in companies and to read other live examples, an investor should read the following article: How Promoters use Loopholes to Inflate their Shareholding
Promoters are keen to increase their shareholding in the Ramco group companies to the extent that they frequently pledge their existing shareholding with lenders to get loans that they use to buy shares of group companies.
For instance, Mr P.R. Venketrama Raja, Chairman of Ramco Industries Ltd had pledged a part of his shareholding in the company to raise loans for buying shares of other group companies.
Corporate announcement to BSE, January 6, 2023, page 1:
3.3) Loans and guarantees were given to promoter group companies by Ramco Industries Ltd:
Over the years, on numerous occasions, Ramco Industries Ltd has given loans as well as given guarantees for loans taken by its promoter-group companies from other lenders.
In FY2009, Ramco Industries Ltd gave an intercorporate deposit (ICD) to Ramco Systems Ltd of ₹1.25 cr (FY2009 annual report, page 61).
In FY2010, the company gave ICDs to Ramco Systems Limited for ₹1.25 cr and to Rajapalayam Mills Limited for ₹3 cr.
Additionally, Ramco Industries Ltd has been giving guarantees to the lenders on behalf of promoter-group companies for the loans taken by them.
For example, in FY2013, the company had given guarantees for almost ₹110 cr to the promoter group entities namely: Ramco Systems Limited (₹65.5 cr), Shri Harini Textiles Limited (₹36.3 cr) and Deccan Renewable Wind Electrics Ltd / Axis Wind Energy Ltd (7.7 cr).
FY2013 annual report, page 75, related party transactions section:
The company has been extending guarantees for promoter group companies for a long time. For example, in FY2001, it had given a guarantee for ₹16 cr to a promoter group entity, Thanjavur Spinning Mill Limited.
FY2001 annual report, page 28:
Corporate guarantees furnished by the company to banks on behalf of M/s. Thanjavur Spinning Mill Limited to support their credit facilities was outstanding to the extent of Rs.16 crores as on 31st March, 2001.
Giving guarantees to banks for loans taken by others is risky because if due to any reason, these other companies are not able to repay their lenders, then the lenders will recover their money from Ramco Industries Ltd.
While doing its assessment, the credit rating agency CRISIL adds these guarantees to the debt of Ramco Industries Ltd. So, these guarantees effectively carry the same risk as the debt taken by Ramco Industries Ltd itself.
Credit rating report by CRISIL, January 2023:
outstanding amounts against corporate guarantees provided to weaker Ramco group companies have been included as debt of RIL.
It seems ironic when a company like Ramco Industries Ltd, which has been supporting numerous promoter-group entities by way of equity investments, loans and guarantees, when announces its own capital expansion project, then instead of tapping into all these entities for funds, it has to take loans and pay interest costs.
The company plans to take a loan of ₹150 cr to fund its latest announced calcium silicate board project.
Credit rating report by CRISIL, January 2023:
RIL is also contemplating investing Rs.200 crores to set up a CSB plant in Madhya Pradesh and is expected to avail Rs.150 crores of debt for the project.
In the past, there have been instances where Ramco Industries Ltd had to use short-term loans for long-term purposes, which usually is a sign of stretched liquidity because using short-term loans for long-term purposes creates an asset-liability mismatch, which can create a risky situation for companies.
FY2007 annual report, page 26:
Company has utilized Rs.29.68 Crores from Short Term sources towards Long Term obligations.
Therefore, it seems that at times, Ramco Industries Ltd has gone out of its way to help promoter-group entities.
Also read: Why Management Assessment is the Most Critical Factor in Stock Investing?
3.4) Business transactions with promoter group entities:
Ramco Industries Ltd enters into many sale and purchase transactions with other Ramco group companies including the sale of yarn to Rajapalayam Mills Limited, Rajapalayam Textile Limited, Sandhya Spinning Mill Limited, purchase of cement from The Ramco Cements Limited etc. Cumulatively, these transactions exceed ₹100 cr in a year. In FY2022, Ramco Industries Ltd sold and purchased goods and services worth ₹133 cr (FY2022 annual report, pages 193-195).
In addition, the company sold its assets to group companies e.g. in FY2018, it sold its cement clinker grinding plant to The Ramco Cements Ltd for ₹21.13 cr.
An investor should closely monitor all the related party transactions of Ramco Industries Ltd with its promoters and their entities because all such transactions have the potential of transferring economic benefits from public shareholders to promoters.
3.5) Joint ownership of Aircrafts with promoter group companies:
In FY2004, Ramco Industries Ltd invested ₹1.02 cr to get 1/8th stake in an aircraft with other Ramco group companies (FY2004 annual report, page 28).
In FY2009, the company increased its stake in the aircraft from 1/8 th to 1/6 th by putting in additional ₹35.5 lac. (FY2009 annual report, page 27).
In FY2011, it bought joint ownership (50%) in another aircraft by investing ₹5.8 cr (FY2011 annual report, page 51).
The FY2012 annual report disclosed that Ramco Industries Ltd owns these aircrafts in joint ownership with The Ramco Cements Ltd (previously known as Madras Cements Ltd).
FY2012 annual report, page 66:
In FY2016, the company sold its transferred its ownership of the aircraft to a promoter group company providing aircraft charter services, Madurai Trans Carrier Limited (MTCL) and received a 17.17% equity stake in MTCL.
In FY2022, Ramco Industries Ltd paid ₹4.13 cr to MTCL for aircraft charter services (FY2022 annual report, page 196).
In the case of ownership of aircraft and availing chartered aircraft services, an investor may do her due diligence regarding the need for such services or whether the company could have been better with other available alternatives.
As in the case of all other related party transactions, an investor should be very cautious while analysing them.
Also read: How Promoters benefit from Related Party Transactions
4) Remuneration of promoters of Ramco Industries Ltd:
While analysing the remuneration paid by the company to its promoter family members, an investor notices some incidences, which need consideration while doing management analysis.
While analysing the remuneration of promoters, we have assessed them in comparison to the performance of operations of Ramco Industries Ltd i.e. after excluding the share of profit of associate companies.
The below table shows the net profit of Ramco Industries Ltd from its operations after excluding the share of profits of associates from FY2014 to FY2023.
In FY2017, the net profit of the company excluding the share from associates declined by 20% from ₹69 cr in FY2016 to ₹56 cr in FY2017. However, in FY2017, the remuneration of the Chairman, Mr P.R. Venketrama Raja increased by 260% to ₹3.13 cr from ₹1.12 cr in FY2016 (FY2017 annual report, page 47).
Along similar lines, in FY2019, when the net profit of the company excluding the share from associates declined by 6% from ₹79 cr in FY2018 to ₹74 cr in FY2019, the remuneration of the MD, Mr P.V.Abinav Ramasubramaniam Raja increased by 41% to ₹2.92 cr from ₹2.07 cr in FY2018 (FY2019 annual report, page 50).
The next year, in FY2020, when the net profit of the company excluding the share from associates declined further by 6% to ₹69 cr, the remuneration of the MD, Mr P.V.Abinav Ramasubramaniam Raja increased by another 40% to ₹4.03 cr (FY2020 annual report, page 51).
It represented a case where the salary hike given to the promoters has no correlation with the operating performance of the company. The company itself stated this fact in its annual report.
FY2020 annual report, page 51:
There was no relationship between the average increase in remuneration and the Company’s performance
As a result, there is no surprise that the MD of the company at the age of 28 years, in FY2021, drew a salary of ₹8.24 cr, which seems high at about 7% of the net profit of the company excluding the share from associates in FY2021 of ₹116 cr.
Advised reading: How to identify Promoters extracting Money via High Salaries
5) Ramco Industries Ltd reported debt as an inflow under cash flow from operating activities:
While analysing the FY2015 annual report, an investor notices that the company has included an increase in the current maturity of long-term debt (CMLTD) as an inflow under cash flow from operations (CFO).
An investor can ascertain it via the following steps.
In the cash flow statement for FY2015, the company has disclosed ₹54.89 cr as an inflow on account of “Other current Liabilities” in the CFO calculation.
FY2015 annual report, page 86:
The section “other current liabilities” in the annual report shows that it has increased by about ₹50 cr in FY2015 to ₹145.49 cr from ₹95.76 cr in FY2014.
FY2015 annual report, page 90:
Out of different components of “other current liabilities”, the biggest contributor to the increase during FY2015 is Current Maturities of Long-term Debt (CMLTD): Secured and Unsecured portions, which have increased to ₹92.95 cr (= ₹73.07 cr secured + ₹19.88 cr unsecured) in FY2015 from ₹51.69 cr in FY2014 i.e. an increase of ₹41.26 cr (= 92.95 – 51.69).
Therefore, out of the ₹54.89 cr of inflow shown by Ramco Industries Ltd in the CFO calculations under “other current liabilities”, the maximum contribution from CMLTD (₹41.26 cr), is nothing but a debt component.
Therefore, we may conclude that in FY2015, Ramco Industries Ltd included ₹41.26 cr of debt as an inflow under cash flow from operations, which had the impact of showing a higher CFO than it actually is.
We can crosscheck this finding by ascertaining the cash flow from financing activities of Ramco Industries Ltd for FY2015.
In the summary balance sheet for FY2015, an investor notices that the long-term borrowings (LTB) have decreased from ₹183.02 cr in FY2014 to ₹112.95 cr in FY2015 representing a decrease (outflow) of ₹70.07 cr (= 183.02 – 112.95). On the other hand, short-term borrowings (STB) show an increase (inflow) of ₹33.48 cr from ₹173.67 cr in FY2014 to ₹207.15 cr in FY2015.
FY2015 annual report, page 84:
The data of LTB and STB showed in the summary balance sheet excludes the current maturity of long-term debt (CMLTD). This is because, in the summary balance sheet, the CMLTD is shown under other financial liabilities.
Cash flow from financing activities of Ramco Industries Ltd for FY2015 shows only the outflow in LTB (₹70.07 cr) and the inflow in STB (₹33.48 cr) as calculated above using only the LTB and STB data from the summary balance sheet without factoring in the CMLTD.
FY2015 annual report, page 87:
A comprehensive view from all the calculations done in the above discussion would show that the data in the CFF only corresponds to the LTB and STB as per the summary balance sheet data. Therefore, the CFF data misses the impact of the current maturity of LTD (CMLTD), which is an increase/inflow of ₹41.26 cr included in the other financial liabilities.
At the same time, the calculations of the CFO include the impact of CMLTD through “other current liabilities”.
Therefore, the net impact of these accounting assumptions followed by Ramco Industries Ltd is that the inflow/increase due to CMLTD of ₹41.26 cr is shifted from cash flow from financing activities (CFF) to cash flow from operating activities (CFO).
This effectively inflates/increases the CFO by ₹41.26 cr and deflates/decreases the CFF by ₹41.26 cr.
As a result of these accounting assumptions, an investor should be extra cautious while analysing the financial data presented in the financial statements.
Advised reading: How Companies Manipulate Cash Flow from Operating Activities (CFO)
6) Scope for improvement in internal processes and controls at Ramco Industries Ltd:
An investor comes across many instances which indicate that internal processes and controls of the company have a scope for improvement. Let us see some of these instances.
In FY2014 and FY2015, the company delayed its interest payments to lenders and as a result reported “Interest Due but not paid” in the annual report. At the end of FY2014, it had an “Interest Due but not paid” of ₹2.10 cr and at the end of FY2015, it was ₹1.57 cr.
FY2015 annual report, page 28:
A delay in the payment of interest despite having a large investment portfolio indicates that it might be due to a lack of oversight that interest payments got delayed.
In FY2010, the company purchased some DEPB scrips from the open market to adjust against its pending custom duty liabilities. However, it could not verify the authenticity of these scrips. Later, these scrips turned out to be fraudulent and in FY2015, the company received a notice from the Department of Revenue Intelligence (DRI).
FY2015 annual report, page 98:
Company received a notice from the Department of Revenue Intelligence (DRI) for an amount of ₹ 32.40 lakhs excluding interest and penalty pertaining to the year 2009-10 for short payment of customs duty to the extent of utilization of DEPB Scrips purchased in the open market by the Company and which were originally obtained by the ultimate export firms fraudulently as alleged by the DRI
In FY2018, the company delayed the filing of Annual Performance Reports (APR) under FEMA regulations for its Sri Lankan subsidiaries.
FY2018 annual report, page 20:
As regards compliance with FEMA…the Annual Performance Reports (APR) for the financial year ended 31st March 2017…should have been submitted…on or before 31st December 2017. However, the Company:
(a) Has not submitted the APR of its WOS, M/s. Sri Ramco Lanka (Private) Limited…as on the date of this report; and
(b) Has belatedly submitted the APR…of the financial year ended 31st March 2017 to the AD in respect of…its SDS M/s. Sri Ramco Roofings Lanka (Private) Limited, only on 23rd May 2018.
In FY2019, the company could not verify whether the auditor of the company who has issued limited review reports for its quarterly results had met all the requirements stipulated by ICAI. In FY2019, one of its auditors did not meet the condition of the peer review certificate from August 15, 2018, to March 25, 2019.
FY2019 annual report, page 20:
Regulation…requires the listed entity to ensure that the limited review reports…on a quarterly basis are to be given only by an Auditor who has subjected himself to peer review process…and holds a valid certificate…The Peer Review process of one of the Company’s Joint Auditors M/s. Ramakrishna Raja & Co., was due for review on 15th August 2018…and the Certificate was issued by the Peer Review Board on 26th March 2019.
Therefore, it seems that the internal processes and controls at Ramco Industries Ltd have a scope for improvement.
An investor may read the example of National Peroxide Ltd, a Wadia Group company, where there was a history of inadequate internal controls and later, a fraud came out indicating that the senior management was siphoning off the money for almost 10 years. Later on, the company fired the senior management including the managing director of the company.
An investor may read our detailed analysis of National Peroxide Ltd and the fraud due to weak internal controls in the following article: Analysis: National Peroxide Ltd
The Margin of Safety in the market price of Ramco Industries Ltd:
Currently (July 1, 2023), Ramco Industries Ltd is available at a price-to-earnings (PE) ratio of about 11.9 based on consolidated earnings of FY2023. An investor would appreciate that a PE ratio of 11.9 appears low and seems to offer a margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor. However, the market may be giving it a low PE ratio due to the continuous outflow of cash from the company to other Ramco group companies.
Moreover, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which considers the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be a sign of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
Analysis Summary
Ramco Industries Ltd has grown its business at a rate of 7% per annum over the last 10 years (FY2014-FY2023). During this period, its sales have seen a nearly consistent increase; however, its profitability has followed a cyclical pattern as its OPM has fluctuated between 8% and 16%.
The company’s products are commodity in nature where a customer can easily switch from one supplier to another without a significant impact on functionality. In addition, customers can also choose from many substitute products like GI steel sheets. Therefore, Ramco Industries Ltd does not have strong pricing power over its customers and whenever raw material prices increase, then it is not able to pass it on to customers. As a result, it has to take a hit on its profit margins.
Ramco Industries Ltd operates in an intensely competitive environment, both in the building material as well as textile segment where players compete on price to gain customers’ business. Due to low entry barriers, the competitive intensity is continuously high.
The company depends upon the general economic situation for its demand because the real estate industry with spending on home improvement and clothing creates demand for its products. As a result, it faces cyclicity in its demand and its business performance.
In such a situation, Ramco Industries Ltd attempts to reduce its costs and become a low-cost producer to survive and grow amid intense price-based competition. It has installed windmills to reduce its power costs, has closed uneconomical business segments like piping division and plastic storage containers, contracted with Ultratech to improve utilization of its cement plant and later sold it to a group company, The Ramco Cements Ltd. It also rationalized its employee costs by offering VRS and is increasing its presence in the high-margin calcium silicate board segment to increase its profit margins.
The company uses asbestos to make its fibre-cement sheets and boards, which is a toxic material and is banned in many countries for mining as well as use. India has banned all mining of asbestos and allows only the use of imported white asbestos in manufacturing while completely banning the use of blue and brown asbestos.
As a result, Ramco Industries Ltd has to import its asbestos requirement from limited suppliers, whose number is continuously reducing due to the ban on asbestos mining in Brazil and Canada. Now, coupled with the ongoing Russia-Ukraine war, the prices of asbestos have increased impacting its profit margins. Recently, it is maintaining a high asbestos inventory due to supply uncertainties. Ongoing local protests in India against asbestos processing plants increase the regulatory risk for the company.
Ramco Industries Ltd has also suffered from adverse regulatory changes in the power segment especially in Tamil Nadu. It has also faced challenges in its investments in the Sri Lankan market as recently, its operations are hit by political unrest and economic downturn in the country. Due to restrictions imposed by Sri Lankan central bank, it could not get royalties from its overseas subsidiaries.
The company has produced a surplus cash flow over the last 10 years (FY2014-FY2023) and has invested a large portion of it in equity shares of other Ramco group companies like The Ramco Cements Ltd, Ramco Systems Ltd and Rajapalayam Mills Ltd. Some of these companies own large stakes in Ramco Industries Ltd. These cross-holding structures allow promoters to increase their shareholding in group companies by utilizing even those resources that ideally belong to public shareholders.
Ramco Industries Ltd has also given loans and guarantees to lenders for loans taken by other promoter-group companies. It seems ironic because, for its own expansion project, the company is planning to take debt despite going out of the way to support other promoter-group companies with its resources.
Currently, promoter-family members: the 64-years old chairman and his 28-years old son, managing director are leading the company. In the past, the promoters have received large salary hikes despite a decline in the profits excluding the share of profit of associates of the company.
In addition, the promoters earn a 1% commission by acting as the sole selling agent for the company via their trust. In the last 10 years (FY2014-FY2023), the company has paid a commission of about ₹61 cr to their trust. We believe that instead of running a separate trust as a selling agent, promoters could have used their skills to create selling teams and infrastructure within Ramco Industries Ltd to save the company’s costs and increase profits for public shareholders.
Ramco Industries Ltd enters into business transactions for the purchase and sale of goods and services exceeding ₹100 cr every year with other promoter-group companies. It also shares chartered aircrafts with the Ramco group. Investors should analyse all these transactions in depth.
The company seems to have good project execution skills because, in the past, it has completed numerous capital expansion projects within or ahead of scheduled timelines.
There is a scope for improvement in the internal controls and processes at Ramco Industries Ltd because at times a lack of oversight seems to have resulted in delays in payment of interest to lenders, and submission of required documents to govt. authorities. Moreover, the company has shown debt under the current maturity of long-term debt (CMLTD) as an inflow under cash flow from operations (CFO) instead of cash flow from financing activities (CFF).
Therefore, investors should increase the level of their due diligence while analysing the company’s financial statements.
Going ahead, an investor should keep a close watch on the profit margins of the company to assess whether it is able to handle an intensely competitive environment. She should check further investments by the company in promoter-group companies to see if it diverts its resources for the benefit of group companies.
Investors should closely track regulatory developments related to asbestos and the power sector as they have a significant impact on the company. They should monitor developments in Sri Lanka because a significant money is invested by the company there. They should check each related party transaction of the company with its promoter-group entities because each of these transactions has the potential of shifting economic benefits from public shareholders to promoters.
Further recommended reading: How to Monitor Stocks in your Portfolio
These are our views on Ramco Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
I hope it helps!
Regards,
Dr Vijay Malik
P.S.
Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
