Though the share price of Ramco Industries has doubled to Rs 720 in less than two months, it still holds a good upside potential
Ramco Industries is probably the only Asian company to have a full-fledged Enterprise Resource Planning (ERP) software product. Its ERP product Ramco Marshall has been well received in international markets and is doing reasonably well. (ERP software integrates all the operations of an organisation across locations and across various functions.)
Ramco is currently planning to spin off its software business into a separate company. This will be win-win situation for shareholders of Ramco Industries as they are expected to be rewarded by way of shares in the new company. The spin-off will enable the systems division to realise much higher value than it currently gets from the market. Further, analysts expect the systems division to be profitable and double its turnover this year.
Ramco's core business of asbestos cement is the most profitable division at present and commands the highest margins at the operatioanl levels in the industry.
Analysts say that the cement and the textiles business of Ramco are profitable and generate a return on capital employed of over 30 per cent (The systems division is unprofitable with carried forward losses). Moreover, it holds 13 per cent of Madras Cements, which alone is currently worth Rs 66 crore, while Ramco Industries has a market capitalisation of Rs 306 crore. This is an added advantage of buying Ramco.
Systems business: Growth driver
Ramco Systems, a division of Ramco Industries at present, competes with international ERP majors like SAP, Baan, PeopleSoft and Oracle, both in the local and international markets. The Ramco Systems model has been very different from other Indian software companies like Infosys Technologies or Satyam Computer. It has entered both the Indian and global market with one branded product. It does not provide services like other software majors.
Infosys Technologies attracts a P/E of 60, Satyam Computers has a P/E of 35.6 while Ramco Industries has a P/E multiple of only 20. In international markets, software majors like Netscape, Microsoft, Oracle having branded products attract much higher P/E multiples than those who do not have branded products. Analysts say in the long run, a product-based, branded business proves to be more tougher to enter and hence profitable. They expect an upward revaluation for Ramco in the near future.
Developing a brand always means heavy capital expenditure in the initial phase, and it has been only five years since Ramco Systems began its commercial operations. For example ERP majors like SAP, Baan and PeopleSoft to have reached the current position have taken 10 to 25 years. ERP is a major growth area for software companies as almost all global companies are going for an ERP to remain successful in the long run.
The global ERP market is expected to be around $15 billion at present and is expected to triple in the next three years. Even if Ramco captures just 0.5 per cent of the present market, it will mean a turnover of $75 million (Rs 315 crore).
At present, Marshall is installed at 150 customer installations worldwide. Its latest version Ramco Marshall 3.0 has met with good response globally with repeat orders from existing clients. Implementaion of the ERP software can take up to three years and implementation costs are often much higher than the software cost.
While other ERP companies sell the package separately and the implementation is mostly done by an independent vendor, Ramco sells a solution including the software and implementation.
Ramco has invested around Rs 150 crore in the last five years in the form of development, fixed assets and capital investments in subsidiaries abroad for Marshall. Last year onwards, the company has started amortising the capital expenditure incurred. In 1997-98, it amortised Rs 20 crore as deferred revenue expenditure.
Ramco Systems posted a turnover of $11 million and made a loss. Other than its US subsidiary, the other four subsidiaries are making profits. Analysts expect the company to wipe out the carried forward loss of these subsidiaries of around Rs 60 crore in three years. Analysts expect this division to post a turnover of $20 to $25 million this year. As major expenses have been incurred, the expenditure growth will come down enabling the company to make profits from this year.
Other businesses: Cash cows
Cement fibre business:Ramco Industries manufactures 'Ramco' fibre cement roofing sheets, flat sheets, fibre cement pressure pipes, roofing accessories, irrigation and rainwater pipes and fittings. It has a 13 per cent market share in the asbestos cement sheets business. To increase its market share, it is expanding its capacity by building new plants. It is setting up a facility at Silvassa with a capacity of 45,000 tonne per annum at a cost of Rs 15 crore. This plant should help the company service large markets in the west and north.
In 1997-98, the company exported around Rs 0.75 crore worth sheets to Sri Lanka and Oman. It is planning to increase its presence in Sri Lanka and is setting up a greenfield sheeting plant in Colombo with a capacity of 36,000 tonne at Rs 16 crore.
While the systems business accounts for about 50 per cent of the capital employed, its contribution to the profit is zero whereas the cement fibre business acccounting for 35 per cent of the capital employed contributes around 80 per cent of the current profit.
Textiles business: The asbestos industry has been going through a bad phase with excess capacity and poor demand. To mitigate the effect of this, Ramco had diversified into textiles and software. It has a 100 per cent export oriented cotton yarn unit. Though last year cotton yarn exports have come down from Rs 23.03 crore in 1996-97 to Rs 20.01 crore, realisations have improved. This is primarily due to increased orders for finer counts of cotton and cost control.
Competition in international market has increased due to the Asian crisis. Analysts say Ramco will get affected this year but to a much lesser extent as most orders are for finer counts. This means that this division will not be affected much.
Financials
Ramco's financial performance has been good considering the state of the industries in which it operates. Though the turnover came down 3.8 per cent to Rs 154.97 crore in 1997-98, the company has been able to maintain margins at operating levels. Operating profit margin increased marginally from 21.87 per cent to 21.9 per cent. Net profit margin has been maintained at 9.6 per cent. Though interest expense came down 9.4 per cent to Rs 9.9 crore, interest will increase this year as the debt burden has increased, and probably slow down the profit growth. This is already visible in the first quarter results where interest expenses increased 85 per cent to Rs 3.43 crore.
Last year, the company started to write off the product development expenditure for Marshall. It charged Rs 6.16 crore to the profit and loss account. In spite of this expense, it has been able to maintain its net profit margin at 9.6 per cent. Return on capital employed dropped to 15.3 per cent in 1997-98 from 22 per cent in 1996-97. This is due to the marginal drop in profits while the capital employed increased during the year. Return on net worth also dropped to 13.1 per cent in 1997-98 from 19.5 per cent. Ramco Systems is expected to double its turnover this year from Rs 44 crore to Rs 88 crore. If Ramco is able to maintain same margins, which it can, it will post a net profit of Rs 18.5 crore. This works out to an EPS of Rs 43 making it attractive at a discounting of 16 times.
