JK Cement - Higher realization to support earnings, upgrade to Buy - Centrum

JK Cement's Q4FY12 result was below estimates with EBITDA margin at 21.3% (vs. est. 24.4%) and adj. profit at Rs688mn (vs. est. Rs808mn). Grey cement sales volume was at 1.49mt (vs. est. 1.51mt) and realization at Rs3,914/tonne (vs. est. Rs3,937/tonne). Energy cost during the quarter was higher at Rs1,204/tonne (vs. est. Rs1,125/tonne) led by sequential increase in pet coke prices which also impacted operating margin of the company. Though the result was lower than our estimates, profit of the company was up 37.8% to Rs688mn. Going forward, the management expects sales volume from South plants to improve and foresees 10-12% growth in grey cement sales volume in FY13E. Last year, sales volume from this plant was ~44% which is expected to improve to ~70% in FY13E. Cement price remained firm in July due to lower rainfall and we expect average retail price in Q2 to be lower by ~2% against our earlier expectation of 4% sequential decline, which will result in higher profits than our earlier estimates. We upgrade our earning estimate by 15.5%/14% to Rs33.7/Rs36.1 for FY13E /FY14E. JK Cement was our top-pick among mid-caps and recently we downgraded it to Neutral from Buy in our Strategy report. We upgrade it to Buy again with a price target of Rs293, upside of 27.3% from CMP.

- Higher realization and sales volume help post better results: Revenue of the company increased 21.5% YoY to Rs7.4bn led by 6.3% YoY growth in grey cement realization to Rs3,914/tonne and 13.3% YoY growth in cement sales volume to 1.49mt. Realization of White cement increased 32.3% YoY to Rs16,362/tonne. EBITDA increased 21.6% YoY to Rs1,565mn and profit increased 37.8% YoY to Rs688mn.

- Conference call highlights: 1) The management has started the next leg of expansions with a grinding capacity of 3mt (1.5mt each at Jhajjar, Haryana and Mangrol, Rajasthan). The clinker capacity expansion will be of 5,000tonnes/day. The capex for the project will be Rs17bn, which will include CPP of 25MW and a waste Heat recovery plant of 5MW. This plant is expected to be commissioned in FY15E and the LoI (Letter of Intent) for the machinery has been issued. 2) The project would be funded by a D/E mix of 1:2. Hence, the borrowings for expansion in India will be Rs11.5bn. 3) Clinker transportation to split grinding unit at Haryana will be through Nimbahera/ Mangrol plant. 3) Grey cement volume in FY13E is expected to increase by 10-12% YoY and the incremental growth will mainly be from the South-based plant. 4) Current average cement price is almost flat on a sequential basis. 5) In July '12, cement despatches were up 10% YoY (down ~4% MoM). 6) Cement demand is expected to grow by 7.5-8% YoY in FY13E. 7) The management will appeal against the order of the Competition Commission of India in the Competition Appellate Tribunal where a penalty of Rs1.29bn was imposed on the company.

- Earnings estimates revised upwards: We have revised our earnings estimates upwards by 15.5%/13.9% to Rs33.7/36.1 for FY13E/FY14E considering strong domestic realization.

- Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.4x FY14E EPS, 4.2x EV/EBITDA and EV/tonne of US$72.8. We expect improvement in RoE of the company to 14% in FY14E against 12.3% in FY12. We upgrade rating on the stock to Buy (from Neutral earlier) with a price target of Rs293, upside of 27.3% from CMP.

Source : Equity Bulls

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