JK Cement - Stellar performance, maintain Buy - Centrum

JK Cement's Q2FY13 result was above estimates with EBITDA at Rs1.3bn (vs. est. Rs1.2bn), EBITDA margin at 18.2% (vs. est. 17.2%) and profit at Rs541mn (vs. est. Rs410mn). Higher profit was largely due to a) higher sales of white cement at 0.10mt (vs. est. 0.09mt), b) grey cement realization at Rs3,973/tonne (vs. est. Rs3,939/tonne) and c) 22.5% QoQ decline in interest cost to Rs290mn. Going forward, with higher sales from South plants in the current year, the management believes that grey cement sales volume could increase by 8-10% in FY13E. Last year, sales volume from this plant was ~44% which is expected to improve to ~70% in FY13E. The expansion plan of 3mt (split grinding units of 1.5mt each in Haryana and Rajasthan) is on track and the management expects these plants to get commissioned by end-FY14E. We believe that higher grey and white cement sales volume will lead to improved earnings for the company and expect EPS to grow by 53.1% YoY to Rs39.4 in FY13E. EPS of the company is expected to grow at a CAGR of 24.7% between FY12-FY15E. Higher earnings will lead to improvement in RoE to 16.9% in FY13E against 12.3% in FY12. JK Cement is our top-pick among midcaps and we maintain Buy on the stock with a price target of Rs354, upside of 30.5% from the CMP.

- Better performance from both segments helps to post better results: Revenue of the company increased 39.3% YoY to Rs7.1bn led by 40.9% YoY growth in grey cement revenue and 34.6% YoY growth in revenue of white cement. EBITDA increased 114.9% YoY to Rs1.3bn and EBITDA margin expended 6.4pp YoY to 18.2%. EBITDA margin expansion was primarily due to 7.9pp YoY improvement in op. margin of grey cement. Adj profit of the company increased 15.2x YoY to Rs541mn.

- Higher realization and sales volume lead to stellar performance from grey cement: Led by 17.8% YoY sales volume growth and 19.6% YoY realization growth, revenue from grey segment increased 40.9% YoY to Rs5.4bn. Higher realization and sales volume led to 189.2% YoY growth in operating profit of this segment to Rs839mn and EBITDA margin expanded 7.9pp YoY to 15.4%. Operating cost of grey cement increased 9.3% YoY to Rs3,360/tonne primarily due to an increase in raw material, energy and freight costs. EBITDA/tonne of grey cement increased 145.4% YoY to Rs614/tonne.

- Sequential improvement in operating profit of white cement: Sales volume of white cement increased 12.2% YoY (and 9.3% QoQ) to 0.10mt and realization increased 19.9% YoY (and 2.6% QoQ) to Rs16,792/tonne. EBITDA from this segment was up 17.6% YoY (and 9.8% QoQ) to Rs435mn. EBITDA/tonne increased 4.8% YoY (and 0.5% QoQ) to Rs4,307/tonne.

- Earnings estimates revised upwards: We have revised our earnings estimates upwards by 2%/1.6% for FY13E/FY14E to Rs39.4 and Rs43.5 respectively.

- Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.2x FY14E EPS, 3.3x EV/EBITDA and EV/tonne of US$64.6. We expect improvement in RoE of the company to 16.9% in FY13E against 12.3% in FY12. For FY13E, we are expecting 53.1% YoY growth in EPS to Rs39.4. Earnings of the company is expected to grow at a CAGR of 24.7% between FY12-FY15E. We maintain Buy on the stock with a price target of Rs354, upside of 30.5% from the CMP.

Source : Equity Bulls

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