JK Cement - Smartly exploring opportunities - PhillipCapital

JK Cement Ltd. (JKC) announced its Q2FY13 results recently and we also hosted a conference call to discuss the company's performance and the outlook forward. JKC is amongst the leading cement manufacturers in North India (7% capacity share) and a new entrant for grey cement in South India (3% capacity share). The company is one of the only two notable white cement manufacturers in the country enjoying 40% white cement market share (UltraTech Cement enjoys the majority of the rest). We re-initiate coverage with a BUY rating and a price target of Rs413 (+26%). The following are some of the key takeaways from the recent discussion on the conference call and investment arguments for JKC:

- JKC's volumes grew by 18% YoY (-8.3% QoQ), 25% YoY (9.4% QoQ) and 41% YoY (12.7% QoQ) in business segments of grey cement, white cement and putty, respectively. Of the total grey cement sales; North India operations contributed 66% balance coming from South Indian operations. JKC's South India utilisations have improved from 40% YoY to +60% currently (Declined sequentially from 67%; 16% YoY volume growth). It sold 1 mn tonnes of grey cement volume in South India in H1FY13E (0.7mn tonnes YoY) and JKC believes that they are now a sturdy and established brand in South India. South India operation caters largely to regions of Karnataka, Maharashtra and Goa (small quantities being also sold in markets of Andhra Pradesh & Kerala). JKC expects volumes to pick up 3QFY13 onwards, expecting at least 6mn tonnes of consolidated grey cement volumes (North + South India), which will mean a minimum growth of 13% YoY. JKC does not expect any major new capacities to firm up in Karnataka till the end of FY14.

- Realisations have improved by R2.100/tonne in grey cement in current quarter. Average net sales realisation for JKC for Q2FY13 were at Rs3860/tonne (Rs3,250/tonne YoY; Rs3,914/tonne QoQ) and Rs16,760/tonne (Rs13,980/tonne YoY; Rs16,360/tonne QoQ) for grey cement and white cement, respectively. Absolute EBITDA was at Rs881mn (Rs252mn YoY; Rs.1.19 bn QoQ) and Rs435mn (Rs370mn YoY; Rs396mn QoQ) for grey cement and white cement, respectively. Grey cement recorded an EBITDA/tonne of Rs.644. JKC's North India realisations for Q2FY13 was at Rs3,740/tonne while for South operations it was at Rs4,280/tonne. South India operations currently are more profitable by Rs.200 per tonne. There was no change in sales mix of JKC (in terms of trade and non-trade sales) in Q2FY13. JKC believes that peers who have reported marginal growth in realisations sequentially, the increase is largely on account of location advantages of plant or split grinding units. JKC expects to partially overcome this disadvantage in North India in the longer run with setting up of its split grinding facility in Haryana.

- JKC expects FY13E to close with a 15% volume growth YoY. FY14E onwards the volume growth guidance remains at 12-15% YoY. It is to be noted that presently and for immediate future, all the volume levers are only from South India, as JKC's North Indian operations are already operating at optimum capacity utilisations. Given the current scope of volume growth in South India and its Brownfield expansions in North India, JKC firmly believes that even in a worst case scenario, the company will comfortably deliver a minimum of 10-12% YoY volume growth for the next couple of years.

We have valued JKC at 6.0x EV/EBITDA in White Cement segment and 7.0x EV/EBITDA in Grey Cement segment on FY14E earnings. JKC is moving smartly with two simultaneous expansions, effectively in two different business segments (Grey and white cement). These expansions will not only strengthen footprints of JKC in grey cement in North India but will also ensure that it emerges as one of the leading global white cement producers with an overseas production facility, ultimately also enhancing the brand value of JKC in Indian and overseas markets. Moreover, the concept of having a grey cum white cement plant has worked very effectively for JKC. Volume triggers for JKC will continue to emerge one after the other, as and when these expansions commission.

At CMP of Rs328, stock of JKC trades at 8.3x and 7.9x PER; 5.5x and 5.9x EV/EBITDA and US$ 77 and 99 EV/tonne on FY13E and FY14E earnings, respectively.

At our price target of Rs413, stock of ICL will trade at 10.4x and 9.9x PER; 6.4x and 6.7x EV/EBITDA and US$90 and 112 EV/tonne on FY13E and FY14E earnings, respectively.

Re-rating of the stock becomes inevitable as JKC moves closer to the 10mn tonne p.a. capacity mark.

Source : Equity Bulls

Keywords