JK CEMENT - Strength of grey, beauty of white - Edelweiss

JK Cement (JKCE) is the second-largest player in the high-growth white cement business and also one of the leading manufacturers of grey cement in India. Firm cement price outlook in North and South, incremental volume from its plant in South and robust white cement volumes will drive 16% EBIDTA CAGR over FY13-15E. While we value its grey cement business at 5x FY15E EV/EBITDA, we value the white cement business at 7x FY15E EV/EBITDA considering sustainable high margins. We initiate coverage on the stock with 'BUY' and target price of INR470.

Southern delight: Firm prices, operating leverage to propel EBITDA/t JKCE's plant in South (Karnataka) caters to Maharashtra and Karnataka markets, where prices are expected to remain firm. Moreover, the plant's EBITDA/t is >30% superior compared to the company's plant in the North (Rajasthan). We expect the Karnataka plant to contribute a lion's share of the incremental volume over FY13-15 as it operated at 51% utilisation in FY12 (North plant operated at full capacity). Ergo, factoring in improvement in operating leverage in South and firm price outlook, we estimate JKCE's EBITDA/t to catapult from INR667 in FY12 to INR757 in FY15.

White cement: Scaling to grow

JKCE is enhancing its white cement and putty capacities by 0.2mtpa each by end FY13 to meet the growing domestic demand. It is also installing a 0.6mtpa greenfield capacity in Fujaira (UAE) by end FY14 to cater to the global demand. These measures will catapult the segment's EBITDA from INR1.63bn in FY12 to INR3.18bn in FY15E and also increase the share in overall EBITDA from the current ~30% to ~40% by FY15E.

Outlook and valuations: Concrete outlook; initiate with 'BUY'

At CMP, the stock trades at 6.0x FY15E EV/EBITDA. We value JKCE's grey cement business at 5x FY15E EV/EBITDA (44% discount to our assumed multiple for large pan-India players) and white cement business at 7x considering sustainable high margins. Assuming 40% discount to the estimated capital work in progress (CWIP) as at the end of FY14, our SOTP-based target price is INR470/share (40% upside). Hence, we initiate coverage with 'BUY/Sector Outperformer' recommendation/rating.

Source : Equity Bulls

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