JK Cement - Operating performance disappoints - Centrum

JK Cement's Q4FY13 result was below estimates with EBITDA at Rs1.3bn (vs. est. Rs1.7bn), EBITDA margin at 17.2% (est. 20.8%) and Profit at Rs562mn (est. Rs785mn). Lower operating profit was primarily due to lower than estimated grey cement realization of Rs3,684/tonne (est. Rs3,854/tonne). Revenue during the quarter was at Rs7,688mn (est. Rs8,094mn) led by lower realization of grey cement. The expansion plan of 3mt (split grinding units of 1.5mt each in Haryana and Rajasthan) are on track and the management expects these plants to get commissioned by mid-FY15E. Going forward, the company is set to benefit from its capacity expansion of white cement (0.6mt from 0.4mt in FY12) and we expect sales volume growth of 12.4% and 11.7% in FY14E and FY15E respectively. White cement and wall putty sales volume has grown by 14.5% and 22.2% YoY during FY13. As per the management, grey cement sales and realization are under pressure post Q4 and the volume is down by ~13% for April '13, whereas, realization is down ~5% from the average of Q4FY13. Considering lower volume and realization, we have revised EPS estimates downwards by 14.5%/8.4% to Rs40.6/Rs46.5 for FY14E/FY15E. Though we expect the earnings to recover in H2FY14E due to recovery in demand, considering the current sluggish environment the stock is expected to remain under pressure in the near-term. In the long-run, we maintain our positive stance on the company and advise to accumulate at lower levels. We maintain Buy on the stock with a one year price target of Rs374 (earlier: Rs415).

- Lower sales volume and realization of grey cement impact profit: Revenue of the company declined 4.6% YoY to Rs7.7bn led by 14.5% YoY decline in grey cement revenue. Revenue from white cement was up 38.4% YoY during the quarter. Led by sharp decline in operating profit of grey cement (51.9% YoY), operating profit declined 33.6% YoY to Rs1.3bn. Adjusted profit of the company was down 34.3% YoY to Rs562mn.

- Lower sales volume, realization and higher cost impact grey cement: Revenue of grey cement declined 14.5% YoY to Rs5,600mn led by 11.3% YoY drop in sales volume to 1.52mt and 3.6% YoY decline in realization to Rs3,684/tonne. Operating cost for grey cement increased 9.1% YoY led by increase in raw material, freight and energy costs. OPM of grey cement declined 10.1pp YoY (3.4pp QoQ) to 13%. EBITDA/tonne of grey cement was at Rs480 against Rs885 in Q4FY12.

- Robust performance of white cement continues: Revenue from the white cement segment increased 38.4% YoY to Rs2,088mn driven by increase in sales volume of 18.9% YoY and 16.4% YoY in realization. EBITDA from this segment was up 14.1% YoY (and 5.4% QoQ) to Rs583mn. OPM of the segment was down 5.9pp YoY to 27.9%, whereas, EBITDA/tonne declined 4% YoY to Rs4,941/tonne.

- Earnings estimate revised downwards: Considering the weak demand and realization in key markets of the company, we have revised volume assumption downwards by 2.9% for FY14E. We have also revised realization assumption downwards by 3.2%/2.6% for FY14E/FY15E. Factoring in these changes, EPS estimate for the company stands revised downwards by 14.5%/8.4% for FY14E/FY15E.

- Maintain Buy on attractive valuations: At the CMP, the stock trades at 6.8x FY14E EPS, 3.9x EV/EBITDA and EV/tonne of US$60.7. Though, we expect the stock to remain weak in the near-term considering weak demand scenario and pressure on realizations, we remain positive on the company in the long run. We expect improvement in RoE of the company to 15.9% by FY15E against 12.3% in FY12. We maintain Buy on the stock with a price target of Rs374 (based on 4.5x FY15E EBITDA and assigning the benefit for debt portion of capex), upside of 36.1% from the CMP.

Source : Equity Bulls

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