JK Cement - Management interaction - Takeaways and earnings revision - Centrum

We spoke with the management of JK Cement on future prospects and volume trends from its South and North plants. Key takeaways are given below:

- Significant volume decline from South plant: Grey cement sales volume from the South plant was down 30.1% YoY to 0.24mt in April and May '13 against 0.35mt in April and May '12. We expect the sales volume from this plant to be 0.37mt for Q1FY14E, a utilization rate of ~49%.

- North plant volumes too under pressure: Grey cement sales volume from North plant was down 7.6% YoY to 0.58mt in April and May '13. In Q1FY14E, we expect sales volume from this plant at 0.86mt, a utilization rate of 76.6%.

- Lower volumes in North & South plants result in steep decline in grey cement volume: Led by lower volume from both North and South based plants, grey cement sales volume declined 15.6% YoY to 0.82mt during April and May '13. We expect grey cement sales volume to be 1.2mt in Q1FY14 against 1.5mt in Q1FY13.

- White cement volume grows: Sales volume of white cement increased 28.2% YoY to 0.74mt during April and May '13 and we expect the company to report ~18% YoY volume growth for white cement to 0.11mt during Q1FY14E. Also, volume growth for wall putty was at 60.7% YoY during April and May '13. The management expects volume growth for white cement and wall putty to be over 10% and 20% in FY14E. The company has expanded white cement production capacity to 0.6mt from 0.4mt during FY13.

- Update on grey cement capacity expansion: Expansion plan of 3mt grey cement capacity in the North region is running as per schedule. The management expects Mangrol (Rajasthan) plant of 1.5mt to be completed by September 2014 and the split grinding unit at Jhajjar (Haryana) by June 2014. This expansion will also include a 25MW coal-based thermal power plant, waste heat recovery (WHR) plant of 10MW and railway sliding at both units.

- Earning estimates revised downwards: We have revised sales volume estimates for the company downwards by 4%/4.7% for FY14E/FY15E considering weak demand across India. We have revised realization assumption for grey cement downwards by 1.6% for FY15E. Factoring in lower volumes and realization, EPS estimates for the company stands revised downwards by 12%/11.2% to Rs35.8/Rs41.3 for FY14E/FY15E.

- Valuation and recommendation: The stock is trading at 6.4x FY14E EPS and 5.5x FY15E EPS. On EV/EBITDA, it trades at 4.4x FY14E and 3.6x FY15E (adjusted for debt portion of capex related to grey cement plant). On EV/tonne, it trades at US$65.1 and US$62 on FY14E and FY15E respectively (adjusted for debt portion of capex related to grey cement plant). Though, grey cement sales volume is expected to remain under pressure till H1FY14E, the company will benefit from higher volumes in the white cement segment. We expect white cement sales to grow 12.7%YoY/11.5% YoY during FY14E and FY15E. During FY13, white cement sales volume increased 16.7% YoY to 0.44mt. Led by volume growth in the white cement segment, we expect EPS to grow at a CAGR of 11.9% between FY13-FY15E. RoCE is expected to improve to 14.5% by FY15E against 13.4% in FY13. The stock has corrected by 17% post weak Q4 results and we believe that at the current price, it factors in most of the negatives in terms of weak volume and pricing scenario. We maintain Buy on the stock with a revised price target of Rs331 (Rs374 earlier), based on 4.5x FY15E EBITDA and assigning the benefit for debt portion of capex.

Source : Equity Bulls

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