JK Cement - Capacity expansion of white and grey cement to boost future earnings - Centrum

We retain Buy on JK Cement with a TP of Rs295 as the earnings of the company are set to improve in 2HFY14E on the back of recent price hikes, indication of further price hikes by dealers and expectation of demand recovery going ahead. The company increased white cement production capacity recently to 0.6mt from 0.4mt which will help boost profitability form this segment. The expansion plan in the North region is on schedule with expected commissioning by Sep '14 and this will help volume growth in FY16E. Valuation at 4.8x FY15E /3.6x FY16E EV/EBITDA looks attractive.

Recent price hike to help earnings improvement in 2HFY14E: Our interaction with cement dealers suggests that prices were hiked recently by Rs20/bag in the trade segment and Rs40-50/bag in the non-trade segment across India except in the East region. Dealers expect further price hikes in the near-term. We believe these price hikes will sustain due to our expectation of a recovery in cement demand in 2HFY14E that could lead to better earnings post subdued H1FY14E. Our interaction with the management confirmed the recent price hike of Rs15-20/bag.

Capacity expansion in the North region to help volume growth: The Company is increasing capacity by 3mt (split grinding units of 1.5mt each in Haryana and Rajasthan) in the North region, post which its grey cement capacity will be 10.5mt. The grinding unit is expected to get completed by Jun '14 and clinkerization unit by Sept '14. Expansion in the North region will help volume growth of the company. We believe effective utilization in the North region will bottom out at 79.4% in FY14E and improve to 79.7%/81.4% in FY15E/FY16E.

Expect subdued Q2FY14E results due to lower volume and cement price: Grey cement volume for the quarter is expected to decline ~10% YoY largely due to lower volume from the South plant where despatches were down ~30% YoY. Grey cement volume declined 10.7% YoY (and 2.6% QoQ) during July and August '13. Sales volume of white cement is expected to increase ~3% YoY. Driven by the decline in sales volume and cement price, we expect the company to report 45-50% decline in op. profit during the quarter.

Valuation and key risks: The stock trades at 5.5x FY15E EPS, 4.8x EV/EBITDA and EV/tonne of US$58.8. We expect recovery in cement demand in 2HFY14E, which will help cement companies post better numbers. We maintain our positive stance on the company in the long run and believe the recent correction in the stock price factors in most concerns. We maintain Buy with a possible upside of 53.9% on the stock. Key downside risks could be a) lower sales volume and continued lower utilization rate of the Karnataka plant (3mt capacity, operating at ~44% utilization rate) and b) higher energy costs.

Source : Equity Bulls

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