JK Lakshmi Cement - Cement Sector Update - Karvy

Weak demand in north limits its FY14E volume growth: We expect JK Lakshmi's (JKLC) standalone FY14E sales volume to grow by 2.5% YoY. The growth is primarily driven by its clinker sale to the recently commissioned grinding unit of its subsidiary – Udaipur Cement. We factor in higher cement sales in FY15E on account of ramp up in JKLC's Jhajjhar grinding unit in 4QFY14 by 0.65 mnMT and expected demand recovery in the northern region.

Chhattisgarh green-field expansion expected by 3QFY15E: JK Lakshmi has deferred the commissioning of the 2.7 mn MT cement expansion in the eastern region by ~9 months on account of current weak demand environment. We are not factoring in any material contribution from this eastern plant in FY15E as further delays can be possible if demand remains sluggish. This green-field expansion will diversify the sales presence of JK Lakshmi Cement in the eastern & central regions vs. currently mostly being the northern region (& parts of Gujarat).

Profit decline to continue in 3QFY14: Amid the persisting weak demand in the northern region, we expect JKLC's volume to grow 6% QoQ (9% YoY). However, with QoQ price improved being limited to ~Rs10-12 per bag, we expect JKLC's EBITDA decline to continue for the fourth consecutive quarter.

Best in-class operating margins in its peer group: Further, JKLC has also delivered highest operating margin over the last 10 quarters on account of its cost efficiency as compared to its mid-cap peer group in the northern/central region (eg JK Cement Mangalam Cement, Birla Corp and Heidelberg Cement). We estimate JKLC's EBITDA & PAT CAGR of 12% and 9% during FY13-15E period on account of demand improvement from 4QFY14 onwards.

Valuation & Recommendation: We value the stock at 4.7x its FY15E EBITDA thereby arriving at a TP of Rs85.

Source : Equity Bulls

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