J.K. Cement - Cement Sector Update - Karvy

Grey Cement demand remain subdued post monsoon: Cement demand in the northern region has not picked up post monsoon on account of sand mining ban in Rajasthan, non availability of laborers due to the festive season and drop in the temperatures constraining working hours. This would result in only modest Rs10-12 per bag recovery in grey cement realization/ EBITDA per MT during 3QFY13 vs Rs20-25 per bag hike initiated at the end of 2QFY14. Hence, we expect JK Cement's (JKCE) grey cement's FY14E EBITDA to decline 65% FY14E.

Expanding White/Putty profit share to moderate FY14E EBITDA decline to 35% YoY: JKCE ramped up its White/putty capacity during 1HFY14 thereby leading to 22% YoY volume growth in 1HFY14. This along-with shrinking grey cement profitability boosted its EBITDA share 4x to 73%. White/putty EBITDA share should to expand to ~59% during FY14-15E vs. 38% during FY11-13 on account of JKCE's higher White/Putty sales.

Working capital strained: Over the last 2 quarters, JKCE's trade receivables has surged 50% on account of weak cement demand leading to higher credit period across trade & non-trade sales. Its loan & advances is up 40% driven by the on-going capex & CCI penalty deposit with the government.

Sharp decline in FY14E profitability: We expect JKCE's FY13-15E EBITDA & PAT CAGR of 19% and -2% as we factor in weak cement demand, expected delays in commission/ ramp-up of its upcoming capacities - 0.6 mn MT white cement expansion in Fujairah (expected in 4QFY14) and 3 mnMT in north India (by 2QFY15). A 60% YoY decline in FY14E PAT should result in JKCE's FY14E RoE to contract sharply to 5.4% vs 14.4% in FY13E.

Valuation & Recommendation: We maintain our "SELL" recommendation with a SOTP target price of Rs188 per share. We value JKCE's grey cement business at 4.5x Y15E segmental EBITDA and its white/putty business at 6.5x FY15E segmental EBITDA.

Source : Equity Bulls

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