JK Cement - Q3FY14 Result update - Result better than estimates, challenges continue - Centrum

Rating: Hold; Target Price: Rs185; CMP: Rs181; Upside: 2%

Result better than estimates, challenges continue

We maintain Hold rating on JK Cement with a price target of Rs185 due to expensive valuations and bleak cement demand scenario putting pressure on the margins in the grey cement business. Going forward, the company is set to benefit from a) expansion in white cement capacity of 0.6mt in UAE by March '14 and b) expansion of grey cement capacity of 3mt in the North region by Sept '14. But, we remain concerned on the deterioration of earnings quality of cement companies led by lower demand which has put pressure on realization and impacted their operational performance. In the quarter, profit was above our estimates led by higher sales volume of grey cement, lower interest cost and higher other income.

Lower profit from grey cement segment impacts performance: Revenue of the company declined 1.8% YoY to Rs6.7bn led by 5.8% YoY decline in grey cement revenue. Revenue from white cement was up 7.1% YoY during the quarter. Led by sharp decline in operating profit of grey cement (down 77.4% YoY), operating profit declined 45.3% YoY to Rs731mn. Adjusted profit declined 80.3% YoY to Rs112mn.

Lower realization and higher operating costs impact grey cement's performance: Revenue from grey cement segment declined 5.8% YoY led by 10.1% YoY drop in realization. Sales volume of grey cement was up 4.8% YoY. Led by sharp decline in realization, EBITDA of this segment declined 77.4% YoY to Rs177mn. Operating cost for grey cement was up 3.4% YoY led by increase in energy and freight costs. OPM of grey cement declined 12.5pp YoY to 4%.

Better performance continues for white cement segment: Revenue from white cement segment increased 7.1% YoY led by 12.3% YoY increase in sales volume. Sales volume of white cement increased 5.5% YoY and that of Putty 23.4% YoY. Realization of this segment was down 4.6% YoY led by decline in realization of Putty (due to pressure from local players, as suggested by the management). EBITDA from this segment increased 5.2% YoY. OPM declined 48bps YoY to 25.7% mainly due to a fall in realization.

Valuation & Risks: The stock trades at 6.4x/4.8x FY15E/FY16E EV/EBITDA. The near-term scenario for the grey cement business continues to remain challenging and there has been steep volatility in cement prices due to lacklustre demand. We maintain Hold rating with a price target of Rs185, possible upside of 2%. Key upside risks could be a) better cement realization and b) higher than expected sales volume. Key downside risks could be a) lower sales volume and continued lower utilization rate of the Karnataka plant b) lower than expected realization of grey cement and c) delay in commissioning of white cement capacity.

Source : Equity Bulls

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