BUY JK Lakshmi Cement: AnandRathi Institutional Research

JK Lakshmi Cement - Expansion to drive earnings; initiating, with a Buy with a target price of Rs 409

The northern India-based JK Lakshmi Cements, with 8.3m-ton cement capacity and self-sufficient in energy, with 93 MW, is one of the most cost-efficient companies in our universe. Despite the expansion plans, we expect better operating cash flows. We initiate coverage, with a Buy and a price target of Rs. 409.

Expansion to drive growth. With plants at various locations, JK Lakshmi has clinker capacity of 6.1m tons and grinding capacity of 8.3m tons. It is setting up two 1m-ton grinding units, one each in Gujarat and Odisha in, respectively, FY17 and FY18. This expansion would take its capacity by FY18 to 10.3m tons. We expect a 12% CAGR in volumes over FY16-18.

Cost-efficient operator. The company focuses on maintaining its cost efficiency by using low-cost pet-coke, making it one of the best in the industry with regard to power and fuel consumption. It is also self-sufficient in power as it has a 93 MW station. The expansion into the newer markets in the eastern region and its capex for railway sidings would help it to reduce the average lead distance and lower freight costs. Following these improvements, we expect EBITDA/ton to increase from Rs. 356 in 9mFY16 to Rs. 776 in FY18.

Healthy operating cash flows. In the last three years most of its plants have been operating at 85%. Together with this benefit, we expect it to gain from cost savings and volume growth at its new plants. We expect it to generate healthy operating cash flows from FY17, which would suffice to fund pending capex. Its present net gearing is 1.5x; with debt repayments, this is likely to slip to 0.9x in FY18.

Valuations. At present valuations the stock trades at an EV/EBITDA of 8x and an EV/ton of $76 on FY18e. We initiate coverage, with a Buy rating and a price target of Rs. 409. Our target price is based on EV/EBITDA of 9x, which reflects an EV/ton of $90. Risk. Delay in expansion, delayed demand recovery.

Shares of JK LAKSHMI CEMENT LTD. was last trading in BSE at Rs.332.8 as compared to the previous close of Rs. 335.05. The total number of shares traded during the day was 2615 in over 179 trades.

The stock hit an intraday high of Rs. 338.4 and intraday low of 332.8. The net turnover during the day was Rs. 876479.

Source : Equity Bulls

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