Maintain BUY on JK Cement - Both segments on strong footing - HDFC Securities

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities.

JK Cement (Q4FY20): Both segements on strong footing. Maintain BUY
(TP Rs 1,425, CMP Rs 1,246, MCap Rs 96bn)

We retain BUY on JK Cement (JKCE) with a TP of Rs 1425. We like the co for its increased grey cement capacity in lucrative north markets and as its white/putty profits continue to firm up (on a high base). During 4QFY20, grey capacity ramp-up in north moderated covid-led vol loss in 4QFY20. Grey segment's profit continued to soar in 4Q and in FY20 on robust pricing in north/central and falling energy costs. Similarly, healthy pricing and low fuel cost even firmed up white/putty profitability in 4Q/FY20. Thus, consol net debt/EBITDA in FY20 fell to 2.3x (from 2.5x), despite 6-yr high capex spend.

Strong surge in grey earnings: Covid impact on sales was lower in 4Q (Vol fell 7% YoY) to 2.36mn MT owing to production ramp-up from recent 3.5mn MT capacity increase in north. Robust regional pricing, reversal of annual discount provisions (Rs 200mn) and falling energy costs boosted unitary EBITDA by ~50% YoY to ~Rs 900/MT, driving seg EBIDTA to Rs 2.2bn (~+40% YoY). In FY20, while grey vols fell 2% YoY, robust pricing and lower energy costs buoyed both segmental margin and EBITDA by 90% each to Rs 800/MT and Rs 6.9bn resp.

Stellar show continues in White/putty: Segmental sales vol (in India) fell 13% YoY in 4Q to 0.3mn MT, on covid lockdown. However, healthy realization and falling fuel cost flattened EBITDA YoY at Rs 1.3bn. During FY20, consol EBITDA firmed up ~10% YoY to Rs 5.2bn and margin remained buoyant (and steady) at 28% on strong demand and low fuel cost tailwinds.

Expansion update and balance sheet trend: Of its planned 4.2 mn MT grey capacity expansion, 3.5mn MT got operational by 4QFY20. Its 0.7mn MT SGU in Gujarat is delayed to 3QFY21 due to Covid. Capex outgo in FY20 accelerated to Rs 12.4bn (6 yr high). Consol OCF almost doubled on robust grey profits, supporting capex. Net debt grew 35% YoY to Rs 28bn. However, net Debt/EBITDA marginally cooled off to 2.3x vs 2.5x YoY. In FY21, JKCE will complete clinker debottlenecking (0.33mn MT in Rajasthan), increase putty capacity by 0.3mn MT in MP and also commission 13 MW WHRS in north. Amid Covid uncertainty, JKCE has decided to not pursue Panna expansion during FY21E, to reduce balance sheet stress.

Outlook: We expect consol EBITDA to fall 10% YoY on Covid led vol loss, but should rebound 25% in FY22E. We have cut FY21E EBITDA by 5%, factoring in Covid impact. Increased grey vol and margin should boost grey cement's segmental EBITDA contribution to 66% in FY22 from 57% in FY20. We reiterate BUY with a higher TP of Rs 1,425 valuing it at 10x FY22E consol EBITDA (in-line its 5-yr mean multiple). We like the co for its increased presence in the robust north market (grey biz) and for its steady growth in the white/putty segment.

Shares of J.K.CEMENT LTD. was last trading in BSE at Rs.1246.25 as compared to the previous close of Rs. 1220.05. The total number of shares traded during the day was 14628 in over 2411 trades.

The stock hit an intraday high of Rs. 1260 and intraday low of 1217.7. The net turnover during the day was Rs. 18102947.

Source : Equity Bulls

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