JK Cement - Ripe for re-rating - ICICI Securities

JK Cement's (JKCE) recent capacity additions in high utilisation / better pricing markets of North / Central regions are likely to see a quick ramp-up along with better cost efficiencies. Consolidated net debt is likely to peak out at Rs24bn in FY21E as JKCE could generate OCF of >Rs10bn p.a. from FY22E which would be sufficient for its future capex requirements. Besides, JKCE enjoys better than peers' RoEs of 16-18% over FY20-22E. Factoring higher utilisation, we raise our FY22E EBITDA / EPS by 4-6%. With improving growth / market share and profitability, we raise our target multiple to 10x (earlier 9x) and increase our target price to Rs1,725/share (earlier: Rs1,460) based on 10x FY22E EV/E. Maintain BUY.

- Key triggers for re-rating: Quick ramp-up of new capacities (better volume growth), improved cost efficiencies resulting in grey cement EBITDA/te sustaining above Rs1,000/te, peaking-out of consolidated net debt in FY21.

- Key risks to re-rating: Any pricing weakness in JKCE's key markets of North, increased investments / losses in UAE subsidiaries, higher pay outs to consultants, lower growth / profitability in white cement portfolio.

- Capacity expansion benefits to kick in: JKCE commissioned 2.6mnte clinker unit at Mangrol and 3.5mnte grinding capacities at Mangrol and Aligarh in H2FY20. Given that new capacity additions are in high growth / utilisation markets of North and Central regions, they may see a quick ramp up, in our view. Besides, pricing is expected to remain firm in these regions as utilisation remains at >80% owing to better supply / demand dynamics. Commissioning of 0.7mnte grinding unit at Balasinor is likely by Oct'20, while modernisation of 0.3mnte line-3 at Nimbahera is expected to complete by Dec'20.

- Cost savings of Rs100/te possible over the next two years on the back of better cost efficiencies from new capacity at Mangrol and modernisation of line-3 at Nimbahera in FY21. Besides, the management is targeting fixed-cost reduction of Rs600mn-700mn in FY21, which includes ~25% YoY cut in professional charges. Grey cement EBITDA/te is likely to increase to Rs1,065/te by FY22E from ~Rs940/te (our estimate) in FY20.

- Consolidated net debt likely to peak out at Rs24bn in FY21E: JKCE would incur capex of Rs4bn for ongoing expansion projects and Rs2.5bn for line-3 Nimbahera modernisation in FY21. Net debt to EBITDA ratio may decline from 1.9x in FY20 to 1.3x in FY22E. JKCE is likely to generate OCF of >Rs10bn p.a. from FY22E which would be sufficient for its future capex requirements. JKCE also enjoys better than peers' RoEs of 16-18% over FY20-22E. The stock trades at an attractive valuation of 8.4xFY22E EV/E.

Shares of J.K.CEMENT LTD. was last trading in BSE at Rs.1416 as compared to the previous close of Rs. 1393.5. The total number of shares traded during the day was 778 in over 168 trades.

The stock hit an intraday high of Rs. 1424 and intraday low of 1391.65. The net turnover during the day was Rs. 1098078.

Source : Equity Bulls

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