JK Cement - Strong overall execution; re-rating to continue - ICICI Securities

JK Cement's (JKCE) Q2FY21 standalone EBITDA at Rs4.1bn (up 62% YoY), was significantly better than our/consensus estimates mainly owing to lower costs. Grey cement volumes grew 28% YoY; while blended EBITDA/te rose 29% YoY to highest-ever Rs1,461/te (I-Sec: Rs1,169/te). JKCE's recent 40% capacity expansion at Mangrol will not only drive market share gains, but also improve profitability. And coupled with strong OCF of >Rs10bn p.a. from FY21E (which would fund its future capex) would lead to re-rating of the stock (refer our 5th Jul'20 note: Ripe for re-rating). Factoring higher volumes, we raise our FY21-22E EBITDA by 11-13%, increase our target EV/E to 11x (from 10x) and raise our target price to Rs2.370/share (earlier: Rs1,725) based on 11x Sep'22E EV/E on half-yearly rollover. Maintain BUY.

- Standalone revenue increased 23% YoY at Rs15.3bn, in-line with estimates. Grey cement volume (including clinker) increase of 28% YoY to 2.5mnte was ahead of industry average owing to better growth in North markets and also aided by expansion. Grey cement realisation declined 3% QoQ (up 1% YoY) to Rs4,514/te owing to monsoon. Our channel checks suggest cement prices in North region have increased by Rs15/bag in trade and Rs30/bag in non-trade segment in Oct'20. White cement and wall care putty volumes increased 9% YoY to 0.36mnte. Other operating income sharply increased 73% YoY to Rs252mn.

- Standalone EBITDA increased 62% YoY to highest-ever Rs4.1bn (I-Sec: Rs3.3bn). Blended cost/te declined 9% YoY (4% QoQ) vs our estimate of 4% YoY decline owing to lower than expected fuel costs and other expenses. Raw material plus power & fuel cost/te declined 6% YoY on low fuel costs and efficiency improvements from new plants. Freight cost/te increase was restricted to just 1% YoY despite 14% YoY increase in diesel costs; while other expenses/te (including employees cost) declined sharply 21% YoY owing to strict control on overheads and better operating leverage. PAT doubled YoY to Rs2.2bn (I-Sec: Rs1.5bn).

- Market share gains to continue: JKCE commissioned 0.7mnte grinding unit at Balasinor in Oct'20, taking its total capacity to 14.7mnte. Modernisation of 0.3mnte at Nimbahera is likely to complete by Q2FY22 (spent Rs2.6bn on the same till Sep'20). 0.3mnte wall putty expansion at Katni got commissioned in Oct'20, taking its total capacity to 1.2mnte and making JKCE the largest player of wall putty in the country.

- Consolidated net debt declined by Rs2.3bn to Rs21bn as of Sep'20-end. Consolidated FCF generation stood at Rs3.3bn post working capital release of Rs1.3bn and capex spend of Rs3.1bn in H1FY21. JKCE has invested Rs1bn in UAE and Panna (future expansion) subsidiaries in H1FY21.

- Consolidated EBITDA increased 69% YoY to Rs4.3bn. UAE subsidiary likely registered sharp improvement with EBITDA of Rs207mn vs EBITDA of Rs18mn YoY and EBITDA loss of Rs27mn QoQ, respectively.

- May announce next phase of expansion soon at Panna, MP. JKCE is planning to set up 3.5-4mnte grey cement capacity in Panna, Madhya Pradesh with split grinding units. JKCE has received environment clearance and 90% land for plant area has been acquired. Further, mining lease agreement has been executed and part of mines land has also been procured. Project is yet to be approved by the Board. JKCE may generate OCF of >Rs10bn p.a. from FY22E, which will be sufficient for its future capex requirements.

- Key management changes post the recent demise of Mr. Yadupati Singhania, CMD in Aug'20: Mrs. Sushila Devi Singhania (Non-executive Non Independent Director) has been appointed as the Chairperson of the Board, while Mrs Kavita Y Singhania has been appointed as an Additional Director (Non-executive Non Independent). Mr Raghavpat Singhania has been appointed /redesignated from ED (Corporate Affairs & White Cement) to MD, while Mr Madhavkrishna Singhania has been appointed /redesignated from ED (Grey Cement) to Dy. MD and CEO and Mr Ajay Kumar Saraogi has been appointed /redesignated from ED and CFO to Dy. MD and CFO.

Shares of J.K.CEMENT LTD. was last trading in BSE at Rs.1895.6 as compared to the previous close of Rs. 1873.45. The total number of shares traded during the day was 521 in over 107 trades.

The stock hit an intraday high of Rs. 1898.95 and intraday low of 1875. The net turnover during the day was Rs. 984969.

Source : Equity Bulls

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