JK Cement - Entry into paint business - ICICI Securities

JK Cement (JKCE) announced its plan to diversify into paint business and invest up to Rs6bn in it over the next five years. It plans to leverage its strong (a) JK White cement / putty brand, (b) 50,000+ distribution network of white cement / putty dealers (large portion of which also sells paints), and (c) longstanding relationship with real estate developers. While the company's diversification into paint business may raise capital allocation concerns (given many entry barriers, heightened competition and probability of minor EBITDA loss in the initial years), it may provide steady-state growth / stable income over the medium term, in our view. Besides, paint is still likely to remain a relatively small business for JKCE and constitute <5% of capital employed, revenue and EBITDA over the next five years. Maintain BUY on the stock with an unchanged target price of Rs3,935/sh (14x FY24E EV/E). Key risks: lower demand / pricing, and sharp cost escalations.

• Entry into paints may raise capital allocation concerns given the many entry barriers, heightened competition and probability of minor EBITDA loss in the initial years, hence an overall RoCE-dilutive impact. In FY14, JKCE had invested ~Rs8bn in white cement business outside India in Fujairah, UAE, and that business is still incurring loss at net level with the company making cumulative impairment provision of ~Rs3.2bn for FY20-FY21.
• Establishing 'right to win' for JKCE: Company plans to leverage the strong: (a) JK White cement / putty brand, (b) 50,000+ distribution network of white cement / putty dealers (large portion of which also sells paints), and (c) longstanding relationship with real estate developers. JKCE may commercialise the proposed paint business in FY24 and focus solely on its core markets of North and Central regions instead of pan-India (similar to its market positioning in grey cement).
• Paint business may provide steady-state growth / stable income in the medium term, in our view: Unlike peers, JKCE has been able to utilise its white cement / putty EBITDA to fund its grey cement expansion and gain market share. Besides, the company's white cement/putty business generates a relatively steady-state EBITDA, which provides stability to overall EBITDA despite sharp volatility in grey cement business. Similarly, the proposed paint business too may provide stability to JKCE's overall income in the medium term.
• Core business - grey cement expansion plans unlikely to be affected by entry into paint business. JKCE's balance sheet remains strong and its consolidated net debt is unlikely to exceed Rs25bn and 'net debt to EBITDA' may remain below 1.5x even after Rs6bn investment into the planned paint business over the next five years. The new business will still likely remain relatively small for JKCE and constitute <5% of capital employed, revenue and EBITDA over next five years.

Shares of JK Cement Limited was last trading in BSE at Rs. 2186.20 as compared to the previous close of Rs. 2334.90. The total number of shares traded during the day was 22375 in over 3774 trades.

The stock hit an intraday high of Rs. 2394.30 and intraday low of 2168.35. The net turnover during the day was Rs. 50217513.00.

Source : Equity Bulls

Keywords

JKCement INE823G01014 Diversification PaintBusiness ICICISecurities