JK Cement - Focus on core business intact - ICICI Securities

Key takeaways from JK Cement (JKCE) management concall on entry into the paint business: (a) maximum investment in paint segment would be Rs6bn over the next five years including any EBITDA loss in the initial years, and no additional debt would be raised at the paint subsidiary level; (b) listing of the paint business separately (once it attains scale / profitability) along with white cement / putty, remains an option in the long run; (c) target is to achieve 7-8% market share in paint in the focused markets of North / Central India with 15-20% EBITDA margin / RoCE in the medium term; and (d) all expansion plans in the core grey cement business remain intact. While JKCE's diversification into paint may raise capital allocation concerns, the segment would likely remain a relatively small business for the company and constitute <5% of capital employed, revenue and EBITDA over the next five years, in our view. Maintain BUY with an unchanged target price of Rs3,935/sh (14x FY24E EV/E). Key risks: lower demand / pricing, and sharp cost escalations.

• Management intends to leverage strong: a) JK White cement / putty brand, and b) 60,000+ distribution network of white cement / putty dealers (~40% of which pertains to North / Central regions and a large portion of it also sells paints) and a good number of retailers. Besides, paint (high-growth and high-RoCE business as per management) complements JKCE's existing offerings of white cement / putty.
• JKCE plans to focus only on its core markets in North / Central India (similar to its market positioning in grey cement). It plans to spend Rs3bn for a 60k-litre capacity plant at Central UP and the balance would include expenses on tinting machines, warehouses, branding and marketing. The business would be headed by white cement / putty head and the new team would be recruited from paint industry.
• Targeting 7-8% paint market share in North / Central regions by gaining market share from unorganised market (estimated at ~25%), penetrating into tiers-3&4 cities and leveraging the strong brand equity and distribution network. JKCE may commercialise the proposed paint business in Apr'24 and it expects revenue of Rs1bn-1.5bn in FY25, inching upto Rs8.5bn in the fifth year after launch. As per the management, JKCE is unlikely to compete on pricing and is aiming at 15-20% EBITDA margins / RoCE in the medium term. Management believes the option to separately list the paint business (once it attains scale / profitability) along with white cement / putty remains in the long run to unlock value.
• Core business (grey cement) expansion plans unlikely to be affected by entry into paint biz. JKCE's balance sheet remains strong and its consolidated net debt may not exceed Rs25bn and 'net debt to EBITDA' is likely to remain below 1.5x, in our view. JKCE is likely to continue to gain market share with improved profitability in grey cement backed by strong expansion plans and execution track record.

Shares of JK Cement Limited was last trading in BSE at Rs. 2296.25 as compared to the previous close of Rs. 2291.55. The total number of shares traded during the day was 8426 in over 1235 trades.

The stock hit an intraday high of Rs. 2341.90 and intraday low of 2274.80. The net turnover during the day was Rs. 19417987.00.

Source : Equity Bulls

Keywords

JKCement INE823G01014 PaintBusinessForay ConcallUpdates ICICISecurities CoreBusiness FocusIntact