Buy JK Cement for Target Price of Rs 220 - Elara Capital

• JK Cement
• Rating : Buy
• Target Price : INR220
• Upside : 35%
• CMP : INR163 (as on 2 August 2010)

Taxing times

Higher tax rate squashes bottom line

The operating performance of JK Cement (JKC) was in line with our expectations, but the lower net profit (due to a higher effective tax rate) was 15.2% below our estimates.

JKC reported a 21.8% YoY growth in revenues thanks largely to a strong expansion in volume due to the addition of new capacities. The EBIDTA margin has declined by 1,280 bps YoY to 17.2%. The PAT for the quarter weakened 58% YoY (32.8% QoQ) to INR295mn.

Higher volumes, white cement shield profitability

Volume (including both grey and white) increased by 22.0% YoY to 1.34mn tonnes but blended realizations for the quarter were down by 0.2% YoY (1.2% QoQ) to INR3,882 per tonne as compared to INR3,889 per tonne in Q1FY10 due to sales in the low price South Indian market. However, higher proportion of white cement sales (17.2% in Q1FY11 vs 16.3%in Q1FY10) helped cushion a sharp fall in realizations. Rising overall cost pressures were visible during the quarter as the cost per tonne increased 18% YoY (1.3% QoQ) to INR 3,214 as compared to INR 2,724 in Q1FY10. The EBITDA per tonne stood at INR668 as compared to INR1,165 in Q1FY10.

Maintain BUY with a target price of INR220

Though we expect margins for cement companies to be under pressure in the medium term due to the cost push and a decline in cement prices, JKC earnings are likely to be (partially) supported by stable white cement prices and a strong volume growth. Besides, the company is also trading at a more than 50% discount to its replacement cost as well as its large cap peers. Thus we are maintaining our BUY rating on JK Cement with an unchanged target price of INR220.

Source : Equity Bulls

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