Buy JK Lakshmi Cement - Elara Capital

• JK Lakshmi Cement
• Rating : Buy
• Target Price : INR90
• Upside : 43%
• CMP : INR63 (as on 28 July 2010)

High fuel cost hurt margins

Cost push hit the earnings

JK Lakshmi Cement (JKLC) reported a 78.6% YoY (76% QoQ) decline in its net profits for Q1FY11. The revenues for the period declined 7.8% due to 8.7% decline in realizations. The EBITDA in Q1FY11 declined 52.8% to INR 563 mn due to a higher cost per tonne (14.3% increase YoY). The net profit for the quarter declined on the back of lower EBITDA and increase in effective tax rate (31.1% in Q1FY11 v/s 21.9% in Q1FY10).

Volumes up marginally

Cement volumes in Q1FY11 increased 1.0% YoY to 1.02 mn tonnes. Realizations for the quarter were down 8.7% YoY (up 1% QoQ) to INR 3,169 in Q1FY11 as compared to INR3,470 in Q1FY10. The power and fuel cost increased 34.8% YoY (51.8% QoQ) due to sharp increase in petcoke prices. The EBITDA per tonne for the quarter stood at INR 551 as compared to INR 1,180 in Q1FY10.

Valuation

To factor in higher than expected cost increases we have downgraded our FY11 and FY12 earnings by 18% and 3% respectively. At CMP of INR 63 the stock is trading at EV per tonne of USD 48.8 on FY11 capacity. The large cap peers in the cement sector continue to trade at the replacement cost of USD100/tonne. Hence, we believe there is limited downside for JK Lakshmi, going ahead. Considering the healthy balance sheet, presence in the better placed northern region, the volume growth that is likely to creep in post the completion of greenfield capacity additions and the steep discount to the large cap peers, we continue to remain positive on JK Lakshmi despite lower than expected quarterly results. We maintain our Buy rating on the stock with a revised target price of INR 90.

Source : Equity Bulls

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