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On an upward growth trajectory; reiterate Buy

* We maintain Buy on JK Cement and OW stance in sector EAP due to: 1) capacity additions that would help in volume and profitability growth; 2) exposure to white cement segment, which provides stable cash flows; and 3) comfortable gearing ratio (net D/E at 0.8x/0.6x in FY21/22E vs. 0.9x in FY20E) after the completion of ongoing capex.

* The company commissioned a 2.64mt clinker plant and 1mt grinding capacity in Q2FY20. Additional grinding units with a combined capacity of 3.2mt will be commissioned by the end of FY20. We expect 13.3% volume CAGR for grey cement over FY20-22E.

* We expect the white cement segment’s OPM to be at 28-29% until FY22E and the profitability of the segment is more sustainable. Grey cement’s EBITDA/ton is expected to be Rs846/Rs707/Rs715 in FY20/21/22E vs. Rs420 in FY19 (our estimate).

* We believe measures to improve logistics and energy costs along with new capacities (better efficiencies) will help achieve cost savings in its North India operations. Limestone mines in Madhya Pradesh will help in further capacity expansions in grey cement.

Capacity additions to drive grey cement volume growth:

JKCE’s grey cement capacity will increase by 4.2mt to 14.7mt by Mar’20 after the completion of ongoing expansion plans. It has already commissioned a clinker plant of 2.64mt and grinding unit of 1mt in Q2FY20. We believe the company will be able to achieve grey cement volume growth of 16.3%/10.4% in FY21/22E after the completion of ongoing expansions. We expect grey cement’s EBITDA/ton to be Rs846/Rs707/Rs715 in FY20/21/22E vs. Rs420 in FY19 (as per our estimate). In FY19, the white cement segment achieved volume growth of 8.5% yoy. We expect volume growth to be 6%/7.1%/7.2% in FY20/21/22E. We expect this segment’s OPM to be at 28.5% over FY20-22E (OPM of ~28% between FY11 and FY18).

Cost-saving initiatives to boost grey cement’s profits:

JKCE has achieved logistics cost savings of Rs100/ton in grey segment. Management expects further cost savings of Rs100/ton in the grey cement segment for North operations due to: 1) new capacities, which will be more efficient in fuel and energy consumption; 2) kiln III upgrade at Nimbahera, Rajasthan after which it will be similar to new kiln in efficiency norms (power and coal consumption); and 3) further reduction in freight costs (Rs20-30/ton). The sustenance of pet coke prices at current levels should help in further cost reduction of Rs70-80/ton vs. H1FY20.

Eyes further capacity growth:

After the completion of proposed expansions, JKCE plans to further expand grey cement capacity in the next 4-5 years to use its limestone mines in MP. We expect 18.1% EBITDA CAGR over FY19-22E. The sustenance of higher cement prices in North region could surprise us positively as we factor in a realization decline in FY21E. We believe net D/E at 0.6x and net debt/EBITDA at 1.74x in FY22E will help achieve future expansion plans. We maintain Buy with a revised TP of Rs1,440, valuing white cement segment at 11x Sep’21E EV/EBITDA and grey cement at 10x Sep’21E EV/EBITDA vs. 9x earlier on improved outlook. We are OW in sector EAP. Key risks: steep decline in cement prices/increase in pet coke prices.

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