JK Lakshmi Cement Ltd

JK Lakshmi Cement came out with quarterly results yesterday. The company continued its robust performance which was reflected by a rise in Revenues (up 18%) as well as Net Profit (up 76%) over the same quarter of the previous  financial year (Q2FY09). The company mainly benefited from increased production, higher price realization on cement sales and lower fuel prices.

Highlights of the Quarter:

Cement Production increased to 10.25 lac ton in Q2FY10 as compared to 9.61 lac ton in Q2FY09 (up 6.7%). In the same period, Net Realizations increased from Rs 2,906/ton to Rs. 3265/ton. The combined effect of both these factors saw the Net Sales increase from Rs. 293.3mn to Rs. 345.2mn, a rise of 18%

On the cost front, JKLC continued to benefit from the pet-coke contracted at lower prices in the earlier part of the year.

Their average pet-coke cost was about Rs. 4,000/ton as compared to the market rate of Rs. 4,500/ton. Raw materials cost increased marginally due to higher gypsum & fly-ash prices and an increase in royalty on limestone mining levied by the Government

Blending ratio stood at around 70% (towards PPC) which has been marginally higher than in Q2FY09. However, going ahead, looking at the excess industry capacity scenario, this ratio may decrease as producing more of OPC (as compared to PPC) naturally cuts down production without shutting off the kilns

Interest cost has reduced considerably in this quarter due to higher gains on treasury income, interest subsidy from the Govt. of Rajasthan and lower negotiated interest rates on term loans from banks

JKLC had expected to gain from certain tax exemptions in Q1FY10 and hence made lower deferred tax provisioning accordingly. However, the company could not claim these exemptions and compensated by making additional deferred tax provision in the current quarter (Q2FY10) which increased the tax rate to 48%.  This is a one time event and the company would be back to the normal tax bracket (34%) from the next quarter

Other Developments:

The Board has announced an interim dividend of Rs. 2 per share (record date Nov. 11)

The Board has also announced a split in the face value of equity shares (from Rs 10 per share to Rs 5 per share)

The company is planning to set up a new 0.55 MTPA Split Grinding unit at a cost of Rs. 80cr to be completed by March 2011. The unit will be set up in Northern India to save on logistics cost and get a stronger hold in the Northern Markets. A similar strategy has been successfully implemented in the Gujarat Market

Construction of new Thermal (18MW) and Waste Hear Recovery (12MW) power plants is on schedule and expected to be commissioned by March 2011

Going Ahead

Going ahead, we expect cement prices to fall marginally which would decrease the per ton cement realization of the company

The current contract for pet-coke (at lower prices) will end by this month and the company will have to enter into new contracts for pet-coke at rates which will be 10-15% higher

There has been some delay in getting power from V.S. Lignite and the management expects to get this power from December (instead of October). V.S. Lignite had entered into a contract with JKLC to provide 21MW of power annually at Rs. 3.3/unit (as compared to the State Grid Power at Rs. 4.6/unit). This delay will increase the future Power costs as we had expected the company to enjoy cheaper power from V.S. Lignite from this quarter onwards

Work on opening of kilns has been completed in this quarter which will enable JKLC to go on full steam in the second half (H2FY10) of this financial year and achieve 20-25% higher clinker production compared to the first half of this financial year (H1FY10)

Our View

The share price of JK Lakshmi Cement has fallen in line with the overall markets since release of our report initiating coverage on the company. At the CMP of Rs. 123, the stock trades at 3.3x FY10e EPS of Rs.37.7 & 0.7x FY10e BVPS of
Rs.169. On EV/ton basis, the stock trades at $47/ton. We maintain BUY on JKLC at these attractive valuations.

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