Below is the View On the 4QFY18 on J.K. Cement (JKC) by Binod Kumar Modi Sr. Research Analyst Reliance Securities
Rsec View: Looking ahead, we expect grey cement performance to improve in ensuing quarters owing to visible revival in pricing trend in Western region and other key pockets despite marginally disappointing quarterly performance led by higher fuel cost. Further, current valuations at 9.9x and 8.8x FY19E and FY20E EBITDA, respectively appear to be attractive.
J.K. Cement (JKC): 4QFY18
* Robust Volume Growth: 27% YoY jump in grey cement volume was mainly on account of significant increase in institutional sales, while trade sales volume saw a moderate increase. Clinker production for FY18 stood at 6.1mnT (81% CU). Sales volume in Rajasthan remains strong despite sand mining ban. JKC expect FY19 volume to growth by ~8%.
* Dismal Performance of Grey Cement: Higher utilisation from vintage kilns along with higher fuel prices resulted in Rs200/tonne incremental power & fuel cost. Further, there was an additional provision of Rs110mn in Employee cost pertaining to change in gratuity liability from Rs1mn to Rs2mn. Freight cost reached at Rs2/tonne/km FOR led by higher diesel prices.
* Measures to Improve Grey Cement Margins:Apart from realisation recovery (which JKC expects to happen shortly), JKC considers following measures to aid improvement in grey cement performance; a) Brownfield expansions to aid saving in costs, but that will flow from FY20E, b) endeavour to increase PPC volume (now at 60%), and c) higher usage of AFR. JKC expects AFR to result in savings of Rs150-200mn annually from Rs70mn as of now.
* Value Added Products Outlook: While JKC does expect moderate volume growth in White Cement, it remains confident about Wall Putty business mainly due to higher demand of Wall Putty. White Cement growth is depended on Wall Putty growth as 50-60% of White Cement is used in Wall Putty production. JKC expects its value added segment growth and margins to sustain in ensuing years.
* Capex Guidance: JKC is expected to incur a capex of Rs8.5bn and Rs14.5bn for FY19E and FY20E, respectively including routine capex of Rs1.5bn annually. Clinker capacity (single line Kiln of 7,500 TPD) at Mangrol is to be commissioned by Dec’19, while 1mnT GU each at Nimbahera and Mangrol is expected to be commissioned in Sept’19. As land acquisition is still in progress and EC has to be obtained post acquisition, SGU at Western UP, near Aligarh (1.5mnT) and 0.7mnT at Silvasa (Gujarat) are expected to be commissioned in Mar’20. Total capex for the proposed expansion is estimated at Rs20bn (Rs1.75bn for Gujarat, Rs2.75bn for Western UP, Rs1bn for Nimbahera and balance for Clinker and GU at Mangrol including land cost and WHRS. The capex is likely to be funded by through debt (up to Rs12-13bn) and remaining through internal accruals.
* UAE Operation: Current utilisation is 60%. It has gained market share in UAE and targets to enhance its reach in Africa. It also intends to ship White cement from UAE to Southern states. It is also working to change in group structures as to avail the benefits of duties. It has started working on to secure own limestone mine. JKC expects this to fructify in two years.
* Sales Mix: PPC: OPC is 60:40 and Trade to Non Trade is 60:40 with an average lead distance of over 450kms.
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