Capacity expansion to improve volumes; upgrade to Buy
* Our channel checks indicate strong volume growth for JKCE in Q2FY21 as the company benefits from new capacities. We expect 23-25% yoy volume growth for grey cement in Q2FY21 and 8.5%/14.6%/5% yoy in FY21/22/23E.
* Recovery in white cement/wall putty segments has been better than expected and we expect volume growth of 3-5% yoy in Q2FY21, though FY21 volumes may decline 10% yoy. Capacity expansion of 0.3mt (33% of existing capacities) in wall putty in Q3FY21 should help volume growth in FY22-23E.
* JKCE increased production capacity of grey cement by 3.5mt in FY20. The grinding unit of 0.7mt in Balasinor, Gujarat, will be commissioned in Q3FY21. Environment clearance for the proposed expansion at Panna, MP, is expected to be received in Q3FY21.
* We raise sales volume estimates of grey cement by 4-5% and EBITDA estimates by 3-4% for FY21-23. JKCE benefits from stable cash flows in white cement (OPM of 25-30% in last 10 years). Cost saving strategies should help grey cement profits. We upgrade JKCE to Buy, based on 12x/11x Dec’22E (Sep’22E earlier) EV/EBITDA for white/grey segments.
* Strong volume growth led by commissioning of new capacities: JKCE increased grey cement production capacity by 3.5mt to 14mt in FY20, which will be increased by 0.7mt in Q3FY21. New capacities have helped JKCE push volumes in the North region and we expect 23-25% yoy volume growth in Q2 as per our channel checks. In FY21, we expect volume growth of 8.5% yoy despite volume industry volume decline in the North/South regions, which indicates market share gain.
* White cement segment recovers, provides stable cash flows: Demand in white cement and wall putty is expected to recover in Q2 after a 48% yoy drop in Q1FY21. We expect volume growth of 15.8%/7% yoy in FY22/23E after a 10.1% yoy drop in FY21. The white cement segment is less volatile compared to grey cement and provides stability to cash flows. OPM of this segment is 25-30% in last 10 years with EBITDA CAGR of ~15% over FY11-20. After an 18.8% yoy EBITDA drop in FY21E, we expect the segment’s EBITDA to grow at a CAGR of 17.7% over FY21-23.
* Aims further growth; upgrade to Buy: JKCE has benefitted from timely capacity additions in grey and white segments. Production capacity of Grey Cement has been increased by 3.3x (CAGR of 10.9%) over FY09-20, which led to sales volume CAGR of 7.5% in the same period. Sales volume of white cement/putty has grown at a CAGR of 12.6% between FY11-20. JKCE plans to increase grey cement capacities through a Greenfield plant at Panna, MP, where it has limestone mines. It will also benefit from cost saving strategies (upgrading Kiln III at Nimbahera and 15MW WHRS at Mangrol plant). We upgrade to Buy from Hold, based on 12x/11x Dec’22E (Sep’22E earlier) EV/EBITDA for white/grey segments. Key risks: Steep decline in cement demand/pressure on cement prices
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