Opex under control, valuations attractive
* JKLC’s Q4 results were above our estimates as the lower realization was offset by a higher-than-expected decline in opex. EBITDA was at Rs2bn (est. of 1.73bn), OPM came in at 19% (est. of 15.8%), and EBITDA/ton stood at Rs818 (est. of Rs691).
* Key positive was a 5.1% qoq decline in Opex/ton, owing to lower freight, energy and other expenses. Key negatives were: 1) volume decline of 16.3% yoy vs. estimate of 15% decline and 2) realization decline of 0.5% qoq vs. our estimate of 1.5% qoq growth.
* Current utilization has improved to 65-70% after the disruption caused by the lockdown. However, management believes that volumes may come under pressure in the rural areas after the initial spurt. Cement prices are up by Rs10-15/bag in the North, Central and East regions. Expansion plans have been kept on hold.
* We raise FY21-23E EBITDA by 8-11% due to lower opex, which may remain subdued with lower petcoke prices and the commissioning of WHRS at Sirohi. Valuations are attractive at 5.5x FY22E EV/EBITDA and EV/ton of US$35. Maintain Buy/OW in sector EAP.
Higher realization supports earnings: JKLC continued to benefit from higher cement prices in North/Gujarat and reported strong operating performance. Realization was up 8.1%/9.6% yoy in Q4/FY20, which helped achieve EBITDA growth of 53.9%/62% yoy in Q4/FY20. Its efforts to reduce logistics costs resulted in 7.4% yoy/2.2% qoq reduction in freight costs. Energy cost was down 6.6% yoy/10.5% qoq due to lower petcoke prices, which have further declined in the last few months and should keep energy costs in check. Opex/ton declined 1.5% yoy/5.1% qoq due to lower freight/energy costs. Sales volumes fell 16.3% yoy due to the nationwide lockdown announced from March 24 and a high base of last year. Higher realization resulted in a 7.8pp yoy improvement in OPM to 19% and 83.9% yoy growth in EBITDA/ton to Rs818 (30-quarter high). Depreciation was up 14.2% yoy due to the commissioning of Cuttack grinding unit. Reduction in debt led to a 7.8% yoy drop in the interest expense. Profit was up 2.3x yoy in Q4.
Raise estimates; maintain Hold: We raise FY21-23E EBITDA by 8-11% due to lower opex. Petcoke prices have come down to US$60/ton from an average of US$70/ton in Q4, which will help reduce energy costs going forward. The installation of 10MW WHRS at Sirohi plant will help save costs (Rs200mn) in FY22E. Near-term volume outlook remains uncertain due to Covid-19-related challenges and our view of a slowdown in government infrastructure spending/lower demand from real estate. We have factored in a volume decline of 19.6% yoy in FY21E and thereafter, growth of 15.6% yoy in FY22E. Management indicated that cement prices have been increased by Rs10-15/bag in North, Central and East regions, which is better than our estimates. The planned capex in the North region has been kept on hold in the current scenario. Debt is down by Rs1.5bn to Rs14.6bn in FY20. We believe that current valuations are attractive at 5.5x FY22E EV/EBITDA and EV/ton of US$35. We maintain Buy, with a revised TP of Rs305 (7x Jun-22E EV/EBITDA vs. last 13 years’ average multiple of 9.4x). Key risks could be lower-than-expected cement demand and lower cement prices.
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