Stronger Realisation Drives Performance
Aided by higher-than-expected realisation, JK Lakshmi Cement (JKLC) has reported a strong set of numbers for 2QFY20, despite dismal sales volume. EBITDA grew by a stellar 62% YoY to Rs1.48bn vs. our estimate of Rs1.1bn, while EBITDA/tonne stood strong at Rs722 (vs. our estimate of Rs526) vs. Rs431 and Rs729 in 2QFY19 and 1QFY20, respectively owing to Rs370/tonne higher realisation than our estimate. Average realisation/tonne increased by 13.4% YoY to Rs4,541, which is even sequentially higher by 1.6%. Notably, low sales volume in Chhattisgarh markets and higher volume in Northern region led to higher realisations. Sales volume declined by 3% YoY and 11.6% QoQ to 2.06mnT in 2QFY20, while it declined marginally by 0.5% in 1HFY20. Operating cost/tonne deteriorated by 7% YoY and 2% QoQ to Rs3,820, mainly led by sharp increase in input cost/tonne (+7% YoY and +6% QoQ). PBT and PAT increased significantly by 5x YoY to Rs728mn and Rs460mn, respectively. It commissioned 0.8mnT Odisha SGU during the quarter, which along with likely savings from recently commissioned 20MW CPP in Durg and recent reduction in petcoke prices are likely to aid its operating performance further in the ensuing quarters. Upgrading our EBITDA estimates by 6%/7% for FY20/FY21 to factor in superior realisation, we maintain our BUY recommendation on the stock with a revised Target Price of Rs465 (from Rs430 earlier).
Dismal Volume on Poor Demand in Eastern Region
While soft demand environment especially in the Eastern region led to 3% YoY decline in JKLC’s sales volume, 10% YoY growth in revenue to Rs9.4bn is attributable to ~13.4% YoY improvement in average realisation. Notably, cement sales volume grew by ~3% and clinker volume declined by 48% during the quarter. Further, JKLC’s RMC revenue stood at Rs390mn in 2QFY20 (flat on YoY basis). Looking ahead, we expect JKLC’s sales volume to clock 4.5% CAGR through FY19-FY21E.
Superior Realisation Leads to Robust Performance
A higher-than-expected average realisation aided JKLC to beat our estimates with a stellar 62% YoY growth in EBITDA to Rs1.48bn vs. our estimate of Rs1.1bn, while EBITDA/tonne stood at Rs722 as against Rs431 and Rs729 in 2QFY19 and 1QFY20, respectively. Looking ahead, we believe commissioning of SGU in Odisha and reduction in petcoke prices are likely to aid JKLC’s operating performance in the ensuing quarters. We expect JKLC’s EBITDA/tonne at Rs690/Rs712 in FY20E/FY21E.
Outlook & Valuation
While gross borrowings reduced by Rs500mn compared to FY19 at Rs15.6bn, it generated interest adjusted OCF of Rs520mn in 1HFY20 vs. Rs5bn in FY19. It incurred Rs185mn capex in 1HFY20. With no meaningful capex hereon, we expect JKLC to generate FCF worth Rs10bn in FY20-FY21, which should aid it to improve its return ratios and pare down its debt level. As the current valuations at 5.5x EBITDA and US$45 EV/tonne for FY21E look attractive, we maintain our BUY recommendation on the stock with a revised Target Price of Rs465 (8x of FY21 EBITDA)
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