Buy JK Cement Ltd For Target Rs.2,146 - HDFC Securities
JK Cement (JKCE) is a part of the JK Group. It has a multi-region presence which helps the company to take benefits of demand from different regions. The company commands ~40% of market share in white cement industry with an installed capacity of 2.42MTPA. JKCE has 17.1MTPA of total installed cement capacity.
We expect that Covid-19 led slowdown in the economy to result in subdued revenue growth of JKCE for FY21 but benign raw material price and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. In the case of JKCE, incremental volumes from the commencement of additional capacities will result in a lower decline in volumes compared to the industry. Also, on the demand side, key growth drivers are likely to be pick up in rural housing, Pradhan Mantri Awas Yojana (rural), Pradhan Mantri Gram Sadak Yojana and spending on key infrastructure projects.
Valuations and View:
We expect, that the company will get benefit from a strong position in grey as well as white cement market. Also, captive power plants (~125.7 MW of captive power plants and upcoming ~25 MW of capacity) and stable working capital augur well for JK Cement. JKCE continues to be a strong growth story in the cement space. It has commissioned the on-going 4.2MTPA of expansion projects across north, central and west India Post this, it further plans to accelerate its work on 3.5 MTPA greenfield capacity in Central India (Panna-MP) which will take its overall capacity to 18MTPA. With the commissioning of this capacity, JK Cement is well-placed to tap demand recovery post COVID-19. High RoE along with strong FCF generation and reduction in Net Debt over FY21-22 provides comfort.
JKCE provides strong growth visibility in regions with favorable market dynamics and remains a play on high margin-high growth white cement segment. It also benefits out of high exposure to North where prices remain steady, offers volume growth visibility owing to rampup from new capacities, and sticky cash flows from white cement/wall putty segment. JKCE could deliver high double-digit volume growth over next two years largely led by ramp-up from new brownfield units at Nimbahera/Mangrol and grinding units in Gujarat and UP.
We expect, 10% CAGR in top-line and 21% EPS CAGR over FY20-22E. The company is trading at FY22E EV/T of $134/T. We feel the base case fair value of the stock is Rs.2063(11.4xFY22E EV/EBITDA, FY22E EV/T of $145) and the bull case fair value is Rs.2146 (11.8xFY22E EV/EBIDTA, FY22E EV/T of $150) over the next two quarters. We feel investors can buy the stock at LTP and add on dips to Rs.1727-1735 band (9.8xFY22E EV/EBITDA, FY22E EV/T of $125).
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