Buy JK Lakshmi Cement Ltd For Target Rs.404 - HDFC Securities
JK Lakshmi Cement Ltd. (JKLC) is a part of 132 years old JK group. It has a 3% market share in India with 13.3MTPA cement capacity. Proximity to raw materials, self-sufficiency in power and competitive freight costs are the key drivers which has been ensuring high-cost efficiency for JKLC.
We expect that Covid-19 led lockdown and slowdown in the economy will lead to subdued growth in volumes of JK Lakshmi Cement for FY21 but benign raw material price and aggressive control on variable costs are likely to drive EBIDTA growth. The industry has a higher 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 JKLC, incremental profitability will also be driven by deleveraging balance sheet and saving on interest costs. 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. As per the management, Eastern India region is largely underpenetrated and thus has high growth potential compared to the rest of our country.
Valuations and View:
We expect, that the company will get benefit from a strong position in Northern-Western region, ~75% of the revenue of the company comes from these regions. Also, captive power plants (~105 MW of captive power plants) and stable working capital augur well for JKLC. However, in short to medium term Covid-19 led slowdown could result in lower utilization is likely to adversely impact growth.
We like JKLC due to its steady profitability owing to firm prices in North (due to consolidated supply and lower supply), deleveraging in standalone operations and cheap valuations. JKLC’s subsidiary Udaipur cements is undertaking a new capex to set up an integrated cement plant with 2.5 mnt capacity, expected to be completed in next three years. The debottlenecking at Udaipur Cement (0.3 mtpa clinker and 0.6 mtpa cement) is on track to be completed by Q4FY21 taking the grinding capacity to 2.2 mtpa at a capex of Rs0.6 bn.
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