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Focus on NSR improvement to expand margins

Result Synopsis

JK Lakshmi Cement (JKLC) reported mixed-bag performance, delivered better than anticipated revenue by +5%, but higher than expected cost translates to a 6% miss on EBITDA in Q2FY23. Revenue grew by 16% y/y to Rs13bn (YSECe of Rs12.4bn) led by 17% y/y on blended NSR growth (10% above YSECe), which also mitigated the impact of 1% y/y volumes loss to 2.31MT (5% below YSECe). EBITDA declined by 15% y/y to Rs1.4bn (6% lower YSECe), while EBITDA margins contracted by 390bps y/y to 10.6%. Total cost increased by Rs931/te y/y (23% y/y; 12% above YSECe) mainly due to a jump in RM & power/te by 28% & 49% y/y respectively. Increased cost was largely mitigated by NSR growth of Rs831/te y/y, resulting in an EBITDA decline by Rs100/te y/y to Rs601/te (inline to YSECe). On a standalone basis, JKLC’s utilization inched up to 74% in FY22 and expected to clock +80% by FY24E. Thereby to overcome the volume growth concerns, JKLC has embarked on the next phase of expansion in its owned subsidiary, UCWL (2.5MTPA cement and1.5MTPA clinker). JKLC also completed debottlenecking at UCWL took its capacity to 2.2MTPA cement and 1.5MTPA clinker in FY22 providing some production headroom for near-term. JKLC’s announced expansion located in the North increasing its North exposure to ~66% of overall capacity (currently ~59%). As a result, higher NSR share from North will prove margin accretive for JKLC. Further, higher trade/blended sales should boost realizations and upcoming 15MW of WHRS to foster efficiency. Going forward, we believe JKLC will generate a CFO of~Rs15bn on a standalone basis and UCWL will add Rs2-3bn over FY23-24E should support the B/S against ongoing capex. Hence, we believe Net debt to EBITDA will remain at a comfortable level on a console basis. At CMP, stock trades at 8.5x and 5.8x on EV/EBITDA for FY23/24E. We value JKLC on SOTP basis; as standalone entity we continue to value at 7x EV/EBITDA on FY24E, while its subsidiary UCWL valued at US$80 EV/te on FY24E maintaining the TP of Rs740 with an ADD rating (earlier BUY).

Result Highlights

* Reported a revenue of Rs13bn increased by 16% y/y (-16% q/q; 5% above YSECe) as blended NSR increased substantially by 17% y/y (+2% q/q; 10% above YSECe). While volumes declined by 1% y/y and 17% q/q to 2.3MT (5% below YSECe).

* Witnessed a total cost/te uptick of 23% y/y and 5% q/q (12% above YSECe) due to increase in RM/power by +28/49% y/y and +12/10% q/q respectively.

* NSR growth of Rs831/te y/y largely mitigated the total cost increase of Rs931/te y/y, resulting in an EBITDA decline by Rs100/te y/y to Rs601/te (in-line YSECe).

* Total cost was 7% higher than YSECe (+22% y/y), which translates to a 6% miss on EBITDA of Rs1.39bn; declined by 15% y/y and 36% q/q. While EBITDA margins contracted by 390bps y/y to 10.6% (v/s YSECe 11.9%) in Q2FY23.

* Reported a PAT decline of 23% y/y and 42% q/q to Rs590mn (14% below YSECe).

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