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Buy J K Cement Ltd For Target Rs.3,585

Market share gains to drive earnings

Central India expansion a long-term positive

* J K Cement (JKCE) continues to gain market share, with volumes up 71% YoY in 1QFY22, led by a ~40% capacity expansion. We expect this to continue over the next 4–5 years as the company is now setting up a 4mtpa greenfield plant (commissioning by 1QFY24) in Central India. This plant should improve the regional mix for North and Central India to ~85%.

* We keep our estimates broadly unchanged and reiterate Buy on a 21% EPS CAGR over FY21–23E, driven by a 12% volume CAGR.

Higher grey cement realization drives 21% beat on EBITDA

* Standalone revenue / EBITDA / adjusted PAT rose 69%/86%/168% YoY to INR16.3b/INR4.0b/INR2.1b in 1QFY22, beating our estimate by 4%/21%/27% – driven by higher grey cement realization (up 1% YoY) at INR4,679/t (+6% QoQ) v/s our est. of INR4,536/t.

* Volumes were up 71% YoY to 3.02mt (in line with est.) – Grey Cement (incl. clinker) rose 73% YoY to 2.76mt and White Cement was up 50% YoY to 0.26mt.

* Blended realization was up 3% QoQ at INR5,407/t (v/s our est. of INR5.193/t), led by higher cement realization and a higher mix of grey cement at 91.3% (v/s 89.9% in 4QFY21).

* EBITDA/t beat our est. of INR1,097/t and stood at INR1,323/t (+17% QoQ, +9% YoY). This was driven by higher grey cement realization as cost/t fell 1% QoQ to INR4,085(-4% YoY), but was in line with our estimate.

* As a result, EBITDA was up 86% YoY to INR4.0b, while margins came in at 24.5% (+2.15pp YoY, +3.07pp QoQ; est. 21.1%).

* Standalone gross/net debt stood at INR28.1b/INR14.0b v/s INR28.4b/INR11.3b in Mar’21. Thus, net debt/EBITDA came in at 0.83x v/s 0.75x in Mar’21.

* The Nimbahera Line 3 upgrade is progressing as per schedule and expected to be completed in 2QFY22. INR3.9b out of the budgeted capex of INR4.1b has been spent to date.

* The greenfield expansion at Panna and grinding unit at Hamirpur are expected to be completed by Mar’23. INR4.4b out of the budgeted capex of INR29.7b has been spent to date.

Valuation and view

* We expect JKCE to deliver an above-industry volume CAGR of 12% over FY21–23E on account of its expansion in North India. The announced expansion at Panna should continue to drive market share gains over the long term as well as improve its regional mix in favor of North/Central India. It should help the company move down the cost curve by lowering power and fuel as well as other costs.

* Our TP of INR3,585/share is based on 15x Sep’23E EV/EBITDA for the White Cement business and 12x for the Grey Cement business. Maintain Buy.

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