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Higher prices offset cost pressure QoQ

JK Cement (JKCE) reported higher-than-expected EBITDA of Rs3.7bn (CentrumE: Rs3.49bn), down 17% YoY but up 13% QoQ and EBITDA/t of Rs1,116, down 21% YoY but up 13% QoQ. The outperformance was due to higher-than-expected average cement realisation which was up 6% QoQ. Overall CoP/t though was up 4.5% QoQ/11.5% YoY to Rs4,725/t on account of increase power & fuel but increase was lower than the industry average. As the new capacity has been ramped up, total cement volume was flat QoQ but up 4.8% YoY to 3.32mt. JKCE’s 4mtpa new expansion at Panna with Hamirpur GU is on track and is expected to be commissioned by FY23-end, providing visibility for FY24 volume growth. We value JKCE at 13.5x average of FY23E and FY24E EV/EBITDA and arrive at a TP of Rs3,173. With limited downside, we upgrade the stock to Reduce from SELL.

Higher prices led to increase in revenue

JKCE recorded average blended cement realisation of Rs5,841/t, up 6% QoQ/5% YoY while grey cement realisation increased by 4.6% QoQ/8% YoY to Rs4,847/t. With ramp up of capacity, it recorded total cement volume of 2.92mt, flat QoQ/up 6% YoY. Higher cement realisation helped net sales to increase by 6% QoQ/10% YoY to Rs19.4bn.

Higher cement prices offset cost pressure, increasing EBITDA/t higher

Operating cost was up 14.2% QoQ/4.5% YoY to Rs4,725/t on account of sharp increase in power & fuel cost which increased by Rs278/t QoQ to Rs1,310/t. Freight cost remained almost flat QoQ at Rs1,154/t. Higher cement prices offset cost increase and as a result, EBITDA increased ~13% QoQ to ~Rs3.71bn and EBITDA/t increased by 13% (Rs128/t) QoQ to Rs 1,116/t. The management guides Q4FY22 CoP to be higher by 12-13% QoQ on account of fuel cost and stays higher till Q1FY23.JKCE has increased average cement prices by Rs10-20/bag in nOrth and Rs15-25/bag in South in Feb- beginning which will not be sufficient to pass on full cost hike.

JKCE’s expansion on track; to be commissioned by FY23-end

JKCE’s Panna expansion in Madhya Pradesh will be commissioned by FY23-end. The equipment ordering by JKCE to set up a greenfield integrated plant of 4mtpa capacity (2mtpa GU at Panna, 2mtpa GU in Uttar Pradesh, with clinker capacity of ~2.9mtpa) is completed. It will add 22MW WHRS plant at Panna. The cost is estimated at Rs29.7bn and will be financed through a mix of debt (~Rs17bn) and internal accruals. JKCE has invested Rs6.7bn on it till Q2FY22. The management guides FY22 capex of Rs12.5bn (includes Rs9bn for Panna expansion) and FY23 capex of Rs14bn (includes Rs12bn for Panna expansion).

Valuation and View – Near term weakness but on right track

Despite improved demand, industry is unable to take sufficient price hikes which can fully offset cost pressure. With fuel cost remain elevated, we expect JKCE’s margins will fall in Q4FY22. Ramp up of existing capacity should provide ~6% volume growth in FY23. Post that, its new 4mtpa capacity at Panna will become operational, providing volume growth visibility for FY24-26. Balance sheet remains healthy, with net debt/EBITDA of 1.2x by FY23E. However, at CMP, the stock discounts the growth and is expensive at 15.6x FY23E EV/EBITDA. We recommend Reduce and prefer to enter at a lower prices with a TP of Rs3,173

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