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Realization surprises positively

Deleveraging to drive 15% EPS CAGR over FY21-23E

* EBITDA grew 33% YoY to INR2.7b in 4QFY21 (34% above our estimate), led by 3% QoQ increase in realization and 2% QoQ decline in cost per tonne.

* We have raised our FY22E/FY23E EPS estimate by 23%/22% to factor in accelerated deleveraging, which should drive 15% EPS CAGR over FY21-23E. We reiterate our Buy rating on attractive valuations (6.5x FY22E EV/EBITDA) as well as growth optionality from the announced 2.5mtpa expansion in North India through its subsidiary Udaipur Cement Works (UCWL).

Lower costs, higher realization drives 34% beat on EBITDA (up 33% YoY)

* Revenue/EBITDA/adjusted PAT rose 25%/33%/66% YoY in 4QFY21 to INR13.2b/INR2.7b/INR1.7b (3%/34%/122% above our estimate), led by higher realization and lower power and fuel cost.

* Volumes grew 18% YoY to 2.9mt (in line) and EBITDA/t was 36% above our estimate at INR922 (+30% QoQ, +13% YoY).

* While realization was 4% above our estimate at INR4,552/t (+3% QoQ, +6% YoY), per tonne cost was 2% below our expectation at INR3,630/t (+4% YoY, -2% QoQ) on account of lower-than-expected power and fuel cost at INR782/t (-4% YoY). However, a sharp increase (14%/8% YoY) was seen in raw material/freight costs due to higher diesel prices.

* The company booked an exceptional loss of INR309m on account of the impairment of the conveyor belt project at the Durg plant.

* Revenue/EBITDA/adjusted PAT rose 8%/17%/49% YoY in FY21 to INR43.8b/INR7.9b/INR3.9b. Volumes grew 8% YoY to 9.89mt in FY21, despite COVID-19, and EBITDA/t improved 9% to INR799. OCF/capex/FCF stood at INR8.6b/INR0.5b/INR8.1b in FY21 (v/s INR5.4b/1.2b/4.2b in FY20).

* It also announced a higher dividend of INR3.75/share.

Highlights from the management commentary

* Cement demand has declined by 30% MoM in Apr’21 and by a further 5% MoM in May’21. The management expects demand to recover by Jun’21.

* The company has exhausted its low-cost fuel inventory. 1QFY22 will witness the full impact of higher fuel prices. The incentive of INR40-50/t to UCWL for volumes sold in Rajasthan has expired in Mar’21.

* FY22 capex guidance stands at INR1.4b for JKLC (including INR1b for the Sirohi WHRS project), while another INR2b will be spent on the announced capacity expansion at UCWL.

* Debottlenecking of clinker capacity to 1.5mt (from 1.2mt) and cement to 2.2mt (from 1.6mt) at UCWL is expected to be completed in Jun’21.

* Standalone gross/net debt stands at INR11.3b/INR4b, while consolidated gross/net debt stands at INR16.5b/INR8.2b.

Valuation and view

* The company has been focusing on deleveraging. With improved profitability and lack of capex in the standalone business, we expect FCF generation to continue, which should reduce standalone net debt to almost nil in FY22E (from INR10.2b/INR4b in FY20/FY21).

* The announced 2.5mtpa expansion in North India through its subsidiary UCWL provides growth visibility beyond FY24E.

* JKLC trades at 5x FY23E EV/EBITDA and at USD47/t on an EV/capacity basis, which is at a discount of ~30% to its 10-year average. We value the stock at 7x FY23E EV/EBITDA to arrive at our TP of INR650. Maintain Buy.

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