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Result in line as higher realization offsets lower volumes

Expansion at UCWL provides growth visibility beyond FY24E

* JKLC’s 2QFY22 result was in line with our estimates, despite a miss on volumes due to the transporters strike in Chhattisgarh, but was offset by higher other operating income (RMC and AAC sales). Volumes fell 3% YoY to 2.32mt, while cost inflation led to a 3.3pp YoY dip in EBITDA margin.

* Given the reasonable valuation (7.3x FY23E EV/EBITDA) and growth visibility from the announced 2.5mtpa expansion (with a budgeted capex of INR16b) in the North India through its subsidiary Udaipur Cement Works (UCWL), we maintain our Buy rating as well as our FY22E/FY23E/FY24E estimate.

Higher revenue from other segments boosts blended realization

* Standalone revenue/EBITDA/adjusted PAT stood in line with our estimate at INR11.2b/INR1.6b/INR0.8b (+7%/-13%/-5% YoY).

* Sales volume (including clinker) missed our estimate by 6% and declined by 3% YoY to 2.32mt (-13% QoQ) as dispatches to East India were impacted (for 13 days in Sep’21) by the transporters’ strike in Chhattisgarh. Cement volumes declined by 2% YoY and 5% QoQ to 2.17mt.

* Miss on volume was offset by higher realization, which was up 10% YoY at INR4,828/t (+4% QoQ) v/s our estimate of INR4,533/t on account of: 1) lower clinker sales at 0.15mt (-19% YoY and -60% QoQ), and 2) higher revenue from other segments at INR920m v/s INR700m in 2QFY21.

* Cost/t was up 15% YoY to INR4,126/t (+8% QoQ). EBITDA/t declined by 10% YoY to INR702/t (-14% QoQ) v/s our estimate of INR638/t.

* Standalone revenue/EBITDA/adjusted PAT rose 26%/15%/56% YoY in 1HFY22 to INR23.5b/INR3.8b/INR2b on account of a 16% growth in volumes at 4.97mt.

* OCF/FCF was negative at INR662m/INR1.3b in 1HFY22 (v/s INR4.2b/INR3.7b in 1HFY21), while capex stood at INR650m v/s INR438m in 1HFY21.

Highlights from the management commentary

* In Oct’21, JKLC raised prices by INR15-20/bag MoM across its operating geographies. A transporters’ strike in Chhattisgarh led to a loss of 17 days of dispatches (to East India) from the Durg plant. The management is confident of recouping lost volumes over 2HFY22.

* It believes a further round of price hikes would be needed to pass on the cost inflation, and expects to achieve it post Diwali, led by an uptick in demand. It expects demand to grow by 7-8% over 1HFY22.

* Its coal inventory will last till Jan-Feb’22, while the full impact of higher fuel cost will be reflected in 4QFY22. Blended cost of fuel stood at INR8,300/t in 2Q and is expected to inch up to INR9,000/t in 3QFY22.

* The integrated unit (1.5mtpa/1mtpa of clinker/grinding capacity) at UCWL is expected to be commissioned in Oct’23, while the split grinding unit (1.5mtpa) will be commissioned in Mar’24.

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