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Focusing on profitable growth

We met with the management of JK Lakshmi Cement (JKLC) to understand the company’s growth plan, cement demand, pricing scenario and cost-saving initiatives. Here are the key highlights from the meeting:

* JKLC is expected to focus more on - 1) geo-mix optimization, 2) increasing the share of trade sales and premium products, 3) better brand visibility, 4) sustainable growth, and 5) digitization and automation to increase yield value per tonne. It aims to improve EBITDA/t by INR300 through revenue growth and efficiency measures in the next 18 months.

* Profitability improvement would be driven by a mix of revenue growth through better geo-mix, trade sales (INR200/t), and cost savings in manufacturing and logistics (saving of INR50/t each).

* The company has growth plans for Nagaur (Rajasthan), Durg (Chhattisgarh) and Kutch (Gujarat) regions. JKLC aims to increase its capacity to 30mtpa by FY30 from 18mtpa now (including ongoing Udaipur expansion and rented GU). Land acquisitions have been started at Kutch and Nagaur. To achieve this plan, JKLC expects a capex of ~INR80b, which will be met through internal accruals and borrowings (no plans of equity dilution).

* JKLC will prioritize expansion at the Durg plant but only if land acquisition for railway siding is completed. In case it faces hurdles in land acquisitions, it will look to set up a 3rd line at Udaipur, apart from the ongoing expansion.

* JKLC is currently expanding the capacity of its subsidiary, Udaipur Cement Works (UCWL). It is a brownfield expansion with a clinker/cement capacity of 1.5mtpa/2.5mtpa in Udaipur, Rajasthan (North), at an estimated capex of INR16.5b. It has spent INR8.5b as of Mar’23 and expects clinker/cement capacity to be commissioned by 3QFY24/2QFY25.

* Volume growth opportunities are limited for JKLC in the standalone business and growth will be seen after the completion of UCWL expansion. However, replacement of clinker sales with cement will boost cement volumes.

* JKLC has seen some improvement in price positioning of its brands vs. peers, though it is not as per expectations. In Odisha, it has introduced composite cement, which now accounts for 60% of its volumes in Odisha.

Inexpensive valuation; reiterate BUY

* In our recent note, we highlighted that JKLC’s EBITDA/t gap vs. peers’ average narrowed to INR163/t in FY23 from INR467/INR429 per tonne in FY17/FY18. Profitability should improve further with better geo-mix, higher green energy share (currently ~37% and targets to increase to ~50% by FY25) and increasing share of a thermal substitution rate from 4% to 16% (initial target of 10% by Dec’23 and 16% in next year).

* We believe JKLC is trading at an attractive valuation of 6.4x FY25E EV/EBITDA and USD62/t. We value JKLC at 8.5x FY25E EV/EBITDA to arrive at our TP of INR870 and reiterate our BUY rating on the stock.

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