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Market share gains, better profitability to drive re-rating

In our view, JKCE would emerge as the sixth largest cement group in India with 21mnte grey plus white cement / putty capacity by Q3FY23 with potential to increase the same by >50% via brownfield expansion at ~US$70/te at Panna unit (MP) in medium term. Unlike mid-cap peers, it derives nearly 25% EBITDA (Rs4bn) from white cement / putty portfolio which provides steady-state cashflow to fund its grey cement expansions. The company enjoys better grey cement market mix with no exposure to East and <10% exposure to South markets where prices remain volatile due to over-supply concerns. JKCE continues to gain market share with 9% volume CAGR over FY13-22E vs <5% for industry and is expected to post 12% volume CAGR over FY22-24E. Its standalone blended EBITDA/te is unlikely to fall below Rs1,000/te even in FY23E vs Rs1,108/te in FY22E despite cost pressures. Hence, we believe, JKCE may trade at a premium to its long term historical average once the recent concerns around sharp fuel cost escalation recede. Maintain BUY with an unchanged target price of Rs3,170/sh based on 13xFY24E EV/E, implying 50% upside. JKCE remains our high conviction preferred pick in the sector. Key risks: Lower demand / pricing and high cost escalation.

* JKCE may still deliver blended EBITDA/te of ~Rs1000/te during H1FY23 amidst sharp cost escalation. JKCE’s key markets have seen ~7% QoQ price increase during Q1FY23 which should suffice for QoQ cost increases and hence, blended EBITDA/te is unlikely to fall QoQ vs Rs973/te in Q4FY22. Its volume may grow ~15% YoY on a low base during Q1FY23 – broadly in-line with industry average. Seasonally, Q2FY23 may see 15-20% QoQ increase in white cement / putty volumes which would support blended EBITDA/te in Rs900-1,000/te range.

* Market share gains to continue for JKCE: The company has posted 9% volume CAGR over FY13-22E and 20% CAGR over FY20-22E vs <5% industry volume CAGR over the same period. 4mnte Panna expansion (Central India) may get commissioned in Q3FY23 which should support 12%+ volume CAGR over the next two years. Panna has the potential for brownfield expansions; it can add another 10- 11mnte at ~US$70/te allowing JKCE to continue to gain market share in medium term.

* Better market mix to aid profitability: North would still constitute ~60% of JKCE’s capacity even after current 4mnte Panna expansion. Utilisation in the North is likely to remain >85% over FY22-25E - the highest vs all other regions. Hence, price and margins are likely to remain firm. Besides, Panna’s profitability may be in-line with the company’s average in the medium term owing to WHRS and incentives.

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