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White-cement/wall-putty shine; capacity expansion announced

JK Cement’s Q2FY23 standalone EBITDA declined 16% YoY and 26% QoQ to Rs3bn, standing 7-10% above consensus’ and our estimates owing to better-than-expected performance in the wall-putty and white-cement businesses. Blended EBITDA/ton fell 24% YoY/28% QoQ to Rs814 (Emkay Est: Rs750). The Board has approved cement-capacity expansion of 5.5mt and clinker capacity-addition of 0.66mt at a capex of Rs11.6bn (US$26/ton) over the next two years. Accordingly, Company has revised upward its capex guidance to Rs19bn/Rs14bn vs earlier guidance of Rs17bn and Rs11bn for FY23 and FY24, respectively. Net debt increased by Rs8bn in H1FY23, to Rs29bn as of Sep-22, and Management expects peak net debt of ~Rs35bn by Jun-23. Factoring-in the Q2 beat and higher volume growth with the capacity addition announcement, we increase our EBITDA estimates for FY24-25 by ~5%. We maintain HOLD on the stock, with a revised Sep-23 TP of Rs2,725/share (Rs2,600 earlier). Our DCF-based-TP implies 1-yr forward EV/EBITDA of 11x.

Results summary: Grey-cement volume (incl. clinker) rose 10% YoY to 3.22mt, in line with our estimate, while grey-cement realization fell 7% QoQ (+5% YoY) to Rs4,838 (Emkay est.: Rs4,904/ton). Premium product sales stood at 9% (+100bps QoQ) of trade sales in Q2FY23. White-cement plus wall-care putty volumes rose 9% YoY and QoQ to 0.42mt, beating our estimate by 8%; realization rose 10% YoY/~3% QoQ to Rs12,540/ton (Emkay est.: Rs11,686/ton). Total cost/ton rose 14% YoY/~2% QoQ to Rs5,064. Consol. EBITDA declined 14% YoY and 24% QoQ to Rs3.1bn, implying that the UAE subsidiary’s EBITDA stood at Rs84mn in Q2FY23 vs. EBITDA of Rs7mn/Rs36mn in Q2FY22/Q1FY23. What we liked: Better-than-expected performance in the white-cement and wall-putty businesses; low-cost capex announcement. What we did not like: increase in leverage.

Earnings-call KTAs: 1) Industry has witnessed price hike of Rs15-20/bag in the South and of Rs10/bag in the West post Sep-22. In the North, the extent of absorption of the Rs10/bag price hike taken in the past couple of days is awaited. 2) Company has already planned for volumes from upcoming capacity in Panna and is hopeful of ramping-up the Panna capacity within 6-9 months. Management maintained grey-cement volume growth guidance of 10% YoY for FY23. To recall, grey-cement volumes increased 12% YoY in H1FY23, which implies 8% volume growth in H2FY23. 3) Fuel mix for the company: Petcoke is 50%, in terms of volume. Fuel cost has gone up by 20% QoQ to Rs2.4/Kcal, and Management expects material benefit from the fuel-cost reduction, likely to be witnessed in Q4FY23. 4) The lead distance stood at 477km in Q2 which the Management expects to decline post the Panna capacity turning fully operational. Road: Rail mix for the quarter stood at 81:19. 4) Project update: 2mt de-bottlenecking capacity at existing plants is likely to be completed by Ma-23. New GU at Ujjain is likely by Mar-24, while that of the grinding unit at Prayagraj, UP is likely in H1FY25. With clinker capacity addition of 0.66mt (Panna clinker line increasing, from 8ktpd to 10ktpd), clinker capacity will increase to 14.5mt, which Management expects can support cement volumes of up to 21mt. 5) Capex guidance revised upward to Rs19bn (vs Rs17bn earlier) for FY23 and Rs14bn (vs Rs11bn earlier) for FY24. Maintenance capex is likely to log at around Rs3bn. Management expects to achieve peak debt of ~Rs35bn by Jun-23.

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