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Strong operating performance led by volumes...

JK Cement’s performance was ahead of our estimates for Q3FY21 with revenue growth of 25.3% YoY to | 1760.1 crore (vs. I-direct estimate: | 1672.5 crore). Blended sales volume grew 23.8% YoY to 3.17 MT while realisations improved 1.3% YoY to | 5,554/t and stayed flat QoQ vs. expected decline of ~2%. EBITDA margins improved 572 bps YoY to 25.5%, better than our estimated margins of 24.8%, supported by lower raw material & employee expenses. EBITDA/t came in at | 1,416/t vs. | 1085/t last year and | 1461/t last quarter. It was better than our expected EBITDA/t of | 1,340/t. Reported PAT for Q3FY21 came in at | 238.3 crore, up 73.2% YoY, ahead of our estimated PAT of | 200.6 crore. On the B/S front, gross debt has increased marginally from | 2,733 crore as on Sep-20 to | 2,791 crore of Dec-20, owing to capital expenditure made during the year of ~| 1,648 crore. With improved earnings, net debt to EBITDA has declined to 0.98x vs. 1.35x reported in FY20 while net debt to equity was at 0.4x vs. 0.51 as of Mar-20. In the next phase of expansion, the company would set up 4 MT integrated grey cement capacity at Panna MP with split grinding unit in UP and 12 MW WHRS plant for capex of | 2970 crore (i.e. at $103/t).

Completion of phase-I expansion to fuel growth…

The entire 4.2 MT has been commissioned this fiscal. The newly added capacities include 1 MT grinding unit (GU) each in Nimbahara and Mangrol along with 2.6 MT clinker plant and 1.5 MT GU in Aligarh and 0.7 MT GU in Gujarat (Balasinor). Hence, despite a challenging FY21E, the company is likely to report volume growth of 14% to 11.1MT. For FY20-23E, we expect volume and revenue CAGR of 12.1% and 12.5%, respectively.

Phase-II expansion in MP to add another 4 MT capacity

Post incurring major capex of over | 1,648 crore towards phase-I expansion, the next 2 years would lead to healthy OCF generation. However, the same is going to be mainly utilised towards the next phase of expansion at Panna (MP) for proposed ~4 MT greenfield capacity (8000tpd clinker with 2MTGU in MP & UP along with 22 MW WHRS) as it would entail a capex of ~| 2,970 crore ($102/t). Hence, we expect debt levels to remain higher over the next two years. However, incremental OCF from new capacity would settle down debt/EBITDA at 2.0x in FY23E vs. 2.5x in FY20. The said project would also be entitled to various state government incentives including capital subsidy in MP and GST benefits in UP.

Valuation & Outlook

The management’s efforts to improve cost efficiencies through newly added capacities (4.2 MT) are expected to drive profitability. Thus, we believe there is further scope for growth and margin expansion. The funding for phase-II expansion will be partially be done by incremental inflows from newly added capacities. Hence, it would keep debt levels under check. Hence, we maintain BUY rating with a revised target price of | 2950/share (i.e. valuing at 13.5x FY23E EV/EBITDA) (earlier TP | 2450).

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