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Growth plans and cost savings to drive earnings

* JK Cement (JKCE) is increasing its grey cement capacity by 27% to 18.7mtpa by FY23-end, driving a CAGR of 11% in grey cement volume over FY22-25E. JKCE further intends to increase its grey cement capacity to 25mtpa by FY25E.

* Over FY22-25E, we expect a 12% EBITDA CAGR (~13% CAGR in grey cement and ~10% CAGR in white cement). Improvement in grey cement profitability will be driven by cost-saving initiatives (increasing blended cement share, renewable energy, and alternative fuel) and improvement in realization with increasing exposure in North and Central India.

* We estimate cumulative OCF (consolidated) at INR52b over FY23-25E, which will partly support further capex requirement. Consolidated net debt is estimated to peak out by FY24 and deleveraging will start from FY25 onwards.

* We upgrade JKCE to Buy, valuing it at 13.5x Sep’FY24E EV/EBITDA (premium to its five year average one year forward EV/EBITDA of 12.5x) to arrive at our TP of INR3,170, an upside of 17% from its current levels. Earlier, we had downgraded the stock to Neutral from Buy in Nov-21, considering rich valuations and looming concerns of input cost pressures.

Building scale and market reach in grey cement will help future growth

* JKCE has been consistently adding capacities, helping in its volume growth and diversification of its market-mix. Its grinding capacity in grey cement registered a CAGR of 9.6% over FY09-22, driving sales volume CAGR of 9.3%.

* JKCE plans to expand its presence in the Central India by setting up an integrated plant at Panna, Madhya Pradesh (MP) and a split grinding unit (GU) at Hamirpur, Uttar Pradesh (UP). This project is expected to be commissioned by Mar’23, post which, its grey cement capacity will increase to 18.7mtpa.

* It intends to increase its total grinding capacity to ~25mtpa by FY25E, through a mix of greenfield and brownfield expansions. As per our channel checks, JKCE has placed orders for two greenfield GUs in Central India, having a combined capacity of 3.9mtpa. Apart from that, it plans to increase its grinding capacity at four of its existing grinding units by 0.5mtpa each, through debottlenecking.

Strengthening presence in North and Central India

* JKCE commissioned 4.2mtpa grey cement capacity during FY20/21, out of which, 50% (2mtpa) was added to its existing north plants. This expansion helped the company to hold its position among the top five players (in terms of installed capacity) in the North region.

* In the current phase of expansion, the company is adding ~10mtpa over the next three years, out of which, 80% (8mtpa) is being added in Central India. These expansions will help JKCE to be one among the top five cement players (in terms of installed capacity) in central India as well.

* High capacity utilizations (in the range of 77-83% in FY22) and higher consolidation (~78% of capacity share is held by the top five players) in the North and Central India should offer better pricing power in these regions.

Focusing on efficiency improvement and sustainable growth

* JKCE’s new kilns are more efficient than the old kilns, leading to lower energy consumption. The company’s kiln heat rate has reduced by ~5%, while its power consumption has declined 31% from its FY09 levels. After commissioning its new plant at Panna, MP, the share of modern kilns will increase to +81% (v/s 57% in FY19) and would further help to reduce energy consumption.

* The company is also increasing green energy share in total power consumption by adding WHRS, Solar, and Wind power plants. It plans to double its WHRS capacity to 84.3MW by FY24E and treble its Solar and Wind power capacity (including group captive) to 55.7MW by FY23E. It targets to increase green energy share in total power consumption to 75% by FY30 v/s 32% in FY22.

* The company has increased the usage of alternative fuels (AFR) in the last few quarters. It achieved thermal substitution rate of 8.9% at the company level (TSR of 18% at Muddapur, Karnataka plant) in FY22. This also aided cost savings. The management highlighted cost savings of INR774m in FY22 v/s INR219m in FY21.

Upgrade to Buy on improving growth outlook

* JKCE is set to increase grey cement capacity to 25mtpa by FY25. Over FY19-22, despite Covid headwinds, JKCE reported industry leading volume CAGR of ~12%, (grey cement) helped by capacity additions and diligent efforts towards brand visibility. We estimate grey cement volume CAGR of ~11% over FY22-25E.

* JKCE’s OCF will not be enough to support capex, and hence, borrowing will increase till FY24. We estimate the company’s net debt to peak out by FY24 and deleveraging to start from FY25. We estimate a net debt/EBITDA ratio of 2x in FY24, which should improve to 1.6x in FY25E.

* JKCE trades at 12.8x/10.8x FY24/FY25 EV/EBITDA and EV/t of USD134/ USD103 FY24/25E. We estimate further upside will be driven by 1) EBITDA growth (12% CAGR over FY22-25E); 2) improvement in profitability of grey cement business (estimate blended EBITDA/t of INR1,075/INR1,150 FY24E/FY25E); and 3) higher OCF, which will support expansion as well as deleveraging of its balance sheet.

* We value JKCE at 13.5x Sep’FY24E EV/EBITDA (premium to its five year average one year forward EV/EBITDA of 12.5x) to arrive at our TP of INR3,170, an upside of 17% from its current levels. We upgrade the stock to Buy from Neutral.

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