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Higher power and fuel cost drags EBITDA lower

JK Lakshmi Cement (JKLC) reported lower-than expected operating results, with standalone EBITDA of Rs2.17bn (CentrumE: Rs2.43bn), down ~22% QoQ/flat YoY and EBITDA/t of Rs779/t (CentrumE: Rs833/t), down 11% QoQ. The sequential fall in EBITDA/t was due to higher power & fuel cost on back of increase in coal and pet coke prices and lower volume as a result of fall in demand. Management expects further 20% QoQ increase in power cost in Q2FY23 while realisation is likely to remain flat QoQ. JKLC’s incremental capacity will come by FY24-end which will help in volume growth from FY25 onwards. We factor in higher realisation offset by increase in cost leading marginal change in FY23E/FY24E EBITDA by -1.1%/0.2%. We value JKLC at 8.0x FY24E EV/EBITDA and maintain our target price of Rs551. Reiterate BUY.

Lower volume offset by higher realisation increases topline

QoQ JKLC sold 2.79mt (including clinker) in Q1FY23, down 11.4% QoQ due to subdued demand and accounting changes (not showing cement sales to UCWL for which it receives clinker, now showing only conversion changes). Derived cement realizations increased to Rs5,567/t, up by Rs804/t (17%) QoQ/up Rs934/t (20%) YoY. Overall higher realisation offset lower volume leading net sales to increase by 3.6% QoQ to Rs15.5bn.

Higher cost/t dragged EBITDA lower QoQ; EBITDA/t fell to Rs779

The power and fuel cost stood at Rs1,314/t up 35% QoQ. The cost of fuel consumed was at Rs11,700/t v/s ~Rs9,000/t in Q4FY22. Management guides ~20% QoQ increase in fuel cost in Q2FY23. Logistics cost at Rs1,120/t was up 10% QoQ. Lead distance remained flat (393km v/s 394km in Q4FY22). As a result, overall CoP increased by Rs903/t to Rs4,788/t. Thus, EBITDA decreased 22% QoQ/flat YoY to Rs2.17bn with EBITDA/t decreasing by 11% QoQ/ down 4% YoY to Rs779.

Adding 2.5mtpa grinding unit at Udaipur by FY24 and targets 30mtpa capacity by FY30

JKLC targets to increase cement production capacity from 11.8mtpa to 30mtpa by 2030. Currently focus is to complete expansion projects at JKLC’s subsidiary, Udaipur Cement works of 2.5mtpa grinding unit along with 1.5mtpa clinker unit in Udaipur by FY24-end. To further enhance capacity JKLC will start brownfield expansion projects at Udaipur, Sirohi and Durg from FY24. Besides, it is also evaluating greenfield expansion as won limestone mines at Nagaur (Rajasthan) and in Kutch. It is looking for land acquisition as well. Its target is to reach 30mtpa by FY30.

Volume growth to resume from FY25 onwards– recommend BUY

In Q2FY23, we expect EBITDA/t to fall further owing to increase in power and fuel cost. We expect ~2% volume CAGR over FY22-24E for JKLC to 11.2mt. The incremental capacity is expected to be commissioned by FY24-end which will provide volume growth from FY25 onwards. We value JKLC at 8.0x FY24E EV/EBITDA to arrive at a target price of Rs551 (EV/t of USD65).

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