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Higher cost drags EBITDA and profitability

JK Lakshmi Cement (JKLC) 1QFY23 delivered better than anticipated revenue, but higher costs led to an 8% miss in EBITDA. Net sales grew by 26% YoY to INR15.5bn (8% above JMFe) led by 5% growth in volumes to 2.79MT (4 % below JMFe), while realisation grew by 20% to INR5,567/t (13% above JMFe). EBITDA was flat YoY at INR2.2bn, 8% below JMFe, while EBITDA margins contracted by 360bps YoY to 14%. Total operating costs increased by INR968/ton, mainly led by sharp 44% (INR406/t) in power & fuel costs. This was offset by a strong INR934/ton increase in realisations, resulting in EBITDA of 779/t, down 4% YoY. UCW board has approved a fund raise of i) INR 4.5bn of equity through rights issue and ii) INR 11bn of debt for 2.5MTPA expansion. We maintain BUY valuing the stock at 10x FY24 EBITDA, with TP of INR 630 (Mar’23).

* Decent volume growth led to beat in revenues: JK Lakshmi’s 1QFY23 reported 26%YoY growth in revenue at INR15.5bn (+4% QoQ; 9% ahead of JMFe) as both volumes and realisations grew. Overall, volumes stood at 2.79mnT, reporting a 5% growth YoY (-11% QoQ; 4% below JMFe). Blended realisations witnessed a sequential growth of 17% at INR 5,567 (+20% YoY; 13% above JMFe). We expect volume growth to be moderate vs peers as new capacity (2.5MTPA) at UCW is expected to be commissioned by 2HFY24

* Higher fuel cost drags EBITDA: Overall, costs reported a strong uptick on a sequential basis, as power/fuel costs increased by INR342/t, but management indicated that in 2Q cost per tonne is expected to decline given reduction in coal and petcoke prices. Further, fixed expenses such as employee costs and other expenses too witnessed a sequential uptick on absolute basis by 28% and 46% respectively in 1Q. Overall EBITDA (INR 2.2bn; flat YoY) and EBITDA/t (INR 779; -4% YoY) remained flattish on YoY basis, as sustenance in operational performance was on account of operational efficiencies, increased volume, optimizing product mix and higher sales of premium products..

* 2.5MTPA expansion to be commissioned by Mar’24: JKLC has planned an expansion of 2.5MTPA (1.5MTPA clinker with WHR), in its subsidiary, Udaipur Cement Works (UCW), at an estimated cost of INR 16.5bn. The expansion will be funded through a mix of debt (70%) and equity (30%). Debt of INR 8.5 has been tied up for the project. Further, board has given its approval for INR 4.5bn of fund raise through rights issue. JKLC had a negligible debt on standalone level. Additionally, UCW had a net debt of INR 9bn (increased from INR 5bn owing to expansion under implementation)

* Maintain BUY with a TP of INR 630: We have trimmed our EBITDA estimates for FY23/FY24 factoring in impending increase in power/fuel costs (company is yet to witness a complete impact of commodity cost escalations). With the expansion of 2.5MTPA capacity in North, we believe the concerns on volume growth will be mitigated. We continue to value the stock at 10x FY24 EBITDA. We maintain BUY with a revised TP of INR630 (Mar’23).

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