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Higher non-trade sales drag margins down...

JK Cement’s performance remained weak operationally in Q4FY21. While sales volume grew 45.8% YoY 3.89 MT (vs I-direct estimate: 3.87 MT), realisations dipped 4.7% YoY (down 5.1% QoQ) to | 5,271/t that restricted revenue growth to 38.8% YoY at | 2052.5 crore (vs. I-direct estimate: | 2151.1 crore). Grey cement volumes were up 48.1% YoY to 3.5 MT whereas white cements sales grew 29.4% YoY to 0.39 MT. Cost of production broadly stayed flat QoQ at | 4143/t.

However, lower realisations led to 204 bps YoY drop in EBITDA margins (down 411 bps QoQ). EBITDA/t was at | 1,128/t vs | 1,297/t last year and | 1416/t last quarter. PAT of | 63.4 crore also stayed far lower than estimate of | 261.2 crore as the company booked impairment loss of | 166.9 crore w.r.t. its UAE subsidiary. On the b/s front, gross debt has increased from | 2,594 crore last year to | 2,841 crore in FY21 owing to capital expenditure.

Post addition of 4.2 MT cement capacity in FY21, the company would now set-up 4 MT integrated grey cement capacity at Panna MP with split grinding unit in Uttar Pradesh and 12 MW WHRS plant for capex of | 2970 crore (i.e. at $103/t). Completion is likely by H2FY24E.

Completion of phase-I expansion to fuel growth in FY22E…

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 the challenging environment, the company has been able to post 19% growth in volumes. Going forward also, we expect healthy volume CAGR of 11.1% during FY21-23E.

…but Phase-II expansion to keep debt elevated

The incremental cash flow from new installed capacities would be mainly utilised towards next phase of expansion at Panna (MP) for proposed ~4 MT greenfield capacity as it would entail a capex of ~| 2,970 crore ($102/t). Hence, we expect debt to remain higher in the next two years. However, improved OCF from new capacity would settle down debt/EBITDA at 2.0x in FY23E vs. 2.5x in FY20.

O/s liability of UAE subsidiary to likely fall into Indian entity

The Fujairah unit of the company has consistently remained loss making leading to significant net-worth erosion. The management has highlighted that the UAE entity currently has an outstanding debt of | 387 crore to be paid over the next three years. This will most likely be paid by the India entity if profitability of the UAE entity does not improve.

Valuation & Outlook

While new capacities would drive cost efficiencies, the increase in the nontrade mix would keep check on margins. Further, the Panna expansion along with an additional debt obligation from its UAE subsidiary would continue to keep debt levels high. Post the recent run up in the stock price, we now downgrade our rating from BUY to HOLD with a revised target price of | 2850/share (valuing at 13x FY23E EV/EBITDA, earlier TP | 2950)

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