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Healthy margins sustain…

About the stock: With 14.7 MT grey cement capacity, JK Cement is the fourth largest player in North India contributing over 40% of its revenues. The company also has a presence in the western region in Gujarat, Maharashtra along with the southern region in which Karnataka is a key market for the company.

* It is also the second largest producer of white cement (0.6 MT) and wall putty (1.2 MT) in India

* The company is adding another 4 MT integrated cement capacity in the central region that will take its capacity to 18.7 MT by FY24E.

Q1FY22 Results: JK Cements reported a good set of numbers for Q1FY22.

* While revenues declined 20.4% QoQ to | 1633.7 crore led by 22.4% QoQ drop in volumes (3.02 MT), EBITDA of | 399.6 crore was ahead of our estimated EBITDA of | 355.5 crore mainly led by 300 bps QoQ increase in margins to 24.5%

* Higher realisations (up 2.6% QoQ to | 5407/t) and lower cost of production (down 1.4% QoQ to | 4143/t) supported margin expansion. EBITDA/t came in at | 1,323/t vs | 1,219/t last year and | 1,128/t last quarter

* PAT of | 208.3 crore remained higher than estimated PAT of | 158.9 crore.

What should investors do?

JK Cement’s share price has grown by ~4.0x over the last 36 months (from ~| 786 in August 2018 to ~| 3200 levels in August 2021).

* We maintain our HOLD rating on the stock due to a sharp run-up

Target Price & Valuation: We value stock at | 3500/share, at 14x FY23E EV/EBITDA

Key triggers for future price performance:

* Stabilisation of newly commissioned capacities (4.2 MT in FY21) to generate higher operational cash flows and support next leg of growth

* In phase-II expansion, the company to add another 4 MT integrated cement capacity (2.6 MT clinker capacity), 22 MW power plant with capex of | 2970 crore. This would further expand its footprints in UP & MP market

* Despite capex, net debt to remain below | 2,500 crore due to cash generation and debt repayments to the tune of | 1200 crore over FY22-24E

Alternate Stock Idea: In our cement coverage, we also like JK Lakshmi Cement

* With expected capacity utilisation of 90%+, operating leverage benefit would help sustain healthy margins

* BUY with a target price of | 800/share

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