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Low-Cost Fuel Inventory Leads to EBITDA Beat; Headwinds Ahead

JK Cement (JKCE) reported an EBITDA that was ahead than our estimate due to lower than expected costs. Grey cement sales volume (including clinker) at 3.17mn tonnes increased by a healthy 15% YoY (down 10% QoQ), marginally ahead than our estimate of 3.15mn tonnes. Grey cement realization was up by 11% YoY and 5.3% QoQ to Rs5,191/tonne (our estimate of Rs5,100/tonne), owing to the change in sales mix in favour of trade segment and focus on higher realization in non-trade segment. EBITDA/tonne at Rs1,124 fell 15% YoY, but increased 16% QoQ, higher than our estimate of Rs951. JKCE benefitted from low-cost coal inventory resulting in flat Input cost/tonne (RM+P&F) on a QoQ basis, which stood at Rs2,329 (+31% YoY). Hence, despite lower volumes sequentially, higher realisation and cost control led to EBITDA increasing by 5% QoQ (flat YoY) to Rs4bn (our estimate of Rs3bn). Freight cost/tonne stood at Rs1,220 (+10% YoY and +4% QoQ), due to higher lead distance (selling in new markets of central India) from existing plants and higher diesel cost. Employee cost increased 16% YoY and 18% QoQ to Rs1.43bn, as the company hired extra manpower to enter newer markets. Other expenditures/tonne witnessed an increase of 30% YoY and 3% QoQ at Rs1,009, due to higher marketing expenditure. White cement sales volume including that of wall putty at 0.39mn tonnes increased by 45% YoY (down 1.2% QoQ), while realisation at Rs12,230/tonne increased 5.5% YoY and 0.6% QoQ. Adj. PAT stood at Rs1.8bn (-13% YoY and -10% QoQ), ahead of our estimate of Rs1.6bn. We have increased our EBITDA estimates by 2%/6% for FY23E/ FY24E, mainly to factor in higher volumes and realisation, partly offset by higher costs. We maintain our target multiple at 11x for FY24E for the standalone business, and our HOLD rating on the stock with a revised SOTP-based 12-month Target Price of Rs2,750 (from Rs2,575 earlie

Capacity Addition to Drive Volume Growth

JK Cement is working towards commissioning its greenfield 4MTPA integrated cement plant at Panna, Madhya Pradesh, by 3QFY23 versus its earlier guidance of 4QFY23. Also, the management is evaluating grinding capacity addition in Central India and via debottlenecking to reach its target of 25MTPA by FY25E. Increased diversification in Central India, attractive regional prices and demand growth prospects make the expansion project value accretive. We believe this bodes well for the company and we expect JKCE to report a strong volume CAGR of 13% in grey cement over FY22-FY24E.

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