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Greater focus on improving operating efficiency; retaining a Buy

JK Lakshmi’s sharper focus on better realisations aided revenue growth, but the high-cost environment curbed its operating performance. The ongoing UCW expansion is on track and expected to be complete by FY24. Efforts like improving operating efficiency via more renewable energy/ alternative fuel and increasing the blended cement share/premium cement would help. We retain our Buy call, with a TP of Rs.828 (Rs.616 earlier).

Higher realisations aided topline. The optimal geo-mix, high premium share (21% of trade sales) and 55% trades sales improved realisations 17% y/y to Rs5,651/tonne. Overall revenue grew 16.5% y/y to Rs13bn while noncement revenue grew 26% y/y. Cement volumes dipped 0.5% y/y to 2.31m tonnes on weak demand. The greater focus on improving realisations through higher share of blended cement (72-75%, from 67%), higher trade share (60% from 55%) and higher geo-mix focus would aid topline growth. We expect a 9% revenue CAGR over FY22-25.

Long-term EBITDA target of Rs1,000/tonne. Partially aided by low cost fuel stocks, higher costs pushed EBITDA down 14.7% y/y to Rs1.4bn, EBITDA/ tonne 14% y/y to Rs601. The average cost of power & fuel consumed is guided to be Rs12,000-13000/tonne (Rs12000 in Q2 FY23). With a long-term target of improving EBITDA/tonne to Rs1000, the various efforts: higher renewable energy share, alternative fuel share and reducing the lead distance would be key contributors. We expect EBITDA to clock a 6% CAGR over FY22-25.

Business outlook, Valuation. The UCW expansion (2.5m tons cement/1.5m clinker) is 75% done and is expected to be complete by end-FY24. It would be funded at 2:1 debt-equity. The company aims at 30m-tonne cement capacity by FY30 through brownfield and greenfield expansions. Dr. Arun Kumar Shukla was appointed president and director w.e.f. 1st Aug’22. Shailendra Chouksey and Sushil Kumar Wali ceased to be directors on completion of their terms. We introduce FY25e and retain our Buy rating, at a TP of Rs828, 9x FY25e EV/ EBITDA. Risks: Demand slowdown; fuel-price rise.

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