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Seasonal headwinds and higher costs to hurt 2QFY23 profits

EBITDA beat led by better realizations of grey/white cement

* JK Cement (JKCE)’s standalone EBITDA/adjusted PAT (adjusted for additional depreciation on CPP) stood at INR4b/INR2b v/s our estimate of INR3.6b/INR1.6b, respectively. Realizations of grey cement/white cement were 2%/1% above our estimates, respectively, in 1QFY23

* We increase our FY23E/FY24E consolidated EBITDA by 8%/5% and EPS by 12%/9%, respectively, given its outperformance in 1QFY23 as well as the recent reduction in energy costs. JKCE’s valuation at 13.2x FY24E EV/EBITDA (v/s one-year forward EV/EBITDA of 11x for the last seven years) appears rich. We retain our Neutral rating with a TP of INR2,570

Benefitted from low-cost fuel inventory, EBITDA/t at INR1,124

* JKCE’s standalone revenue/EBITDA/adj. PAT stood at INR21.7b/ INR4b/INR2b (+33%/0%/-8% YoY and 2%/13%/20% above our est.), respectively. Total sales volume grew 18% YoY (+45% for white cement and +15% for grey cement). Blended realization rose 13% YoY (2% above our est.), led by 11%/6% increase in grey/white cement realizations, respectively.

* Opex/t was up 22% YoY led by a 31%/10% increase in variable/freight costs, respectively. The company benefitted from low-cost fuel inventory, driving flattish variable cost QoQ. However, freight cost increased due to higher lead distance (selling in new markets of central India) from existing plants and higher diesel cost.

* Employee cost rose 16% YoY/18% QoQ to INR1.4b and other expenses/t increased 29% YoY. Higher opex was offset by better realization/volume and EBITDA remained flat YoY. OPM contracted 6pp YoY to 18.5%. EBITDA/t stood at INR1,124 v/s INR1,320/INR973 in 1Q/4QFY22.

Highlights from the management commentary

* Volume growth for the company including white cement should be at 10% in FY23E. Cement prices have corrected and the current price is lower by INR15-18/bag in North and INR20/bag in South v/s 1QFY23 average.

* The company benefitted from low-cost fuel inventory in 1Q and the full impact of coal/petcoke cost increase will be seen in 2QFY23. Energy cost is likely to be higher by INR200/t QoQ in 2QFY23E.

* Expansions at Panna (IU) and Hamirpur (GU) are at advanced stages and the entire 4mtpa is expected to be commissioned in FY23. It aims to reach to a total grey cement capacity of 25mtpa by FY25E.

Valuations rich; maintain Neutral

* JKCE is in the process of increasing its Grey Cement grinding capacity by 4mtpa in Central India by Mar’23 (current capacity: 14.5mtpa). Higher limestone reserves in Panna, Madhya Pradesh (518mt) can help it increase capacities by 8mtpa (assuming a 30-year plant life).

* We value JKCE at 13x FY24E EV/EBITDA to arrive at our TP of INR2,570 (v/s INR2,350 earlier). We await a better entry point and maintain our Neutral rating on the stock.

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