Neutral J K Cement Ltd For Target Rs.3,545 - Motilal Oswal
Fuel cost pressures to continue in 4Q, capex plans on track
Higher opex impacts performance
* JK Cement (JKCE)’s 3QFY22 result was in-line with our estimates on operating parameters, though, profit was 15% below estimate led by lower other income and higher interest expense/ETR.
* As expected, increased opex (up 14% YoY) dented profitability. EBITDA dipped 17% YoY and OPM contracted 6.4pp YoY to 19.1%. EBITDA/t at INR1,116 was down 21% YoY. Adj. Profit was down 30% YoY.
* We reduce our FY22E/23E/24E consolidated EBITDA by 3%/3%/1%, respectively, due to lower profits for the UAE subsidiary and higher energy costs. However, we cut FY22E/23E/24E EPS by 15%/13%/6%, respectively, on 1) lower other income and 2) higher interest expense.
* Though we continue to like the company’s growth strategy, the current valuations at 15.2x/13.6x FY23E/24E EV/EBITDA (v/s an average one-year forward EV/EBITDA of 10.8x for the last seven years) leave no room for negative surprises. We value White Cement/Grey Cement at 16x/14x FY24E EV/EBITDA, to arrive at a TP of INR3,545. We await a better entry point and maintain our Neutral rating on the stock.
In-line operating numbers; Realization/ unitary EBITDA improves QoQ
* Standalone revenue/EBITDA/PAT stood at INR19.4b/INR3.7b/INR1.7b (+10%/-17%/-30% YoY and +3%/+1%/-15% v/s our estimates), respectively. Grey/White cement sales volume was at 2.89mt/0.45mt respectively, up 5% YoY each.
* Blended realization improved 5% YoY led by 8% growth in grey cement realization (up 5% QoQ). Realization of white cement was down 3% YoY (but, up 1% QoQ).
* Opex/t rose 14% YoY (6% QoQ) as variable cost grew 16% YoY. Employee cost climbed 18% YoY leading to 12% YoY rise in employee expense/t. Freight cost/other expense per ton rose 5%/24% YoY, respectively.
* EBITDA/t stood at INR1,116 v/s INR1,417/INR1,066 in 3QFY21/2QFY22. Interest and depreciation costs shot up 10% and 16% YoY, respectively.
* 9MFY22 sales volumes/realization improved 25%/1% YoY, leading to a 27% YoY increase in revenue to INR54.1b. However, Opex/t was up 7% YoY and restricted EBITDA growth at a mere 5% YoY to INR11.3b. OPM declined 4.3pp YoY to 20.8%. EBITDA/t came in at INR1,163 v/s INR1,388 in 9MFY21. Adjusted profit was up 6% YoY.
Highlights from the management commentary
* There have been price hikes in the North (INR10-20/bag) and South (INR15-25/bag) markets in Feb’22. The management expects these hikes to sustain due to input cost pressures.
* Coal consumption cost increased 14% QoQ in 3QFY22 and there could be a further increase of 15% QoQ in 4QFY22. It is likely to remain elevated until 1QFY23.
* Capex plans for 4mtpa grinding capacity addition along with WHRS of 22MW are progressing as per schedule. The clinker plant is likely to get completed in CY22- end; whereas; the grinding unit is projected to get completed by FY23-end (earlier guidance was 1QFY24).
* Capex in FY22E is estimated to be INR12.5b (INR9.7b spent in 9MFY22), whereas, capex in FY23E will be INR13b.
Valuation rich; maintain Neutral
* JKCE is in the process of increasing its grey cement grinding capacity by 4mtpa in Central region by 1QFY24 (current capacity: 14.5mtpa). Higher limestone reserves in Panna, Madhya Pradesh (518mt) could help it increase capacities further by 8mtpa (assuming a 30-year plant life).
* The stock trades at 15.2x/13.6x FY23E/FY24E EV/EBITDA. It has traded at an average one-year forward EV/EBITDA of 10.8x for the last seven years. Current valuation appears rich even after factoring in the capex plans and improvement in Grey cement’s profitability during the last two years.
* We value White Cement/Grey Cement at 16x/14x FY24E EV/EBITDA to arrive at a TP of INR3,545 (7% potential upside). We await a better entry point and maintain our Neutral rating on the stock.
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