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Valuations outpace earnings; downgrade to Reduce

JK Cement (JKCE) shifted its focus back to realizations in a pandemic-hit Q1FY22. Gray cement volume declined ~21% QoQ (grew 73% YoY on weak base), though realization increased by 6% QoQ (flat YoY) to Rs4,679/tonne. White cement revenue contribution fell to 19% from 24% in Q4FY21. Overall cost fell marginally QoQ (1.4% to Rs4,085/tonne) and was well contained.

Effectively, EBITDA fell ~9% QoQ to ~Rs4bn and EBITDA margin expanded to 24.5% from 21.4% in Q4FY21 (22.3% in Q1FY21). APAT dipped ~10% QoQ to Rs2.1bn. We have retained our FY22E EBITDA at Rs16.7bn, but have revised our FY23E EBITDA to Rs20.8bn from Rs20.5bn, factoring in revisions in our volume estimates and better cost rationalization. We assign EV/EBITDA multiple of 12x to arrive at a fair value of Rs2,920. We revise our rating to REDUCE (ADD earlier), as we believe valuations (13.2x FY23E EV/EBITDA) have raced ahead of earnings.

Realizations soar; compensate for volume decline

JKCE‘s gray cement volume dipped 21% QoQ to 2.76mn tonnes (including clinker sales of 0.08mn tonnes) in a quarter with distorted demand. This was well countered by increase in gray cement realization by 6% QoQ (flat YoY) to Rs4,679/tonne, aided by higher trade sales mix of 68% (63% in Q4FY21). White cement volumes fell higher by 33% QoQ to 0.26mn tonnes due to higher impact on value-added products that dragged realization down by ~4% QoQ.

Controlled costs help improve EBITDA margin

Operating costs declined 1.4% QoQ to Rs4,085/tonne, as savings of 32% QoQ in other expenses (higher than volume decline) helped offset inflated logistics costs. Energy cost (adjusted for raw material cost) was unchanged QoQ (down 10% YoY), with support from WHRS. Logistics cost/tonne inflated 2.5% QoQ to Rs1,107, pushed by diesel prices and increased road transport (84%). However, higher realization gains pushed up aggregate EBITDA/tonne by ~17% QoQ to Rs1,323. EBITDA declined ~9% QoQ. EBITDA margin expanded to 24.5% from 21.4% in Q4FY21 and 22.3% in Q1FY21.

JKCE’s new expansion to go on stream with some delays

JKCE’s Panna expansion in Madhya Pradesh will be commissioned in FY23 (or early FY24 due to Covid delays). Equipment ordering to set up an integrated greenfield plant of 4mn-tonne capacity (2mn-tonne grinding unit at Panna; 2mn-tonne grinding unit in Uttar Pradesh, with clinker capacity of ~2.9mn tonnes) is completed. It will add 22MW WHRS at Panna. Residual capacity addition at Nimbahera is likely to be completed by H1FY22.

Valuations race ahead of earnings; REDUCE

We have revised our FY23E EBITDA upwards to Rs20.8bn (earlier Rs20.4bn) factoring higher white cement volume and cost rationalization (FY22E unchanged). We assign EV/EBITDA multiple of 12x FY23E to arrive at a fair value of Rs2,920 (earlier Rs2,818). JKCE continues be on a healthy ground with focus on growth, steady balance sheet and capacity expansion in Central India markets; white cement segment adds comfort. However, we believe current valuations at 13.2x EV/EBITDA FY23E have raced faster than earnings. We downgrade the stock to REDUCE (ADD rating earlier).

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