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Expanding capacity, upgrade to Accumulate…

JK Lakshmi Cement (JKLC) is part of JK group mainly focused in North, West and Eastern regions of India with a consolidated capacity of 13.4MT.

* We revise upward our Target to Rs.730 (from Rs.600), upgrade to Accumulate considering capacity expansion to take care growth.

* Q2FY22 revenue grew by 7%YoY supported by 10%YoY growth in realisation (+4%QoQ). Volumes de-grew by 2.9%YoY impacted by trucker’s strike in East.

* EBITDA margin declined to 14.5% from 17.9% YoY (17.5% QoQ) due to surge in costs partially offset by higher realisation.

* JKLC’s subsidiary (UCWL) is expanding its capacity by 2.5MT with a capex of Rs.16bn (D/E of 70%:30%), commissioning by FY24.

* Pressure on margins due to sharp increase in costs will be reduced by price hikes and cost reduction initiatives like Waste Heat Recovery.

* JKLC currently trades at 8.5x 1Yr Fwd EV/EBITDA (5Yr Avg=9.9x). We value at 8x FY23E EV/EBITDA.

Volumes impacted by trucker’s strike in East region

JKLC reported Q2FY22 revenue growth of 7%YoY supported by realisation growth of 10%YoY. Volumes de-grew by 2.9%YoY due to strike by trucker’s association in East. Value added products including RMC revenue was at Rs.92cr (Vs. Rs.78cr QoQ / Rs.70cr YoY) and the company is targeting Rs.500cr from this segment. Management expects 8-9% volume growth in FY23. GoI’s strong focus on infra & housing will support demand. We expect revenue to grow by 11%CAGR over FY21-23E.

Price hike to mitigate cost pressure and recoup margins…

EBITDA margin declined by 330bps YoY to 14.5% (17.5%QoQ) due to surge in costs, partially offset by higher realisation. Total expenses/Ton increased by 14.7%YoY while realisation improved by 10%YoY. On a per ton basis, RM cost increased by 14.4%, Staff cost by 8.9%, Power & Fuel by 12.9%, Freight by 14.5% and other expenses by 22.6% on YoY basis. Pet coke & coal prices have witnessed a sharp increase in recent months, at Rs.7,000 (Q1FY22), Rs.8,300 (Q2FY22) and current average at Rs.9,000), which may exert some pressure in margins in the coming quarters. However, the company has taken price hike of Rs.15-20/bag in October. Cost reduction initiatives like Waste Heat Recovery (WHR) projects at its North plant (by Q3FY22) will bring some cost savings. Expect EBITDA/Ton to be at ~Rs.830 in FY23E. Adverse movements in cement, fuel and RM prices are the key risks.

Capacity expansion to take care of growth

JKLC’s subsidiary, UCWL has announced a capacity expansion of 2.5MT with a capex of Rs16bn, which is to be commissioned by end of FY24. The funding for the expansion will be through Debt-Equity (70%:30%) and the subsidiary will raise equity through right issue or equity infusion from JKLC. The company will spend Rs.1.5bn-2bn in FY22 (already spent Rs50cr) and Rs.6bn-7bn in FY23. JKLC has been focusing on deleveraging and the current gross debt stands at Rs.11bn (Net debt at Rs.5bn) Vs Rs.21bn in FY17. Debt repayment scheduled for FY22 is ~Rs.330cr.

Valuation & Outlook

Demand outlook is positive given GoI’s strong focus on infra & Housing. The expansion of 2.5MT will support future growth. The stock currently trades at 8.5x 1Yr Fwd EV/EBITDA. We increase valuation to 8x FY23E EV/EBITDA (5Yr Avg=9.9x) to arrive at a revised Target of Rs.730 (earlier Rs.600), upgrade to Accumulate rating considering capacity expansion to take care growth along with deleveraging

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