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Strong performance, cost pressure in the near-term

JK Lakshmi Cement (JKLC) is part of JK group mainly focused in North, West and Eastern regions of India with a consolidated capacity of 14MT.

* We revise our Target to Rs.552 (from Rs.470) upgrade to Buy rating considering the capacity expansion and attractive valuation.

* Q4FY22 revenue grew by 13%YoY aided by the volume growth of ~7%YoY and realisation growth of 6%YoY. • EBITDA margin declined to 18.4% from 20.3%YoY (12.3% QoQ) due to the surge in costs partially offset by higher realisation.

* JKLC’s subsidiary (UCWL) is expanding its capacity by 2.5MT with a capex of Rs.16.5bn (D/E of 70:30), expected to be commissioned by FY24.

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

* JKLC currently trades at 7x 1Yr Fwd EV/EBITDA. We value at 6x FY24E EV/EBITDA (3Yr Avg=7x) considering the current input price inflation.

Healthy volumes and realisation supported revenue growth

JKLC reported a revenue growth of 13%YoY in Q3FY22 supported by ~7% growth in volumes and 6%YoY growth in realisation. The value added products including RMC revenue was at Rs.103cr (Vs. Rs.100cr QoQ) and JKLC is targeting ~Rs.500cr in the coming years. The current capacity utilization is at 90% which limits future volume growth. But the company expands capacity at its subsidiary company (UCWL) by FY24. GoI’s strong focus on infra & housing will support the demand on going forward. We expect the revenue to grow by 7% CAGR over FY21-24E, partially supported by higher realisation to compensate for higher costs.

Price hike and cost reduction measures aids margin recovery

EBITDA margin declined to 18.4% from 20.3%YoY but recovered sharply from 12.3% QoQ. Total expenses/Ton increased by ~9%YoY while realisation/Ton improved by 6%YoY. On a sequential basis, Total expenses/Ton declined by ~9% due to reduction in the staff cost, Power & Fuel and other expenses. Average blended cost of fuel was at Rs.9,000/Ton in Q4FY22 Vs. Rs.9,400 in Q3FY22, but the current price is at Rs.13,400, which may exert some pressure in margins in the short-term. However, recent commissioning of 10MW WHR, higher usage of alternate fuel (14% Vs 10% QoQ), will aid the fuel cost reduction. The company is taking price hikes to mitigate margin pressure and hiked Rs.25-30/bag in April. EBITDA/Ton declined to Rs.880 Vs. 913 YoY but improved from Rs.595 QoQ. Adverse movements in cement, fuel and RM prices are the key risks.

Capacity expansion to take care of growth

JKLC’s subsidiary, UCWL’s capacity expansion of 2.5MT with a capex of Rs16.5bn is planned to be commissioned by the end of FY24. The funding for the expansion will be through Debt-Equity (70%:30%). The subsidiary will spend ~Rs.7bn in FY23 and ~Rs.9bn in FY24. JKLC’s current gross debt stands at Rs.18.5bn & Net debt at Rs.6.5bn and expects the net debt will remain under Rs.10bn after the expansion.

Valuation & Outlook

Demand outlook is positive given GoI’s strong focus on infra & Housing. The expansion of 2.5MT will support the future growth. The stock currently trades at 7x 1Yr Fwd EV/EBITDA. Considering the current input price inflation, we value at 6x FY24E EV/EBITDA (3Yr Avg=7.4x) to arrive at a revised Target of Rs.552 (earlier Rs.470). Upgrade to Buy rating considering the capacity expansion and attractive valuation.

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