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Healthy volumes, but expects margin pressure

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 our Target to Rs.600 (from Rs.590), considering healthy volumes, but downgrade to Reduce rating due to surge in valuation.

* Q1FY22 revenue grew by 49%YoY (-21%YoY in Q1FY21) supported by 39%YoY growth in volumes (-18%YoY in Q1FY21). Realisation grew by 7.2% YoY (+3%QoQ).

* EBITDA grew by ~51%YoY (-19.56%QoQ) and EBITDA margin was largely stable at 17.5% on YoY basis (20.3% QoQ) despite surge in costs supported by higher realisation.

* JKLC’s subsidiary (UCWL) is expanding its capacity by 2.5MT with a capex of Rs.14bn (D/E of 2:1), commissioning in the next 3 years.

* Sharp increase in Pet coke (fuel) prices in recent quarters is likely to impact margins further. However, commissioning of 10MW Waste Heat Recovery (WHR) in North plant by Q3FY22 will bring some cost savings.

* JKLC currently trades at 9x 1Yr Fwd EV/EBITDA (3Yr Avg=7x). We value at 7x FY23E EV/EBITDA.

Better volumes amidst challenges

JKLC reported Q1FY22 revenue growth of 49%YoY (-6.8%QoQ) supported by volume growth of 39%YoY along with 7% YoY growth in blended realisation and low base (- 21% in Q1FY21). Value added products including RMC revenue was Rs.78cr (Rs.95cr QoQ/ Rs.29cr YoY) and the company is targeting Rs.500cr from this segment. Given GoI’s strong focus on infra & housing, we expect demand to pick up in H2FY22 despite near-term uncertainties due to Covid-19. Factoring better than expected volume growth in the quarter, we increase our volume assumptions and expect revenue to grow by 10%CAGR over FY21-23E.

Sharp increase in fuel price will impact margins…

EBITDA margin was largely stable at 17.5% (Vs 17.4% YoY) despite sharp surge in fuel costs supported by better realisation and reduction in staff cost but declined sequentially from 20.3% (8 year high). Total expenses/Ton increased by 7%YoY while realisation improved by 7.2%. Pet coke prices have witnessed a sharp increase in recent months (Q1FY22 average-Rs.7,000/ton, Vs Rs.6,600YoY and is currently at Rs.8,000), which may exert some pressure in margins in the coming quarters. However, 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.799 in FY23E. Adverse movements of cement, fuel and RM prices are the key risks.

Capacity expansion

JKLC’s subsidiary, UCWL has announced a capacity expansion of 2.5MT with a capex of Rs14bn, which is to be commissioned within 3-year period. The funding for the expansion will be through Debt-Equity (2:1) and the subsidiary will raise equity through right issue or equity infusion from JKLC. JKLC has been focusing on deleveraging and the current gross debt stands at Rs.1,095cr (Net debt at Rs.435cr) Vs ~Rs.2,100cr in FY17. Debt repayment scheduled for FY22 is ~Rs.330cr.

Valuation & Outlook

Barring short-term uncertainty on account of Covid-19, demand outlook is positive given GoI’s strong focus on infra & Housing. The stock currently trades at 9x 1Yr Fwd EV/EBITDA. We value at 7x FY23E EV/EBITDA to arrive at a revised Target of Rs.600 (earlier Rs.590), downgrade to Reduce rating due to surge in valuation.

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