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Cost declines, realisation improves, but valuation expensive

JK Lakshmi Cement Ltd (JKLC), part of the JK Group, primarily focuses on North, West and Eastern regions of India, with a 14MT capacity in cement manufacturing.

• We downgrade our rating to SELL with a target price of Rs.710 due to high valuation while maintaining a positive outlook on the sector.

• Input costs have declined but are still at higher levels. Cement prices have improved in the recent months, which will aid margin improvement in the coming quarters.

• JKLC has reported revenue growth of 17%YoY in the last quarter, aided by strong growth in realization (+17%YoY). Operating profit declined by 15%YoY as EBITDA margin contracted to 10.6% from 14.5%YoY.

• Amidst high volatility in fuel prices, JKLC is strongly focusing on margins through improving geo mix, segment mix, product mix, and fuel mix.

• UCWL (subsidiary) is expanding its capacity by 2.5MT (from 2.2MT) with a capex of Rs.16.5bn (D/E of 70:30), commissioning by FY24 end.

• The stock currently trades at 1Yr fwd P/E of 9.5x. We value JKLC at 7x FY25E EV/EBITDA (3Yr Avg=7x).

Strong realisation supported revenue growth

JKLC reported a healthy revenue growth of 17%YoY in Q2FY23 supported by ~17% growth in realization. However, volumes declined by 0.5%YoY as the company has changed the accounting for clinker transfer from UCWL (subsidiary) since the start of FY23. In place of showing the purchase of clinker and subsequent sale of cement to the subsidiary, JKLC now accounts only for the conversion charges, which resulted in a sharp improvement in realization. Further, the value-added products grew by 26%YoY to Rs.116cr (targets ~Rs.500cr by next year). JKLC is expanding capacity at UCWL (+2.5MT) by FY24. We expect the revenue to grow by 12% CAGR over FY22-24E.

Focus on measures to improve profitability

EBITDA margin declined to 10.6% from 14.5%YoY (14%QoQ). Total expenses/Ton increased by ~22%YoY, while realization improved by 17%YoY. Power & Fuel cost increased sharply by 48%YoY while raw material cost by 27%YoY. Average blended fuel cost per ton was at Rs.12,000 vs Rs. 11,700 in Q1FY23 (Rs.9,000 in Q4FY22) and is expected to increase to Rs. 13,000 again in Q3FY23, which may exert some pressure on margins in the short-term. EBITDA/Ton declined to Rs. 602 Vs. 702 YoY. Commissioning of WHR, improving green power mix (targets ~37% from current 35%), alternate fuels & raw materials (targets ~10% by next year from current 3.5%), will aid reduction in power & fuel cost. Focus on improving region mix, segment mix, product mix and channel mix will support margins. We expect EBITDA/Ton is expected to decline to Rs.680 in FY23E but will improve to Rs.830 by FY24E. Adverse movements in cement, fuel and RM prices are the key risks.

Capacity expansion to take care of growth

UCWL (subsidiary) is expanding capacity by 2.5MT with a capex of Rs16.5bn (DebtEquity proportion of 70:30) by FY24 end. The subsidiary will spend ~Rs.7bn in FY23 and ~Rs.9bn in FY24. JKLC’s current gross debt stands at Rs.9bn & Net debt at Rs2.3bn and UCWL’s net debt increased to ~Rs.10bn from Rs. 6.2bn due to ongoing capex.

Valuation & Outlook

Demand outlook is positive given GoI’s strong focus on infra & Housing. The expansion of 2.5MT will support the future growth. JKLC currently trades at 1Yr fwd P/E of 9.5x, we value JKLC at 7x FY25E EV/EBITDA (3Yr Avg=7x) to arrive at a target price of Rs.710 but downgrade to SELL rating due to high valuation.

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