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JK Lakshmi cement (JKLC) reported good set of numbers for 2QFY24 on account of higher than expected blended realization and lower costs. The company has commissioned its clinkerisation unit at Udaipur (part of subsidiary UCWL) in October 2023 and the grinding unit is expected to come up by 1QFY25. During the intervening period between commissioning of clinker and grinding capacity, the company will have to supply clinker to existing grinding units in Gujarat and Rajasthan to support cement production and it will also sell clinker in the market. We believe that profitability of the company will be impacted adversely due to 1) higher initial startup costs of clinker unit, 2) weak demand in NCR due to pollution related construction ban and 3) possibility of lower volumes and profitability in Gujarat market owing to ramp up of Sanghi plants by Adani group. As a result, we believe that earnings for next 2 quarter will be soft for JKLC. We were earlier valuing the standalone business of the company and then adding the value of subsidiary UCWL. We now value the company based on consolidated numbers and our revised TP now stands at Rs814 and we maintain our Add rating on the stock

2QFY24 result summary JK Lakshmi reported standalone revenue at Rs14.5bn which was 5.4% above our estimate of Rs13.7bn. Volumes came in at 2.53 mn mt, up 9.8% YoY and above 2.2% of our estimates. Realisations/mt at Rs5,737 were up 2.7%, sequentially. Operating costs/mt at Rs5,032 were flat YoY. Power and fuel costs/mt came in at Rs1,373 which were down 5% YoY. Absolute EBITDA at Rs1.7bn was up 28.8% YoY and 6.5% QoQ (19.6% above our estimate). As a result, EBITDA/mt came in at Rs705 as against our expectations of Rs602. PAT at Rs830 mn was up 40.8% YoY and 10.9% QoQ. On consolidated basis, the company reported revenue/EBITDA of Rs15.7bn/Rs2.1bn, up 15% and 33% YoY. Volumes at 2.9mn mt are up by 14% YoY and EBITDA/mt at came in Rs755/mt

Earnings to be impacted by timing difference in commissioning of clinker and grinding units

JKLC has commissioned its clinker unit of 1.5mn mt at Udaipur in October 2023. The associated grinding unit is expected to be commissioned by March or April 2024. We believe that initial startup costs associated with new clinker unit till stabilization and better utilization will impact earnings negatively for the subsidiary UCWL. Additionally, upcoming ramp up of Sanghi plants by Adani group is likely to result in weak volume growth in Gujarat and possibly lower profitability. The company will have to resort to clinker sales initially which will result in higher costs and lower realization in the interim period. Combined effect of these is likely to result in soft earnings and EBITDA/mt in near term for the company.

Valuation and outlook

We were earlier valuing the company based on 8x FY25E EV/EBITDA on standalone basis and then adding the value of subsidiary UCWL based on market cap. We have now moved our valuations and estimates on consolidated basis. Given the better volume growth expected through UCW expansion, we have raised our target multiple to 8.5x from 8.0x earlier. While the company is working on improving various operating parameters like improving trade share, blended cement and geo-mix, we believe that current valuations are factoring in the growth adequately. We maintain our ADD rating on the stock with revised TP of Rs814 (Rs733 earlier) as we move to Sep25E valuation from Mar25E.

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