Buy J K Cement Ltd For Target Rs. 3,600 - Motilal Oswal Financial Services Ltd
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Earnings beat led by higher other operating income
Other operating income up 86% YoY on higher subsidies
* JKCE reported consolidated EBITDA of INR4.1b vs. estimated INR3.7b in 1QFY24, primarily led by higher other operating income. EBITDA/t stood at INR881 (est. INR802) and adj. PAT was at INR1.24b (est. INR1.17b).
* Central India plant’s utilization increased to ~75% in 1QFY24 and has started generating EBITDA/t closer to the company’s average level of grey cement business. Profitability of this plant will further improve with the stabilization of WHRS by 3QFY24 and an increase in AFR usage.
* We largely maintain our FY24/FY25 EBITDA estimates. We prefer JKCE for its steady expansion and better execution compared to peers. We maintain BUY with a TP of INR3,600, valued at 14x FY25E EV/EBITDA.
Volumes up 25% YoY, OPM down 3pp YoY
* JKCE’s consolidated revenue/EBITDA/adj. PAT stood at INR28b/INR4.1b/ INR1.24b (up 22%/1%/down 24% YoY and up 1%/9%/6% vs. our estimate). Sales volumes stood at 4.63mt (up 25% YoY). Blended realization was at INR5,968/t (declined 3% YoY; 2% above estimates) in 1QFY24. Other operating income jumped 86% YoY/60% QoQ to INR831m.
* Opex/t was up 1% YoY (in line), led by a 5%/1% rise in variable/freight costs. Employee cost/t was down 6% YoY and other expenses/t declined 8% YoY, benefitting from higher volumes. OPM contracted 3pp YoY to 15% (est. 14%) and EBITDA/t declined 19% YoY to INR881.
* Consolidated net debt stood at INR30.3b vs. INR29.1b in Mar’23. Net debt to EBITDA stood at 2.3x vs. 2.21x in FY23.
Highlights from the management commentary
* Grey cement volume growth should increase 15-20% YoY in FY24. Volumes in Jul’23 were lower due to the monsoon season and maintenance shutdowns. There has been an effective price hike of INR7-10/bag in North region in Jul’23, while prices were unchanged in South and Central India.
* Fuel cost/t of cement should decline by INR250-300/t in FY24. In 1QFY24, savings in fuel costs stood at ~INR150/t as JKCE procured domestic coal at cheaper rates. There should be further savings of INR65-70/t each for the next two quarters. However, fuel prices remain volatile and are a key thing to watch out for to assess movement in energy costs.
* Capex guidance maintained at INR13-14b/INR7-8b for FY24/FY25. Capex stood at INR3b in 1QFY24 (including spill over capex of Panna expansion).
View and valuation
* Ramp-up of JKCE’s Central India plant is quite encouraging as it achieved capacity utilization of ~75% with improvement in profitability. Moderation in fuel costs and operational efficiency will help to improve profits.
* JKCE trades at 14.4x/12.4x FY24E/FY25E EV/EBITDA. We maintain BUY with a TP of INR3,600, based on 14x FY25E EV/EBITDA, considering its growth plans (one of the best among mid-sized companies) and cost saving strategies.
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