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Focus on cost reduction; Expansion plan on track

J.K. Cement Ltd. reported a Q2FY25 volume of 4.4mnt, which is a 2.9% decline YoY and 10.4% decline QoQ. The Q2FY25 revenue was INR25,601mn, down 7.0% YoY and 8.8% QoQ. Management expects a 6-7% volume growth for FY25E. Consequently, the blended realization/t during Q2FY25 was INR5,858/t, down 4.2% YoY but up 1.8% QoQ. PAT for the quarter was INR1,258mn, down 28.2% YoY and 32.1% QoQ. EPS for the quarter was INR17.6. Capacity utilization for grey cement stood at 64% for the quarter. The share of the green power mix was 49% for Q2FY25 and is targeted to reach 75% by FY30E. Premium products accounted for 14% of trade sales.

* Expansion Plans on Track: JK Cement Ltd. plans a total Capex of INR19,000mn for FY25E and INR 18,000mn for FY26E, with INR 7,500mn already spent in FY25E and the remainder to be utilized in H2FY25E. The 6 MTPA grey cement capacity expansion is on track, including 3.3 MTPA clinker capacity at Panna and 1 MTPA cement capacity each at Panna, Hamirpur, and Prayagraj. Orders for key machinery and contractors are finalized, with construction progressing as scheduled, and INR4,450mn spent by September 2024, toward a total project cost of INR 23,020mn. Additionally, a 3 MTPA split grinding unit in Bihar is advancing, with land acquisition complete and machinery orders placed; INR 33 crore has been spent on this project as of September 2024. Both expansions are integral to achieving the 30 MTPA capacity target by FY26E.

* Total cost/t came at INR5,209/t: During the quarter, JK Cement’s total cost/t amounted to INR 5,209/t, reflecting a 2.5% YoY and 9.4% QoQ increase, driven by one-time expenses, including INR 100 million for clinker purchases due to the Muddapur plant shutdown and INR 550 million for maintenance of major kilns, with prolonged downtime caused by excessive rainfall. Power and fuel costs/t stood at INR 1,128/t, decreasing 19.8% YoY and 3.4% QoQ, supported by lower fuel prices. In September 2024, petcoke prices remained at $102.7, down from $107.3 the previous month. Freight expenses per ton increased to INR 1,317/t, up 10.5% YoY and 3.7% QoQ, attributed to a higher lead distance of 419 km compared to 415 km in the prior quarter. Management expects a near-term reduction in power, fuel, and freight costs, with a targeted total cost reduction of INR 150-200/t by FY26E. Of this, INR 70-80/t savings are projected for FY25E, with the remainder to be achieved by FY26E.

Outlook & Valuation: JK Cement’s management anticipates a moderate cement demand growth of 6-7% in FY25E, primarily driven by the infrastructure and industrial/commercial sectors. To strengthen its market position, the company is actively pursuing various expansion initiatives. Additionally, it is focused on cost optimization through the implementation of Waste Heat Recovery Systems (WHRS), aiming to improve operational efficiency and reduce expenses. Management remains optimistic about achieving 10% growth in FY25E, supported by these strategic efforts. They also expect a recovery in cement prices, which will further enhance profitability. As per our FY27E estimates, we expect Volume/Revenue/EBITDA to grow at a CAGR of 6.2%/4.5%/11.1% respectively over FY24- FY27E. Our target EV/EBITDA multiple is 14.5x on FY27E EBITDA, hence we ascribe a target price of INR4,679, upgrading our rating to BUY.

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