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Lower volume and higher costs lead to missed earnings

* JK Cement (JKCE)’s 2QFY25 consolidated EBITDA was at INR2.8b (down 39% YoY) and ~22% below our estimates due to lower-than-estimated sales volume (6% miss) and higher-than-estimated opex/t (+5% vs. our estimate). Higher opex/t was partly due to: 1) higher branding expenses; 2) clinker purchases for its South plant due to the shutdown; and 3) higher maintenance costs. EBITDA/t declined 36% YoY to INR656 (est. INR787) and OPM contracted 6pp YoY to 11% (est. 14%). Adj. PAT declined 80% YoY to INR359m (60% miss).

* Management trimmed its gray cement volume guidance to ~6-7% YoY (vs. earlier estimate of ~10%). Cement demand has improved and the company expects volume growth YoY in Oct’24. The capacity expansion plan of 6mtpa is on track and expected to be commissioned in 2HFY26. Further, the company aims to realize cost savings of up to INR60/t in FY25E out of its cost-saving target of INR150-200/t in the next two years.

* We reduced EBITDA estimate 8% for FY25E and 5% for FY26E/FY27E (each) on lower volume growth and higher opex/t assumptions. We reiterate our BUY rating on the stock due to its steady expansion plans, better regional mix, and cost-saving initiatives. We value JKCE at 15x Sep’26E EV/EBITDA to arrive at our revised TP of INR5,000 (earlier INR5,270).

Gray cement volume/realization down 3%/6% YoY

* JKCE’s consolidated revenue/EBITDA/adj. PAT stood at INR25.6b/INR2.8b/ INR359m (down 7%/39%/80% YoY and down 5%/22%/60% vs. our est.). Combined sales volume declined 5% YoY to 4.3mt. Blended realization declined 2% YoY (up 2% QoQ) at INR5,918/t. Gray cement volume declined 3% YoY to 3.8mt and realization declined 6% YoY to INR4,707. Other op. income/t stood at INR206 vs. INR198/INR216 in 2QFY24/1QFY25.

* Opex/t increased 4% YoY, led by a 29%/17%/13% increase in employee cost/other expenses/freight costs. Meanwhile, variable cost/t declined 9% YoY. EBITDA/t declined 36% YoY to INR656. Depreciation and interest costs increased 7% YoY (each). Other income grew 29% YoY.

* In 1HFY25, revenue/EBITDA/Adj. PAT declined 3%/12%/27% YoY. Sales volume was flat YoY, while realization declined 3%. EBITDA/t dipped 12% YoY to INR840. Based on our estimate, the implied revenue growth for 2HFY25 is ~5%, while EBITDA/PAT may decline ~8%/19% YoY. For 2HFY25, we estimate volume growth of ~10% YoY and EBITDA/t of INR1,005 vs. INR1,200 in 2HFY24.

Highlights from the management commentary

* Gray cement realizations improved QoQ in 2QFY25, led by an improvement in the geographic and product mix and higher contribution from premium products.

* Fuel consumption cost stood at INR1.65/kcal vs. INR1.94/INR1.62/kcal in 2QFY24/1QFY25. Fuel consumption cost increased QoQ due to inflation in the fuel cost of AFR.

* Capex is pegged at INR18-19b for FY25 and INR18b for FY26. Overall capex stood at INR7.5b in 1HFY25.

Valuation & view

* JKCE’s profitability was adversely impacted during the quarter due to the demand slowdown, prolonged kiln shutdown at the South plant, and weak cement prices. However, it has shown QoQ improvement in realization, supported by a better regional and product mix. We are structurally positive on the company given its increasing scale of operation, better execution strategy, and cost reduction initiatives.

* We estimate its revenue/EBITDA/PAT CAGR at 9%/13%/18% over FY24-27, driven by a 9% CAGR in sales volume and improvement in EBITDA/t. The stock trades at 15x/12x FY26E/FY27E EV/EBITDA. We value the stock at 15x Sep’26E EV/EBITDA to arrive at our revised TP of INR5,000 (earlier INR5,270). Reiterate BUY.

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