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Miss on estimates; weak realization a key challenge

Expects industry volume growth at ~4-5% YoY in FY25

* JK Lakshmi Cement (JKLC)’s 2QFY25 earnings were below our estimates due to lower-than-estimated volume and higher-than-estimated opex/t. JKLC’s consol. EBITDA declined 59% YoY to INR893m and EBITDA/t dipped 55% to INR360. It posted a net loss of INR140m vs. a PAT of INR927m in 2QFY24.

* Management indicated that 2QFY25 was a challenging quarter due to sluggish demand and depressed pricing. The company maintained its market share in its core markets, while due to weak pricing, JKLC cut volumes in its non-core markets since those were not profitable. Management expects industry volume growth at ~4-5% in FY25 and believes the company’s growth will align with the industry in 2HFY25. Its capacity expansion plansremain intact, but the expected timelines of commissioning have been extended by six months.

* We cut our EBITDA estimates by ~15%/10-11% for FY25/FY26-27 due to lower volumes and margin estimates. We estimate EPS to decline in FY27 due to higher depreciation and interest costs, given the expected commissioning of its Durg expansion. We reiterate our BUY rating on the stock and value it at 10x Sep’26E EV/EBITDA (in line with its long-term average valuation) to arrive at our revised TP of INR880 (vs. INR970 earlier).

* Consolidated revenue/EBITDA stood at INR12.3b/INR893m (down 22%/59% YoY and down 13%/42% vs. our estimate) in 2QFY25. JKLC posted a net loss of INR140m vs. a PAT of INR927m in 2QFY24. Sales volume dipped 9% YoY to 2.48mt. Realization was down 14% YoY/3% QoQ to INR4,983/t (-1% vs. est.).

* Opex/t declined 7% YoY, driven by a 17%/1% decline in variable/freight cost. Other expenses/employee cost per tonne increased 13%/16% YoY. OPM contracted 6.6pp YoY to ~7% and EBITDA/t declined 55% YoY to INR360 in 2QFY25. Depreciation/finance costs increased 32%/28% YoY. Other income was down 40% YoY.

* JKLC’s 1HFY25 consol. revenue/EBITDA/PAT stood at INR28.0b/INR3.1b/ INR563m (down 15%/25%/67% YoY). Volume/realization declined 4%/11% YoY. EBITDA/t dipped 21% YoY to INR565 and OPM contracted 1.4pp YoY to ~11%. Based on our estimate, the implied revenue is likely to be flat YoY in 2H, while EBITDA/PAT may decline ~23%/30% due to weak pricing. We estimate ~7% YoY volume growth and EBITDA/t of INR740 vs. INR1,030 in 2HFY24.

Highlights from the management commentary

* Cement demand growth was muted in 1H due to the elections and monsoons. Management expects industry demand growth of ~4%/9-10% in 3Q/4QFY25.

* The cement price decline was higher in the East, West, and North, while the price drop in the South and Northeast was least during the quarter. Prices were stable in Oct’24 and management expects prices to improve with a likely recovery in demand post-festivals.

* Average fuel cost stood at INR1.62/kcal vs. INR1.63/Kcal in 1QFY25. Green power share is likely to increase to ~48-49% by FY25-end vs. ~47% currently.

Valuation and view

* JKLC’s 2QFY25 performance was significantly below our estimates due to lower volumes and depressed pricing. Further, negative operating leverage hurt margins. However, variable costs declined due to lower fuel costs and higher usage of green energy. JKLC is continuing its Durg expansion and is expected to commission capacities in a phased manner during FY27.

* Given the accelerated capex plans, we estimate JKLC’s net debt to mount to INR33b from INR22b as of Sep’24. The net debt-to-EBITDA ratio is expected to remain stable at 2.5x. The stock trades at 10x/9x FY26E/FY27E EV/EBITDA. We value JKLC at 10x Sep’26E EV/EBITDA to arrive at our TP of INR880 (vs. INR970 earlier). Reiterate BUY.

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