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Synergical benefits upon merger with UCWL

JK Lakshmi Cement's Q1FY25 volumes came in at 2.3mnt, down 9.0% QoQ and 8.3% YoY, resulting in revenues of INR 14,445mn, a decline of 12.3% QoQ and 11.6% YoY. The volume decline was attributed to longer layoffs during the election period. EBITDA/t for the quarter was INR796/t, down 26.4% QoQ but up 19.9% YoY, with the QoQ drop mainly due to lower realizations. PAT for Q1FY25 stood at INR 1,563mn, up 9.8% QoQ and 105.1% YoY, with an EPS of INR 13.3. During Q1FY25, the company's Net Debt to EBITDA ratio was 0.29x, and Net Debt to Equity stood at 0.10x. Additionally, the company is implementing a project to enhance its Thermal Substitution Rate (TSR) from 4% to 16% in a phased manner at its Sirohi Cement Plant as part of its green initiatives.

* Future expansion plans: JK Lakshmi Cement is actively working towards surpassing its targeted capacity of 30mnt by FY30E. The company’s subsidiary, Udaipur Cement Works Ltd (UCWL), successfully commissioned a cement grinding capacity of 2.5mtpa was commissioned in March 2024. The company is also expanding its cement grinding capacity at the Surat Grinding Unit from 1.35 mtpa to 2.7 mtpa, with the project expected to cost INR2,250mn, funded through INR1,500mn in term loans from banks and the remainder from internal accruals. Furthermore, the company is setting up a railway siding at its Durg Cement Plant at a cost of INR3,250mn, funded by INR2,250mn in debt and the balance from internal accruals. In addition, JK Lakshmi is expanding the clinker capacity at its integrated cement plant in Durg, Chhattisgarh, by installing an additional clinker line of 2.3 mtpa. The expansion also includes 4 cement grinding units with a total capacity of 4.6 mtpa in Durg, Chhattisgarh, and three split-location cement grinding units with a combined capacity of 3.4 mtpa in Prayagraj, Uttar Pradesh; Madhubani, Bihar; and Patratu, Jharkhand. The entire project is projected to cost INR25,000mn, with INR17,500mn funded through term loans from banks and the balance through internal accruals.

* Synergical benefits upon merger with UCWL: JK Lakshmi Cement plans to issue 4 equity shares of face value INR 5 each for every 100 equity shares of INR 4 each held in Udaipur Cement Works Ltd (UCWL) by UCWL shareholders (excluding JK Lakshmi Cement) as part of a merger based on a fair value swap ratio. This merger is expected to benefit JK Lakshmi by streamlining manufacturing, distribution processes, and logistics, reducing time to market, and offering advantages to customers. The merger will also allow for fixed cost reductions and other economies of scale, including common procurement. Currently, cement assets are fragmented across four entities: JK Lakshmi, Udaipur Cement, Hansdeep, and Hidrive. The proposed scheme consolidates the cement assets of all four entities into a single, business-focused listed entity, resulting in a stronger balance sheet and the availability of consolidated cash flows within one entity, which will facilitate faster growth.

Outlook and Valuation: The outlook for the cement sector appears extremely promising in the coming year, supported by the government's emphasis on infrastructure development and increased budgetary allocations for the sector. The company's management remains committed to its ambitious capex plans, aiming to reach a capacity of 30 million tons by FY30E. Furthermore, Additionally, management is optimistic about securing a position among the top five companies in terms of EBITDA/t. We expect Revenue/EBITDA to grow at a CAGR of 5.6%/14.0% respectively over FY24-FY26E. Our target EV/EBITDA multiple is 9.0x (unchanged) on FY26E EBITDA, hence we ascribe a target price of INR913, with BUY rating

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