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We recently hosted the management of JK Cement (JKCE) for investor meetings in Mumbai. Key takeaways: i) Company has adequate limestone reserves to achieve 40mt grey-cement capacity (vs 20.7mt currently) in the medium term (likely by FY30E). Post its ongoing expansion (3.5mt in central India), Company’s next leg of growth includes a second line in Panna (central India), brownfield expansion at its Muddapur plant (South) and greenfield expansion in Jaisalmer (North). ii) Net debt (Rs30bn, as of Sep-23) has likely peaked, and upcoming capex would be funded via internal accruals, in our view. iii) The recent sustenance of price-hikes (3-4% QoQ) should improve profitability by Rs200-250/t in Q3FY24. iv) White cement/putty EBITDA margin is likely to have stabilized at 17-18%. v) In Paints, target revenue is Rs1.5-2bn/Rs3.5bn in FY24E/FY25E, resp., with EBITDA break-even by FY25-end. We remain structurally positive on JKCE, given that its growth visibility, controlled leverage and return ratios are above its cost of capital. However, we maintain HOLD (on limited upside), with Sep-24E TP of Rs3,500/sh, based on 12x EV/E.

JK Cement: Financial Snapshot (Consolidated)

Panna capacity to further enhance profitability

Company gave a solid performance in H1FY24, with grey cement volume growth of 26% (vs mid-teen growth for the industry), owing to capacity addition. JKCE’s recently commissioned plant in Panna, MP (4mt capacity) has been seeing good progress and has already attained utilization rate of over 75% as of H1FY24. Company is now able to service the eastern/central UP and MP markets more effectively. This reflects in the ~8km QoQ reduction seen in lead distance to 418km in Q2FY24. Further, the plant is eligible for incentives, which would perk up its profitability going forward. Its capacity mix in the fast-growing central market would increase, from 12% in FY22 to ~40% by FY25E. It has overall clinker capacity of 15mt which would aid in cement production of 22mt. In our view, JKCE may prioritize commissioning of a second clinker line in Panna.

Net debt has likely peaked; upcoming capex to be funded via internal accruals

Given the increase in scale and efficiency of its grey-cement operations as well as its steady white cement/wall putty business, JKCE’s cash-flow generation would support its next leg of growth, in our view. We expect JKCE’s OCF to increase by ~2.5x over FY23- 26E vs its FY15-19 OCF. JKCE’s net debt stood at Rs30bn in Sep-23 and, despite factoring-in Rs44bn capex over FY24-26E, net debt is likely to decline to Rs28bn, with net debt-to-EBITDA expected at comfortable levels of 1.1x in FY26E.

Multiple levers to enhance RoIC over the medium term

Company’s average EBITDA CAGR is likely to increase by 1.5x during FY23-26E (vs FY19- 22), with improving profitability and a consequent reset in the RoIC to ~13% in FY24E from below 10% in the past decade. Apart from the recent softening of fuel cost, Company is establishing structural levers to enhance profitability; these include: i) increasing its WHRS capacity to 80MW by FY24E (currently 64MW); ii) target to attain TSR of 35% by FY30 (vs. ~14% now); and iii) reducing the lead distance through commissioning of its Panna plant. We expect RoIC to further improve to the high teens over the next 4-5 years, and sustain such levels over the long term.

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