Analyst Corner: ‘Buy’ on JK Cement with target price at Rs 1,725

Analyst Corner, JK Cement, JKCE, utilisation markets, UAE subsidiaries, EBITDA, NimbaherJKCE commissioned 2.6mnte clinker unit at Mangrol and 3.5mnte grinding capacities at Mangrol and Aligarh in H2FY20.

JK Cement’s (JKCE) recent capacity additions in high utilisation/better pricing markets of north/central regions are likely to see a quick ramp-up along with better cost efficiencies. Consolidated net debt is likely to peak out at Rs 24bn in FY21E as JKCE could generate OCF of >Rs 10bn per annum. from FY22E which would be sufficient for its future capex requirements. Besides, JKCE enjoys better than peers’ RoEs of 16-18% over FY20-22E. Factoring higher utilisation, we raise our FY22E EBITDA/EPS by 4-6%. With improving growth/market share and profitability, we raise our target multiple to 10x (earlier 9x) and increase our target price to Rs 1,725/share (earlier: Rs 1,460) based on 10x FY22E EV/E. Maintain ‘buy’.

Quick ramp-up of new capacities (better volume growth), improved cost efficiencies resulting in grey cement EBITDA/te sustaining above Rs 1,000/te, peaking-out of consolidated net debt in FY21.

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Any pricing weakness in JKCE’s key markets of north, increased investments/losses in UAE subsidiaries, higher pay outs to consultants, lower growth/ profitability in white cement portfolio.

JKCE commissioned 2.6mnte clinker unit at Mangrol and 3.5mnte grinding capacities at Mangrol and Aligarh in H2FY20. Given that new capacity additions are in high growth / utilisation markets of north and central regions, they may see a quick ramp up, in our view. Besides, pricing is expected to remain firm in these regions as utilisation remains at >80% owing to better supply / demand dynamics. Commissioning of 0.7mnte grinding unit at Balasinor is likely by Oct’20, while modernisation of 0.3mnte line-3 at Nimbahera is expected to complete by Dec’20. Cost savings of Rs 100/te possible over the next two years on the back of better cost efficiencies from new capacity at Mangrol and modernisation of line-3 at Nimbahera in FY21. Besides, the management is targeting fixed-cost reduction of Rs 600 m-700m in FY21, which includes ~25% YoY cut in professional charges. Grey cement EBITDA/te is likely to increase to Rs 1,065/te by FY22E from ~Rs 940/te (our estimate) in FY20.

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