JK Cement - Gaining market share with improved profitability - ICICI Securities

Key takeaways from JK Cement's (JKCE) Q2FY21 management concall include: i) Prices have improved by Rs5-10/bag MoM in Oct'20; ii) expects cost savings of Rs100/te to kick in from Q4FY21 on better cost efficiencies from new capacity at Mangrol; iii) 3.5-4mnte grey cement greenfield expansion at Panna, Madhya Pradesh at a capex of US$90-100/te to be announced soon; and iv) confident of sustaining low double digit volume growth in white cement portfolio. Market share gains led by capacity additions with improving profitability along with strong OCF of >Rs10bn p.a. from FY21E (which would fund its future capex) would lead to re-rating of the stock, in our view (refer our 5th Jul'20 note: Ripe for re-rating). Maintain BUY with target price unchanged at Rs2,370/share (11x Sep'22E EV/E).

- Average prices up Rs5-10/bag MoM in Oct'20. Our channel checks suggest prices have increased by Rs10-15/bag in trade segment and Rs25-30/bag in non-trade segment in North region. Prices have broadly remained flat QTD-FY21 in South region. Trade sales mix declined ~800bps QoQ to 66% in Q2FY21.

- Cost savings of Rs100/te (largely variable costs) will kick in from Q4FY21 on the back of better cost efficiencies from new capacity at Mangrol. Given new capacity additions are in high growth/utilisation markets of North and Central regions, they may see a quick ramp up and will also provide operating leverage, in our view. Modernisation of 0.3mnte at Nimbahera may complete by Q2FY22 (spent Rs2.6bn out of planned Rs4bn on the same till Sep'20).

- 3.5-4mnte grey cement greenfield expansion at Panna, Madhya Pradesh at a capex of US$90-100/te to be announced soon. JKCE has received environment clearance for the same and the company has spent Rs1.6bn for factory land (90% acquired) and mining lease agreement and may spend another Rs750-800mn towards the same in H2FY21. Additional Rs1bn would be spent towards mining land during the project period. Project is yet to be approved by the Board.

- White cement & wall putty volumes increased 9% YoY in Q2FY21. JKCE is confident of sustaining low double digit volume growth with EBITDA margin at >25%.

- UAE operations are unlikely to sustain profitability of Q2FY21 owing to Covid-related issues. In Q2FY21, it operated at 90% utilisation with EBITDA of Rs207mn in Q2FY21 (vs EBITDA of Rs18mn in Q2FY20 and EBITDA loss of Rs27mn in Q1FY21) owing to one-time orders from Australia.

- Consolidated net debt declined Rs2.3bn to Rs21bn as of Sep'20-end. JKCE may generate OCF of >Rs10bn p.a. from FY22E, which will be sufficient for its future capex requirements. Accordingly, net debt is unlikely to go above Rs25bn even after completion of Panna expansion over next three years.

Shares of J.K.CEMENT LTD. was last trading in BSE at Rs.1914.7 as compared to the previous close of Rs. 1895.6. The total number of shares traded during the day was 1441 in over 294 trades.

The stock hit an intraday high of Rs. 1922.45 and intraday low of 1900.55. The net turnover during the day was Rs. 2753075.

Source : Equity Bulls

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