JK Cement - 2QFY23 Result Update - Headwinds to Continue; Downgrade to SELL

Mr. Arafat Saiyed - Senior Research Analyst at Reliance Securities.

JK Cement (JKCE) reported an EBITDA that was slightly higher than our estimate due to higher-than-expected volumes. Grey cement sales volume (including clinker) was up by a healthy 10% YoY (+2% QoQ), at 3.22mn tonnes, marginally higher than our estimate of 3.1mn tonnes. Grey cement realization was up by 5% YoY (down 7% QoQ) to Rs5,838/tonne owing to the change in sales mix in favour of trade segment and focus on higher realization in non-trade segment. EBITDA/tonne at Rs815 fell 18% YoY (28% QoQ), as against our estimate of Rs823. EBITDA declined by 10% YoY (26% QoQ) to Rs2.96bn (our estimate of Rs2.88bn). Freight cost/tonne stood at Rs1,196 (+4% YoY and -2% QoQ) while Power cost at Rs1,511/tonne was up 47% YoY and 11% QoQ due to higher lead distance (selling in new markets of central India) from existing plants and higher diesel cost. Employee cost increased 8% YoY (down 2% QoQ) to Rs1.4bn, as the company hired extra manpower to foray into newer markets. White cement sales volume including that of wall putty was at 0.42mn tonnes which increased by 7.6% YoY (+7.9% QoQ), while realisation stood at Rs12,648/tonne, an increase of 10% YoY and 3% QoQ. Adj. PAT stood at Rs1.25bn (-26% YoY and -31% QoQ), higher than our estimate of Rs1.04bn. We lower our EBITDA estimates by 5%/4% for FY23E/FY24E, mainly to factor in lower realisation and higher costs which were partly offset by higher volume. As the stock has witnessed a run-up of more than 45% since its June’22-low leading to its higher valuation coupled with margin pressures and lower realisation, we downgrade the stock to SELL from HOLD, with a revised SOTP Target Price of Rs,2575 (from Rs2,750).

Capacity Addition to Drive Volume Growth

The company has planned for capacity expansion of 5.5 MTPA over next two years out of which 2 MTPA capacity is proposed to be added at existing plants of JKC. A new greenfield split grinding unit of 1.5 MTPA capacity is also expected in the near term. Another new greenfield grinding unit of 2 MTPA capacity would be set up in Jaykaycem. Further, enhancement of clinker capacity at Panna plant by 2,000 TPD (0.66 MTPA), from current 8,000 TPD to 10,000 TPD per day in Jaykaycem is also proposed. The company aims to ramp up Panna plant in the next 6-9 months starting with 50,000-60,000 Tonnes monthly. The management said that utilization for the Panna plant for the first year would be at ~60% while second year onwards, utilization is expected to grow to 75-80%. Also, the management is evaluating grinding capacity addition in Central India aided by debottlenecking to reach its target of 25MTPA by FY25E. Increased diversification in Central India, attractive regional prices and demand growth prospects make the expansion project value accretive.

Outlook and Valuation

JKCE has embarked on the next leg of expansion at Panna, but the near-term growth will be constrained by high utilization as the commissioning is back ended. Further, profitability may take a hit in 3QFY23 owing to rising costs and inability to pass on the same entirely to end users. We believe that the current valuation of 13.5x FY24E EBITDA as against its long-term median of 9x appears expensive in a situation of margin pressure and demand weakness. As the stock has witnessed a run-up of more than 45% since its June’22-low leading to its higher valuation coupled with margin pressures and lower realisation, making risk reward adverse at current level, therefore, we downgrade the stock to SELL from HOLD, with a revised SOTP Target Price of Rs,2575 (from Rs2,750), valuing the stock at an unrevised EV/EBITDA multiple of 11x on FY24E.

Shares of JK Cement Limited was last trading in BSE at Rs. 2947.20 as compared to the previous close of Rs. 2923.05. The total number of shares traded during the day was 8349 in over 778 trades.

The stock hit an intraday high of Rs. 2961.35 and intraday low of 2921.75. The net turnover during the day was Rs. 24589715.00.

Source : Equity Bulls

Keywords

JKCement INE823G01014 Q2FY23 ResultUpdate Downgrade SELL RelianceSecurities