Buy JK Cement - Elara Capital

• Rating : Buy
• Target Price : INR220
• Upside : 21%
• CMP : INR182 (as on 1 June 2010)

High costs burden margins

White cement business insulates downside

JK Cement (JKCEM) reported a strong 25% YoY growth in its Q4FY10 net revenues, led by a 23.8% (YoY) growth in grey cement volumes and 17.8% in white cement volumes besides a 1.3% expansion in blended realizations. The EBITDA for the quarter, however, declined 18.8% to INR1,038mn due to cost pressures. The increase in power, fuel and freight costs was the main reason for the spurt in the cost of goods sold. The adjusted PAT for the quarter declined 26.6% YoY to INR439mn as a result of the lower EBITDA and higher interest as well as depreciation expenses.

Brownfield capacity addition in North

The company is planning to hike the production capacity in the North by way of a brownfield expansion at its existing Mangrol plant by 2.2mn tonnes. The brownfield expansion is likely to be completed by September 2012. JKCEM is also considering the installation of a grinding unit in the North. Post the implementation of these plans, the total production capacity of JKCEM (in the North) would touch 7mn tonnes while the overall capacity would reach 10mn tonnes per annum. We have revised our estimates to factor in the additional capex for these projects.

Continue to maintain BUY with a target price of INR220

We expect margins for cement companies to be under pressure in the medium term as the industry is all set to witness surplus, leading to subdued cement prices. The rising cost pressure coupled with the overcapacity scenario (disallowing companies to pass on the cost push) might dent margins of cement companies going forward. However, for JK Cement, the volume growth in grey cement and its presence in the premium white cement business may help it partially offset the cost pressures. Besides, the company is also trading at more than 50% discount to its replacement cost and (more than) 60% discount to its large cap peers. We maintain our BUY rating on JK Cement with a revised target price of INR220 (based on EV/tonne of USD62). We have revised our target price to factor in the additional debt that will be raised as capex of the brownfield capacity.

Source : Equity Bulls

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