Edelweiss reports decent performance with volumes increased for grey cement and flattish for white cement segment
JK Lakshmi Cement Ltd (JKCE) is one of the leading cement manufacturers in India and the second‐largest white cement manufacturer in the country with an annual capacity of 600,000 tonnes. Founded by Mr. Lala Kamlapat Singhania, JK Cement is an affiliate of the JK Group. Presently, the company has grey cement installed capacity of 10.5mtpa with three cement manufacturing plants at Nimbahera, Mangrol and Gotan in Rajasthan and one unit at Muddapur in Karnataka.
It operates a 5.5 million integrated cement manufacturing unit at Sirohi in Rajasthan along with grinding units in Kalol, Gujarat and now in Jharli, Haryana. The Company is further setting up a green-field project with an investment of Rs.1200 crore in Durg, Chattisgarh.
The cement maker also has 11 fully operational state-of-the-art plants manufacturing Ready Mix Concrete (RMC). JKCE enjoys high brand equity in the market and has a wide network of 2200 dealers served by 70 cement dumps strategically located centers. The company also has a fully automated plant of white cement based wall putty having a production capacity of three million tons per annum (mtpa).
The first quarter of 2018 for the cement manufacturer posted decent performance with EBITDA at Rs 198 crore rising 13 per cent year over year (YoY) and profit after tax (PAT) jumping an impressive 30 per cent. The management has stated that it is early to quantify savings due to GST implementation and it will be in a better position to comment on the same by the end of fiscal 2018.
Grey cement division
The grey cement production grew 9 per cent YoY to 1.75mt and the grey cement volumes jumped seven per cent YoY to 1.74mt on a low base of one per cent in the previous sequential year. The total sales volumes surged 15 per cent including clinker sales of 133kt that is led by 100kt exports to Nepal, which may not continue in ensuing quarters. Additionally, realisations have improved nine per cent QoQ leading to EBITDA/t of Rs 686.
White cement segment
Both white cement division and wall putty volumes remained flat at 256KT, mainly due to GST‐related destocking. White segment disappointed with flattish volumes on year over year along with sales for putty, slowed down to six per cent. Given the pricing pressure, the segment’s EBITDA dipped nine per cent YoY with margin contracting 260bps YoY. The weak performance in the segment is attributed to GST implementation-led destocking, weak realisations and rising costs. The management remains hopeful of recovery in ensuing quarters and expects the volume growth with EBITDA margin reverting to 28 per cent.
Operational performance
Given the current stable cement prices trend and low base of second half of 2017 fiscal, limited risk is perceived to the seven per cent volume growth and Rs 587 EBITDA/t estimates for fiscal 2018. The management has estimated seven to eight per cent volume growth for the second quarter of 2018.
In the first quarter, average pet coke cost was Rs 7,600/t, an increase of Rs 2,000 compared to the previous sequential year. In the second quarter of 2018, the management expects it to increase further by Rs 200/t due to impact of high cost of imported pet coke.
Regional check
In the first quarter of 2018, regional sales mix remained broadly same at 75 per cent sales from Northern plants, and the remaining was from its Karnataka unit. The facilities in North operated at 75 per cent utilisation and at 60 per cent in South during the quarter. Across the key markets, JKCE has witnessed marginal price correction owing to monsoon. The price during the quarter was Rs 8 to 10 per bag compared to previous quarter’s exit prices.
UAE operations
In the June’17 quarter, the operations in United Arab Emirates recorded volume of 75 kilo tonne (kt), whereas the revenue and EBITDA stood at AED31.9mn and AED5mn, respectively. UAE operations remained subdued with volume growth of 3 per cent YoY. The operations continued to suffer due to sustained weak demand and increased pricing competition in the region, which is likely to persist in the short term.
Capacity expansion plans
For the financial year, the management has given guidance for capital investment of Rs 200 to 250 crore. Of this, Rs 25 crore will be incurred on wall putty expansion at Katni. This putty expansion of 0.2mtpa is expected to be commissioned by June 2018. Rs 30 to Rs 40 crore will be required to acquire mining land and the remaining Rs 160 to Rs 175 crore is needed for the maintenance and other environment related improvements at existing plants. The management expects raw mill silo construction work at South plant to start at the beginning of the fiscal 2019.
In case the management undertakes the greenfield expansion, it will be for a 2.5 to 3 mtpa integrated capacity (grey cement) at an estimated cost of Rs 1500 to Rs 1800 crore and the expected timeline of 24 to 30 months from the date of announcement.
Debt and interest cost
As of June 30, 2017, JK cement on standalone basis had gross debt of Rs 2,420 crore and net debt of Rs 1,950 crore. During the quarter, net debt reduced by Rs 130 crore compared to the fourth quarter of 2017. Additionally, UAE subsidiary had total outstanding debt of USD90mn. Over the next few years, the management expects to repay about Rs 200 to 250 crore annually.
On quarter over quarter, interest cost was higher at Rs 68 crore for the first quarter of 2018 against Rs 62.8 crore in the fourth quarter of 2017 primarily owing to exchange rate fluctuations, which is part of finance cost.
Investment theme
JKCE is likely to be one of the beneficiaries of anticipated price and demand uptick in North. Steady volumes and EBITDA growth in white cement will cushion downside risks, if any, from price volatility in grey cement. Return on equity (RoE) of over 20 per cent is expected in the financial year 2019. At the current market price of Rs 1,032 JKCE is valued at ten times its expected EBITDA of 2019. The major risk for the cement manufacturer is the sharp decline in cement prices and hence a sharp increase in the costs of raw materials.