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JK Lakshmi Cement
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Capacity expansion with favourable macro environment to drive earnings

CMP: Rs97

JK Lakshmi Cement is well placed to ride the improving demand (and price) environment in the northern and western regions of the country with the commissioning of additional capacity of close to 1.6 million tonne, taking its operational cement capacity to 6.9 million tonne. With the additional capacity in place, in Q4 the company would not only sustain the healthy double-digit volume growth seen in Q3 but also get a boost from the recent hike of Rs20-25 per bag of cement in its key markets (especially in the north). Thus, we expect a considerable improvement in its performance in Q4FY2014. With a revival expected in the economy, we estimate the earnings of the company would grow at a compounded annual growth rate (CAGR) of 33% over FY2014-16. The company is trading at 4.8x EV/EBITDA and $46 EV/tonne on FY2016 estimates which is higher than its one-year historical average multiple of 4x EV/EBITDA and $43 EV/tonne. Given the recent rally in cement stocks, it would be advisable to accumulate JK Lakshmi Cement on declines with a medium-term price target of Rs110.

Valuation (stand-alone) Valuations Net sales (Rs cr) Growth (%) EBDITA (Rs cr) EBDITA margin (%) Adjusted PAT (Rs cr) Growth (%) EPS diluted (Rs) PE (x) P/BV (x) EV/EBDITA (x) EV/sales (x) RoE (%) RoCE (%) FY2011 1,322 -11 191 14 59 -75 4.8 19.2 1.1 7.3 1.1 6 6 FY2012 1,718 30 328 19 148 150 11.3 8.2 1.0 5.2 1.0 12 11 FY2013 2,055 20 429 21 192 30 14.9 6.2 0.9 4.7 1.0 14 11 FY2014E 2,023 -2 286 14 84 -56 7.1 13.0 0.8 8.9 1.3 7 6 FY2015E 2,375 17 389 16 91 8 7.7 12.1 0.8 7.1 1.2 7 6 FY2016E 2,854 20 531 19 147 63 12.5 7.4 0.7 4.9 0.9 10 8

Sharekhan

March 19, 2014

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Capacity expansion to 10MT to provide next leg of growth over FY2014-16: JK Lakshmi Cement (JK Lakshmi), one of the key cement brands in the northern and western markets, is increasing its capacity to 10 million tonne by FY2016 with a total capital expenditure (capex) of Rs2,200 crore. The company is adding 2.7 million tonne of greenfield capacity in Durg, Chhattisgarh, which is likely to become operational by Q3FY2015. Further, the company is increasing its clinker capacity by 0.33 million tonne at its Rajasthan plant and its grinding capacity by 0.66 million tonne at its grinding unit in Haryana during Q4FY2014. Post-expansion, the company will able to cater to the eastern market where it can leverage its strong brand name (the greenfield plant will help the company to reduce its transportation cost). Currently, the capacity utilisation of the company is around 100% as the company operates in the northern and western markets where the demand is relatively strong and the realisations are better than that in the southern and eastern markets.
Capex plan Location Durg, Chattisgarh Jaykaypuram, Rajasthan Jhajjar, Haryana Revival of Udaipur Cost (Rs cr) 1750 130 140 150 Capacity Commissioning (mn t) date 2.7 0.3 0.7 1.4 Q3FY2015 Q4FY2014 Q4FY2014 0.66MT cement plant commissioned in Q3FY2014

Revenue and EBITDA margin trend

Revenue

EBiDTA

EBIDTA margin

Power and fuel consumption trend

Total Capacity FY2013 Grand total

2170

5.1 5.3 10.4

Capex over FY2014-2015 largely funded by internal accruals: The company is likely to generate enough cash from operations over FY2014 and FY2015 which will be used to fund nearly 65% of the total capex (total capex of Rs1,200 crore for FY2014 and FY2015). In terms of capex cycle, it will hit its peak in FY2015 when the gross debt is likely to increase from Rs1,300 crore in FY2013 to Rs2,100 crore, resulting in a debt/equity ratio of 1.5x in FY2015 vs 1.1x in FY2013.
Debt/Equity ratio trend
800 700 600 500 400 300 200 100 0 FY14E FY15E FY16E D/E ratio FY11 FY12 FY13 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

Higher volumes with better realisation to boost earnings over FY2014-16: The company is one of the lowest producers of cement in the industry (it has a captive power plant of 66MW and uses around 95% pet coke of the total coal requirement). Going ahead, the revenues are likely to grow at a CAGR of 19% over FY2014-16 driven by a mix of volume and price increase. Cost optimisation (power and fuel costs per tonne are likely to decline further) and strong realisation of cement (in the northern market) will improve the margin of the company from 14% currently to 18.6% in FY2016, resulting in an earnings CAGR of 33% over FY2014-16.

Kg/MT

Capex

Cash flow from operations

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March 19, 2014

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Valuation: The company is trading at 4.8x enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) and $46 EV/tonne on FY2016 estimates which is higher than its one-year historical average multiple of 4x EV/EBITDA and $43 EV/tonne. During FY2002-FY2014, the stock has traded on an average

at 4x its one-year forward EV/EBITDA (minimum at 1x, maximum at 10x) and an average $43 one-year forward EV/tonne (minimum $14, maximum $84). Given the recent rally in the cement stocks, it would be advisable to accumulate JK Lakshmi on declines with a medium-term price target of Rs110 (5x EV/EBITDA on FY2016 estimates).

One year forward EV/EBITDA historical trend

One year forward EV/tonne historical trend

10.0

5.0

40.0 30.0 20.0 10.0

0.0 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Aug-12 Feb-13 Aug-13 Feb-14

Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Aug-12 Feb-13 Aug-13 Feb-14

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Sharekhan

March 19, 2014

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