Cement stocks have been in the limelight right through 2012. Patchy rainfall across the country coupled with a pick-up in the construction activity kept investor interest alive in the stocks from this sector. Leading large-cap cement stocks like ACC, Ambuja Cement and UltraTech have given a year-to-date (YTD) return of 23, 30 and 73 per cent, respectively, compared to the 25 per cent rise in the Sensex. Stocks from the mid-cap cement pack, too, gained between 31.8 and 107 per cent, as against 36.7 per cent YTD upswing in the BSE mid-cap index. J K Cement, on the other hand, moved up over 235 per cent – hitting a 52-week high of Rs 339 on December 21. While the company is benefitting from an improvement in realisation, which is in-line with peers, the capacity expansion has also aided performance.
Volume growth
Enjoying the dominant position in the high-margin white cement (40 per cent market share) and wall putty business, J K Cement continues to see strong volume growth. During the September quarter, the white cement (including wall putty) volumes at 101,000 tonnes marked an increase of 24.9 per cent year-on-year (y-o-y) and 9.4 per cent sequentially. The existing capacity stands at 400,000 tonnes for white cement and 100,000 tonnes for wall putty and the company is enhancing these by 0.2 tonnes per annum, each by FY13-end to meet the growing domestic demand. It plans another 0.6 million tonnes (mt) expansion in Fujairah, UAE. This is aimed at the West Asian markets that account for almost 16 per cent of the global demand. Analysts see the project being completed by March 2014. With good growth in the white cement segment, the volume growth in the grey cement segment, too, has been robust at 17.8 per cent y-o-y as against the 3.7 per cent growth seen by the industry in the September quarter.
Volumes including that of clinker rose 21.2 per cent year-on-year to 1.4 mt on production ramp-up at the Karnataka plant. The plant saw realisations increasing to 65 per cent from 45 per cent earlier. A drop in pet-coke prices and fixed costs per tonne (as volumes increased) year-on-year have also cushioned the rise in costs on account of increased grid tariff and diesel price hikes that propelled freight cost higher.
| STEADY MARGINS | |||
| in Rs crore | FY12 | FY13E | FY14E |
| Revenues | 2,547 | 2,980 | 3,352 |
| % change y-o-y | 21.6 | 17.0 | 12.5 |
| Ebitda | 509 | 606 | 680 |
| % change y-o-y | 82.4 | 19.0 | 12.3 |
| Ebitda (%) | 20.0 | 20.3 | 20.3 |
| Net profit | 177 | 266 | 255 |
| % change y-o-y | 177.0 | 50.1 | -4.2 |
| P/E (x) | 14.1 | 9.4 | 9.8 |
| E: Estimates Source: Edelweiss Securities | |||
Outlook
Analysts at Edelweiss Research see the Karnataka plant contributing a lion’s share of the incremental volume over FY13-15 with increasing capacity utilisation compared to 51 per cent utilisation in FY12 (Rajasthan plant operated at full capacity). The Karnataka plant caters to Maharashtra and Karnataka markets, where prices are expected to remain firm. Analysts add that the plant’s Ebitda/tonne is over 30 per cent better compared to the company’s plant in Rajasthan.
Factoring in improvement in operating leverage in the South and firm price outlook, analysts at Edelweiss estimate the company’s Ebitda/tonne to move up from Rs 667 in FY12 to Rs 757 in FY15. In the white cement segment, too, they see Ebitda increasing from Rs 163 crore in FY12 to Rs 318 crore in FY15, while the segment’s share will lead to an increase in overall Ebitda from the current 30 per cent to around 40 per cent by FY15. The company’s current grey cement production stands at 7.5 mt, it plans another 3.5 mt to be completed by FY15. Analysts at Anand Rathi suggest that given the expansion plans, drop in pet coke prices, strong outlook for the white cement business coupled with volume growth and an improved outlook on the realisation front, the future does look promising. They expect 16 per cent and 17.5 per cent growth in the top line for FY13 and FY14, respectively, which give 44 per cent and 28 per cent increase in the bottom-line, respectively, in the same period. For the stock trading at Rs 337 level, the target price is pegged at Rs 401-470 levels.