Multiple triggers for JK Lakshmi Cement

Capacity additions and expected demand recovery make it an attractive pick

JJK Lakshmi Cement, which recorded its all-time high of Rs 190 last week, has gained 50 per cent this month, led by expectations of a recovery in cement demand. The company is benefiting from capacity expansion. Recently, the company commissioned a 1.6-million-tonne (mt) plant; this raised its capacity to 6.64 mt. This will rise to 10 mt by FY16-end. It is also expanding into eastern India, with its Chhattisgarh facilities coming on-stream by the second half of FY15. Therefore, analysts are raising target prices for the stock. Analysts at Religare Institutional Research believe the company is entering a phase of transformation — from a single-region small-cap company to a multi-region mid-cap. They expect volumes for JK Lakshmi to increase 15 per cent and 17 per cent in FY15 and FY16, respectively, against three per cent in FY14. They have raised their target price for the stock to Rs 205 from Rs 115 earlier.

Ravi Sodah at Elara Capital has raised the target price from Rs 112 to Rs 212; he feels the stock is trading at an enterprise value per tonne of $54 on FY16 capacity (a sharp discount to the replacement cost of peers). For the stock, trading at Rs 172, the consensus target price (post results) stands at Rs 218. In the March quarter, aided by an 18 per cent rise in capacity and a two per cent rise in realisations, revenue increased 21 per cent y-o-y to Rs 648 crore. Better realisations and operational efficiencies raised earnings before interest, tax, depreciation and amortisation to Rs 112 crore. At 17.3 per cent, margins, though down 30 basis points, were impressive, considering the 29 per cent rise in fuel costs and the 13.3 per cent rise in freight costs. At Rs 66.53 crore, adjusted profits increased 48.1 per cent y-o-y. The good performance was helped by some plant closures (of peers) in the North. But now, demand is likely to be hit by the approaching monsoon. Shailendra Chouksey, whole-time director at J K Lakshmi Cement, feels if the government starts clearing stalled projects, the boost to cement demand will be huge.

The upswing in the demand-supply situation, however, is likely to be gradual. Analysts at Religare model expect cement volume growth of nine per cent (compounded annual growth rate) during FY14-FY17, driven by political stability and the government's renewed thrust on big-ticket projects.