J K Cements: On firm foundation

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’s interest alive in the stocks from this sector.

While leading large-cap cement stocks like ACC, Ambuja Cement and UltraTech have given a year-to-date (YTD in 2012) return of 23, 30 and 73 per cent respectively, as compared to the 25 per cent rise in the Sensex. Stocks from the mid-cap cement pack, too, gained between 31.8– 107 per cent, as against 36.7 per cent the YTD upswing in the BSE Mid-cap index.

J K Cements, on the other hand, moved up over 235 per cent – hitting a 52 week high level of Rs 339 on 21 December. 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, JK Cements continues to see strong volume growth. During the September 2012 quarter, the white cement (including wall putty) volumes at around 1.01-lakh tonne 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 four-lakh tonnes for white cement and one-lakh tonne for wall putty and the company is enhancing these by 0.2 metric tonne per annum (mtpa) each by FY13-end to meet the growing domestic demand. It plans another 0.6 million tonne (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 a 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 2012 quarter.

Volumes including the clinker increased 21.2 per cent year-on-year to 14.01-lakh tonne due to production ramp up at the Karnataka plant. The plant saw realisations increasing to 65 per cent from earlier 45 per cent. 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.

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 (North 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 the North (Rajasthan).

Factoring in improvement in operating leverage in South and firm price outlook, analysts at Edelweiss estimate Company’s EBITDA/tonne to catapult from Rs 667 in FY12 to Rs 757 in FY15. In the white cement segment, too, they see the 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 for the company.

They expect 16 per cent and 17.5 per cent growth in the top-line for FY13 and FY14 respectively, which gives 44 per cent and 28 per cent increase in the bottom-line respectively in the same period. For the stock trading at Rs 337 levels, the reports suggest a target price of Rs 401 – 470.