Buy JK Cement; target of Rs 295: Sharekhan

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Buy JK Cement; target of Rs 295: Sharekhan

Broking house, Sharekhan keeps buy rating on JK Cement with price target of Rs 295.

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Broking house, Sharekhan keeps buy rating on JK Cement with price target of Rs 295.

Sharekhan report on JK Cement:

Key points

"JK Cement has put up an impressive performance in the first half of the current fiscal year. The company's leverage to cement prices has led to a massive 142% year-on-year (y-o-y) jump in its operating profit to Rs 129 crore. Its operating   profit margin (OPM) has expanded by a whopping 10% to 23.7%. The EBITDA per tonne has more than doubled to Rs 717 from Rs 297 in the same period last year."

"The company's power cost has dented its profitability significantly. Recognising the need to manage its power cost, the company had earlier announced its plans to set up captive power plants (CPPs), including a waste heat recovery plant, at its facilities at Nimbahera and Mangrol. The work on the CPPs is progressing well and the CPPs are expected to be commissioned on schedule."

"On setting up these power plants, the company will be able to save close to Rs2.5  per unit of power which will translate into savings of approximately Rs200 per  tonne and of Rs 60-70 crore in absolute terms."

"Recently the company completed the expansion of its grey and white cement capacities to 4,000,000 metric tonne (MT) and 400,000MT respectively."

"JK Cement has also embarked on an exercise to set up a 3.5-million-tonne greenfield facility at Karnataka at a total cost of Rs1,070 crore. The plant would get commissioned by the end of December 2008 and will cater mainly to Karnataka, Andhra Pradesh and pockets of Maharashtra and Goa."

"Going forward, the firm cement prices and higher volumes from the increased capacity will drive the company's top line. This coupled with the company's efforts to bring down the power cost would result in margin improvement and cause the earnings to grow at a compounded annual growth rate (CAGR) of 158% year on year (yoy) over FY2006-08."

"At the current price of Rs186 the stock is discounting its FY2007E earnings by 8.7x and FY2008E earnings by 6x. On an enterprise value (EV)/tonne basis, it is trading at USD77 per tonne whereas its closest peer, Shree Cement, commands a valuation of USD173 per tonne."

Valuation and view

"Going forward, the firm cement prices and the higher volumes resulting from the increased capacity will drive the company's top line. This coupled with the company's efforts to bring down the power cost would result in margin improvement and cause the earnings to grow at a CAGR of 158% over FY2006-08." 
 
"At the current price of Rs 186, the stock is discounting its FY2007E earnings by 8.7x and FY2008E earnings by 6x. On an EV/tonne basis, the stock is trading at USD 77 per tonne whereas its closest peer, Shree Cement, commands a valuation of USD 173 per tonne. Even after discounting for the efficient cost structure and the consistent performance of Shree Cement, we believe such a steep discount is unjustified and the company should command higher valuations. We thus maintain our Buy recommendation on the stock with a price target of Rs 295."