JK Cement a market outperformer: P Lilladher

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JK Cement a market outperformer: P Lilladher

Prabhudas Lilladher is bullish on JK Cement and has maintained a market outperformer rating on the stock.

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Prabhudas Lilladher is bullish on JK Cement and has maintained a market outperformer rating on the stock.

Prabhudas Lilladher research report on JK Cement

The Rajasthan-based JK Cement (JKCL) which was incorporated following the restructuring of JK Synthetics, primarily caters to the northern markets. From Q2 FY08 it would see substantial savings in power cost, following the commissioning of its petcoke and waste heat recovery-based power plants. This, along with a robust price outlook, would boost its earnings. The stock is attractively valued on an EV/ton (USD83) and a PER (4x FY08E) basis, compared to its peers. We initiate coverage, with an OUTPERFORMER rating.

JKCL is expected to register robust volumes even as the industry is faced with imminent shortage. It has added 0.5m tons in August '06 while an additional 0.4m tons will start flowing in October- November '07. JKCL has invested nearly Rs 2.5billion towards cost-cutting measures. These involve a 20-MW petcoke-based captive power plant, a 13.2- MW waste-heat-recovery plant, and replacing a 7.5-MW turbine with a 10-MW one. With the above measures, the company is expected to operate with 100% captive power. The benefits of significantly lower power costs would start flowing in from Q2 FY08.

We expect the company to report a strong 42% bottom-line growth over FY07-FY09. However, free-cash flows are expected to turn negative from FY08 as the 3m-ton Karnataka plant would require an investment of Rs 10.5billion. Despite this, JKCL's D/E is expected to go up only marginally -- from 0.5x in FY08 to 0.8x the year following. 

At the current price, the stock quotes at a PER of 4x our FY08 estimates and at an EV/E of 2.9x. On EV/ton, it is valued at USD83. We believe the current valuations to be extremely attractive and expect the Q2 FY08 results to act as a trigger for the stock. We initiate coverage, with an OUTPERFORMER rating.