Buy J K Cement; target of Rs 1196: Motilal Oswal

Motilal Oswal's research report on J K Cement

JKCE’s 10.5mt grey cement capacity is available at an EV/t of USD40-70 (64-34% discount to midcap cement) on FY19 basis, if we value its white cement business at 14-10x FY19E EV/EBITDA. Its white cement business deserves a premium over its grey cement business, given raw material constraint, JKCE’s 45% market share, and superior profitability. The company is strategically placed, with 70-75% exposure to North markets as also considerable exposure to key markets of West and South India.  North markets likely to see the highest price improvement, driven by increase in utilization on favorable base, limited supply addition and demand stabilization. With its grey cement business scaling up to ~14mt over the next 3-4 years, JKCE could see a multiple re-rating.

Outlook

JKCE is strategically placed to benefit from the expected price improvement in the North due to limited supply addition. Incrementally, the grey cement division should see marked improvement in profitability due to higher proportion of volumes from new efficient units. The white cement business has gained meaningful scale and deserves premium valuations, given raw material scarcity and JKCE’s 40-45% share in the domestic white cement market. We value the white cement segment at an EV/EBITDA of 11.5x FY20E and the grey cement business at an EV/EBITDA of 8x (FY20E) to arrive at a target price of INR1,196 (implied EV/tonne of USD140 on standalone capacity). Buy.