Buy J. K. Cement; target of Rs 635: Sushil Finance

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26 Aug, 2025 12:21

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Sushil Finance`s research report on J. K. Cement“JK Cement is adding 3MnT p.a grey cement capacity in north India, 1.5 Mn split grinding unit in Haryana and 1.5 Mn Plant in Rajasthan. The new capacity of JK is coming up at a time when no major capacity is being added by other north based players. A total of ~7 Mn of incremental capacity is likely to come in the Northern part by FY16 and the incremental supply is likely to be absorbed and hence no major demand supply mismatch is likely to happen in the near term. We expect grey cement volume growth of 31% in FY15 to 7 MnT & 21% in FY16 to 8.5 MnT. White cement volume is expected to grow by 35% in FY15 to 1.08 MnT & 25% in FY16 to 1.35 Mn T. White cement is manufactured by only two players, JK cement & Ultratech, duopolistic nature of the business has enabled a pricing discipline in the business for many years. JK has expanded white cement capacity from 0.4 Mn T to 0.6 MnT in FY14.J K is coming up with a plant in UAE , capable of manufacturing 0.6 Mn T of White Cement or 1 MnT of Grey Cement. White cement enjoys EBITDA margin of 25-30% vs 8-12% in grey cement and we believe the new capacity will result in better efficiency of plants and lower lead time to the target market and cost savings can result in EBITDA/ Ton improvement of ~ Rs.150-200 in next 2 years. White cement contributed 60% of total EBITDA in FY14 and is likely to contribute ~40% of EBITDA in FY15/ FY16 respectively thus bringing in higher visibility to the earnings as the prices of white cement is likely to protect it from the volatility in grey cement business.” “We expect revenues to post 24% CAGR, backed by 18.6% CAGR in volume and 4.9% CAGR in realization over FY14-17.During the same period EBITDA is expected to see 51% CAGR, both on the back of cost savings and higher operating leverage. JK Cements northern plants are quite old and hence the cost structure were on a higher side compared its peers and hence the EBITDA/ Ton in grey cement was lower by ~ Rs.200/ Ton compared to the new plants by existing players. With the new plants coming up and lead distance reducing we expect EBITDA margins to improve from 13% in FY14 to 15.1% in FY15 and 19.1% in FY16. Other factors which can contribute to improved margins are better capacity utilization of the southern plant to ~65% in FY15 vs 50% in FY14 and higher contribution from white cement business. We believe cement is the best commodity to play the Indian infrastructure story. Cement by virtue of its nature is not impacted by international prices and is driven by the domestic demand supply scenario. The Indian cement industry had the toughest time in recent years due to overcapacity and lack of demand on the other hand. The Industry utilization levels have been ~70%. However, excluding south which is facing severe overcapacity condition, the utilization rates are in the range of 85-90%.In the absence of any major capacity being added in the northern part we like companies which are coming up with capacity when the apparent demand seems picking up."

"Cement stocks have appreciated sharply in the last 6 months and JK Cement has gone by ~ 3 x over the same time. However, an improving macro coupled with renewed focus on infra and housing we believe the best days are yet to come. At the CMP of Rs.488 the stock trades at 11.8x its FY16E EPS and 6.5x FY16 EV/ EBITDA. At EV/ Ton of $ 87 for FY16 we believe the stock is still undervalued compared to the growth opportunities that it provides. We recommend BUY on the stock with a target price of Rs.635, implying 30% upside from the current levels. At the target price the stock will trade at EV/Ton of $ 102, which is ~40%-45% discount to the large cement manufacturers in India,” says Sushil Finance research report.

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