Switch to JK Cement from JK Lakshmi Cement: Sushil Finance

JK Cement Ltd though has performed below our expectations on bottom-line front, during the current quarter due to higher than expected depreciation and interest; it has performed better on operating parameters compared to similar sized cement players. When most of the mid-sized cement players have seen margin erosion during the quarter, JK Cement has reported a 170 bps QoQ improvement in EBITDA margins, backed by cost savings. We see more margin expansion for JK Cement in the quarters to come as its new plants ramps up. Brown filed expansion is the key reason why we believe the company will be able to improve its margins.

Though cement prices has not seen run up as expected earlier, White cement has been the key strength of JK Cement, accounting for a lion share of its operating profit. Post completion of its 3 Mn Ton p.a expansion the company has rightly gone for expanding of its Putty Business. Duopolistic nature of the white cement business will result in sustained pricing power going ahead, resulting in superior bottom-line growth vs its peers.What should be the strategy Next ?

JK Cements, UAE operations has not picked up as expected and has been under operating loss. Lack of grid connectivity is resulting in higher power cost and resulting losses. We expect the power issues to be resolved in couple of quarters. The southern plants of the company continue to be underutilized and can play a key role in overall margin improvement in FY17.

On the other hand JK Lakshmi Cement has reported 10% YoY growth in revenues (good considering no new plant has started production) with 6% drop in realization QoQ and 200 bps decline in EBITDA margins. The trail run of the 1.7 Mn Tons p.a integrated unit at Durg has also started during the quarter. However, the 1 Mn Tons p.a grinding units at Cuttack, Odisha is getting delayed as the final clearance for starting the project is yet to be achieved. We believe even if the clearance is obtained by Q4FY15 end it will take four to six quarters to start production from that unit and hence our volume assumptions for FY16 & FY17 have been changed accordingly.

"Post 27% Outperformance of JK Cement Ltd’s stock price ( post our thematic report) it is now valued at 19.0x its FY16E EPS and 10.4x FY17E EPS and 9.2X & 6.1X its FY16 & FY17 EV/ EBITDA respectively. Though JK Cement has rallied post our report and JK Lakshmi Cement has underperformed, we believe the trend will continue and JK Cement will continue to outperform vs JK Lakshmi in the medium term. However, we don’t recommend fresh switch over from JK Cement to JK Lakshmi Cement", says Sushil Finance research report.

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