JK Cement: Grey eminence: Elara

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Grey eminence
Grey cement capacity up 67%, to prop up earnings
JK Cement Limited (JKCEM) has increased its grey cement capacity by
67% from 4.5mn tonnes to 7.5mntonnes, through a greenfield
expansion in Karnataka. The capacity expansion is likely to spur the
volume growth in FY11 as well as in FY12. On account of the capacity
addition, we expect JKCEM’s grey cement volume to go up at a CAGR
of 16.8%, cushioning earnings of the company from a decline in
margins.


White cement to provide stable cash flow
JKCEM has a capacity of 0.4mn tonnes in the white cement segment,
characterized by the presence of just two players and a relatively
steady demand (with higher realizations and margins). White cement
realizations are ~4.6x higher than grey cement (INR13,301/tonne as
compared to INR 2,873 tonne for grey). In Q2FY11 while white
cement earned an EBITDA/tonne of INR 2,494, grey cement earned a
negative EBITDA/tonne of INR 112. Thus we believe the white cement
business will continue to provide the company stable cash flows to
comfortably service its interest expenses.

Plans to hike capacity in North India by 2.5mn tonnes
JKCEM is planning to increase its cement capacity in North region by
way of a brownfield expansion. The expansion is likely to be complete
by end of Q2FY13 post which, the total grey cement capacity in the
North would touch 7mn tonnes while the overall capacity, 10mn
tonnes. The capacity expansions will provide the company with a
sustained volume growth in the coming years.

Karnataka plant to reduce regional risk
JKCEM had a restrictive presence only in the Northern region prior to
commissioning of the Karnataka plant which has slashed the regional
risk. The company will become partly insulated from the slowdown in
demand in Northern region post the Common Wealth Games.

Valuation
At the CMP of INR 168 per share, the stock is trading at 16.1x and
8.9x its FY11 and FY12 earnings, respectively. It is trading at
EV/tonne of USD54 and USD51 of its FY11 and FY12 capacities,
respectively. Considering the volume growth from the greenfield
plant, stable cash flow from white cement business and a steep
discount at which the stock is trading to its replacement cost we are
reiterating a Buy rating on the stock with priced target of INR
220/share