JK Lakshmi Limited- Cementing its true place: Elara

Visit http://indiaer.blogspot.com/ for complete details �� ��


Cementing its true place
Capacity to go up by 67%, debottlenecking to boost volume
JK Lakshmi Limited (JKL) is in the process of increasing its cement
capacity by 67% from existing 4.75mn tonnes to 7.95mn tonnes by
end of FY13 through a new greenfield plant and debottlenecking of
the existing plant. The debottlenecking would enhance cement
volume of JKL at a CAGR of ~1% (FY10-12) while the benefit from the
greenfield plant is expected to be visible only from end of FY13.


Savings from captive power to partly mitigate margin pressure
The company is also expanding its captive power capacity to 66 MW
by setting up a 12 MW waste heat recovery plant (WHR) and an 18
MW thermal power plant at Sirohi, Rajasthan. For the WHR plant,
which will generate carbon credits, the variable cost will be INR0.3-0.4
per unit. Savings from captive power (INR130/tonne) is expected to
partly cushion the margins for the company.

Enough cash to fund capex, sound debt equity ratio too
At the end of FY10, JKL had gross cash and investments of INR7bn
(INR 57 per share,) and a comfortable net debt equity ratio of 0.2x. We
believe that the cash balance and internal accruals will be sufficient to
fund capex plan of the company for the next 1.5 years. Thus we
expect the company’s gross debt (~INR9.2bn) to remain at current
levels up to end of FY12.

Not to make losses in current cycle on lower leverage
Unlike the last down cycle, we do not expect JK Lakshmi to incur losses
(on an annual basis) in the current down cycle as it has lower
leverage, and has undertaken cost cutting measures. Despite strong
fundamentals and an increase in replacement cost, the stock is trading
at a discount to the last down cycle.

Valuation
At the CMP of INR63, JKL is trading at 6.4x and 4.8x its FY11 and
FY12 earnings respectively. On an EV/tonne basis, it is trading at
USD47 and USD55 at its FY11 and FY12 capacities respectively.
Despite much stronger fundamentals and an increase in
replacement costs, the stock is trading at a discount to the last
down cycle. The stock is trading at close to half of its replacement
cost and 20% discount to the FY10 book value. Thus we are
reiterating our Buy rating on the stock with a revised priced target
of INR78/share. We have valued the company at EV/tonne of
USD62 on FY12 capacity.