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For 3QFY2011, JK Lakshmi Cement (JKLC) posted a substantial 1,732bp yoy
decline in operating margin to 7.9% due to the fall in realisations and a steep
66% yoy increase in per tonne power and fuel costs. Going ahead, we expect
JKLC to face relatively less pricing pressures owing to pick-up in demand in the
northern region. JKLC is currently trading at US $32/tonne based on FY2012E
capacity, which is lower than its peers and well below its replacement cost. Hence,
we maintain a Buy on the stock.
PAT declines 87.8% yoy on lower realisations, higher power cost:
JKLC posted 10.7% yoy decline in top-line to `315cr (`353cr) primarily on
account of the substantial fall in realisations on a yoy basis. However, qoq
top-line grew by 18.6%. OPM for the quarter plunged by a substantial 1,732bp
yoy to 7.9% (25%) on account of the fall in realisations and significant increase in
the power and fuel costs. Thus, bottom-line came in at `4.6cr (`46cr), down
90.1% yoy. The decline in bottom-line was however, restricted by the lower tax
expense due to write-backs.
Outlook and valuation: We expect JKLC to post a modest 2.3% CAGR in top-line
over FY2010-12, aided by a 6% CAGR in dispatches over the period. Going
ahead, we expect realisations to improve on the back of better demand from the
housing and real estate sectors. JKLC is currently trading at US $32/tonne on
FY2012E capacity, 57% below its replacement cost. We have valued JKLC at
EV/tonne of US $50 to arrive at a fair value of `80, which is still at a discount to
its replacement cost. We maintain a Buy on the stock, with a revised Target Price
of `80 (`92).
Investment arguments
Activity concentration in the northern region to protect margins: JKLC derives more
than 50% of its revenue from the northern region. Although, this region is currently
facing low demand, the long-term demand outlook for the northern region is good
due to huge infrastructure and real estate projects that are likely to come up in the
region. Further, the region is not expected to witness major capacity addition over
the next two years. Thus, we expect players in the region to regain pricing power,
with the improvement in demand situation. Hence, we expect JKLC to gain out of
the positive demand-supply dynamics in the region.
Rising captive power usage to improve profitability: JKLC is planning to increase its
total captive power capacity to 87MW from 36MW by FY2012E, which will be
sufficient to meet nearly 90% of its power requirement on the expanded capacity of
8.1mtpa, thus improving its profitability substantially. Moreover, JKLC has tied up
with VS Lignite, a KSK Group company, for the purchase of 21MW power every
year for the next 20 years at a price of `3.2/unit, which is close to the company’s
captive power cost.
Strong balance sheet: JKLC’s debt currently stands at ~ `1,050cr, of which
~`100cr is on account of deferred sales tax (interest free). The company’s cash
and liquid investments stand at ~`560cr. Thus, JKLC’s balance sheet is well
placed, with net debt/equity of 0.35x, which would enable smooth execution of its
expansion plans. The company is currently setting up a 2.7mtpa green-field plant
at Chattisgarh, which is expected to be operational by FY2013.
Outlook and valuation
We expect JKLC to post a modest 2.3% CAGR in top-line over FY2010-12, aided
by a 6% CAGR in dispatches over the period. Going ahead, we expect realisations
to improve on the back of better demand from the housing and real estate sectors.
JKLC is currently trading at US $32/tonne on FY2012E capacity, 50% below its
replacement cost. Even on relative terms, the company is trading at a huge ~57%
discount v/s the other mid-cap players. We have valued JKLC at an EV/tonne of
US $50 on FY2012 estimates to arrive at a fair value of `80, implying 53% upside
from current levels and it is still at a discount to its replacement cost. Hence, we
maintain a Buy on the stock, with a revised Target Price of `80 (`92).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JK Lakshmi Cement – 3QFY2011 Result Update
Angel Broking maintains a Buy on JK Lakshmi Cement with a Target Price of Rs. 80.
For 3QFY2011, JK Lakshmi Cement (JKLC) posted a substantial 1,732bp yoy
decline in operating margin to 7.9% due to the fall in realisations and a steep
66% yoy increase in per tonne power and fuel costs. Going ahead, we expect
JKLC to face relatively less pricing pressures owing to pick-up in demand in the
northern region. JKLC is currently trading at US $32/tonne based on FY2012E
capacity, which is lower than its peers and well below its replacement cost. Hence,
we maintain a Buy on the stock.
PAT declines 87.8% yoy on lower realisations, higher power cost:
JKLC posted 10.7% yoy decline in top-line to `315cr (`353cr) primarily on
account of the substantial fall in realisations on a yoy basis. However, qoq
top-line grew by 18.6%. OPM for the quarter plunged by a substantial 1,732bp
yoy to 7.9% (25%) on account of the fall in realisations and significant increase in
the power and fuel costs. Thus, bottom-line came in at `4.6cr (`46cr), down
90.1% yoy. The decline in bottom-line was however, restricted by the lower tax
expense due to write-backs.
Outlook and valuation: We expect JKLC to post a modest 2.3% CAGR in top-line
over FY2010-12, aided by a 6% CAGR in dispatches over the period. Going
ahead, we expect realisations to improve on the back of better demand from the
housing and real estate sectors. JKLC is currently trading at US $32/tonne on
FY2012E capacity, 57% below its replacement cost. We have valued JKLC at
EV/tonne of US $50 to arrive at a fair value of `80, which is still at a discount to
its replacement cost. We maintain a Buy on the stock, with a revised Target Price
of `80 (`92).
Operational highlights
In 3QFY2011, JKLC’s per tonne cement realisations declined by 3.5% yoy to
`3,186. Dispatches during the quarter also fell by 7.5% yoy to 0.99mn tonnes, as
demand failed to pick up in the company’s primary markets in the northern and
western regions. The low demand in the regions was due to the poor off-take from
the real estate and infrastructure sectors. The company’s per tonne power and fuel
costs increased by 66.4% yoy to `1,059 during the quarter. Per tonne freight cost
also increased by 23.4% yoy to `683. Operating profit per tonne stood at `251
during the quarter, down 76.5% yoy.
Investment arguments
Activity concentration in the northern region to protect margins: JKLC derives more
than 50% of its revenue from the northern region. Although, this region is currently
facing low demand, the long-term demand outlook for the northern region is good
due to huge infrastructure and real estate projects that are likely to come up in the
region. Further, the region is not expected to witness major capacity addition over
the next two years. Thus, we expect players in the region to regain pricing power,
with the improvement in demand situation. Hence, we expect JKLC to gain out of
the positive demand-supply dynamics in the region.
Rising captive power usage to improve profitability: JKLC is planning to increase its
total captive power capacity to 87MW from 36MW by FY2012E, which will be
sufficient to meet nearly 90% of its power requirement on the expanded capacity of
8.1mtpa, thus improving its profitability substantially. Moreover, JKLC has tied up
with VS Lignite, a KSK Group company, for the purchase of 21MW power every
year for the next 20 years at a price of `3.2/unit, which is close to the company’s
captive power cost.
Strong balance sheet: JKLC’s debt currently stands at ~ `1,050cr, of which
~`100cr is on account of deferred sales tax (interest free). The company’s cash
and liquid investments stand at ~`560cr. Thus, JKLC’s balance sheet is well
placed, with net debt/equity of 0.35x, which would enable smooth execution of its
expansion plans. The company is currently setting up a 2.7mtpa green-field plant
at Chattisgarh, which is expected to be operational by FY2013.
Outlook and valuation
We expect JKLC to post a modest 2.3% CAGR in top-line over FY2010-12, aided
by a 6% CAGR in dispatches over the period. Going ahead, we expect realisations
to improve on the back of better demand from the housing and real estate sectors.
JKLC is currently trading at US $32/tonne on FY2012E capacity, 50% below its
replacement cost. Even on relative terms, the company is trading at a huge ~57%
discount v/s the other mid-cap players. We have valued JKLC at an EV/tonne of
US $50 on FY2012 estimates to arrive at a fair value of `80, implying 53% upside
from current levels and it is still at a discount to its replacement cost. Hence, we
maintain a Buy on the stock, with a revised Target Price of `80 (`92).
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