22 December 2012

JK Cement - Management Interaction - Centrum


Management Interaction Takeaways
JK Cement
Buy
Target Price: Rs465
CMP: Rs333
Upside: 39.6%
We spoke with the management of JK Cements to get an insight into future prospects and volume trend from its South and North plants. Key takeaways from our discussion are given below:-

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m  Update on grey cement volume from South plant: Grey Cement sales volume in the quarter is expected to be 1.24mt against 1.27mt in Q2FY13 (YoY decline of ~2.6%). Volume from South plant in Oct-Nov ’12 was 0.24mt (utilization rate of 47.8%). However, the management expects the volume to revive in Q4FY13E as busy construction season sets in. For the first eight months (Apr-Nov ’12), sales volume from the Karnataka plant was 1.24mt, which translates into a utilization rate of ~62%. Trade sales volume from South based plant is ~70%.
m  Update on grey cement volume from North plant: Volume from North plant in Oct-Nov ’12 was 0.59mt (utilization rate of 78.5%). However, the management expects the volume to revive in Q4FY13E. From the North based plants, sales volume in the first eight months (Apr-Nov ’12) was 2.4mt, which translates into a utilization rate of 83%. Sales volume of the company in 9MFY13E is expected to be 4.1mt, growth of 9.3% YoY which would largely be driven by the South plant. We expect sales volume growth of grey cement to be 9.8% YoY to 6.3mt in FY13E.
m  Volume growth of White cement: In the White cement, volume growth expected in Q3FY13E is ~37%. In Oct-Nov ’12, white cement sales volume was 0.08mt compared to 0.09mt in Q3FY12. In FY13E, white cement volume is expected to grow at ~14%. Sales volume of wall putty grew at ~39% in H1FY13 and the management expects growth of ~25% for FY13E. Wall putty sales volume growth was 28% YoY in FY12.
m  Procurement of pet coke from MRPL refinery will lead to savings from Q1FY14E: Current pet coke price is Rs7,300/tonne for North plants and Rs7,500/tonne for South plant. Going forward, the company would also benefit from the pet coke capacity expansion of MRPL as it has entered into an agreement with the company to receive pet coke. The company is dependent on imported pet coke for its South based plants which is costlier compared to the landed cost for North based plants where the pet coke is procured from Reliance and IOC. The management expects pet coke procurement from this plant to start from Q1FY14E.
m  Update on grey cement capacity expansion: The company has plans to expand its grey cement capacity by 3mt through a brownfield expansion in the North. This expansion involves setting up of 5,000TPD kiln at Mangrol plant and grinding unit of 1.5mt at the same plant. Apart from that a split grinding unit of 1.5mt at Jhajjar, Haryana will be set up. This expansion will also include 25MW coal-based thermal power plan, WHR (waste heat recovery) plant of 9MW and railway sliding at both units. The capex for this project is Rs17.24bn, which would be funded through a debt-equity mix of 70:30. The management indicated that order for plant and machinery has already been placed and financial closure is expected very soon.
m  Update on White cement expansion plan in India: The company is expanding white cement capacity by 0.2mt to 0.6mt and Putty capacity by 0.2mt to 0.5mt in phases through modification and debottlenecking. As per the management, partial expansion has been completed and white cement capacity will be at 0.5mt by FY13E. Second phase of capacity expansion will be completed by H1FY14E. The capex for this expansion is Rs2,000mn.
m  White cement expansion plan in Fujairah, UAE on track: The company has plans to set up a 0.6mt white cement capacity (equivalent to 1mt grey cement capacity) through a 90:10 JV joint venture with the Government of Fujairah. The capex for this expansion is US$150mn which will be funded through a D/E of 2:1. The company has spent ~US$30mn to the end of Q2FY13. Construction activities are at full swing at this plant and the management expects this plant to get commissioned by FY14E-end. 
m  Robust Q3 ahead: We expect company to post robust numbers in Q3 driven by better grey cement realization and higher white cement sales volume. We expect 34% YoY growth in op. profit to Rs1.6bn. EBITDA margin is expected to improve 3.7pp YoY to 23.1% and profits are expected at Rs724mn (growth of 66.3% YoY).
m  Earning estimates revised upwards: We have revised our EPS estimates upwards by 7.6%/15.2% for FY13E/FY14E considering higher white cement sales volume. We have revised white cement sales volume to 0.43mt (vs. earlier expectation of 0.38mt) in FY13E and 0.47mt (vs. earlier expectation of 0.42mt) in FY14E. White cement has higher op. margin (op. margin of 26-33% over last seven quarters) compared to grey cement with lesser volatility in margins due to seasonal factors.
m  Valuation and recommendation: The stock is trading at 7.8x FY13E EPS and 6.6x FY14E EPS. On EV/EBITDA, it trades at 4.2x FY13E and 3.6x FY14E (adjusted for debt portion of capex related to grey cement plant). With expected increase in sales volume and realization going forward, we expect EPS of the company to grow by 64.7%/18.3%/15.5% for FY13E/FY14E/FY15E. EPS CAGR of the company is expected to be 31% between FY12-FY15E. RoE of the company is expected to improve to 18.4% in FY14E against 12.3% in FY12 (and 4.2% in FY11). We maintain Buy rating on the stock with a revised price target of Rs465, upside of 39.6% from CMP.


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