Rating: Hold; Target Price: Rs185; CMP: Rs181; Upside: 2%
Result better than estimates, challenges continue
We maintain Hold rating on JK Cement with a price target of Rs185 due
to expensive valuations and bleak cement demand scenario putting
pressure on the margins in the grey cement business. Going forward,
the company is set to benefit from a) expansion in white cement
capacity of 0.6mt in UAE by March ’14 and b) expansion of grey cement
capacity of 3mt in the North region by Sept ’14. But, we remain
concerned on the deterioration of earnings quality of cement companies
led by lower demand which has put pressure on realization and impacted
their operational performance. In the quarter, profit was above our
estimates led by higher sales volume of grey cement, lower interest
cost and higher other income.
$ Lower profit from grey cement segment impacts performance: Revenue
of the company declined 1.8% YoY to Rs6.7bn led by 5.8% YoY decline in
grey cement revenue. Revenue from white cement was up 7.1% YoY during
the quarter. Led by sharp decline in operating profit of grey cement
(down 77.4% YoY), operating profit declined 45.3% YoY to Rs731mn.
Adjusted profit declined 80.3% YoY to Rs112mn.
$ Lower realization and higher operating costs impact grey cement’s
performance: Revenue from grey cement segment declined 5.8% YoY led by
10.1% YoY drop in realization. Sales volume of grey cement was up 4.8%
YoY. Led by sharp decline in realization, EBITDA of this segment
declined 77.4% YoY to Rs177mn. Operating cost for grey cement was up
3.4% YoY led by increase in energy and freight costs. OPM of grey
cement declined 12.5pp YoY to 4%.
$ Better performance continues for white cement segment: Revenue from
white cement segment increased 7.1% YoY led by 12.3% YoY increase in
sales volume. Sales volume of white cement increased 5.5% YoY and that
of Putty 23.4% YoY. Realization of this segment was down 4.6% YoY led
by decline in realization of Putty (due to pressure from local
players, as suggested by the management). EBITDA from this segment
increased 5.2% YoY. OPM declined 48bps YoY to 25.7% mainly due to a
fall in realization.
$ Valuation & Risks: The stock trades at 6.4x/4.8x FY15E/FY16E
EV/EBITDA. The near-term scenario for the grey cement business
continues to remain challenging and there has been steep volatility in
cement prices due to lacklustre demand. We maintain Hold rating with a
price target of Rs185, possible upside of 2%. Key upside risks could
be a) better cement realization and b) higher than expected sales
volume. Key downside risks could be a) lower sales volume and
continued lower utilization rate of the Karnataka plant b) lower than
expected realization of grey cement and c) delay in commissioning of
white cement capacity.
Thanks & Regards
--
Result better than estimates, challenges continue
We maintain Hold rating on JK Cement with a price target of Rs185 due
to expensive valuations and bleak cement demand scenario putting
pressure on the margins in the grey cement business. Going forward,
the company is set to benefit from a) expansion in white cement
capacity of 0.6mt in UAE by March ’14 and b) expansion of grey cement
capacity of 3mt in the North region by Sept ’14. But, we remain
concerned on the deterioration of earnings quality of cement companies
led by lower demand which has put pressure on realization and impacted
their operational performance. In the quarter, profit was above our
estimates led by higher sales volume of grey cement, lower interest
cost and higher other income.
$ Lower profit from grey cement segment impacts performance: Revenue
of the company declined 1.8% YoY to Rs6.7bn led by 5.8% YoY decline in
grey cement revenue. Revenue from white cement was up 7.1% YoY during
the quarter. Led by sharp decline in operating profit of grey cement
(down 77.4% YoY), operating profit declined 45.3% YoY to Rs731mn.
Adjusted profit declined 80.3% YoY to Rs112mn.
$ Lower realization and higher operating costs impact grey cement’s
performance: Revenue from grey cement segment declined 5.8% YoY led by
10.1% YoY drop in realization. Sales volume of grey cement was up 4.8%
YoY. Led by sharp decline in realization, EBITDA of this segment
declined 77.4% YoY to Rs177mn. Operating cost for grey cement was up
3.4% YoY led by increase in energy and freight costs. OPM of grey
cement declined 12.5pp YoY to 4%.
$ Better performance continues for white cement segment: Revenue from
white cement segment increased 7.1% YoY led by 12.3% YoY increase in
sales volume. Sales volume of white cement increased 5.5% YoY and that
of Putty 23.4% YoY. Realization of this segment was down 4.6% YoY led
by decline in realization of Putty (due to pressure from local
players, as suggested by the management). EBITDA from this segment
increased 5.2% YoY. OPM declined 48bps YoY to 25.7% mainly due to a
fall in realization.
$ Valuation & Risks: The stock trades at 6.4x/4.8x FY15E/FY16E
EV/EBITDA. The near-term scenario for the grey cement business
continues to remain challenging and there has been steep volatility in
cement prices due to lacklustre demand. We maintain Hold rating with a
price target of Rs185, possible upside of 2%. Key upside risks could
be a) better cement realization and b) higher than expected sales
volume. Key downside risks could be a) lower sales volume and
continued lower utilization rate of the Karnataka plant b) lower than
expected realization of grey cement and c) delay in commissioning of
white cement capacity.
Thanks & Regards
--
