JK Lakshmi Cement – 2QFY2011 Result Update Angel Broking

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

 JK Lakshmi Cement – 2QFY2011 Result Update

Angel Broking maintains a Buy on JK Lakshmi Cement  with a Target Price of Rs92.

For 2QFY2011, JK Lakshmi (JKLC) posted a 2,314bp yoy decline in operating
margin to 10.4% due to a fall in realisations and a steep 62% yoy increase in
per tonne power and fuel costs, due to higher coal prices. Going ahead, we
expect JKLC to face relatively less pricing pressure post the recent price hike
and the pick-up in demand post monsoons. JKLC is currently trading at
US $39/tonne based on FY2012E capacity, at a valuation lower than its peers
and well below its replacement cost. Hence, we maintain Buy on the stock.


PAT down by 87.8% yoy due to lower realisations, higher power cost: JKLC’s
2QFY2011 top line fell by 23.0% yoy to `266cr. The decline was due to a
13.7% drop in despatches to 0.82mn tonnes coupled with lower realisations,
due to low demand in the northern and western regions, the company’s
major markets. On the operating front, OPM fell by 2,314bp yoy to 10.4%,
primarily due to lower realisations and a substantial increase in power costs.
On the bottom-line front, net profit declined by 87.8% yoy to `6cr.

Outlook and valuation: We expect JKLC to post a modest 2.3% CAGR in top
line over FY2010–12E, aided by a 6% CAGR in despatches over the period.
Going ahead, we expect realisations to improve, aided by better demand
post the cessation of monsoons. JKLC is currently trading at US $39/tonne on
FY2012E capacity, 50% below its replacement cost. We have valued JKLC at
an average target EV/EBITDA of 5.5x and EV/tonne of US $55 to arrive at a
fair value of `92, which is still at a discount to its replacement cost.
We maintain Buy on the stock with a Target Price of `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 66MW 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: As of 1HFY2011, JKLC’s debt stood at `1,004cr, of which
~`100cr is on account of deferred sales tax (interest free). The company’s cash
and liquid investments stand at ~`500cr. Thus, JKLC’s balance sheet is well
placed, with net debt/equity of 0.4x, which could enable smooth execution of the
company’s expansion plans of 2.7mtpa.


Outlook and valuation
We expect JKLC to post a modest 2.3% CAGR in top line over FY2010–12E, aided
by a 6% CAGR in despatches over the period. We expect realisations to improve
going ahead, aided by better demand post the cessation of monsoons. JKLC is
currently trading at US $39/tonne on FY2012E capacity, at ~50% below its
replacement cost. Even on relative terms, the company is trading at a huge ~50%
discount to the valuation of other mid-cap players. We have valued JKLC at an
average target EV/EBITDA of 5.5x and EV/tonne of US $55 on FY2012E estimates
to arrive at a fair value of `92 (implying 53% upside from current levels), which is
still at a discount to its replacement cost. Hence, we maintain Buy on the stock with
a Target Price of `92.