JK Lakshmi, Capacity expansion to drive growth… :: ICICI Securities, report

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Capacity expansion to drive growth… • Revenues for Q3FY15 rose 10.6% YoY (down 2.9% QoQ) to | 555.9 crore (vs. I-direct estimate: | 578.4 crore). The lower sales growth was mainly due to the lower realisation growth during the quarter • As a result, the EBITDA margin of 13.6% (up 94 bps YoY) remained below our estimated margin of 15% for the quarter. In absolute terms, the company reported EBITDA of | 75.4 crore (up 18.9% YoY) and EBITDA/tonne of | 501/tonne, which was lower than our estimated EBITDA of | 86.6 crore and EBITDA/tonne of | 580/tonne • While the adjusted profit of | 28.5 crore came in ahead of our estimates due to lower depreciation charge on account of changes in the accounting policy, net profit was lower at | 18.5 crore due to excess provisioning of | 10 crore pertaining to sales tax exemption demand notice from sales tax authorities One of the most efficient players in cement midcap space JK Lakshmi Cement is one of the most cost efficient players in the industry. It has been operating close to ~100% capacity utilisation for the last three years with healthy operating margins vs. industry. Its cost efficiency emanates from high usage of alternate fuel (pet coke), logistic advantage led by expansion strategy through split grinding unit and self sufficiency in power. Its per tonne power consumption remains best in the industry with usage of 72 Kwhr/tonne against industry norms of 90-95 Kwhr/tonne. Its fuel consumption is also lower at 706 kcal/kg for the company against industry norms of 800 kcal/kg. The company has also more than 100% low cost power availability for its plants. Due to this operational efficiency, P&F cost has remained lower for the company. Healthy expansion plans to fuel growth in future We expect JK Lakshmi to report healthy revenue CAGR of over 27.1% in the next three years led by capacity expansion and healthy demand in the northern region (to add 3.4 MT capacity i.e. 56% of its existing capacity over the next two years) coupled with operating efficiency leading to better volume growth and higher profitability. The company’s ongoing greenfield project at Durg is expected to come on stream by the end of Q4FY15E. Apart from this, the company is expanding its grinding capacity by 7.0 lakh tonne per annum at Gujarat. Both projects are expected to be complete by the end of FY15E and FY16E, respectively, leading to total capacity of 9.3 MT in FY15E, 10.0 MT in FY16E and 10.8MT by FY17E from current capacity of 6.6 MT. Expect D/E to remain in comfort zone despite aggressive expansion We expect the net debt-equity ratio to remain in a comfortable zone (i.e. below 1.0x) despite aggressive expansion undertaken by the company. As per our estimates, we expect the company to generate free operating cash flow of ~| 490 crore each over the next three years, which will be sufficient to fund the balance pending capex. Timely commissioning of new capacity remains key value driver On the back of expansions and improvement in demand, we expect volume CAGR of 20.6% (vs. ~9.3% during FY11-14) in FY14-17E to 9.8 MT. We expect cement EBITDA of | 644/tonne in FY16E and | 690/tonne in FY17E vs. | 537/tonne in FY14 due to favourable demand-supply matrix in North India. Further, better cost efficiencies remain key positives for the company. Hence, we maintain BUY recommendation on the stock with a target price | 458/share (i.e. at 10.0x FY17E EV/EBITDA, $105/tonne on FY17E capacity of 10.8 MT).

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