Analysis

The timely capacity additions in the northern, central and western India markets will boost grey cement volume growth. We can expect the capacity expansion and higher infra spends to propel revenues over the next couple of years. The steady demand for putty and rising exports from the UAE plants to south India and African countries has improved volume growth visibility. 

JK Cement Ltd. is a part of the industrial conglomerate JK Organization. With over 40 years of experience in cement manufacturing, it has emerged as the second largest manufacturer of white cement in India. It is also the second largest producer of wall putty in India with an annual installed capacity of 700,000 tonnes. The company’s installed grey cement capacity has reached 10.5 million TPA, rendering it one of the leading cement manufacturers in the country. JK Cement has forayed into the international market by setting up a greenfield dual process white cementcum-grey cement plant in the free trade zone in Fujairah. This enables it to serve the GCC countries and the African markets.

Industry Outlook 

India is the world’s second largest cement market, both in terms of production and consumption. According to Cement Manufacturers Association (CMA), the industry witnessed 14 per cent growth in H1FY19 – making it the first double digit growth since 2009-2010. With a decline in government spending and delays in the release of state funds ahead of India’s general election, there was a slowdown in the growth of demand for Indian cement in the period between April and May 2019. Nevertheless, the hike in cement prices persisted throughout May 2019 with a growth of 3.2 per cent MoM. This can be attributed to the price hikes in the North (+8.6 per cent), East (+4.7 per cent) and West (+2.8 per cent). Meanwhile, the southern and central regions experienced a more stable to moderately positive trend in May 2019. The production of cement rose an impressive 16 per cent YoY in March 2019 (+13.3 per cent in FY19). This was triggered by the rise in demand from the infrastructure segment. The benefits of moderation in pet-coke, coal and diesel have started accruing to the companies operating in the cement industry. Moving forward, especially with the monsoon season just around the corner, the sustainability of the price hikes will propel further upgrades. Based on a comprehensive regional analysis by a leading research firm, the southern region has the maximum demand for cement. India’s cement production capacity is expected to reach 550 million tonnes by 2025. The cement industry endeavours to lower its carbon footprint by 45 per cent by the year 2050. As such, all the cement players are adopting the best possible environmental practices in order to adhere to the stringent environmental standards. 

Financial Performance

For the quarter ended March 2019, the sales volume improved 6 per cent YoY to 28.79 lakh MT from 27.20 lakh MT. Thus, the company reported total income from operations of Rs.1,491.91 crore as against Rs.1,315.95 crore in Q4FY18, posting a growth of 13.37 per cent. EBITDA stood at Rs.279.47 crore in Q4FY19 versus Rs.181.92 crore in Q4FY18, an increase of 53.62 per cent. As a result, the EBITDA margin expanded 37 per cent YoY to 19 per cent in Q4FY19 versus 13.91 per cent in Q4FY18. The net profit came in at Rs.149.97 crore in Q4FY19 in comparison to Rs.96.45 crore in Q4FY18, registering an increase of 55.49 per cent. Thus, EPS rose to Rs.19.41 in Q4FY19 from Rs.13.79 in Q4FY18, thereby rising 40.75 per cent. 

For the year ended March 31, 2019, total income from operations stood at Rs.5,258.68 crore in FY19 as compared to Rs.4,846.32 crore in FY18, posting an increase of 8.51 per cent. EBITDA was reported at Rs.810.12 crore in FY19 versus Rs.760.66 crore in FY18, posting a growth of 7 per cent. Nevertheless, EBITDA margin declined 2 per cent YoY to 16.47 per cent in FY19 versus 16.75 per cent in FY18. Net profit plummeted by 7.69 per cent to Rs.263.63 crore in FY19 from Rs.285.59 crore in FY18. As a result, EPS spiralled down to Rs.36.74 in FY19 from Rs.41.41 in FY18, thereby sinking 11.28 per cent. The debt-to-equity (D/E) ratio stood at 0.44 in FY19 as compared to 0.78 in FY18. The price-to-earnings (P/E) multiple stood at 27.8x in FY19 as against 24.4x in FY18. The return on equity (RoE) stood at 11.3 per cent in FY19 in comparison to 16.3 per cent in FY18. 

Operating Performance 

JK Cement delivered strong operational performance in Q4FY19, driven by total volume growth of 5.8 per cent YoY and healthy growth of 7.1 per cent YoY in realisations. The volume growth was driven by around 5.5 per cent YoY growth in grey cement volumes owing to good growth and price recovery. As a result, grey cement constituted 73 per cent of total revenue in Q4FY19. During the quarter, the overall grey cement capacity utilisation increased to 96 per cent as compared to 92 per cent YoY and 82 per cent QoQ. The improvement in realisations is attributable to higher prices in the south and a change in the sales mix in the north. Furthermore, the company undertook two price hikes totalling Rs. 30 to Rs.40 per bag in April and May 2019. However, the lower volume offtake during this period arrested volume growth. JK Cement’s subsidiary in UAE also delivered healthy volume growth of 39 per cent YoY. The prudent cost controls measures and operatFor the year ended March 31, 2019, total income from operations stood ing leverage arrested growth in opex to 1 per cent and offset the impact of higher energy costs. The company’s efforts to optimise freight costs translated into benefits of around Rs.50/tonne. The management expects to realise further benefits to the tune of Rs.30/tonne. Thus, backed by higher realisations and lower freight costs, EBITDA margin expanded 491 bps YoY to 18.7 per cent. Other income showcased a tremendous improvement of 196 per cent QoQ to Rs.35 crore in Q4FY19 as against Rs.12 crore in Q3FY19. Even the finance costs dropped 5 per cent QoQ to Rs.53 crore in Q4FY19 from Rs.56 crore in Q4FY18. On the other hand, the PAT was dragged down on account of lower other income and higher tax rate. The losses reported by the UAE subsidiary too contributed to the decline in profits for FY19. The topline growth in the North was subdued due to clinker constraints. 

Growth Drivers 

In response to the clinker constraints in North, the management declared its plans for capacity expansion in line with market demand across the country. The new clinker line with a capacity of 7500 TPD is expected to be commissioned by September 2019. Moreover, the brownfield expansion of 1 MT each at the Nimbahera and Mangrol grinding units (GUs) will be commissioned by H1FY20. The greenfield GUs at Aligarh and Balasinor are also likely to be completed in FY20. After incurring capital expenditure of Rs. 550 crore in FY19, the company intends to spend Rs.1,200 crore in FY20. It also aspires to set up a cement unit in Madhya Pradesh and the same is presently at a preliminary stage. Around 300 acres of land has already been acquired for this purpose, with an additional 200 acres expected to be acquired in FY20. Over the course of the next two years, the brownfield expansion planned in Rajasthan will remain a key focus area. 

The company has already placed major orders for equipments, some of which have already reached the site. It has also acquired land and mining leases in central India. However, the project in Rajasthan has precedence over this. Presently, the trade and non-trade mix stands at 68:32. The management is focusing on expanding JK Cement’s presence in the trade segment. This is because the trade segment has improved in terms of better volumes and realisation in H2FY19. The higher truck axle load limit resulted in lower logistic costs. The management aspires to further reduce logistic costs and achieve additional savings of Rs.50 to 60/tonne. 

Strengths 

The company’s manufacturing facilities are adjacent to large reserves of highquality limestone and core northern and southern markets. In order to provide long-term sustained source of low-cost power, JK Cement is engaged in captive power generation. It is making constant additions to its portfolio of value-added products.Risks The company will have to raise debt in order to expand its capacities. This could bring the gross debt level to Rs.3,200 crore in FY20. As of March 31, 2019, the gross debt stands at Rs. 2,199 crore, while the net debt level is at Rs.1,261 crore. Conclusion The timely capacity additions in the northern, central and western India markets will boost grey cement volume growth. We can expect the capacity expansion and higher infra spends to propel revenues over the next couple of years. The steady demand for putty and rising exports from the UAE plants to south India and African countries has improved volume growth visibility. The strong price and cost tailwinds will boost margins in the upcoming quarters. JK Cement intends to turnaround its UAE subsidiary by exporting white cement to South India and African countries. The company’s cash position has improved to Rs.938 crore in FY19 from Rs.562 crore in FY18. By virtue of these factors, we have an optimistic view on the company’s future prospects. Thus, we urge our reader-investors to BUY the stock of JK Cement.

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