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JK Cement strikes the right note with investors
Summary
The mid-cap cement manufacturer delivered stellar performance in the March quarter (Q4FY23) on many counts. Healthy sales volume is a factor that stands out with growth at 16% year-on-year (y-o-y) to 4.67 million tonnes.JK Cement Ltd investors are in a mood to rejoice. The mid-cap cement manufacturer delivered stellar performance in the March quarter (Q4FY23) on many counts. Healthy sales volume is a factor that stands out with growth at 16% year-on-year (y-o-y) to 4.67 million tonnes. This was aided by the faster ramp-up of the Panna integrated unit situated in Madhya Pradesh. It is worth noting that in its first full quarter of operations, the recently commissioned Panna facility achieved 60% utilization and also turned Ebitda-positive, the management said in the earnings call.
Lately, cement companies are going full throttle on capacity additions. Amid robust demand and rising competition, the chase for volume growth and thereby market share gains is getting intense. In this backdrop, JK Cement’s thrust on capacity additions bodes well for investor confidence.
Last quarter, JK Cement completed debottlenecking of 2 million tonnes per annum at its existing plants. Further, greenfield units at Ujjain and Prayagraj are expected to be commissioned in FY24 and Q2FY25 respectively.Going ahead, the company eyes double-digit market share in its core markets of central and north India, management said. Company plans capital expenditure of ₹1,200-1,400 crore for FY24 and ₹700-800 crore for FY25.
Cement demand growth is expected to be supported by increased government focus on infrastructure spending, in a pre-election year. In Q1FY24, industry growth is expected to be near 10% y-o-y, but JK Cement could grow at a higher rate, supported by capacity additions and higher utilization from Panna expansion, the management said. In FY24, its mainstay grey cement business is expected to see a y-o-y volume growth of around 15%.
With this, volume growth should be in good stead. However, pricing remains a pain point for the cement sector, clouding the outlook on realization. Currently, cement prices are flat or marginally negative versus Q4FY23 exit, the management said. They see a probability of price hikes only post the monsoon season. Further, with easing fuel costs, the company has guided for Ebitda/tonne of ₹1,000 in H2FY24.
“JK Cement’s timely capacity expansion is positive, but pace of margin recovery is crucial," said Rajesh Ravi, institutional analyst, cement, HDFC Securities Ltd. While in Q4, consolidated Ebitda/tonne improved sequentially by around ₹150 to ₹751, aided by fuel cost reduction and operating leverage gains, margin in white cement business has come off to sub-20% versus 25%+ pre-covid, thus restricting blended margin upside, he added.
Further, JK Cement’s recent foray into the highly competitive paint business needs to be monitored. According to the management, its paint business revenue would be ₹150-180 crore in FY24 and ₹270-300 crore in FY25. It has guided for a gross margin of 28-30%, in-line with the industry. However, the management expects an operating loss in the initial period mainly due to spends toward brand building. The company is not looking at more than ₹50-60 crore for FY24 as investment expenditure in paints, management said.
For now, the company appears to be striking the right notes with investors in the cement business. JK Cement’s shares have hit a new 52-week high of ₹3,290 on NSE on Tuesday. In last one year, the stock has rallied by 35%, outperforming Nifty 500 index. Following this up move, valuation offers limited comfort. “While we continue to like strong growth prospects of the company, we believe that the growth is reflecting in (EV/Ebitda) valuations at 12.5x FY25, post the sustained run up in the stock," said a Jefferies India report.
