JK Lakshmi Cement has the recipe for revival, but execution is key

Weak cement prices in key operating markets led to a steeper-than-anticipated fall in realizations. (Image: Pixabay)
Weak cement prices in key operating markets led to a steeper-than-anticipated fall in realizations. (Image: Pixabay)

Summary

  • After a solid Q4FY24, a mixed Q1FY25 show was a dampener for JK Lakhsmi, raising concerns among investors. The company is focusing on cost-saving measures and capacity expansions, but will it be enough to boost performance?

Shares of JK Lakshmi Cement Ltd have declined about 13% so far in 2024, significantly lagging the Nifty 500 index’s 21% rally. The company is facing a slew of challenges, and for the trend to reverse, many factors need to align.

True, the June quarter (Q1FY25) was a tough one for the entire sector mainly due to subdued prices and impact on demand owing to elections-led disruption. But after a solid Q4FY24, a mixed Q1FY25 show was a dampener for JK Lakshmi. Consolidated volume growth was flat year-on-year at around 3.04 million tonne versus industry growth of 3-4%. Weak cement prices in key operating markets led to a steeper-than-anticipated fall in realizations, leading to cuts in FY25 earnings estimates. 

Sure, the company’s focus on cost-saving measures, such as higher use of alternative fuels and increasing thrust on green energy in the last year, is positive. Backed by these, the management expects further cost savings of 50-75 per tonne going ahead. The company is simplifying its corporate structure by consolidating subsidiaries. This is expected to boost cash flow and drive efficiencies in manufacturing, distribution, and logistics in the medium term.

Expansion plans

The next leg of growth can come from expansions in the east and northeast. It aims to raise the grinding capacity to 30 million tonne per annum (mtpa) from 16.4 mtpa currently. The fight for market share gains has made timely capacity additions a crucial trigger for many cement stocks. 

JK Lakshmi’s capacity expansion may keep its debt elevated. The accelerated capital expenditure (capex) plan could push net debt to 3,000 crore in the medium-term from 1,640 crore as of June-end, estimates Motilal Oswal Financial Services. “However, its net debt-to-Ebitda ratio is likely to be comfortable at <2.0x by FY27," said the brokerage. In Q1FY25, JK Lakshmi’s consolidated capex was 150 crore with an expected spending of 1,500-1,600 crore in the remainder of FY25.

Also Read: This indicator shows why cement companies have a rough road ahead

Nirmal Bang Institutional Equities expects JK Lakshmi Cement to report revenue, Ebitda and profit after tax CAGR (compound annual growth rate) of 10%, 17% and 23% respectively over FY24-FY26E. The brokerage has valued JK Lakshmi stock at nine times its June 2026 estimated EV/Ebitda with a revised target price of 912, underpinned by strategic positioning in the key north, west and east markets. JK Lakshmi’s shares now trade at 785 apiece. 

All said, execution in capex and ramping up new capacities could be challenging due to increased competitive intensity. The pace of revival in the stock’s performance hinges on how that pans out. If the company manages to clock decent earnings growth amid the industry's changing dynamics, it may gain some brownie points from investors. 

Also Read: Mint Primer | Mining minerals: Could cement & steel get dearer?

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