Home / Markets / Mark To Market /  Why JK Cement can’t rest on Q1 laurels

The availability of low-cost inventory saved the day for JK Cement Ltd in the June quarter. As a result, standalone Ebitda at 400.1 crore in Q1FY23 exceeded the estimates of analysts. Ebitda is short for earnings before interest, tax, depreciation and amortization. At a time when many cement manufacturers are struggling with high input costs, JK Cement’s relatively lower operating expense provided some relief to its investors.

Unfortunately, the benefit of low-cost inventory would wane soon.

The company’s management expects the impact of high-cost fuel inventory to reflect in the September quarter, thus weighing on its profitability. Investors would also closely monitor its expansion plans.

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JK Cement aims to add capacities of 4 million tonnes per annum (mtpa) in central India by Q3FY23. The company targets to reach 25 mtpa capacity by FY25. “Increased diversification in central India, attractive regional prices, and demand growth prospects make the expansion project value-accretive," said analysts at Kotak Institutional Equities.

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A timely ramp-up of these units is crucial for a boost in volume growth, especially when peers are also adding capacities in this region.

However, after the recent run-up in the stock’s price, valuation has become expensive, especially given the weak performance of its white cement business and concern of higher cash burn in the initial phase of its paint venture.

The company’s shares hit a 52-week low of 2,003.70 on 23 June 2022. From those levels, the stock has rallied 37% in just two months. Analysts said this rally has more to do with market sentiment turning in favour of the cement sector as costs are easing, than just company-specific factors.

Bloomberg data shows that the stock is trading at FY24 EV/Ebitda of 12x. EV is short for enterprise value.

“While JK Cement has been doing very well in its grey cement business, delivering both capacity and margin expansion, the white cement business is witnessing increased competition from paint companies, dragging its margin and profit contribution," said analyst Rajesh Ravi, institutional research, HDFC Securities.

JK Cement’s recent foray into the highly competitive paints business may also drag its profitability and this should restrict valuation re-rating, he said.

Meanwhile, the company’s management said that it is setting up a paint plant in Uttar Pradesh that will be commissioned by the end of FY24. The company will incur total capital expenditure of 600 crore for the paints business over five years.

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