Depending on how the lockdown situation unfolds, the company may announce an expansion of 2.5 million tonnes per annum brownfield project by next quarter
JK Lakshmi Cement Ltd’s leverage has begun to worry analysts, with some of them valuing it at a slight discount to its historical average. The company plans to address this concern, and has aimed to repay its debt of ₹400 crore over FY21 and FY22.
At the end of the June quarter, its standalone gross debt stood at ₹1,500 crore and net debt was at ₹800 crore. Given the short-term challenges on demand and pricing fronts, meeting this target will be a tall ask, said analysts.
In a post-earnings conference call, the management said its expansion plan in the north has been put on hold for now. Depending on how the lockdown situation unfolds, it may announce an expansion of 2.5 million tonnes per annum (MTPA) brownfield project by next quarter.
Analysts cautioned that the increase in capital expenditure will keep debt elevated. Also, the balance sheet will remain under pressure in the initial phase till capacity stabilizes at this plant.
It should be noted that competitors are ramping up capacities in the north, so JK Lakshmi Cement may not be able to benefit from any potential demand improvement.
As a result of the increased competition, it may end up losing market share and volumes. The management expects volumes to be flat in FY21 year-on-year.
Moreover, realizations are anticipated to be muted, hit by oversupply in eastern India and severe competition in the western markets. It gets more than 50% volumes from the east, followed by the west and north.
Dealers channel check by Kotak Institutional Equities showed that cement prices in the east declined by ₹3 per bag to ₹338 in August.
“Heavy rainfall in the region led to a fall in rural demand. Moreover, increasing spread of covid-19 in the region has led to stringent lockdowns hampering construction activity. Shortage of migrant labour and the onset of festive season are also impacting demand. Dealers expect trade prices to remain under pressure in the near-term," said the Kotak report on 24 August.
September is a seasonally weak quarter for the sector, so realizations will be subdued in this quarter as well.
Additionally, its practice of lending to the holding company, although limited to ₹40 crore, adds to the discomfort, analysts said. As per the management, this money was placed via inter-corporate deposit of the group company for a period of one year ended August. The company may redeploy it in the similar instrument next year, it added.
The stock trades at a one-year forward EV/Ebitda of around 5 times, shows Bloomberg’s estimates. EV stands for enterprise value. Ebitda is short for earnings before interest, tax, depreciation and amortization.
Given its leveraged balance sheet and unfavourable geographical mix, valuations may not improve in a hurry.
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