Buy JK Lakshmi Cement; target of Rs 495: ICICI Direct
ICICI Direct’s research report on JK Lakshmi Cement
JK Lakshmi Cement reported a mixed set of Q2FY18 numbers. While revenues were above our estimates, margins and PAT remained below our expectations. Revenues increased 18.5% YoY to Rs 776.7 crore (below I-direct estimate of Rs 719.4 crore) led by 10% YoY increase in volume to 1.9 MT (vs. I-direct estimate of 1.9 MT) mainly due to healthy demand in the company’s key markets. Realisation increased 7.7% YoY at Rs 4,110/t (vs. I-direct estimate of Rs 3,868/t) EBITDA/tonne fell 7.4% YoY to Rs 505/tonne (vs I-direct estimate of Rs 516/t) mainly led by higher power & fuel cost/t (up 40.1% YoY driven by higher pet coke prices) & 18.6% YoY increase in freight cost/t PAT declined 46.9% YoY to Rs 13.2 crore.
The government’s focus on construction of roads (83,677 km to be built over the next five years) and affordable housing (~2.2 crore houses to be built over the next two or three years) bodes well for cement demand. Further, the company’s exposure to high growth regions like north and east is expected to result in healthy volume growth over FY17-19E. A revival in cement demand coupled with capacity expansion is expected to result in 17.1% CAGR in revenues in FY17-19E. Further, cost control initiatives like setting up of a grinding unit, captive power plant, WHRMS and conveyor belt at Durg are expected to drive margins in FY17-19E. We expect OPM to improve from 12.3% in FY17 to 15.3% in FY19E. This coupled with the recent correction in the stock prompts us to upgrade the stock from HOLD to BUY with a target price of Rs 495/share (i.e. at $ 88/tonne on FY19E capacity of 13.0 MT).
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