Capacity expansion to drive growth: JK Cement (JKCem), a JK organization group company, has a grey cement capacity of 10.5mtpa catering to the markets of North, West and South regions of India. 7.5mtpa of its plant capacity is located in the North region (Rajasthan and Haryana) and the remaining 3mtpa is located in the South region (Karnataka). This includes newly added capacity of 3mtpa in North India, comprising of 1.5mtpa split grinding unit each in Haryana and Rajasthan, translating into an increase in capacity by 40%. JKCem started production from these newly set up units during 1HFY2015. We expect production from these new plants to ramp up during FY2016. The Management guided that new plants’ utilization levels will reach 85%+ in the next two years. The company’s North India plant (excluding new plant) is operating at 90% capacity utilisation. Industry capacity expansion in the North region is expected to slow down going forward to 4.5% (CAGR) over FY2014-17 period as against the earlier capacity expansion rate of 5.8% CAGR over the FY2010-14 period. Hence we believe that the output from JKCem’s new capacities (3mtpa) would be absorbed by the market. We expect JKCem’s volume to grow at 16.4% CAGR during FY2014-17 on account of the expanded capacity.
Top 2 players in White cement business: JKCem has white cement capacity of 0.6mtpa in Gotan, Rajasthan. There are only two major players manufacturing white cement, one being JK Cem itself and the other being UltraTech Cement. Thus the utilization level is healthy led by stable demand for white cement. White cement contributed 31% to the top-line of JKCem in FY2014. White cement’s EBITDA margins are higher and consistent at 25-28%, while the margins in grey cement have been volatile over the years. The company has doubled its white cement capacity to 1.2mtpa by starting production at the 0.6mtpa plant in UAE. We expect white cement standalone business volume to grow at a CAGR of 7.0% over FY2014-17 period.
Valuation: At CMP of Rs673 the stock is trading at 10.4x and 7.7x its FY2016E and FY2017E EV/EBITDA (blended), respectively. We initiate coverage on JK Cement with a Buy recommendation and target price of Rs778 based on 8.0x grey cement and 9.0x white cement FY2017 EV/EBIDTA; the target price implies EV/tonne of $100 (on blended capacity of 11.6mtpa).

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