Buy This Small-Cap Cement Stock For 54% Potential Gains: HDFC Securities

Stock Outlook & Returns

On Friday, the stock of the company gained 1.28% and ends at Rs 442.45 apiece. As of now, the share is trading at Rs 76.2 above the 52-week low levels and Rs 373.55 below the 52-week high levels, respectively.

Its 52-week low was recorded at Rs 366.25 apiece on March 17, 2022, and its 52-week high was recorded at Rs 816 apiece on July 29, 2021, respectively. The PE ratio is 11.74. The P/B ratio is 2.06. TTM EPS is Rs 37.68. ROE is 18.50%.

Over the years, the shares of the company have performed well and have given decent returns to shareholders. In the past 1 week, it declined nearly 3.95%, and gained 5.26% in past 1 month, respectively. In 1 year and 3 years, it has given mixed returns, In 1 year it gave a negative return of 39.8%, and 3 years gave a positive return of 30.4%. In the past 5 years, its share has fallen roughly 0.19%.

Q1FY23 performance

While consolidated sales volume fell 8% QoQ (seasonal impact), it grew 7% YoY on a low base. NSR jumped 16/12% YoY/QoQ, mainly led by healthy pricing gain across north markets and owing to the increased share of non-cement revenue and fall in clinker sales. Adjusted for both these, grey cement NSR rose ~8/10% YoY/QoQ, in our view. JK Lakshmi Cement's increased usage of imported coal (at the expense of lower-cost pet coke) drove up its fuel costs by 30% QoQ, negating the robust pricing gain, moderating unitary EBITDA to Rs 847/MT (down 7/14% YoY/QoQ).

Outlook

Fuel cost is expected to rise by above 20% QoQ in Q2 due to increased dependence on imported coal. The company expects a cool-off from Q3 onwards. The company is targeting to expand the share of trade sales from 55% in FY22 to 60% by the end of FY23, increase sales of premium cement and also reduce its lead distance, all of which should help cushion the impact of energy inflation. Construction work for the Udaipur plant has started and the company expects the integrated plant to be commissioned by FY24 end. Capex estimate for this project remains unchanged at INR 16.5bn: of this, the company has spent Rs 3.5bn so far and the rest will be spread over until FY24. JK Lakshmi Cement's capacity will increase to 16mn MT on full commissioning of this project (18% increase over FY22) and boost its volume growth from FY25 onwards. We maintain our earnings estimates for FY23/24E. In our view, JK Lakshmi Cement's consolidated net debt/EBITDA should remain comfortable under 1.5x, despite this expansion.

HDFC Securities Suggests Buy For A Target Price of Rs 680 apiece

Commenting on the valuation, the brokerage said, "We maintain our BUY rating on JK Lakshmi Cement (JKLC) with an unchanged target price of Rs 680/share (8x Mar-24E consolidated EBITDA). We hold on to our thesis: its current low gearing and healthy cash flow would support its planned Udaipur expansion, without stressing its balance sheet and keeping the ROE buoyant. In Q1FY23, while the company witnessed robust pricing QoQ, the same proved insufficient to pass on the soaring fuel price increase and unitary EBITDA cooled off to Rs 847 per MT (-14% QoQ). Net debt on books remained flattish QoQ, even as its Udaipur plant expansion has gained pace (due for commissioning in FY24 end). Mr Arun Shukla has been inducted to the board of directors and elevated to CEO of the company after the retirement of Mr Sushil Wali and Mr Shailesh Chouksey w.e.f. Aug-22."