Buy This Small-Cap Cement Stock For Target Price Of Rs 640 To Get 36% Robust Gains

Stock Outlook

The current market price (CMP) of the stock is Rs 470.75 apiece with the 52-week low of Rs 366.25 apiece, and the 52-week high of Rs 747.60 apiece, respectively. It has a market capitalization of Rs 5,539.32 crore.

Returns over the past 5 years

Over the past week, the stock of the company has given a negative return of 2.25%. Whereas, in in the past 1 month it gave a positive return of 2.35% and in the past 3 months, it gave 4.94% of positive return, respectively. Over the past 1 year, it gave a negative return of 33.02%. In the past 3 years, it has given a positive return of 44.67% and in the past 5 years, it has given a return of 6.95%, respectively.

Mixed quarter; higher realizations aid while cost pressures persist

JK Lakshmi Cement (JKLC) reported a mixed performance for 1QFY23 wherein consolidated revenue at ₹16.5bn improved by 24.8% YoY/3.4% QoQ while EBITDAloweredby0.6%YoY/20.9% QoQ to ₹2.6bn. The EBITDA/tn moderated by 11.4%QoQ while realizations bettered by 15.8% QoQ. PAT at ₹1.1bn declined by 15.4% YoY/39.5%QoQonlowerotherincome. The cost pressure continues to weigh on the performance, but the improved realizations majorly offset the effect of the same.

The higher cost inflation weighed on operational performance as EBITDAmargindippedto15.5% (-400bps YoY/480bps QoQ). The overall cost at ₹4,757.5/tn increasedby18.6%YoY/22.8% QoQ while P&F cost at ₹1,546/tn soared by 39.9%YoY/38.2%QoQ.Consequently, EBITDA/tn at ₹874.5 lowered by 11.4% QoQ. The improved operational efficiencies, better product mix & higher sale of premium products partially offset the cost inflation.

In terms of fuel mix, coal accounted for 46%, petcoke accounted for 41%, &13%other alternative fuels. The P&F costs are expected to increase by another 20%QoQfor 2QFY23.

Business Update

JKLC has devised a multi-tier blueprint aiming on reducing costs: 1) It has managed to beself-sufficient in power through Captive Power Plant (CPP) of 54MW, waste heat recovery plant of 33MW, and Solar Power Plant of 6MW. 2)To tune down freight costs, JKL Chasadded 0.8MT grinding unit in Odisha. 3) It has the consequential benefits of its proximity to market. 4) In the Eastern Zone, the company has commissioned CPP of 20MW to be self-sufficient.

Investment Rationale

Gross debt, on a consolidated/standalone basis, stood at ₹18bn & ₹9.2bn while net debt stood at ₹6.5bn/₹15.2bn respectively. While at the company, there are no expansions currently, UCWL is currently undergoing an expansion with a capex outlay of ₹16.5bn. For this project, the company has already expended ₹3.50bn & the remaining capex is expected to be spent over the next two years. The company plans to finance 2.5MTcement and1.5MTclinker capacities through a debt-to-equity ratio of 2:1. For this purpose, the financial closure with the bank has already been implemented, with a loan tenure of 15yrs. The manage mentaims to scale the production capacities to 30MTPA by FY30 with thrust over the use of green energy (80%).

Major portion of operating region recorded increase in cement prices during April &May and demand improved in July-22. The seasonality led to price moderation in Western and Northern markets that expected to show improvement in coming months due to improving demand.

Valuation

JKLC aims to scale its production capacity to 30MTPA during the decade with thrust over higher use of green energy. The ongoing capacity expansion projects are well on course which will lead into overall operational efficiency improvement. The management has accelerated the efforts to deleverage its BS. The WHRS plants, improving fuel mix & any moderation in input costs are expected to auger well for higher EBITDA/tn (JKLC's target range of ₹850-900/tn). "We retain our BUY rating on the stock with a target price of ₹640, valuing it at 8xFY24 EV/EBITDA," the brokerage said.

Risks

Power and Fuel prices are expected to rise by 20% in Q2FY23, surmounting the already existing cost pressure in the company.

About - JK Lakshmi Cement Ltd.

JK Lakshmi Cements (JKLC) is a north Indian Cement player, established in 1982. JKLC has clinker units in Sirohi, Rajasthan and grinding units in Rajasthan, Gujarat and Haryana. The current clinker capacity is 7.8 MTPA and cement capacity is 13.9 MTPA. JKLC derives sales volume from the northern and western regions. The company has market share of ~6-7% in the northern region and ~9-10% in western regions. JKLC is on the spree of capacity expansion; recently commenced Durg Plant (2.7 MMT), plans for another 1.6 MTPA capacity at Cuttak and Surat also reviving its defunct unit

Disclaimer

The stock has been picked from the brokerage report of Chola Wealth Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.