Motilal Oswal has recommended buying the stocks of JK Lakshmi Cement for returns upto 40% and Granules India for returns upto 23%. The financial services and heavily backed equity research firm sees good upside potential in both these stocks.
Buy J K Lakshmi Cement for upto 40% returns
Motilal Oswal has set a target of Rs 590 on the stock of JK Lakshmi Cement. "Higher volumes (13% above our estimate) and lower costs (-9% QoQ and 10% lower than our estimate) helped J K Lakshmi Cement post an EBITDA of INR2.8b (est. INR1.8b) and EBITDA/t of Rs 879 (estimated Rs 636). Adjusted profit (adjusted for deferred taxes) stood at Rs 1.13 billion (estimates Rs 897m). A sharp reduction in other expense was due to lower fixed and ad spends
"Cement capacity expansion of 2.5mtpa at subsidiary UCWL will raise its exposure to North India. In FY22, it increased UCWL's capacity to 2.2mtpa from 1.6mtpa through debottlenecking. J K Lakshmi Cement has been awarded two limestone blocks in central Rajasthan and coastal Gujarat. The management believes each of these mines can support at least 5mtpa of capacity over the next 40-50 years," Motilal Oswal has said in its report.
Realisation below estimates
In FY22, higher OPEX (up 10% YoY) restricted EBITDA growth to a mere 1% YoY to INR8b, even though realization/sales volume each rose 7% YoY. EBITDA/t stood at INR758 v/s INR799 in FY21. The increase in working capital led to a decline in CFO/FCF to INR5.4b/INR4.3b v/s INR8.6b/INR7.4b in FY21. Standalone net debt stood at INR760m v/s INR4b in FY21.
"The stock trades at 5.2x/4x FY23E/FY24E EV/EBITDA. We value JKLC at 7x FY24E EV/EBITDA to arrive at our target price of Rs 590 for J K Lakshmi Cement. We maintain our Buy rating," Motilal Oswal has said.
Granules India is another stock that Motilal Oswal has a buy call on for returns of upto 23%. Granules sales grew 29% YoY to Rs 10.3 billion (estimated Rs 10.5 billion), driven by Intermediates (PFIs; up 78.3% YoY to Rs 2.6 billion) and APIs (up 27.7% YoY to INR2.5b). Formulation (FDF) sales grew 14% YoY Rs 5.3 billion for the quarter. Gross margin contracted ~830bp YoY to 48.9% due to higher raw material prices, particularly related to paracetamol.
EBITDA margin contracted at a slightly lower rate of 660 basis points YoY to 18.7% (estimated 17.2%). Higher raw materials cost was partially offset by lower employee expenses (-200bp YoY as a percentage of sales).
Motilal Oswal upgrades the stock to a buy
Motilal Oswal has upgraded the stock to a buy. "We upgrade the stock to BUY as we expect multiple levers such as: a) reducing impact of paracetamol's raw material (RM) prices, b) healthy launches in developed markets such as the US/EU, c) steady market share gain in core molecules across global markets and d) improving business prospects from MUPS/ Oncology blocks, to play out over the next 2-3 years. Further, the stock is attractively valued at 12x FY23E EPS of Rs 20.5 and 10x FY24E EPS of Rs 24.5," Motilal Oswal has said.