Brokerage firm, Motilal Oswal has a 'buy' call on JK Cement, with a price target of Rs 1450 on the stock, implying an upside potential of 16 per cent from current levels.
The brokerage firm believes that the company is well placed to benefit from exposure to North India.
Capacity-led volume growth to drive earnings
"J K Cement's (JKCE) 4QFY20 results reflect the benefit of its high exposure to North India, our preferred regional market. EBITDA increased 24% YoY due to higher realization (7% YoY) and decline in costs (4% YoY) despite 7% drop in volumes owing to the COVID-19 impact.
We maintain our EBITDA estimates, but raise FY21/ FY22E EPS estimates to factor in lower finance costs on account of lower debt. We reiterate Buy on expected strong volume and earnings growth driven by expansion," the brokerage firm has stated.
Volume in line, higher realization drives EBITDA growth
"JKCE's 4QFY20 revenue/EBITDA/PBT was up -1%/+24%/+22% YoY to INR14.8b/ INR3.5b/INR2.6b. However, PAT was much weaker at just INR3m, weighed down by INR1.8b impairment of the asset value of its UAE subsidiary JK Cement (Fujairah) FZC due to loss incurred over the last several years.
Volume was in line with estimate, with Grey Cement (incl. clinker) down 6.6% YoY to 2.36mt and White Cement down 13.1% YoY to 0.30mt.
Blended realization at INR5,540/t rose 7% YoY and 1% QoQ (2% above est.) due to reversal of provision. Provisions were made for incentives given to dealers as they couldn't meet volume targets due to the COVID-19 lockdown," Motilal Oswal has stated in its report.
Highlights from management commentary
Cement prices have increased by INR10/bag in North India post lifting of the lockdown. JKCE expects sequential rise in realization but remains cautious regarding the sustainability of demand, which is picking up.
Gross debt is expected to peak at INR35b in FY21 while net debt is expected at INR25-26b. The company has INR10.04b cash including investments in FDs, bonds and mutual funds.
JKCE expects to reduce fixed cost by INR600-700m in FY21.
For Line 3 modernization at Nimbahera, INR1.4b (out of planned INR4.0b) has been spent till Mar'20; the upgradation will be completed by Dec'20.
Valuation and view
"We expect JKCE to deliver higher than industry EBITDA CAGR of 9% in FY20-22E driven by 8% volume CAGR on account of its expansion in the North.
The expansion not only improves its regional mix, which is in favor of North/Central India, but also helps it move down the cost curve by increasing the share of newer cost-efficient capacities. We arrive at a target price of INR1,450/share valuing the white cement business at 10x FY22E EV/EBITDA and the grey cement business at 8x FY22E EV/EBITDA. Maintain Buy," Motilal Oswal has stated in its report.
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