JK Cement rating: Retain ‘buy’ with revised target price of Rs 1,899

By Edelweiss Securities

JK Cement (JKCE) continued to outperform in Q1FY21. Ebitda (down 29% y-o-y) surpassed our estimate 27% and that of consensus by 14%. While Covid-19 impacted demand, the company restricted volume dip to 19% versus industry’s >35% fall. Moreover, July-August volumes have risen 20% y-o-y (with capex completion benefits) even as broader industry demand remains weak. White segment volumes too have recovered now — flat y-o-y in July-August versus ~48% plunge in Q1FY21.

Factoring the volume traction (despite seasonal weakness in cement prices), we revise up FY21/22E Ebitda 12%/6%. We also revise up EV/Ebitda to 12x (11x earlier), given the best is yet to come in terms of volumes & efficiency from new plants; and visibility of sustained growth given recent receipt of environment clearance for its proposed expansion in central India. With high RoEs and estimated FCF generation largely sufficient to meet capex, retain ‘buy’ with revised TP of Rs 1,899 (Rs 1,576 earlier).

White segment performance was weak with volume and revenue plunging 48% and 46% y-o-y, respectively. Assuming 25% Ebitda margin, we estimate the segment’s Ebitda to have come-off ~50% y-o-y to Rs 525mn. However, with volumes normalising in Q2FY21, we estimate improved performance going ahead. Grey segment volume and revenue dipped ~19% y-o-y each. Realisation/t (adjusted to write-back of dealer incentives in Q4FY20) rose 3% q-o-q (our 5% estimate). We estimate the segment to have clocked Ebitda (net of white segment) of ~Rs 1.6bn (down 18% y-o-y) with Ebitda/t of Rs 1,023 (up 2% y-o-y). With Q2FY21 volumes expected to gain traction, we estimate the segment’s profitability to remain broadly firm despite seasonal weakness in cement prices.

We continue to believe that the dream run has just begun for JKCE given, structural improvement in regional mix and efficiency mix owing to capex completion benefits; niche white segment remaining a cash cow; JKCE catapulting into self-funding mode with robust Ebitda driving enough FCF for future capex; and sustained superior RoEs. We maintain ‘buy’ with a TP of Rs 1,899. At CMP, while the stock trades at 9.3x FY22E EV/Ebitda.