Buy JK Cement, target Rs 1141: Nirmal Bang Institutional Equities

Nirmal Bang Institutional Equities has a buy call on JK Cement Ltd. with a target price of Rs 1141. The current market price of JK Cement Ltd. is Rs 940.3. The time period given by the brokerage is Two Year when JK Cement Ltd. price can reach defined target.
JK Cement Ltd., incorporated in 1994, is a mid-cap company with a market cap of Rs 6575.26 crore.

Investment rationale by Nirmal Bang

JK Cement (JKCE) reported a steady set of numbers for 4QFY18 driven by volume and realisation growth. JKCE posted volume growth of 26.1% YoY in grey cement to 2.35mt. In the white cement segment (including putty), JKCE reported volume growth of 10.7% YoY at 0.32mt. Grey cement realisation rose 7% YoY/remained flat QoQ at Rs3,974/tn. White cement segment realisation was up 2.8%/2.1% YoY/QoQ, respectively, at Rs11,670/tn. Overall revenues rose 28% YoY to ~Rs13.2bn (marginally above our estimate of ~Rs12.9bn). However, JKCE’s operating costs increased 9.2% YoY on account of high energy and logistics costs to Rs4,250/tn. Effectively, JKCE reported overall EBITDA of Rs1.8bn (in line with our estimate of Rs1.8bn), down 4.6% YoY. EBITDA margin declined 473bps to 13.8% (from 18.6% in 4QFY17). Following high operating costs, EBITDA/tn of grey cement declined sharply to Rs277/ from Rs480. However, white cement and putty’s EBITDA/tn improved 5.2% YoY to Rs 3,640n on account of higher realisation growth. Effectively, APAT stood at Rs1.05bn, up 104.9% YoY (Rs515mn in 4QFY17) because of reclassification of deferred tax in the base year. JKCE stock currently trades around its replacement cost of Rs8.0bn/mt. (higher because of white cement capacity). We have retained our Buy rating on the stock with a revised target price of Rs1,141/share (from Rs1,179 earlier) based on FY20E capacity. At our target price, the stock trades at a replacement cost of Rs9.5bn/mt, assigning ~ 14% premium and EV/EBITDA of 9.6x FY20E earnings.