Buy JK Lakshmi Cement, target Rs 315: ICICI Direct

ICICI Direct has a buy call on JK Lakshmi Cement with a target price of Rs 315.

The current market price of JK Lakshmi Cement is Rs 271.05.

Time period given by the brokerage is one year when JK Lakshmi Cement price can reach the defined target.


Investment rationale by the brokerage
Demand to outpace supply leading to improving utilisation...: A normal monsoon and uptick in rural demand is expected to benefit the construction sector. In addition, sustained infrastructure spends in low cost housing, roads along with a pick-up in private capex is expected to further boost cement consumption. Further, north (where JK Lakshmi Cement sells majority of its volumes) is expected to see limited capacity addition at 2.0 per cent CAGR in FY18-20E while demand is expected to grow nearly 7-8per cent resulting in improving utilisation and pricing. Consequently, we expect revenues to increase at a CAGR of 13.0per cent in FY18-20E.

...capacity expansion to boost volumes: Majority of the company’s capacity expansion is complete while only 0.6 MT grinding unit at Odisha is expected to be commissioned. The grinding unit will cater to the coastal Odisha market where realisations are healthy. With the addition of the grinding unit, the company’s capacity will be 11.5 MT (standalone capacity) by Q3FY19E. The benefit of these expansions is expected to lead to volume growth of 10.7per cent in FY18-20E.

Shift from grid power to CPP at Durg to improve margins: The company’s east operations have lower profitability compared to its north operations due to high power cost. However, to rationalise power cost, the company has set up a waste heat recovery (WHR), reduced its power consumption to 69 kwh/t from 74/kwh/t in Q2FY19 and is setting up captive power of 20 MW (by end of FY19) in the Durg facility, which will help in saving power cost/t by nearly Rs 200/t. In addition, commissioning of the conveyor belt will help reduce freight expenses on limestone by nearly Rs 30-40/t. This coupled with debt reduction will boost margins.

Cost rationalisation, key positive going forward; maintain BUY: Increased government spending in roads & affordable housing and revival in rural economy are expected to boost cement demand in coming years. In addition, with limited capacity addition (2.0per cent CAGR in FY18-20E) and improved demand (CAGR of nearly 7-8per cent in FY18-20E) in the northern region, we expect utilisation to firm up in coming years. A rise in trade sales should help improve realisations. Consequently, we expect revenues to increase at a CAGR of 13.0per cent in FY18-20E. Further, cost control initiatives like captive power plant, WHRMS and conveyor belt at Durg along with softening prices of some key cost components (like freight, petcoke) are expected to drive margins in FY18-20E. The recent correction in the stock prompts us to maintain BUY rating on the stock with a revised target price of Rs 375/share (i.e. at $65/tonne on FY20E capacity of 13.0 MT, 9x FY20E EV/EBITDA).