Analysts bet on this cement stock post Q3 earnings, see double digit return

Most brokerage houses maintained their bullish stance on JK Cement after the company matched earnings expectations, citing rising cash flows combined with healthy profitability and return ratios.

The stock traded at double the price it quoted same day last year in February. It was quoting at Rs 1,423.40, up Rs 5.40, or 0.38 percent on the BSE at 12:07 hours.

"With the commissioning of the pipeline capacities, we expect the return ratio profile to improve as new capacities are ramped up," said JM Financial which maintained buy call on the scrip.

The brokerage house expects Rs 50 per tonne improvement in EBITDA per tonne, owing to favourable mix and generation of Rs 2,500 crore operating cash flow, to result in deleveraging of balance sheet.

The brokerage valued the company at 9x EV/EBITDA to arrive at a revised target price of Rs 1,580 (March 2021).

Emkay Global also retained its buy call on the stock, while raising FY21/22E EBITDA by 3.9/1.4 percent, considering higher realisation/volumes.

"Cost-saving strategies have yielded results and it is further working on improving operational efficiencies at the North plant."

JK Cement's Q3FY20 results were in-line with estimates. Revenue grew 10 percent YoY, led by 10 percent growth in grey cement realisations (down 2.5 percent QoQ).

Overall, volume growth was muted at 2.4 percent YoY, due to lower growth in both grey cement segment (up 2.8 percent YoY) and white cement segment (flat YoY).

However, blended EBITDA per tonne stood at Rs 1,086 per tonne, up 28.8 percent over Rs 843 per tonne last year, led by improvement in realisations and lower power/fuel and freight expenses, though partially offset by higher raw material and fixed expenses.

EBITDA grew by 31.9 percent year-on-year to Rs 278 crore in quarter ended December 2019, margin expanded 324 bps YoY to 19.8 percent, driven by healthy growth in realisations.

Led by higher operating profit and lower tax expenses, PAT increased 128 percent YoY to Rs 137.6 crore during the quarter.

Net debt increased by Rs 320 crore in 9MFY20 to Rs 1,580 crore as on December 2019.

"While at absolute levels, the company’s debt looks to be elevated, improving cash flows are expected to keep leverage levels under check. Rising cash flows combined with healthy profitability & return ratios are key factors in favour of the company," said ICICI Securities which continued to remain positive on JK Cement and maintained a buy rating on the stock.

The brokerage upgraded its target price on the company to Rs 1,650, factoring in the growth that the company would witness from the new capacities.

JK Cement completed two grinding units of 2.5 million tonne in February 2020 after the commissioning of 1 million tonnes grinding unit at Nimbahera, Rajasthan and a clinker plant of 2.64 million tonnes at Mangrol, Rajasthan in September 2019. The 0.7mt grinding unit at Balsinor, Gujarat will be commissioned in Q4FY20.

Dolat Capital said it broadly maintained FY20/ FY21 estimates for revenue and EBITDA. However, it increased PAT estimates by 13.4/ 6.5 percent, for FY20/ FY21 considering 9MFY20 results.

The brokerage likes JK Cement because of its sizable presence in higher EBITDA margin contributing white cement & putty business and healthy cash generation & RoE.

"Moreover, the strategical expansion of its grey cement into strong pricing markets of north/central will benefit it. However, 64 percent/ 9 percent run-up in stock price during YTD in FY20 since our Q2FY20 update note (November 14, 2019), leaves limited upside. Thus, we maintain accumulate with upward revised price target of Rs 1,582 as we rollover to FY22," Dolat said.