Strong performance; cost-saving initiatives to help further

* Q2 results were better than expectations, owing to low operating costs and high realization of grey cement (down 2.9% qoq vs. estimated decline of 4.9%). EBITDA stood at Rs4.1bn vs. estimated Rs3.1bn and OPM was at 26.5% vs. estimated 20.2%.

* Key positives: 1) Grey cement’s volume growth at 28.4% yoy as JKCE benefits from new capacities; 2) White cement & putty volume growth at 9.4% yoy; 3) UAE subsidiary’s EBITDA at Rs207mn vs. Rs18mn in Q2FY20 and a loss of Rs27mn in Q1FY21.

* JKCE completed grinding unit of 0.7mt at Balasinor, Gujarat, and putty expansion of 0.3mt in Katni, Madhya Pradesh in Oct’20. Management believes that there is a scope for cost savings from the new plants (Rs100/ton from Q4) as they are still in the stabilization phase. Price improvement was seen in the trade and non-trade segment in Oct’20.

* We raise FY21/22/23 EBITDA estimates by 5.3%/2.3%/2.8% on higher realization assumptions. JKCE benefits from stable cash flows in white cement (OPM of 25-30% in last 10 years). Costsaving strategies should help grey cement profits. Maintain Buy.

Strong performance led by higher volumes and lower opex: JKCE benefitted from capacity expansions in the North region and reported 28.4% yoy volume growth for grey cement. After a dismal Q1, demand for white cement and wall putty recovered, leading to 9.4% yoy volume growth for this segment. Realization of grey cement was down 2.9% yoy (up 1.1% yoy). Realization of white cement fell 1% yoy/2.7% qoq. Opex/ton was down 9.2% yoy (4.4% qoq), led by a 7.5% yoy decline in variable costs. Employee cost/ton fell 19.2% yoy. Freight cost rose 1.2% yoy/5.7% qoq. Other expense declined 18.5% yoy. Lower costs and higher volumes led to 61.7% yoy growth in EBITDA with 6.2pp yoy improvement in OPM. EBITDA/ton was Rs1,416 vs. Rs1,135/Rs1,219 in Q2FY20/Q1FY21. Revenue from the UAE subsidiary was up 31.9% yoy/2.1x qoq. EBITDA came in at Rs207mn vs. Rs18mn in Q2FY20 and a loss of Rs27mn in Q1FY21.

Management expects cost savings in grey cement and higher volumes in white cement: Management believes that there is a scope for cost savings in the grey cement: a) Rs100/ton after stabilization of new plants, and b) Rs80-100/ton for North plants after upgradation of Nimbahera plant and commissioning of WHRS at Mangrol. It expects double-digit volume growth for white cement with higher margins compared to last year in H2FY21. Trade mix was 66% in Q2 compared to 74-75% in Q1. Land acquisition for the Greenfield plant at Panna, Madhya Pradesh, is going on and the proposal will be submitted to the board for consideration next year. Net debt should be below Rs25bn even after Panna expansion.

Raise estimates; maintain Buy: We raise FY21/22/23 EBITDA estimates by 5.3%/2.3%/2.8% on higher realization assumptions. We expect the company to benefit from the efficiency (lower coal and power consumption) of the new plants and cost saving initiatives (upgradation of Kiln III at Nimbahera and 15MW WHRS at Mangrol plant). JKCE has benefitted from timely capacity additions in grey and white segments and it further plans to increase capacities in the Central region. We maintain Buy with a TP of Rs2,090 (12x/11x Dec’22E EV/EBITDA for white/grey segments). Key risk could be significant pressure on cement demand, which may affect sales volume and cement prices.

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