JK Cement rating – Reduce: Realisations impacted Q4 performance

After a significant re-rating and outperformance over the past two years, further upside from here appears limited. Downgrade to Reduce (from ADD).

JKCE’s Q4FY21 adjusted Ebitda was 14% below our estimate led by lower realisation due to lower trade sales and higher clinker volumes. The ramp-up at newly commissioned 4.2-mtpa capacity is driving growth and market share gain. Expansion plans in Central India are on track and provide strong medium to long-term growth visibility. After a significant re-rating and outperformance over the past two years, further upside from here appears limited. Downgrade to Reduce (from ADD).

Q4FY21—Ebitda miss on weaker grey cement realisations
JKCE reported revenues of Rs 20.5 bn (+41% y-o-y, +17% q-o-q), adjusted Ebitda of Rs 4.8 bn (+46% y-o-y, +7% q-o-q) and net income of Rs 634 mn (+27,959% y-o-y-, 73% q-o-q) (adjusted for Rs 2.3 bn of exceptional loss). White cement and putty volumes rebounded to 0.39 mn (+29% y-o-y, -5% q-o-q) whereas grey cement volumes grew to 3.5 mn tons (+48% y-o-y, +27% q-o-q). Blended realisation fell to Rs 5,270/ton (-4% y-o-y, -5% q-o-q), lower than our estimate, due to increased non-trade sales and higher clinker sales. Costs declined to Rs 4,042/ton (-5% y-o-y, -2% q-o-q). Adjusted Ebitda came at Rs 1,228/ton (flat y-o-y, -13% q-o-q). For FY2021, Ebitda increased to Rs 15.5 bn (+31%) (or Rs 1,334/ton, +10%) on higher volumes (+19%), lower costs (-6%), offset by lower prices (-3%).

Central India expansion provides medium-term growth visibility
JKCE has completed its entire 4.2-mtpa capacity expansion project, which should drive volume growth from FY2021-23e. Nimbahera-line 3 upgradation work is expected to complete in Q2FY22. Further, JKCE has started work on setting up a greenfield 3.5-4 mtpa integrated cement capacity at Panna, Madhya Pradesh for a total capex of Rs 29.7 bn and expects to commission by Q1FY24e. Increased diversification to Central India, attractive regional prices and demand prospects make the expansion project value-accretive. Net debt fell 38% yoy in FY2021 to 0.9X net debt/Ebitda. Net debt/Ebitda remains <1X over FY2022-24E despite growth capex.

We revise FV to Rs 2,450 (from Rs 2,300)
We cut our EPS estimates by 4%/2% for FY2022e/23e mainly led by lower realisations. Our FV increases to Rs 2,450/share (from Rs 2,300/share) at 8.5X EV/Ebitda as we roll over to June 2023e. The stock has been the best performing cement stock in the past two years. However, we now believe the positives – (i) market share gain due to significant capacity addition over FY2020-21, (ii) attractive growth prospects and (iii) improved balance sheet are well priced in. At 10X EV/Ebitda FY2023E (adjusted for CWIP), we see limited upside and downgrade the stock to Reduce.