JK Cement (JKCE) announced its plan to diversify into paint business and invest up to Rs 6 bn in it over the next five years. It plans to leverage its strong (i) JK White cement/putty brand, (ii) 50,000+ distribution network of white cement/ putty dealers (large portion of which also sells paints), and (iii) longstanding relationship with real estate developers.
While the company’s diversification into paint business may raise capital allocation concerns (given entry barriers, heightened competition and probability of minor Ebitda loss in the initial years), it may provide steady-state growth/stable income over the medium term, in our view. Besides, paint is still likely to remain a relatively small business for JKCE and constitute <5% of capital employed, revenue and Ebitda over the next five years. Maintain Buy on the stock with an unchanged TP of Rs 3,935/sh (14x FY24E EV/E). Key risks: lower demand/pricing, and sharp cost escalations.
Entry into paints may raise capital allocation concerns given the many entry barriers, heightened competition and probability of minor Ebitda loss in the initial years and hence an overall RoCE-dilutive impact. In FY14, JKCE had invested ~Rs 8 bn in white cement business outside India in Fujairah, UAE, and that business is still incurring loss at net level with the firm making cumulative impairment provision of ~Rs 3.2 bn for FY20-FY21.
Establishing ‘right to win’ for JKCE: JKCE may commercialise the proposed paint business in FY24 and focus solely on its core markets of North and Central regions instead of pan-India (similar to its market positioning in grey cement).
Paint business may provide steady-state growth/stable income in the medium term, in our view: Unlike peers, JKCE has been able to utilise its white cement/putty Ebitda to fund its grey cement expansion and gain market share. Besides, the company’s white cement/putty business generates a relatively steady-state Ebitda, which provides stability to overall Ebitda despite sharp volatility in grey cement business. Similarly, the proposed paint business too may provide stability to JKCE’s overall income in the medium term.
Grey cement expansion plans unlikely to be affected by entry into paint business. JKCE’s balance sheet remains strong and its consolidated net debt is unlikely to exceed Rs 25 billion and ‘net debt to Ebitda’ may remain below 1.5x even after Rs 6-billion investment into the paint business over the next five years.
