JK Cement’s investors have limited respite
PremiumJK Cement’s shares have risen 0.3% in the past two days, which is still 12.7% lower than before it revealed paint bet
JK Cement Ltd’s stock is struggling to recover lost ground since 5 March, when it said it will enter the paints business. The stock touched a 52-week low of ₹2,139.05 apiece on 9 March, with the main worries for investors being cut-throat competition and high entry barriers of the paint sector.
The JK Cement management attempted to alleviate these concerns, in a call with the analysts on Friday after market hours, by saying that the maximum investment in the paint segment would be ₹600 crore over the next five years, including any operating loss in the initial years. Further, no additional debt would be raised at the paint subsidiary level, it said. JK Cement would focus on selling paints in its core markets of the northern and central regions of the country through its established white cement dealer network.
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JK Cement’s shares have risen 0.3% in the past two days, which is still 12.7% lower than before the notification about entering the paints sector. Respite for JK Cement’s investors is limited as prices of key inputs such as coal and petroleum coke have risen sharply, posing a threat to all cement companies, including JK Cement.
“While the company has allayed the concerns of investors on capital allocation in its upcoming paints business, a near-term concern for it is cost inflation in its cement business. So, any meaningful upside and/or earnings upgrade will solely depend on coal and petcoke prices and the ability to pass on input cost pressures to consumers," said Mangesh Bhadang, research analyst at Nirmal Bang Institutional Equities.
Therefore, much depends how price hikes pan out. In the December quarter, the company’s low cost fuel inventory reduced the impact of the raging cost inflation the sector has been battling with.
These concerns are well reflected in the stock’s performance. So far in calendar year 2022, shares of JK Cement have slumped by around 32%, far more than the Nifty500’s 5% decline. Besides, JK Cement is a mid-cap stock and mid-caps tend to see a sharper fall when the market corrects, analysts noted.
That said, the company’s decent track record of timely execution of capacities provides comfort on long-term volume growth visibility. It expects to commission a clinker unit in Panna (Madhya Pradesh) by Q4FY23 instead of the earlier timeline of Q1FY24. The company is also adding greenfield capacity at Hamirpur in Uttar Pradesh.
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Of course, with the recent correction, analysts do find valuations reasonable. The stock trades at an FY23 EV/Ebitda of 11.72 times, according to Bloomberg data. EV is short for enterprise value and Ebitda is earnings before interest, taxes, depreciation, and amortization.
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