JK Cement (JKCEME) 580

Transcription

1 Result Update Rating matrix Rating : Hold Target : 625 Target Period : 9-12 months Potential Upside : 8% What s changed? Target Changed from 486 to 625 EPS FY17E Changed from 34.6 to 33.1 EPS FY18E Unchanged Rating Unchanged Quarterly performance Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key financials Crore FY15 FY16 FY17E FY18E Net Sales 3, ,531. 4,18.8 4,498.5 EBITDA Net Profit EPS ( ) Valuation summary FY15 FY16 FY17E FY18E P/E Target P/E EV/EBITDA EV/Tonne($) P/BV RoNW (%) RoCE (%) Stock data Particular Amount Mcap 456 Crore Debt (FY16) 2644 Crore Cash & Invest (FY16) 476 Crore EV 6224 Crore 52 week H/L 742 / 425 Equity cap 69.9 crore Face value 1 Price performance 1M 3M 6M 12M Heildelberg Cem India Cement JK Cement JK Lakshmi Cem Research Analyst Rashesh Shah rashes.shah@icicisecurities.com Lower realisation hits revenue growth June 1, 216 JK Cement (JKCEME) 58 JK Cement s results came in below our estimates. JK Cement s Q4FY16 revenues increased 4.2% YoY to crore (below I-direct estimate of 974. crore) led by 13.8% YoY increase in blended volumes while blended realisations declined 8.5% YoY Grey cement volumes increased 13.1% YoY to 1.9 MT while white cement (including wall putty) volumes grew 19.2% YoY to.28 MT led by 23.4% YoY increase in wall care putty and 15.% YoY increase in white cement volumes The blended EBITDA/tonne declined 4.5% YoY to 794/tonne mainly due to lower realisation and higher RM cost per tonne Revenue, PAT for FY16 were at 3,531 crore, 11.5 crore, respectively Capacity expansion, revival in demand to drive growth JK sells majority (~7%) of its cement in the north, which has seen robust volume growth led by an increase in infrastructure spend by the government (especially in road sector, low cost housing) thereby helping it maintain healthy utilisation. Going forward, we expect it to register healthy utilisation level led by the government s thrust on infrastructure development and capacity expansion of 3. MT in North India, during Q2FY15. Considering this, we expect volumes to grow at 9.3% CAGR in FY16-18E. South to see better demand; Maharashtra, production dip remain concern Total 3% of the company s current capacity is in Karnataka (i.e. 3. MT), in the southern region. The company s major markets in the South are Maharashtra (with more than 5% share) while balance quantities are sold in Karnataka, Kerala. In the quarter, the southern region witnessed pressure on realisation led by a pricing decline in Maharashtra. Further, the Karnataka plant at Muddapur was shut down on April 26, 216 due to cracks in clinker silo. Although JK Cement has made a temporary arrangement and resumed production, we believe it will adversely impact Q1FY17E revenues by ~ 15-2 crore. We expect the clinker silo to be restored in six months, leading to stable production in H2FY17E. Further, demand in Karnataka and Kerala is expected to gain traction leading to better realisation. Cost rationalisation to boost margins The company has utilised the new capacity at optimum levels while the older three kilns remained partly closed due to lower demand. This has helped the company reduce power consumption by ~1 units. Further, railway siding at these newer capacity coupled with grid connection & refinancing of loans at lower interest cost (from Libor plus 5.6% to Libor plus 3.25%) in UAE would help the company improve margins. Demand visibility becoming clear but silo breakdown in south, pricing pressure in west a concern We expect the company to benefit from a demand recovery in the sector. We expect revenues to increase at a CAGR of 12.7% in FY16-18E driven by increased infra spends. Although we remain positive on the company from a longer-term perspective, pricing pressure in west, silo breakdown in the south (leading to revenue loss of 2 crore and additional capex of 2 crore) and slowdown in GCC remain near term concerns. Hence, we maintain HOLD recommendation with a revised target price of 625/share (i.e. at 9x FY18E EV/EBITDA, $9/tonne on FY18E capacity (11.8 MT). Devang Bhatt devang.bhatt@icicisecurities.com ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY16 Q4FY16E Q4FY15 YoY (%) Q3FY16 QoQ (%) Comments Total Operating Income The increase in revenues was led by 13.8% YoY rise in volumes while realisation declined 8.5% YoY led by pricing pressure in north and west Other Income Other income includes VAT incentives Raw Material Expenses Employee Expenses Stock Adjustments NA 8.4 NA Power & Fuel Power and fuel expenses declined due to fall in pet coke prices (75% pet coke is used in grey cement and 1% in white cement) and decline in power unit consumption led by utilisation of efficient plants Freight cost Others EBITDA EBITDA Margin (%) bps bps EBITDA margin increased due to fall in power cost Interest Depreciation PBT Total Tax PAT The increase in PAT was mainly due to higher other income (up 46.5% YoY) Key Metrics Volume (MT) The increase in volumes was due to higher government spend on infrastructure (especially in north) Realisation ( ) 4,362 4,654 4, , Pricing pressure in north and west led to lower realisation EBITDA per Tonne ( ) EBITDA/tonne declined 4.5% YoY led by higher RM cost per tonne Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 4,363. 4, N.A 4,498.5 N.A EBITDA N.A 78. N.A EBITDA Margin (%) bps N.A 15.7 N.A PAT N.A 33.3 N.A EPS ( ) N.A 43.4 N.A We have lowered our FY17E revenue estimates due to downward revision in realisation and shutdown in clinker silo at south We expect EBITDA margins to improve 187 bps to 15.7% over FY16-18E Assumptions Current Earlier Comments FY13 FY14 FY15 FY16 FY17E FY18E FY16E FY17E Volume (MT) Realisation ( ) 4,569 4,517 4,659 4,59 4,77 4,85 4,611 4,952 Pricing pressure in Maharashtra is expected to keep realisation growth under check EBITDA per Tonne ( ) We expect EBITDA/tonne of 756 in FY18E ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Capacity expansion to drive growth The company has expanded its cement capacity by 3. MTPA through two split grinding units (1.5 MTPA each), one at Mangrol (Rajasthan) and another at Jhajjar (Haryana). The total project cost is estimated at 1,73 crore, which includes a 25 MW coal-based thermal power plant, a 9 MW waste heat recovery-based power plant and also a railway siding at both units. Apart from this, the company has installed a grey cum white cement plant with an installed capacity of.6 MTPA (white cement) and 1.2 MTPA (grey cement) in Fujairah (UAE), which would start providing once the demand starts improving. The company has also commissioned.2 MT wall putty plant at Katni village Madhya Pradesh. With these expansions coupled with demand improvement, we expect revenue CAGR of over 12.7% in FY16-18E. Demand environment in south to improve; Maharashtra a concern Total 3% of the company s current capacity is in Karnataka (i.e. 3. MT), in the southern region. The company s major markets in South are Maharashtra (with more than 5% share) while balance quantities are sold in Karnataka and Kerala. During the quarter, the southern region witnessed pressure on realisation led by pricing pressure in Maharashtra. However, going forward, we expect demand in Karnataka and Kerala to gain traction leading to better realisation. White cement stronghold in domestic market JK Cement has.6 MTPA of white cement capacity. With only two major players manufacturing white cement, the other being UltraTech Cement, coupled with relatively stable white cement demand, white cement commands around three times the realisation fetched by grey cement. Exhibit 1: White cement, grey cement comparative analysis of realisation, margin trends Realisation ( ) FY13 FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) White Cement (LHS) Grey Cement (RHS) Grey Cement (LHS) White Cement (RHS) New efficient plants to help in cost rationalisation The new expanded capacity of 3 MT has stabilised and the company is expected to reap its benefits in coming quarters. The company is utilising the new capacity at 1% while the older three kilns are partly closed/unutilised. This has helped the company to reduce power consumption by 1 units. Further, the company commissioned railway siding at these newer capacities, which is expected to reduce freight cost. This coupled with grid connection at UAE plant will help the company to improve profitability by ~ 5 crore per quarter. Further refinancing of loans (~ 65 crore) in UAE operation from Libor plus 5.6% to Libor plus 3.25% will help reduce interest cost, thereby boosting margins. ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 2: Expect expansion led revenue CAGR of 12.7% during FY16-18E Expect revenue CAGR of 12.7% during FY16-18E Revenues have grown at 8.7% CAGR in FY12-16 where volume has grown at a CAGR of 7.9% with realisation also growing at a CAGR of 2.6%. Going forward, with capacity expansion of 3. MT,.2 MT of wall putty and.6 MT white cement expansion, we expect expansion led revenue CAGR of 12.7% during FY16-18E. We expect volume CAGR of 9.3% in FY16-18E. We expect the realisation to grow annually at 3.1% FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Grey Cement Sales ( crore) Sales ( crore) White Cement Sales ( crore) Exhibit 3: Capacity addition plans State Region MT Grey Cement Nimbahera Rajasthan North 3.3 Mangrol Rajasthan North.8 Gotan Rajasthan North.5 Muddapur Karnataka South 3. Total 7.5 White Cement and Wall Putty Gotan Rajasthan North.6 Wall Putty.7 Total 1.3 Grey Cemnet Expansion plan Mangrol Rajasthan North 1.5 Jhajjar Haryana North 1.5 Total (after expansion) 1.5 International Expansion plan Country Habhab, Tawian Fujariah UAE.6 white or 1 grey Exhibit 4: Volume to grow at 9.3% CAGR during FY16-18E Million Tonne FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Exhibit 5: Realisation to grow at 3.1 % CAGR during FY16-18E FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Grey Cement Volume White Cement Volume Total Sales Volumes Exhibit 6: Volume grows 13.8% YoY in Q4FY16 Blended Realisation ( /tonne) -LS Exhibit 7: Realisations decline 8.5% YoY in Q4FY16 Growth (%) -RS Million Tonne Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY Q3FY Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Grey Cement Volume Sales volumes -LHS Blended Realisation-LHS ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 8: Expect EBITDA/tonne of 756 in FY18E Margins to improve, going forward With expanded capacity now in place, the company should be able to benefit from economies of scale. White cement commands better margins than grey cement. Hence, we expect blended margins to improve, going forward, despite concerns over the high cost environment. Focus on two regions along with enough captive power also bodes well for the company towards improving margins. Exhibit 9: Higher contribution of white cement to aid in margin expansion FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Blended EBITDA/Tonne Blended EBITDA Margin (%) Exhibit 1: Q4FY16 grey cement EBITDA/tonne was at 358 Exhibit 11: EBITDA/T of white cement increased 22.7% YoY in Q4FY16 /tonne Q4FY Q1FY Q2FY Q3FY Q4FY Q1FY16 Q2FY16 Q3FY16 Q4FY (%) Grey Cement EBITDA/tonne ( ) Grey Cement EBITDA Margin (%) /tonne Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 White Cement EBITDA/tonne( ) Q1FY16 Q2FY16 Q3FY16 Q4FY (%) White Cement EBITDA Margin(%) Expect net margin to improve from 2.9% in FY16 to 6.7% in FY18E After witnessing a sharp decline in profits in FY16, we expect net margins to improve to 6.7% in FY18E from 2.9% in FY16. Overall, we expect net profit to grow from 11.5 crore in FY16 to 33.3 crore in FY18E. Exhibit 12: Profitability trend crore FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E (%) Net profit - LS Net profit margin -RS ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation We expect the company to benefit from a demand recovery in the sector. We expect revenues to increase at a CAGR of 12.7% in FY16-18E driven by increased infra spends. Although we remain positive on the company from a longer-term perspective, pricing pressure in west, silo breakdown in south (leading to revenue loss of 2 crore and additional capex of 2 crore) and slowdown in GCC remain near term concerns. Hence, we maintain HOLD recommendation with a revised target price of 625/share (i.e. at 9x FY18E EV/EBITDA, $9/tonne on FY18E capacity (11.8 MT). Exhibit 13: Key assumptions per tonne FY13 FY14 FY15 FY16 FY17E FY18E Sales Volume (mtpa) Net Realisation Total Expenditure EBITDA per Tonne Source: ICICIdirect.com Research Exhibit 14: One year forward EV/EBITDA ( Crore) May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Exhibit 15: One year forward EV/tonne EV 12.4x 1.4x 8.5x 6.5x 2.5x Million $ May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 EV $12 $1 $8 $6 $2 Exhibit 16: Valuations Sales Growth EPS Growth PE EV/EBITDA EV/Tonne RoNW RoCE ( cr) (%) ( ) (%) (x) (x) ($) (%) (%) FY FY FY17E FY18E ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target Price: Feb-1 May-1 Aug-1 Nov-1 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Mar-12 The company expands its white putty production capacity from 1 lakh tonne to 3 lakh tonne. White cement constitutes ~2% of total revenue for the company with high EBITDA margin of more than 25% compared to grey cement EBITDA margin of 15% to 2% Mar-12 The government proposes to raise excise duty on the building material from 1% to 12% against expectations of a cut in the same Jun-12 The CCI imposes a fine of 5% of annual profit for the fiscal year ending 21 and 211, a total of 6 crore on 11 cement companies including JK Cement ( crore) for alleged cartelisation Oct-13 Revenue contribution from white cement reached 33% in Q2FY14. During the quarter, grey cement reported negative EBITDA while white cement reported ~22% EBITDA margin, thus proving to be a face saviour for the company Mar-14 Expanding its total grey cement capacity from current 7.5 MTPA to 1.5 MTPA and further capacity of.6 MTPA of white cement in UAE. The production from expanded capacity is expected to start from Q2FY15 Jun-14 JK Cement commences grey cement production at Jharli, Haryana having grey cement grinding capacity of 1.5 MT Sep-14 JK Cement commissions 1.5 MT grey cement plant at Mangrol, Rajasthan Sep-15 JK Cement commissions railway siding at mangrol and Haryana Apr-16 Stoppage of clinker production at Muddapur due to cracks in silo May-16 Commences operation of Wall putty plant in M.P having a total capacity of.2 MT Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Yadu International, Ltd. 31-Mar Singhania (Yadupati) 31-Mar Juggilal Kamlapat Holding, Ltd. 31-Mar Fidelity Management & Research Company 31-Mar HDFC Standard Life Insurance Company Limited 31-Mar Franklin Templeton Asset Management (India) Pvt. Ltd. 31-Mar Templeton Asset Management Ltd. 31-Mar Singhania ( Kav it a Y) 31-M ar Sundaram Asset Management Company Limited 31-Mar Singhania (Sushila Devi) 31-Mar Shareholding Pattern (in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Promoter FII DII Others Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Kotak Mahindra (UK) Ltd Templeton Asset Management Ltd HDFC Standard Life Insurance Company Limited Franklin Templeton Asset Management (India) Pvt. Ltd BNP Paribas Asset Management India Pvt. Ltd DSP BlackRock Investment Managers P vt. Ltd SBI Funds Management Pvt. Ltd Kotak Mahindra Asset Management Company Ltd Fidelity Institutional Asset Management.7.1 J.P. Morgan Asset Management (Hong Kong) Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E FY18E Total operating Income 3, ,531. 4,18.8 4,498.5 Growth (%) Raw material cost Employee Expenses Power, Oil & Fuel Freight cost Other Expenses Total Operating Exp. 2, ,41.4 3,479. 3,79.6 EBITDA Growth (%) Depreciation Interest Other Income Exceptional items.... PBT Total Tax PAT Growth (%) Adjusted EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16 FY17E FY18E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity.... Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium.... Others CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY15 FY16 FY17E FY18E Liabilities Equity Capital Reserve and Surplus 1, , , ,1.7 Total Shareholders funds 1, , ,98.6 2,17.7 Total Debt 2, , , ,243.7 Deferred Tax Liability Minority Interest / Others.... Total Liabilities 4, , ,68.7 4,742.8 Assets Gross Block 4, , ,976. 5,276. Less: Acc Depreciation , ,32.8 1,482.2 Net Block 3,336. 3, , ,793.8 Capital WIP Total Fixed Assets 3, , , ,893.8 Intangible Asset Investments Inventory Debtors Loans and Advances Cash Total Current Assets 1,54.6 1, , ,684.1 Creditors ,78.4 1,18.7 Provisions Total Current Liabilities , ,263.4 Net Current Assets Application of Funds 4, , ,68.8 4,742.8 Key ratios (Year-end March) FY15 FY16 FY17E FY18E Per share data ( ) Adjusted EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Cement) CMP M Cap EPS ( ) EV/EBITDA (x) EV/Tonne ($) RoCE (%) RoE (%) Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E ACC* Hold 28, Ambuja Cement* Hold 35, UltraTech Cem Buy 88, Shree Cement ,8 Buy 45, Heidelberg Cem Hold 2, India Cement Buy 2, JK Cement Hold 4, JK Lakshmi Cem Buy 4, Mangalam Cem Buy NA SFCL Buy 2, *CY13, CY14E, CY15E CY16E ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 1

11 ANALYST CERTIFICATION We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM, Research Analysts authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a Sebi registered Research Analyst having registration no. INH99. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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