JK Cement (JKCEME) 746

Transcription

1 Result Update Rating matrix Rating : Buy Target : 855 Target Period : 9-12 months Potential Upside : 15% What s changed? Target Changed from 625 to 855 EPS FY17E Changed from 34.6 to 35.9 EPS FY18E Changed from 43.4 to 44.9 Rating Changed from Hold to Buy Quarterly performance Q1FY17 Q1FY16 YoY (%) Q4FY16 QoQ (%) Revenue (6.6) EBITDA (4.2) EBITDA (%) bps bps PAT , (14) Key financials Crore FY15 FY16 FY17E FY18E Net Sales 3, , ,74.6 4,481.9 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 5217 Crore Debt (FY16) 2644 Crore Cash & Invest (FY16) 479 Crore EV 7382 Crore 52 week H/L 847 / 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 Devang Bhatt devang.bhatt@icicisecurities.com Lower fuel cost boosts margin August 1, 216 JK Cement (JKCEME) 746 JK Cement surprised positively on the margin front during the quarter. While revenue came in marginally lower, increasing 9.2% YoY to crore (vs. I-direct estimate: crore), EBITDA was ahead of our estimates due to sharp fall in power & fuel cost Blended cement volumes & realisation both increased 4.1% & 4.9% YoY, respectively. Prices in the north remained healthy where the company has 75% exposure of total sales volume Grey cement volumes increased 1.4% YoY to 1.63 MT while white cement (including wall putty) volumes grew 24.9% YoY to.26 MT The blended EBITDA/tonne increased 87.4% YoY to 879/tonne UAE operations improved as power connectivity was restored and posted EBITDA of AED3.5 million vs. AED1.75 million YoY Strong presence in north coupled with capacity expansion to drive growth The company sells majority (~75%) of its cement production in the north, which has witnessed robust volume growth led by an increase in infrastructure spend by the government (especially in road sector and low cost housing) thereby helping it maintain healthy utilisation. Going forward, we expect JK Cement 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 a CAGR of 8.% in FY16-18E. Pricing pressure in Maharashtra near term concern but scenario to improve post H2FY16E 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 decline in Maharashtra. However, a better monsoon with a pick-up in construction activity is expected to drive realisation post Q2FY16E. Further, despite temporary issues at the Karnataka plant (due to cracks in clinker silo) we believe the company will be able to maintain its market share due to low capacity utilisation in the southern region. Further, demand in Karnataka and Kerala is expected to gain traction leading to better realisation in H2FY16E. New efficient plants to help in cost rationalisation 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 capacities 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 to improve margins. Higher infra spend, normal monsoon to drive growth; upgrade to BUY! Capacity expansion of 3 MT in the north coupled with a demand revival in the sector is expected to boost volume growth in the next few years. Further, we believe JK Cement will be a key beneficiary of price hikes in the north. Consequently, we expect revenues to increase at a CAGR of 12.5% in FY16-18E. In addition, freight cost savings (led by railway siding), rationalisation of power cost and grid connection & refinancing of loans at lower interest cost in the UAE would help the company to improve margins. Given this, we have revised our target price upwards to 855/share (i.e. at 11x FY17E EV/EBITDA, $115/tonne on FY18E capacity of 11.8 MT). We upgrade our rating on the stock from HOLD to BUY. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY17 Q1FY17E Q1FY16 YoY (%) Q4FY16 QoQ (%) Comments Total Operating Income The increase in revenues was led by 4.1% YoY rise in volumes and 4.9% YoY increase in realisation led by improving pricing scenario in the north Other Income Raw Material Expenses Employee Expenses Stock Adjustments NA -19. NA Power & Fuel Power and fuel expenses declined due to a 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 a fall in power cost Interest Depreciation PBT LP Total Tax NA PAT , The increase in PAT was mainly due to a better performance at the operating level Key Metrics Volume (MT) The increase in volumes was due to higher demand in north (up 7.9% YoY) and higher white cement volumes (driven by capacity expansion of.2 MT in wall putty) Realisation ( ) 4,73 4,665 4, , Better pricing scenario in north led to higher realisation EBITDA per Tonne ( ) EBITDA/tonne increased 87.4% YoY led by lower power cost per tonne Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 4,18.8 4, , , EBITDA EBITDA Margin (%) bps bps We expect EBITDA margins to improve 26 bps to 16.5% over FY16-18E PAT Better performance at operating level to drive net profit EPS ( ) Assumptions Current Earlier Comments FY13 FY14 FY15 FY16 FY17E FY18E FY17E FY18E Volume (MT) Realisation ( ) 4,569 4,517 4,659 4,51 4,812 4,92 4,77 4,85 We expect realisation to increase over next two years led by price improvement in north EBITDA per Tonne ( ) We expect EBITDA/tonne of 89 in FY18E ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Capacity expansion, revival in demand 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 a.2 MT wall putty plant at Katni village Madhya Pradesh. With these expansions coupled with a demand improvement, we expect revenue CAGR of over 12.5% in FY16-18E. Demand environment in south to improve 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) Cost rationalisation to boost margins The new expanded capacity of 3 MT has stabilised and the company is expected to reap its benefits in the 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 has 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 the 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 Expect revenue CAGR of 12.5% 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 12.5% during FY16-18E. We anticipate volume CAGR of 8.% in FY16-18E. We expect realisation to grow annually at 4.1%. Exhibit 2: Expect expansion led revenue CAGR of 12.5% during FY16-18E Exhibit 3: Capacity addition plans State Region MT Grey Cement Nimbahera Rajasthan North Mangrol Rajasthan North Gotan Rajasthan North Muddapur Karnataka South Total White Cement and Wall Putty Gotan Rajasthan North.6 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Wall Putty.7 Total 1.3 Grey Cement Sales ( crore) White Cement Sales ( crore) Grey Cemnet Expansion plan Sales ( crore) 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 8.% CAGR during FY16-18E Million Tonne FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Grey Cement Volume White Cement Volume Total Sales Volumes Exhibit 5: Realisation to grow at 4.1 % CAGR during FY16-18E FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Blended Realisation ( /tonne) -LS Growth (%) -RS Exhibit 6: Volume grows 4.1% YoY in Q1FY17 Exhibit 7: Realisations increase 4.9% YoY in Q1FY17 Million Tonne Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Grey Cement Volume Sales volumes -LHS Q1FY Q1FY15 Q2FY Q3FY15 Q4FY15 Q1FY16 Q2FY16 Blended Realisation-LHS 447 Q3FY Q4FY Q1FY17 ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 8: Expect EBITDA/tonne of 89 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 FY14 FY15 FY16 FY17E FY18E (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Blended EBITDA/Tonne Blended EBITDA Margin (%) Exhibit 1: Q1FY17 grey cement EBITDA/tonne at 547 Exhibit 11: EBITDA/T of white cement increases 24.9% YoY in Q1FY17 /tonne Q1FY Q2FY Q3FY Q4FY Q1FY16 Q2FY16 Q3FY16 Q4FY Q1FY (%) Grey Cement EBITDA/tonne ( ) Grey Cement EBITDA Margin (%) /tonne Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 White Cement EBITDA/tonne( ) Q2FY16 Q3FY16 Q4FY16 Q1FY (%) White Cement EBITDA Margin(%) Expect net margin to improve from 3.% in FY16 to 7.% in FY18E After witnessing a sharp decline in profit in FY16, we expect net margins to improve to 7.% in FY18E from 3.% in FY16. Overall, we expect net profit to grow from 14.4 crore in FY16 to crore in FY18E. Exhibit 12: Profitability trend crore 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 Capacity expansion of 3 MT in the north coupled with demand revival in the sector is expected to boost volume growth over the next few years. Further, we believe JK Cement will be a key beneficiary of price hikes in the north. Consequently, we expect revenues to increase at a CAGR of 12.5% in FY16-18E. In addition, freight cost savings (led by railway siding), rationalisation of power cost and grid connection & refinancing of loans at lower interest cost in UAE would help the company to improve margins. Given this, we have revised our target price upwards to 855/share (i.e. at 11x FY17E EV/EBITDA, $115/tonne on FY18E capacity of 11.8 MT). We upgrade our recommendation on the stock from HOLD to BUY. 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) Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Exhibit 15: One year forward EV/tonne Million $ EV 12.4x 1.4x 8.5x 6.5x 2.5x Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-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 Recommendation history vs. consensus estimate ( ) 1, Aug-14 Oct-14 Jan-15 Mar-15 Jun-15 Aug-15 Oct-15 Jan-16 Mar-16 May Aug-16 (%) Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Mar-12 Mar-12 Event 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% 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 Commences grey cement production at Jharli, Haryana having grey cement grinding capacity of 1.5 MT Sep-14 Commissions 1.5 MT grey cement plant at Mangrol, Rajasthan Sep-15 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 Madhya Pradesh having 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 (Kavita Y) 31-Mar Sundaram Asset Management Company Limited 3-Apr Singhania (Sushila Devi) 31-Mar Shareholding Pattern (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Promoter FII DII Others Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Mirae Asset Global Investments (India) Pvt. Ltd Templeton Asset Management Ltd HDFC Standard Life Insurance Company Limited Franklin Templeton Asset Management (India) Pvt. Ltd Tata Asset Management Limited.5.5 Kotak Mahindra (UK) Ltd Kotak Mahindra Asset Management Company Ltd DSP BlackRock Investment Managers Pvt. Ltd BNP Paribas Investment Partners Asia Ltd Fidelity Management & Research Company 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, , ,74.6 4,481.9 Growth (%) Raw material cost Employee Expenses Power, Oil & Fuel Freight cost Other Expenses Total Operating Exp. 2, ,42.3 3, ,742.7 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, , ,85.3 2,123.3 Total Shareholders funds 1, , ,92.2 2,193.2 Total Debt 2, , , ,243.7 Deferred Tax Liability Minority Interest / Others.... Total Liabilities 4, , , ,765.4 Assets Gross Block 4, , ,976. 5,276. Less: Acc Depreciation , , ,57. Net Block 3,336. 3, , ,769. Capital WIP Total Fixed Assets 3, , , ,869. Intangible Asset Investments Inventory Debtors Loans and Advances Cash Total Current Assets 1,54.6 1, , ,726.7 Creditors ,69.5 1,176.4 Provisions Total Current Liabilities , ,258.7 Net Current Assets Application of Funds 4, , , ,765.4 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* Buy 32, Ambuja Cement* Buy 42, UltraTech Cem Buy 13, Shree Cement ,8 Buy 58, Heidelberg Cem Hold 3, India Cement Buy 3, JK Cement Buy 5, JK Lakshmi Cem Buy 5, 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

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