Expansions on schedule; lower costs to aid margins June 28, 2016 Kamlesh Bagmar kamleshbagmar@plindia.com +91 22 66322237 Ankit Shah ankitshah@plindia.com +91 22 66322244 Rating BUY Price Rs385 Target Price Rs470 Implied Upside 22.1% Sensex 26,403 Nifty 8,095 (Prices as on June 27, 2016) Trading data Market Cap. (Rs bn) 45.3 Shares o/s (m) 117.7 3M Avg. Daily value (Rs m) 5.5 Major shareholders Promoters 45.94% Foreign 12.21% Domestic Inst. 18.06% Public & Other 23.79% Stock Performance (%) 1M 6M 12M Absolute 11.3 17.8 10.4 Relative 12.2 15.6 15.4 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 13.0 9.7 33.7 2018 26.5 24.1 10.1 Price Performance (RIC: JKLC.BO, BB: JKLC IN) (Rs) 450 400 350 300 250 200 150 100 50 0 Jun 15 Aug 15 Source: Bloomberg Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 We met the management of JK Lakshmi cement (JKLC) for an update on the market outlook as well as its expansion projects. While Management sounded confident on the sustainability of discipline in the northern market in terms of price, the Eastern market is likely to remain under pressure (constitutes ~24% of total volumes) due to ongoing capacity addition by new players. However, the impact of weaker prices in Eastern region would be offset by lower power costs and higher scale of operations thanks to capacity expansion. We reiterate BUY given the strong play on large capacity base, efficient operations and attractive valuations. We value the stock at Rs470 (earlier Rs450), EV/EBITDA of 10x FY18E. Expansion plans on track, vision to become 20m tonnes by 2020: JKLC is currently expanding capacity by 4.4mt post which its total capacity would increase by 50% to 13mt. Expansion is expected to be completed in 18 months (3.8mt would be commissioned during next 6 months). Company plans to raise capacity to 20mt over the next 5 years through brown field expansion largely in North (~2/3 of additional capacity would be in North), though the final decision would only be made after completion of current expansion. Capex on existing projects largely done, debt levels peaked out: Company would spend limited capex of Rs2.5bn on completion of current expansion and waste heat recovery of 7MW at Durg. Consequently, management believes debt to have peaked at current levels of gross/net debt of Rs19.2/16.7bn with gross debt/net worth at 1.44x (Net debt/net worth at 1.25x). JKLC expects to repay debt of Rs2bn/year starting from current year onwards. Furthermore, company has also successfully brought down its interest cost to 9.5% (10.3% earlier) by renegotiating a 100bps lower rate on its long term debt of Rs16bn. Contd...2 Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 23,071 26,199 31,375 36,668 Growth (%) 12.2 13.6 19.8 16.9 EBITDA (Rs m) 3,495 2,701 5,175 7,048 PAT (Rs m) 1,633 58 1,529 3,115 EPS (Rs) 13.9 0.5 13.0 26.5 Growth (%) 52.2 (96.5) 2,537.3 103.8 Net DPS (Rs) 2.0 0.2 3.2 6.6 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 15.1 10.3 16.5 19.2 RoE (%) 12.4 0.4 11.5 20.9 RoCE (%) 7.1 4.0 8.0 12.3 EV / EBITDA (x) 17.6 23.3 11.7 8.2 EV / Tonne ($) 112.0 110.0 83.8 75.5 PE (x) 27.7 781.1 29.6 14.5 P / BV (x) 3.4 3.5 3.3 2.8 Net dividend yield (%) 0.5 0.1 0.8 1.7 Source: Company Data; PL Research Management Meet Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Cost reduction efforts to continue, Udaipur plant to alleviate logistical disadvantage: The Company expects to sign agreement with private power producers in the next six months at an investment of Rs50 70m to replace the expensive grid power, leading to savings of Rs1 1.25 or 15% 18% per unit in their Durg plant. This coupled with higher scale (capacity to increase by 50% to 2.7mt by Jun 16) is expected to reduce cost further. Commencement of Udaipur plant in Rajasthan with capacity of 1.6mtpa (likely to get commissioned in Dec 16) would help reduce logistics costs for northern operations due to proximity to NCR and high consuming markets in Rajasthan and Punjab. Plant would enjoy sales tax incentive of 50% (equivalent to Rs100/t) and lower income tax due to unabsorbed depreciation of Rs1bn. Exhibit 1: Commissioning schedule of capacity expansions Mn tonnes 13.5 12.5 11.5 10.5 9.5 8.5 7.5 6.5 5.5 4.5 Odisha by Sep 17 0.6 Udaipur by Dec 16 1.6 Durg by Jun 16 0.9 8.7 Surat by Sep 16 1.4 FY16 FY17E FY18E June 28, 2016 2
Exhibit 2: State wise breakup of despatches from Northern and Eastern plants Exhibit 3: Location wise cement (clinker) capacity spread in mn tonnes June 28, 2016 3
Income Statement (Rs m) Net Revenue 23,071 26,199 31,375 36,668 Raw Material Expenses 5,851 6,926 7,717 8,977 Gross Profit 17,220 19,272 23,658 27,691 Employee Cost 1,461 1,970 2,091 2,300 Other Expenses 12,264 14,601 16,393 18,343 EBITDA 3,495 2,701 5,175 7,048 Depr. & Amortization 1,119 1,629 1,728 1,831 Net Interest 907 1,923 1,831 1,632 Other Income (351) 496 280 280 Profit before Tax 1,118 (355) 1,897 3,865 Total Tax 75 (418) 368 750 Profit after Tax 1,043 63 1,529 3,115 Ex Od items / Min. Int. (590) 5 Adj. PAT 1,633 58 1,529 3,115 Avg. Shares O/S (m) 117.7 117.7 117.7 117.7 EPS (Rs.) 13.9 0.5 13.0 26.5 Cash Flow Abstract (Rs m) C/F from Operations 3,515 3,369 6,003 6,482 C/F from Investing (4,062) (2,613) (1,535) (1,415) C/F from Financing 335 (749) (3,866) (4,095) Inc. / Dec. in Cash (211) 7 602 971 Opening Cash 364 153 160 761 Closing Cash 153 160 761 1,733 FCFF (8,400) 805 1,945 2,556 FCFE (5,721) 2,305 (55) 556 Key Financial Metrics Growth Revenue (%) 12.2 13.6 19.8 16.9 EBITDA (%) 15.7 (22.7) 91.6 36.2 PAT (%) 52.2 (96.5) 2,537.3 103.8 EPS (%) 52.2 (96.5) 2,537.3 103.8 Profitability EBITDA Margin (%) 15.1 10.3 16.5 19.2 PAT Margin (%) 7.1 0.2 4.9 8.5 RoCE (%) 7.1 4.0 8.0 12.3 RoE (%) 12.4 0.4 11.5 20.9 Balance Sheet Net Debt : Equity 1.2 1.4 1.1 0.8 Net Wrkng Cap. (days) (233) (185) (220) (200) Valuation PER (x) 27.7 781.1 29.6 14.5 P / B (x) 3.4 3.5 3.3 2.8 EV / EBITDA (x) 17.6 23.3 11.7 8.2 EV / Sales (x) 2.7 2.4 1.9 1.6 Earnings Quality Eff. Tax Rate 6.7 117.7 19.4 19.4 Other Inc / PBT 16.1 (159.5) 14.8 7.2 Eff. Depr. Rate (%) 2.7 3.9 3.9 3.9 FCFE / PAT (350.3) 3,976.4 (3.6) 17.8. Balance Sheet Abstract (Rs m) Shareholder's Funds 13,307 12,761 13,826 15,997 Total Debt 18,992 20,492 18,492 16,492 Other Liabilities 1,946 2,599 2,859 3,459 Total Liabilities 34,245 35,852 35,177 35,948 Net Fixed Assets 29,846 30,964 31,016 30,845 Goodwill Investments 1,688 1,688 1,688 1,688 Net Current Assets 2,711 3,200 2,473 3,416 Cash & Equivalents 2,693 2,700 3,301 4,273 Other Current Assets 6,645 6,934 6,502 7,505 Current Liabilities 6,627 6,434 7,330 8,362 Other Assets Total Assets 34,245 35,852 35,177 35,948 Quarterly Financials (Rs m) Y/e March Q1FY16 Q2FY16 Q3FY16 Q4FY16 Net Revenue 5,908 6,457 6,483 7,351 EBITDA 507 667 669 859 % of revenue 8.6 10.3 10.3 11.7 Depr. & Amortization 392 417 419 401 Net Interest 453 478 497 495 Other Income 44 60 77 343 Profit before Tax (349) (221) (90) 305 Total Tax (114) (72) (53) (179) Profit after Tax (235) (150) (37) 484 Adj. PAT (180) (97) (117) 484 Key Operating Metrics Volume (mn te) Cement 6.0 7.3 8.1 8.8 Cement Realisation (Rs/te) 3,874.2 3,577.1 3,575.7 3,855.3 EBITDA (Rs/ te) 586.8 368.8 626.6 783.7 RM cost (Rs/ te) 982.5 945.7 1,105.6 1,111.2 Power, Oil & Fuel (Rs/ te) 830.8 745.9 805.9 764.1 Freight Charges (Rs/ te) 866.8 897.8 936.0 963.3. June 28, 2016 4
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage PL s Recommendation Nomenclature % of Total Coverage 50% 40% 30% 20% 10% 0% 45.2% 39.1% 15.7% 0.0% BUY Accumulate Reduce Sell BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly DISCLAIMER/DISCLOSURES ANALYST CERTIFICATION We/I, Mr. Kamlesh Bagmar (CA), Mr. Ankit Shah (BE, MBA, CFA (US)), 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: Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as PL ) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document. PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities. PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company. PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report. PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report. PL or its associates might have received compensation from the subject company in the past twelve months. PL or its associates might have managed or co managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months. PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report. PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report. It is confirmed that Mr. Kamlesh Bagmar (CA), Mr. Ankit Shah (BE, MBA, CFA (US)), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest. PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. DISCLAIMER/DISCLOSURES (FOR US CLIENTS) ANALYST CERTIFICATION The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report Terms & conditions and other disclosures: This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a 6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a 6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. June 28, 2016 5