MOSL: J K CEMENT (Buy)-Grey cement assets available at discount to peers-Best-placed midcap cement company in North markets

J K Cement: Grey cement assets available at discount to peers; Best-placed midcap cement company in North markets

(JKCE IN, Mkt Cap USD1.0b, CMP INR945, TP INR1196, 26% Upside, Buy)

• JKCE’s 10.5mt grey cement capacity is available at an EV/t of USD40-70 (64-34% discount to midcap cement) on FY19 basis, if we value its white cement business at 14-10x FY19E EV/EBITDA.
• Its white cement business deserves a premium over its grey cement business, given raw material constraint, JKCE’s 45% market share, and superior profitability.
• The company is strategically placed, with 70-75% exposure to North markets as also considerable exposure to key markets of West and South India.
• North markets likely to see the highest price improvement, driven by increase in utilization on favorable base, limited supply addition and demand stabilization.
• With its grey cement business scaling up to ~14mt over the next 3-4 years, JKCE could see a multiple re-rating.

Grey cement business at significant discount to peers

JKCE’s grey cement capacity of 10.5mt is available at 64-34% discount to peers, if we value the white cement business at 14-10x FY19E EV/EBITDA. While ~30% of JKCE’s grey cement capacity is inefficient due to legacy designing issues and old plants, the management has been successful in diversifying to efficient assets by way of a new unit in Mangrol and split grinding unit in Haryana. In our view, despite its inefficient assets, the steep 34-64% discount is not warranted, as the residual assets are earning good profitability for the segment.