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MOSL: J K CEMENT (Buy)-Sequential savings in cost leads to margin improvement

J K Cement: Sequential savings in cost leads to margin improvement 

(JKCE IN, Mkt Cap USD0.8b, CMP INR690, TP INR825, 19% Upside, Buy)

 

• Healthy growth in white cement; modest in grey…: Grey cement volumes (incl. clinker) increased by 6% YoY to 2.14mt, while white cement volumes increased by 19% YoY to 0.35mt. Combined realizations stood at INR5,098/ton (flat QoQ, +5% YoY), in line with estimates. Revenue increased 13% YoY to INR12.7b, as against our estimate of INR12.4b.
• Sequential savings in costs boosted profitability: Cost/ton declined 1% QoQ (+3% YoY) to INR4,255. As a result, blended EBITDA/t increased +7% QoQ /15% YoY to INR843. EBITDA increased 24% QoQ/YoY to INR2.1b, with margins expanding 1.42pp YoY (+1.11pp QoQ) to 16.5%. The company decided to avail benefit under section 80IA of the Income Tax Act, 1961, for two new power plants from FY19, instead of FY18 as was contemplated in its audited accounts for FY18. Consequently, deferred tax expense increased by INR254m in 3QFY19. Thus, tax rate for 3QFY19 was 48% v/s 21% in the year ago period. Hence, PAT came was lower at INR609m (-17% YoY), as against our estimate of INR920m due to the higher tax rate.
• Concall highlights: (1) Through Qualified Institution Placement (QIP), the company allotted 7.34m equity shares at INR695.8 per equity share of face value INR10 each, aggregating to INR5.1bn. (2) JKCE is planning to raise INR13,000m debt to fund expansion. (3) Trade contributed ~68% to overall volume mix in 3QFY19 (72% in 2QFY19).
• 9MFY19 performance: Volumes grew 4% YoY, while sales increased 7% YoY. EBITDA/PAT declined by 8%/27% YoY. For 4QFY19, we expect volumes to grow 6% YoY, with sales/EBITDA/PAT growth of 11%/48%/28% YoY.