EUR 120.00 For Business Accounts Only

MOSL: J K LAKSHMI CEMENT (Buy)-Cost pressure to continue; eyeing on volume growth

• JKLC's EBITDA at INR2.2b was in line with our estimate as higher operating cost (13% beat) was offset by better realization (11% beat). Improvement in realization was also supported by change in accounting for inter-company transaction (clinker to cement conversion for UCWL is accounted only on conversion charges v/s addition to total sales volume earlier). Profit was at INR1b v/s estimated INR1.2b.
• The company has hired a grinding unit (capacity of 1.5mtpa) in Uttar Pradesh and targets an additional volume of 0.6mt from this unit in FY23E, depending on clinker availability. We largely maintain our FY23E/FY24E earnings as cost pressures will keep margin under pressure. Given the inexpensive valuation of 4.3x FY24E EV/EBITDA, we retain our BUY

 

Higher cost offsets better realization; EBITDA/t at INR779

• JKLC's standalone revenue/EBITDA/ PAT stood at INR15.5b/INR2.2b/ INR1b (+26%/+0.4%/-15% YoY and +10%/-3%/-16% from our estimate), respectively. Sales volumes (cement + clinker) grew 5% YoY to 2.79mt (down 11% QoQ). Realization improved 20% YoY and 17% QoQ to INR5,567/t.
• OPEX/t grew 25% YoY and 23% QoQ as variable cost/freight cost/other expenses rose 34%/20%/13% YoY and 20%/10%/64% QoQ, respectively. Employee cost grew 11% YoY and 28% QoQ to INR922m. The current employee cost would be a normal run-rate on quarterly going ahead. 
• EBITDA was flat YoY at INR2.2b. OPM contracted 3.6pp YoY and 4.5pp QoQ to 14%. EBITDA/t declined 4% YoY and 11% QoQ to INR779. 

 

Highlights from the management commentary

• Cement demand in Jul'22 was better than last year; though; cement price declined INR10/bag in North and Gujarat markets. Fuel cost is estimated to remain elevated but peak out in 2QFY23 (20% increase expected) based on the current petcoke/coal prices.
• The company aims to reach at a cement capacity of 30mtpa by FY30. The expansion at UCWL (1.5mtpa clinker and 2.5mtpa cement) is estimated to complete by Mar'24.

 

Valuation attractive; maintain BUY

• Cement capacity expansion of 2.5mtpa at subsidiary UCWL will raise JKLC's exposure to North India. In FY22, it increased UCWL's capacity to 2.2mtpa from 1.6mtpa through debottlenecking.
• JKLC has been awarded two limestone blocks - one in central Rajasthan and the other in coastal Gujarat. The management believes each of these mines can support at least 5mtpa of capacity over the next 40-50 years.
• The stock trades at 4.3x FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 9.1x). We value JKLC at 6.5x FY24E EV/EBITDA to arrive at our TP of INR525. We maintain our BUY