JK Lakshmi Cement

JK Lakshmi Cement is aggressively expanding capacity to take advantage of long-term growth opportunities

STRONG demand for cement, especially in the northern markets, coupled with the Budget’s focus on expanding infrastructure across the country is expected to help players including JK Lakshmi Cement. We had recommended this stock in our issue dated May 25, 2009, and since then the stock has gained nearly 57.8%. We believe that there is still potential upside in this stock over the medium term. The stock currently trades at about 1.2 times its trailing book value adjusted for the sub-division in the face value of its share, as compared to a range of 0.3 and 3.2 between March 2006 and March 2009. In addition, the stock trades at a P/E lower than that of other similar sized players like Binani Cement and JK Cement.

CAPACITY:

JK Lakshmi Cement’s capacity was 4.74 million tonne (MT) at the end of March 2009, a rise of 39.4% from two years earlier. The company caters to cement demand in the western and northern belt of the country from its facilities in Rajasthan and Gujarat. This expanded capacity has come at a time when demand, especially in the northern region, has been robust and estimated to have increased by nearly 15% y-o-y between April and December 2009. Demand in northern region has been driven largely by ramp-up in construction activities before the Commonwealth Games in Delhi and housing projects. The company had invested Rs 567.3 crore between March 2007 and March 2009, while its operational cash flow during this period was Rs 984.8 crore. As a result, its leverage ratio stood at 0.99 at the end of the previous financial year as compared to 2.5 in March 2007.

EXPANSION PLANS:


The company is attempting to take advantage of the strong demand conditions for cement in eastern region, with its plan to set up a greenfield project with a capacity of 2.7 MT in Chattisgarh at a cost of nearly Rs 1,200 crore. This facility is expected to be brought-on-stream during 2011-12. Cement demand had grown nearly 18% y-o-y between April and December 2009 in eastern region , as per various reports. JK Lakshmi is also expanding its clinker capacity by nearly 0.4 MT at a cost of almost Rs 145 crore and this facility is expected to be operational by January 2011, and this should help the company raise its capacity by 0.6 MT. This will result in its capacity reaching 5.3 MT by January 2011.Apart from expanding cement capacity, the company is also setting up a waste heat recovery system, which will generate 12 MW of captive power that is expected to come on stream in March 2011. In addition, the company is also setting up a 18 MW thermal power plant at cost of nearly Rs 80 crore and this facility is likely to be operational in 2011.

This will enable the company to save power cost, which is one of the key operational costs for cement makers. The company plans to use a combination of internal accruals and loans to finance its expansion plans. And given its strong cash flows from expanded capacities that had earlier come on stream, analysts are not expecting a rise in JK Lakshmi’s leverage ratio going forward.

FINANCIALS :

The company’s operating profit margin fell 120 basis points y-o-y to 25.2% in the December 2009 quarter, despite an 18.7% rise in its net sales to Rs 353.3 crore. Pressure on its operating profit margins was due to a 22.6% rise in transport, clearing and forwarding charges to Rs 591.4 per tonne in the third quarter, while other expenditure rose 16.8% y-o-y on a per tonne basis.

The company’s realisations rose by an estimated 1.8% y-o-y to Rs 3,037.9 per tonne in the third quarter of FY10 while despatches soared 16.5% to 11.63 lakh tonnes. A cause for concern for the cement industry is the rising cost of imported coal over the past few months. The recent Budget measures included a hike in excise duty by 2% and cement companies have passed on this cost to end-users. Also, a rise in freight costs due to higher diesel prices is expected to be passed on by the industry to consumers.

VALUATIONS:

At CMP, JK Lakshmi Cement trades at nearly 4.1 times its trailing 12 months earnings. Other players with similar size, including Binani Cement trades at nearly 5.3 times and for JK Cement it is 5.5 times. Investors could consider JK Lakshmi Cement in a bid to take advantage of the long-term growth opportunities in this sector.