Stock Review: JK Cement

 

JK Cement is expected to benefit from a pick up in demand during the current peak construction season

 

JK CEMENT, part of the leading business house JK Organisation, is a mid-sized player, which has recently expanded its presence beyond its home market of northern region. The company had earlier brought on stream three million tonne (mt) capacity in the southern part of the country. It appears well positioned to take advantage of growth in demand in both regions in the medium term.

   The cement sector has grappled with sluggish demand conditions over the past few quarters, but analysts are increasingly optimistic of a pick up in demand on the back of the peak construction season. Cement prices in the northern and southern region also have shown signs of a pick up towards the end of the monsoon. However, a rising cost structure, like higher freight and power & fuel costs on a per tonne basis, remain a cause for concern for the sector.

CAPACITY:

The company's total cement capacity (white and portland) amounted to nearly 7.9 mt at the end of March 2010, a rise of 80% from three years earlier. The company initially focused on northern markets, but during October 2009, it had brought on stream a greenfield capacity of 3 mt in Karnataka. In addition, it has a 50 megawatt captive power capacity there.

   The company has expanded its presence amid surging capacity and sluggish demand in the south region. The southern cement capacity is expected to rise by nearly 23% to 105 mt by FY12. The demand is likely to remain sluggish in the region due to absence of fresh, large government-funded infrastructure projects coupled with uneven recovery in the real estate sector in this region. As a result, the surplus cement production in the southern region could easily more than double to nearly 18 mt at the end of March 2012. This, in turn, could put pressure on cement realisations over several quarters. During the April-November 2010 period, southern dispatches grew 3.9% year-on-year, compared to an all-India growth of 5.4%. Despatches in the north grew 7.6% year-on-year during this period.

EXPANSION PLANS:

JK Cement plans to expand its grey cement capacity by 2.2 mt at its existing facilities in Rajasthan. In addition, it has plans for an additional 1.8 mt of grinding facilities in northern India. The capex involved is estimated at 1,500 crore, which also includes additional captive power facilities. These additional capacities are expected to come on stream over the next one-and-a-half year.

   JK Cement's debt-to-equity ratio was 0.8 at the end of March 2010, considerably lower than three years earlier. And while it had invested 627 crore during the period March 2007 and March 2010, its operating cash flow during this period was 1,093.5 crore. And given the company's healthy cash flows and low leverage ratio, it looks well positioned to finance the capex plan.

FINANCIALS:

The company's performance in the September 2010 quarter was adversely affected by a fall in realisations on a per tonne basis, given sluggish demand during the monsoon season. In addition, the company grappled with higher operational costs during the quarter. As a result, its operating profit margin declined 2,360 basis points year-on-year to 4.7% in the second quarter, while net sales fell marginally to 434.9 crore. The company's realisation fell nearly 14% year-on-year to 3,953 per tonne in the second quarter, coupled with its power & fuel cost that rose 8.4% on a per tonne basis. As a result, its net loss amounted to 20.8 crore in the September 2010 quarter.

VALUATIONS:

JK Cement, at 136 per share, trades at a P/E of nearly eight times on a trailing four-quarter basis. India Cements, a leading player in the South and with a presence in the North, trades at a P/E of more than 45 times on a trailing basis. Other mid-cap players with a focus on the North like Mangalam Cement trade at a P/E of 4.8 times.