Q4FY23 Review: JK Cement: Volume led growth; focus on Central India

31 May 2023 , 12:23 PM

JK Cement’s (JKCE) Q4FY23 QoQ profit growth was driven by rampup in Central India volumes (Panna operated at 60% utilisation). For FY24, the company said: 1) It is confident of delivering 15% YoY growth. 2) Will achieve >Rs1,000/t Ebitda in H2FY24. 3) Will add 3.5mtpa capacity in Central India by FY25. 4) Believes net debt is near peak. Over FY23-25, analysts of IIFL Capital Services bake 10% p.a. volume growth and margin recovery, driving Ebitda growth of 25% p.a. They value JKCE at 13.5x FY25 EV/Ebitda with TP of Rs3,250. Maintain BUY.

Ramp-up in Central India drives volume growth: 

JKCE’s consolidated Ebitda grew 41% QoQ (down 9% YoY) to Rs3.5bn — in line with IIFLe, as higher volume growth makes up for lower profitability. Ebitda/t fell 21% YoY (up 25% QoQ) to 748/t, while total volumes grew 17% YoY and 13% QoQ to 4.2mn MT. Grey Cement volumes were up 17% YoY and 13% QoQ to 4.2mn MT aided by ramp-up in the Central India plants (60% utilisation in first full quarter of operations). Moreover, QoQ improvement in grey cement realisations was owing to lower clinker sales and increasing share of trade sales. Grey cement capacity utilisation stood at ~89% in Q4FY23 vs 96%/88% YoY/QoQ. Amidst increased competitive intensity in White business, volumes grew 7% YoY and 9% QoQ to 0.43mn MT; while realisations improved 11% YoY and 4% QoQ to Rs12,495/t.

Robust outlook for FY24: 

JKCE’s added 6mn MT or 40% of existing capacity in H2FY23. However, Panna expansion (4mtpa) saw ramp-up in Q4, while 2mtpa expansion (multiple locations) were commissioned in March 2023. Management is confident of delivering 15% YoY volume growth in FY24 (vs 7-8% for industry) given the ramp-up in these capacities. Falling fuel prices to support profitability; spot petcoke is down to US$125-130/t (vs H2FY23 cost: US$180-190/t) to reflect in Ebitda from H2FY24 onwards. As such, the company expects Rs75-125/t improvement in Q1 due to cost reduction. Further in FY24, the company would book incentives from its Panna plant (~Rs200/t) – this would effectively add Rs25-30/t to Ebitda. In the Paints business, the company is targeting revenues of Rs1.5-1.8bn in FY24 and Rs2.7-3bn in FY25. However, profitability is likely to be lower given the marketing expense.

Net debt near peak: 

At FY23 end, JKCE’s consol. net debt stood at Rs29bn (Rs33bn including WC loans). It expects this to peak out given improved profitability (est. OCF of Rs12bn) and falling capex (Rs13-14bn in FY24 and Rs8bn in FY25). Net debt-to-Ebitda stands at 2.5x, which is estimated to fall to 2x in FY24. This, coupled with 3.5mtpa capacity addition in Central India (drives volume growth), would support valuations.