JK Lakshmi Cements Ltd (Q1 FY15)

JK Lakshmi revenues stood at Rs6bn, marginally below our estimate of Rs6.2bn.

Jul 30, 2014 10:07 IST India Infoline News Service

CMP Rs220, Target Rs270, Upside 22.7% 

  • Q1 FY15 revenues for JKLCE grew by ~31%yoy to Rs6bn - below our expectations of Rs6.2bn primarily on account of lower than factored in realizations.

  • Realizations improved by 13% yoy to Rs3,661/ton but were down sequentially. Dispatch volumes were in-line with estimates. 

  • Margins stood at 18.9% (against our expectation of 17.6%) on account of lower than anticipated freight costs.

  • Additional provision to the tune of Rs165mn for a litigation matter pertaining to previous year translates into PAT growth of 157% yoy.

  • Maintain Buy with a 9-month price target of Rs270.

Result table
(Rs mn) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 6,004 4,570 31.4 6,482 (7.4)
Material costs 1,469 1,014 45.0 1,942 (24.3)
Personnel costs 374 300 24.6 327 14.3
Power and fuel costs 1,218 1,034 17.8 1,141 6.8
Freight cost 1,260 1,025 23.0 1,340 (5.9)
Other overheads 548 495 10.8 612 (10.5)
Operating profit 1,135 704 61.3 1,121 1.3
OPM (%) 18.9 15.4 351 bps 17.3 161 bps
Depreciation (283) (355) (20.2) (310) (8.6)
Interest (215) (200) 7.7 (189) 13.7
Other income 25 29 (13.2) 245 (89.8)
PBT 662 178 272.3 867 (23.7)
Tax (92) (21) 344.0 (152) (39.7)
Effective tax rate (%) 13.9 11.6 17.6
Adjusted PAT 570 157 262.8 714 (20.2)
Adj. PAT margin (%) 9.5 3.4 605 bps 11.0 (153) bps
Extra ordinary items 165 - - 185 (10.8)
Reported PAT 405 157 157.7 529 (24)
Source: Company, India Infoline Research

Revenue growth fell short of expectation due to lower realizations

JK Lakshmi revenues stood at Rs6bn, marginally below our estimate of Rs6.2bn. The underperformance was largely due to realizations; down 4% sequentially against expectations of flat quarter. The realizations were lower on back of easing of supply crunch created in the Northern region during the previous quarter. Volume growth of 18% yoy was due to commencement of 1.5mtpa grinding unit. Volume growth meets our estimates. Going forward, lower monsoon this year could impact construction activity next summer. We have therefore lowered our volume growth projection by 3% for Q4 FY15 and Q1 FY16. The next two quarters we expect JKLCE to deliver volume growth in excess of 15% yoy basis.  

Margins boosted by higher realizations, savings in freight/other overhead cost

Operating margins for JKLCE expanded by 350bps qoq as against our estimate of 220bps. OPM was better than our estimates on back of a) decrease in freight cost, which stood at Rs768/ton as against Rs787/ton previous quarter despite a railway freight hike announced in the middle of the quarter and b) reduction in other overhead (Rs334/ton as against Rs356/360ton in Q1FY14/Q4FY14). Jump in material cost (Rs896/ton as against 729/ton yoy basis) could be due to higher clinker purchase in order to run the newly operational grinding unit.

PAT was higher by 157% yoy at Rs405mn versus our estimate of Rs385mn. This was despite additional provision of Rs165mn (as an exceptional item) for a litigation matter pertaining to previous year. Change in depreciation policy led to a 20% savings on yoy basis.


Cost Analysis
As a % of net sales Q1 FY15 Q1 FY14 bps yoy Q4 FY14 bps qoq
Material costs 24.5 22.2 229 30.0 (548)
Personnel costs 6.2 6.6 (34) 5.0 118
Power and fuel costs 20.3 22.6 (233) 17.6 269
Freight cost 21.0 22.4 (143) 20.7 32
Other overheads 9.1 10.8 (170) 9.4 (32)
Total costs 81.1 84.6 (351) 82.7 (161)

Compelling valuations; maintain Buy

Government emphasis on a) housing for all, b) 100 new cities, c) connecting major rivers and d) infrastructure development like building ports and roads is most likely to boost cement demand in the coming year. Over the past three years, slowdown in the economy (3-year avg GDP at +5.3%) impacted growth in sectors like infrastructure and manufacturing which in turn lowered cement demand.  Cement demand/GDP multiplier also dipped below 1x as against an average of 1.3x seen in high GDP growth phase between 1999 and 2009. Post budget, we expect the GDP growth multiplier to re-gain 1.2-1.3x levels in the coming year, thereby translating into a cement growth of approx 8-12% over the next five years.

As incremental capacity addition for industry slows down and demand picks up, it would lead to better capacity utilization for JKLCE and thereby support improved realizations. Company is enhancing its capacity from 6.6mtpa to 10mtpa in the current year and we expect it to be a major beneficiary of the anticipated volume traction in the northern, eastern and western regions. We factor in 44% earning CAGR over FY14-18. We maintain our 9-month target of Rs270, valuing JKLCE at 9x FY17 EPS of Rs31.


Financial Summary
Y/e 31 Mar (Rs m)  FY14  FY15E  FY16E  FY17E
Revenues   20,567   24,832   30,487   35,728
Yoy growth (%)   0.1   20.7   22.8   17.2
Operating profit   3,021   4,362   6,559   8,292
OPM (%)   14.7   17.6   21.5   23.2
Pre-exceptional PAT   1,115   1,392   2,315   3,634
Reported PAT   1,115   1,392   2,315   3,634
Yoy growth (%)   (41.9)   24.8   66.3   57.0
         
EPS (Rs)   9.5   11.8   19.7   30.9
P/E (x)   23.2   18.6   11.2   7.1
Price/Book (x)   2.0   1.8   1.6   1.3
EV/EBITDA (x)   12.0   9.1   6.0   4.6
Debt/Equity (x)   1.1   1.3   1.2   1.0
RoE (%)   8.7   10.2   15.3   20.3
RoCE (%)   7.7   9.5   13.3   16.7
Source: Company, India Infoline Research

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