JK Lakshmi Cement: Targeting profitable growth; re-rating potential

4 Jan 2024 , 12:11 PM

JK Lakshmi (JKLC) is one of the IIFL’s 2024 top small-cap pick. Historically JKLC has traded at a discount to its peers, but analysts of IIFL Capital Services believe with improving clarity on new capacity additions (targets to double capacity to 30m MT by FY30) and narrowing of profitability gap (targets to bridge Rs250-300/t gap over next 2-3 years) the stock can potentially re-rate. Analysts of IIFL Capital Services estimate its Ebitda to grow at 22% pa over FY24-26 (8.5% volume growth + 12% Ebitda/t improvement). Analysts of IIFL Capital Services value the stock at 9x FY26 Ebitda (long term average of 8.5x) with a TP of Rs1100. Re-iterate BUY. 

Focus on capacity addition; volume growth to improve: 

JKLC’s capacity addition over FY17-24 was subdued as company focused on deleveraging; but now company targets to increase its capacity to 30m MT by FY30 from 14m MT – growing at 12% Cagr. It has targeted a mix of brownfield – Greenfield projects to meet its target. Also, in the past the volume growth has been lower than industry given capacity constraints in North-West markets; however with the commissioning of UCW – both clinker and cement capacity would increase by 18% – this would ensure company would grow in-line with industry. Analysts of IIFL Capital Services estimate JKLC consolidated volumes to grow at 8.5% pa over FY24-26. 

Targeting narrowing of profitability gap with peers: 

JKLC despite being one of the low cost producer, has consistently reported Ebitda/t lower than the industry owing to lower realisation. Now company is targeting to narrow this gap of Rs250-300/t over the next 2-3 years by improving its geo-mix (selling more in higher profitable markets) as well as through optimising cost (increase share of rail once railway siding is completed at Durg plant in Chhattisgarh). In analysts of IIFL Capital Services base case they build-in part benefits of these initiatives and expect the profitability gap to reduce from ~Rs300/t in FY24 to ~Rs200 in FY26. 

Upgrade estimates; re-rating candidate: 

Analysts of IIFL Capital Services upgrade JKLC’ FY25-26 Ebitda by 10% each as they build-in volumes from newly commissioned UCW units and part benefits of Ebitda/t improvement. The stock trades at 48% discount to UTCEM, however with clarity on new capacity additions and benefits of higher realisation should narrow the discount and re-rate the stock. Analysts of IIFL Capital Services value JKLC at 9x FY26ii Ebitda and re-iterate BUY.