J K Cement: Big gains from higher volumes

With improving prospects for demand, stocks of cement makers have seen a spectacular run on the bourses. While this has led to valuations looking stretched for some of the larger companies, analysts still see scope for upside for mid-cap cement companies. One such stock is J K Cement. In spite of its stock more than doubling in a few months, analysts believe valuations remain attractive and thus see more upside. J K Cement trades at a replacement cost of $75 a tonne based on its FY16 capacities. While this is substantially lower than valuations of $127-$185 a tonne that its larger peers like ACC, Ambuja, UltraTech and Shree Cement command, it is also lower than $112 a tonne for South Indian based Ramco Cement. Thus, it is not surprising that 11 out of 12 analysts polled on Bloomberg in July have 'Buy' rating with consensus price target of Rs 488 for the stock trading at Rs 383 indicating potential upside of 26 per cent.

Better outlook for grey cement
The optimism for J K Cement, the maker of white and grey cement, comes from the fact that it is likely to see volume growth led not only by the anticipated strong demand but also from new capacity coming on-stream. Around three million tonnes (mt) of new capacity will take J K's total grey cement capacity to 10.5 mt. While 1.5-mt expansion in Jhajjar (Haryana) commenced production in June, 1.5 mt in Mangrol (Rajasthan) is expected to be commissioned by September this year.

Thus, grey cement growth that has seen a meagre two per cent CAGR over FY11-14 due to capacity limitations at J K Cement's North India plant and subdued demand in the south-west, is now expected to grow by 17 per cent CAGR over FY14-17, according to analysts at Anand Rathi.

Further benefits will accrue from improving outlook for white cement and putty, segments that are more profitable too. Ebitda per tonne for grey cement at Rs 270 was a tenth of white cement Ebitda of Rs 2,878. Moving ahead, analysts at JM Financial see grey cement Ebitda per tonne of Rs 467, Rs 623 and Rs 730 during FY15, FY16 and FY17, respectively and expect white cement's Ebitda to improve to Rs 3,135 by FY17. This will be driven by better realisations as well as lower input costs.

White cement to drive profitability
The company sees its white cement/wall putty capacity almost doubling to 1.2 mt, including its UAE capacities, helping it cater to growing demand. The company expects full utilisation of expanded capacity by FY16 leading to a better volume growth outlook. J K's annual report says that the existing capacity is likely to be fully utilised by 2015-16. In order to meet future demand, J K cement is planning to setup Wall Putty plant at Katni (Madhya Pradesh) - in Phase-I, a plant of 200,000 tonnes will be taken up.

The white cement and wall putty volumes that had seen a strong 22 per cent and 43 per cent growth in FY13 continued their strong growth momentum in FY14, too, growing 10 per cent and 28 per cent, respectively helping the company gain market share. Analysts at Anand Rathi estimate a nine per cent and 16 per cent CAGR over FY14-17 for white cement and wall putty backed by strong brand equity and high market share (40 per cent). Analysts at J M Financial, too, share a similar view and post completion of major expansion in white cement/wall putty in FY14 they expect the strong growth in this segment to continue (25 per cent per annum for wall putty).

With better revenue and profitability outlook, the improving free cash flows are likely to take care of the debt too. The increased investments on capacity expansions have led debt-equity ratio to 1.19 at end of FY14 compared to 0.9 in FY13, but the same is likely to improve moving forward, say analysts.