JK Cement (JKCEME)

CMP: | 1396 Target: | 1550 (11%) Target Period: 12 months HOLD

June 19, 2020

Valuations factor in positive; downgrade to HOLD

JK Cement reported better-than-expected Q4FY20 numbers, beating our
estimates on the operational front. Revenues broadly stayed flat YoY at |
1,477 crore (I-direct estimate: | 1,433 crore). Suspension of operations in

Result Update
end-March led to a 7.3% drop in volume YoY to 2.67 MT (in line with I-direct Stock Data
estimate). Blended realisations grew 6.8% YoY to | 5,533/t (I-direct estimate: Par ticu lar s Am o u n t
| 5,393/t). Higher realisations drove EBITDA margin expansion of 470 bps Mca p |10277 C rore
YoY to 23.4% (I-direct estimate: 21.3%). EBITDA/t jumped 33.6% YoY to | Debt (FY 19) |2355 C rore
1,297/t (I-direct estimate: | 1,148/t); EBITDA increased 24% YoY to | 346 C a s h & Inv es t (FY 19) |878 C rore
crore (I-direct estimate: | 305 crore). In Q4FY20, JK Cement made EV |11754 C rore
impairment provision of | 178 crore for its UAE subsidiary that dragged its 52 w eek H/L |1505 / 795
PBT and PAT. PBT dropped 62% YoY to | 80 crore and PAT plunged almost Equity ca p |77.3 crore
100% to | 0.2 crore vs. | 150 crore last year (I-direct estimate: | 120.7 crore). Fa ce v a lue |10

Increased capacity to restrict volume decline over FY20 Key Highlights

 Healthy realisations in the north,
As production practically halted in April, restarted in May (albeit with supported EBITDA margin expansion
procurement, logistical issues), cement companies lost significant business.
Demand from rural areas with migrant labour returning to their hometown  Management expects industry to
witness negative growth in FY21
(pushing demand in IHB segment) and tier-II, tier-III towns have held up
strong. Despite this, cement industry is expected to see negative growth in  Company to spend ~| 700 crore on
ongoing capex in FY21E. Expect to
FY21. JK’s capacity in FY20 has spiked 35% led by commissioning of Aligarh
reach 14.7 MT in grinding capacity by
greenfield grinding unit, brownfield capacities at Mangrol and Nimbahera. Oct-20.

ICICI Securities – Retail Equity Research

Thus, we expect additional volumes from recently commissioned capacities
 Downgrade from BUY to HOLD with a
to at least offset, if not surpass, the lost business. Thus, we expect the target price of | 1550
company to end FY21 with marginally lower volumes over FY20, with
healthy 17%+ growth expected in FY22E. In FY20-22E, revenue CAGR is
estimated at 4.4%, supported by strong growth expectations in FY22E.
Ongoing capex to continue; debt to peak out in FY21
The management intends to continue the ongoing expansion of 0.7 MT
grinding unit at Balasinor, 0.3 MT addition of putty capacity, WHRMS plant
(Mangrol) and Line-3 modification of Nimbahera clinker plant. These would
entail capex of ~| 700 crore in FY21. The management expects debt levels Research Analyst
to reach a peak around | 3500 crore on a gross basis. They would decide
Rashesh Shah
upon the timelines of Panna (Madhya Pradesh) expansion later in FY21. We rashes.shah@icicisecurities.com
believe, with higher volumes and improving operating profits in the coming
years, JK Cement is comfortably placed on the leverage front. Debt/EBITDA Romil Mehta
is expected to settle down to 2.5x in FY22, after spiking to 3.7x in FY21E. D/E romil.mehta@icicisecurities.com
would continue to remain below 1x over the next two years.
Valuation & Outlook
With commissioning of Balasinor grinding unit, 90% of JK’s capacity would
be based on new technologies and be efficient. Management’s efforts to
improve cost efficiencies (freight, power costs) are expected to improve
profitability, going ahead. Thus, we remain positive on the company
considering its margin profile and healthy balance sheet. However, current
levels, valuations (11x FY22E EV/EBITDA), imply limited upside, lead us to
downgrade the company to HOLD, with a revised target price of | 1,550.
Key Financial Summary
Ke y Fin an cials FY 18 FY 19 FY 20E FY 21E FY 22E C A G R (FY 20-22E)
Net S ales 4591 4981 5464 4915 5957 4.4%
EBITDA 761 810 1182 796 1082 -4.3%
EBITDA (% ) 16.6 16.3 21.6 16.2 18.2
PA T 359 324 579 228 408 -16.0%
EPS (|) 51.3 42.0 74.9 29.5 52.8
EV /EBITDA 15.8 14.5 10.7 15.8 11.3
EV /Tonne ($) 146 142 116 111 108
RoNW 16.7 11.2 18.5 7.0 11.4
RoC E 14.6 12.5 16.2 9.4 13.0
Source: Company, ICICI Direct Research
 Result Update | JK Cement ICICI Direct Research

Exhibit 1: Variance Analysis

Q4FY20 Q4FY20E Q4FY19 YoY (%) Q3FY20 QoQ (%) Comments
Total Operating Income 1477.4 1433.0 1491.9 -1.0 1,404 5.2 Decline in revenues restricted by higher realisations
Other Income 27.1 16.0 34.9 -22.6 23.7 14.4
Raw Material Expenses 207.1 214.3 264.9 -21.8 254.6 -18.7
Employee Expenses 98.7 105.1 83.6 18.1 99.2 -0.5
Power & Fuel 269.0 267.5 303.4 -11.4 253.6 6.0
Freight cost 281.8 287.4 304.5 -7.4 270.5 4.2
Others 274.5 255.5 256.1 7.2 248.5 10.5
EBITDA 346.3 305.5 279.5 23.9 277.7 24.7 Higher realisations drive EBITDA growth
EBITDA Margin (%) 23.4 21.3 18.7 470 bps 19.8 366 bps EBITDA margins expand on the back of improved realisations
Interest 57.2 66.4 53.3 7.2 56.1 1.8
Depreciation 57.7 69.3 49.7 16.1 55.6 3.8
PBT 80.3 185.8 211.4 -62.0 189.7 -57.6
Total Tax 80.1 65.0 61.4 30.4 52.1 53.7
PAT 0.2 120.7 150.0 -99.8 137.6 -99.8 PAT lower owing to exceptional loss of | 178 crore

Key Metrics
Volume (MT) 2.67 2.66 2.88 -7.3 2.56 4.3 Loss of business in March leads to dip in volumes
Realisation (|) 5,533 5,393 5,182 6.8 5,485 0.9
EBITDA per Tonne (|) 1,297 1,148 971 33.6 1,085 19.5
Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates

FY21E FY22E
(| Crore) Old New % Change Old New % Change
Revenue 4,919.0 4,914.9 -0.1 5,998.0 5,957.2 -0.7
EBITDA 776.0 796.5 2.6 1,098.0 1,081.5 -1.5
EBITDA Margin (%) 15.8 16.2 43 bps 18.3 18.2 -15 bps
Source: Company, ICICI Direct Research

Exhibit 3: Assumptions
Current Earlier Comments
FY18 FY15 FY20E FY21E FY22E FY21E FY22E
Volume (MT) 9.4 7.2 9.8 9.5 11.1 9.4 11.2 Expect growth trajectory to resume in FY22
Realisation (|) 4,906 4,659 5,589 5,198 5,376 5,231 5,379
EBITDA per Tonne (|) 809 620 1,209 842 986 866 985
Source: Company, ICICI Direct Research

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 Result Update | JK Cement ICICI Direct Research

Conference call key takeaways

 Operations and outlook: The company faced dispatch issues as one
of the plants was in a containment zone and dispatches could start
only at the end of May. However, in June, JK Cement could see
higher volumes over June 2019. On an overall basis, the company
expects de-growth for the industry in FY21
 Expansion: Out of 4.2 MT grinding capacity addition, 3.5 MT has
been commissioned. Civil construction work at Balasinor has
resumed and is expected to be commissioned by October 2020.
Nimbahera clinker Line-3 modernisation should be completed by
December 2020. Panna greenfield expansion (3-3.5 MT integrated
plant) - has already bought 80% of land; timelines of the project will
be provided in later part of FY21
 UAE subsidiary: UAE sales during the quarter was 1 LT (clinker plus
cement) and 8800 tonnes was sold to India (South India). The
company made impairment provision of | 178 crore towards
investment in the subsidiary. The company had a turnaround plan
for Fujairah plant. However, the slowdown has intensified issues.
Expect $15-18 million to be sent to Fujairah for fulfilling its debt and
interest obligations in FY21
 White cement, putty: The 0.3 MT putty expansion should get
commissioned by the end of August 2020. The wall putty market - 3
MT and white cement market – 1.2 MT. The company has ~25%
market share. Margins in the white cement business have reduced
slightly due to higher sales & distribution expenses (rebranding) and
value added products where margins are lower
 Capex: The company will spend | 400 crore towards Balasinor GU
and WHRMS at Mangrol plant. Nimbahera clinker Line-3 - out of |
400 crore for this project, | 140 crore already spent and will spend |
250 crore in FY21E Total capex for FY21 is expected in the range of
| 650-700 crore. Company could see peak debt of | 3500 crore in
FY21 on gross levels and | 2500-2600 crore on net debt basis.
 Cost savings: Post Balasinor completion, 13.5 MT of the 14.7 MT
capacity would be new technology based and efficient; thus leading
to savings in P&F costs. See | 80-85 per tonne in freight costs
savings. The company has planned on fixed costs savings of | 60-
70 crore in fixed costs to tackle the ongoing issues
 Power & Fuel costs: The company had kept higher inventory of
petcoke considering expanded capacity and anticipating higher
demand. Owing to weaker offtake, we expect the inventory to last
for few more months. Average cost of petcoke for the quarter was
at | 8000 per tonne and average coal/petcoke cost (blended) was |
7000 per tonne, down | 2000 per tonne YoY. Petcoke prices have
slid further but expect benefits to arrive from Q2 owing to higher
inventory
 Other comments: The company had planned to provide incentives
to dealers to increase sales as the company has significantly
increased its capacity YoY. However, due to the Covid-19 lockdown,
the same did not materialise. Hence, the company reversed the
provision made earlier of | 20-25 crore

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 Result Update | JK Cement ICICI Direct Research

Financial story in charts

Exhibit 4: Blended realisations to bounce back in FY22E
14000
12000
10000
8000
6000
4000
11375

11983

11624

12205
11690
4073

4906

4489

5589

4219

5198

4388
4001

5057

5376
2000
0
FY18 FY19 FY20E FY21E FY22E

Grey Cement realisations White Cement realisations Blended Realisations

Source: Company, ICICI Direct Research

Exhibit 5: Grey cement volumes down 6.3% YoY Exhibit 6: White cement volumes dip in double digits

3.00 0.40 0.35 0.35 0.34

2.40 2.53
2.37 0.32 0.33 0.35
2.21 0.35 0.30
2.50 2.04 2.14
1.97 1.91 0.28 0.29
1.87 0.30
Million Tonne
Million Tonne

2.00 0.25
1.50 0.20
1.00 0.15
0.10
0.50 0.05
0.00 0.00
Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20
Grey Cement Volume White Cement Volume
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 7: Grey cement realisations up 7.1% YoY Exhibit 8: White cement realisations increase 5.7% YoY

0.40 0.35 0.35 0.34 12600

0.32 0.33 0.35
0.35 0.30 12400
0.28 0.29
0.30 12200
Million Tonne

|/tonne

0.25 12000 `
12417

0.20 11800
12217

0.15 11600
11750

11741
11738
11670

11664

11616

11591

0.10 11400
0.05 11200
0.00 11000
Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20

White Cement Volume White Cement Realisation

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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 Result Update | JK Cement ICICI Direct Research

Exhibit 9: Volumes to grow in FY22E Exhibit 10: Revenues to grow at 4.4% CAGR over FY20-22E
11.1 7000
12.0 9.8 5957
9.4 9.8 9.5 5464
10.0 1.40 6000 4981 4915
1.27 4591
1.17 1.32 1.25 5000 1709
8.0 1578

| crore
4000 1331 1487 1453
Million Tonne

6.0 3000
8.6 9.7
4.0 8.2 8.5 8.2 2000 3797 4249
3335 3432 3462
2.0 1000
0
0.0
FY18 FY19 FY20E FY21E FY22E
FY18 FY19 FY20E FY21E FY22E
Grey Cement Volume White Cement Volume Grey Cement Sales White Cement Sales
Total Sales Volumes Total Sales
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 11: EBITDA/t for Q4FY20 grows 33% YoY to Exhibit 12: Annual EBITDA/t to see recovery in FY22E
~| 1,300/t
1400 1209
1500 1315 1200
1297 986
1135 1085 1000 809 822 842
971
1000 843 800
786
|
|/tonne

669 650 600

500 400
200

0 0
FY18 FY19 FY20E FY21E FY22E
Q4FY18

Q4FY19

Q1FY20

Q2FY20

Q3FY20

Q4FY20
Q1FY19

Q2FY19

Q3FY19

Blended EBITDA/Tonne
Blended EBITDA/tonne (|)
Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

Exhibit 13: EBITDA to see headwind due to lower profitability Exhibit 14: PAT to see declines led by lower EBITDA, higher
1400.0 25.0 finance costs and deprecation
1181.5
1200.0 1081.5 1400
20.0 1209
1000.0 1200
760.7 810.1 796.5 986
800.0 15.0 1000 822 842
809
600.0 800
10.0
|

600
400.0
5.0 400
200.0
200
0.0 0.0
FY18 FY19 FY20E FY21E FY22E 0
FY18 FY19 FY20E FY21E FY22E
EBITDA (| crore) Blended EBITDA Margin (%)
Blended EBITDA/Tonne
Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5

 Result Update | JK Cement ICICI Direct Research

Exhibit 15: Price performance vs. Nifty

1600 14000
1400 12000
1200 10000
1000
8000
800
6000
600
400 4000
200 2000
0 0
May-17

May-18

May-19
Nov-17

Nov-19
Nov-18

JK Cement (LHS)
NIFTY (RHS)
Source: Bloomberg, Company, ICICI Direct Research

Exhibit 16: Top 10 Shareholders

Ran k Nam e Filin g Date % O /SPo s itio n (m
C h) an g e (m )
1 Y adu International L 31-Mar-20 39.9 30.8 0.0
2 S inghania Y adupati 31-Mar-20 15.6 12.1 0.0
3 S bi Funds Management 31-May-20 7.5 5.8 0.0
4 Fmr L lc 22-A pr-20 7.0 5.4 0.0
5 Franklin Res ources 31-May-20 4.2 3.2 -0.3
6 Mirae A s s et G lobal I 31-May-20 3.0 2.3 0.0
7 A x is A s s et Managemen 31-May-20 2.0 1.5 0.0
8 S inghania K av ita Y 31-Mar-20 1.7 1.3 0.0
9 A ditya Birla S un L if 31-May-20 1.5 1.2 0.1
10 K otak Mahindra A s s et 31-May-20 1.4 1.0 -0.1
Source: Company, ICICI Direct Research

Exhibit 17: Shareholding Pattern

(in %) Mar -19 Ju n -19 Se p -19 De c-19 Mar -20
Promoter 58.07 58.07 58.07 58.07 58.07
FII 10.01 10.70 11.94 12.12 12.39
DII 24.74 24.36 23.49 23.52 23.80
O thers 7.18 6.87 6.50 6.29 5.74
Source: Company, ICICI Direct Research

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 Result Update | JK Cement ICICI Direct Research

Financial summary

Exhibit 18: Profit and Loss Statement | crore Exhibit 19: Cash Flow Statement | crore
(Y e ar -e n d Mar ch ) FY 19 FY 20E FY 21E FY 22E (Y e ar -e n d Mar ch ) FY 19 FY 20E FY 21E FY 22E
T o tal o p e r atin g In co m e 4,981.3 5,463.8 4,914.9 5,957.2 Prof it a f te r Ta x 324.4 400.4 227.9 408.2
G row th (% ) 8.5 9.7 -10.0 21.2 A dd: De pre c ia tion 194.4 214.4 260.6 285.2
R a w ma te ria l c os t 838.0 860.7 846.2 1025.1 (Inc )/de c in C urre nt A s s e ts 30.1 -385.3 408.4 6.5
Employe e Ex pe ns e s 353.5 390.9 402.6 442.9 Inc /(de c ) in C L a nd Prov is ions214.4 -55.7 -124.2 61.1
Pow e r, O il & Fue l 1052.3 1009.1 917.1 1097.1 C F fr o m o p e r atin g activitie763.3
s 173.7 772.7 761.1
Fre ight c os t 1081.8 1032.1 1021.1 1224.6 (Inc )/de c in Inv e s tments -316.9 393.5 -135.0 -80.0
O the r Ex pe ns e s 845.6 989.4 931.3 1086.0 (Inc )/de c in Fix e d A s s e ts -689.0 -860.3 -675.0 -247.0
Tota l O pe ra ting Ex p. 4,171.2 4,282.2 4,118.5 4,875.7 O the rs -201.3 -14.1 0.0 0.0
EBIT DA 810.1 1,181.5 796.5 1,081.5 C F fr o m in ve s tin g activitie
-1,207.2
s -480.9 -810.0 -327.0
G row th (% ) 6.5 45.8 -32.6 35.8 Is s ue /(Buy ba c k) of Equity 7.3 0.0 0.0 0.0
De pre c ia tion 194.4 214.4 260.6 285.2 Inc /(de c ) in loa n f unds -34.8 616.7 0.0 -275.0
Inte re s t 222.7 222.9 276.4 250.8 Div ide nd pa id & div ide nd ta x -84.3 -84.3 -93.2 -93.2
O the r Inc ome 80.0 85.9 85.9 73.0 Inc /(de c ) in S e c . pre mium 0.0 0.0 0.0 0.0
Ex c e ptiona l ite ms 0.0 0.0 0.0 0.0 O the rs 495.5 -77.4 0.0 0.0
PBT 473.1 830.2 345.4 618.5 C F fr o m fin an cin g activitie s383.7 455.0 -93.2 -368.2
Tota l Ta x 148.7 251.6 117.4 210.3 Ne t C a s h f low -60.2 147.8 -130.5 66.0
PA T 324.4 578.5 227.9 408.2 O pe ning C a s h 543.5 483.3 631.1 500.7
G row th (% ) -5.1 78.3 -60.6 79.1 C lo s in g C as h 483.3 631.1 500.7 566.6
A d ju s te d EPS (|) 42.0 51.8 29.5 52.8 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

Exhibit 20: Balance Sheet | crore Exhibit 21: Key Ratios

(Y e ar -e n d Mar ch ) FY 19 FY 20E FY 21E FY 22E (Y e ar -e n d Mar ch ) FY 19 FY 20E FY 21E FY 22E
L ia bilitie s Pe r s h ar e d ata (|)
Equity C a pita l 77.3 77.3 77.3 77.3 A djus te d EPS 42.0 51.8 29.5 52.8
R e s e rv e a nd S urplus 2,813.0 3,051.6 3,186.4 3,501.4 C a s h EPS 67.1 79.6 63.2 89.7
Tota l S ha re holde rs f unds 2,890.2 3,128.9 3,263.7 3,578.7 BV 374.1 404.9 422.4 463.2
Tota l De bt 2,355.2 2,972.0 2,972.0 2,697.0 DPS 9.0 9.0 10.0 10.0
De f e rre d Ta x L ia bility 310.7 409.4 409.4 409.4 C a s h Pe r S ha re 62.5 81.7 64.8 73.3
Minority Inte re s t / O the rs 0.0 0.0 0.0 0.0 O p e r atin g Ratio s (%)
T o tal L iab ilitie s 5,556.1 6,510.3 6,645.0 6,685.1 EBITDA Ma rgin 16.3 21.6 16.2 18.2
A s s e ts PA T Ma rgin 6.5 7.3 4.6 6.9
G ros s Bloc k 5,324.3 6,216.5 7,320.7 7,495.7 Inv e ntory da ys 40.4 40.0 42.0 30.5
L e s s : A c c De pre c ia tion 1,699.4 1,913.7 2,174.3 2,459.5 De btor da ys 15.1 14.9 15.1 13.0
Ne t Bloc k 3,624.9 4,302.7 5,146.3 5,036.1 C re ditor da ys 81.7 30.2 30.0 30.0
C a pita l WIP 543.8 509.2 80.0 165.0 Re tu r n Ratio s (%)
Tota l Fix e d A s s e ts 4,168.7 4,811.9 5,226.3 5,201.1 R oE 11.2 18.5 7.0 11.4
Inta ngible A s s e t 10.4 13.0 13.0 0.0 R oC E 12.5 16.2 9.4 13.0
Inv e s tments 1,196.3 915.7 1,050.7 1,130.7 R oIC 14.9 18.0 9.0 13.9
Inv e ntory 570.5 627.2 503.9 491.6 V alu atio n Ratio s (x)
De btors 205.6 223.4 203.3 212.2 P/E 31.7 25.7 45.1 25.2
L oa ns a nd A dv a nc e s 313.2 624.0 359.0 355.9 EV / EBITDA 14.5 10.7 15.8 11.3
Cash 483.3 631.1 500.7 566.6 EV / Ne t S a le s 2.4 2.3 2.6 2.0
Tota l C urre nt A s s e ts 1,572.6 2,105.8 1,566.9 1,626.3 Ma rke t C a p / S a le s 2.1 1.9 2.1 1.7
C re ditors 1,114.4 452.6 404.0 489.6 Pric e to Book V a lue 3.6 3.3 3.1 2.9
Prov is ions 277.5 883.5 807.9 783.4 So lve n cy Ratio s
Tota l C urre nt L ia bilitie s 1,391.8 1,336.1 1,211.9 1,273.1 De bt/EBITDA 2.9 2.5 3.7 2.5
Ne t C urre nt A s s e ts 180.8 769.7 355.0 353.3 De bt / Equity 0.8 0.9 0.9 0.8
A p p licatio n o f Fu n d s 5,556.1 6,510.3 6,645.0 6,685.1 C urre nt R a tio 1.1 1.6 1.3 1.3
Source: Company, ICICI Direct Research Q uic k R a tio 0.8 1.1 0.9 0.8
Source: Company, ICICI Direct Research

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 Result Update | JK Cement ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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 Result Update | JK Cement ICICI Direct Research

ANALYST CERTIFICATION
I/We, Rashesh Shah, CA, Romil Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject
issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of
this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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