JK Lakshmi Cement: more strength in store


Updated Mon, 22 Dec 2014 16:53:41 GMT

The stock of JK Lakshmi Cement has surged 430 per cent since the buy recommendation a year ago. At the current market price of ₹396, the stock still holds potential given that the valuation is reasonable and the company is set to see earnings expand in the coming years.

The enterprise value of the stock is at a reasonable $98/tonne. Others such as ACC, UltraTech and Ambuja Cements are trading at enterprise value of above $130/tonne. Cement demand should revive in 2015 given the new infrastructure funding norms, the impending interest rate cuts and the Centre’s promised rural and infrastructure spends. JK Lakshmi Cement, a mid-size cement manufacturer based in the North, should benefit from the increase in demand and also as its new units are set to commence production in the next few months. From the current 6.6 mtpa (million tonnes per annum), the company’s capacity will rise to 9.3 mtpa by March (and increase further to 11.6 mtpa by FY16). JK Lakshmi has seen revenue and profits grow at a compounded annual rate of 16 per cent and 17 per cent, respectively, in the last three years. Growth in the current fiscal year, however, has been much better.

In April-September, thanks to northern markets seeing a higher than average demand growth, JK Lakshmi recorded 16 per cent growth in despatches against the industry’s 10 per cent, .

In the first half of FY15, the company’s sales grew 29 per cent and profits jumped 173 per cent. Higher volumes apart, better realisation and cost savings helped boost profits. Cement prices were down in July and August due to rains, but recovered in September.

In Delhi, the prices ruled at about ₹300/bag in September, ₹20/bag more than over the same month last year and ₹15/bag over the previous month.

Cost control

The company’s operating profit margin improved to 17.3 per cent in the April-September period, up from 13.9 per cent in the same period last year.

Margin expansion followed improved realisations, better fuel efficiency and also savings in power cost. Power costs as a percentage of sales was 20 per cent, down from 22 per cent last year. The company largely uses pet-coke in kilns in the place of coal. Since pet coke prices are linked to global oil prices, there will be significant cost saving for the company now. Brent Crude is at around $60/barrel, down from over $110/barrel last year.

The company’s debt-to-equity ratio is 1.05. For ongoing and future capex activities, funding requirements can be easily met internally.

Even if the company raises debt, it is well placed to meet interest costs. The interest-coverage ratio is 3.5 times now.

On price earnings multiple, the stock trades at 20 times its expected earnings for FY16.

Others such as JK Cement and Heidelberg Cement in the mid-cap cement space are trading in the price band of 21-25 times FY16 earnings.