>JK CEMENT (ICICI DIRECT)

Company Background
JK Cement, a part of the JK group, was incorporated by acquiring the assets of the cement division of JK Synthetics in November 2004. Currently, JK Cement has grey cement capacity of 4.4 million tonne (MT) and white cement capacity of 0.4 MT. The company is the second largest manufacturer of white cement in India. JK Cement sells cement under brand names Sarvashaktiman (43 grade OPC), JK Super (blended cement) JK White Cement and JK Wall Putty.

The JK Cement Works (Fujairah, UAE) FZC, a subsidiary of JK Cement, has signed an MoU with the Municipality of Fujairah. The company has been allotted limestone mines with reserves estimated at 150 MT.

Investment rationale

To increase cement capacity by 68%
JK Cement’s 3 MT greenfield plant at Karnataka is likely to be commissioned in H1FY10. The new plant will increase grey cement capacity by 68% from 4.4 MT at present to 7.4 MT at the end of H1FY10. On account of capacity additions, we expect JK Cement’s grey cement volumes to grow at a CAGR of 23.2% between FY09 and FY11.

Decline in pet coke prices, entering into high priced South Indian market to boost margins
JK Cement meets 90% of its fuel requirement through petcoke and rest 10% from linkage coal and open market. With crude oil and coal correcting from its peak, petcoke prices have also declined by 25% from its peak. Thus, we expect JK Cement’s power & fuel cost to decline to Rs 785 per tonne in FY10 from Rs 972 per tonne in FY09. Apart from this, JK Cement’s entry into the high-priced South India market will have a favourable impact on blended realisations. Thus, we expect the EBITDA margin of JK Cement to improve from 21.6% in FY10 from 22.6% in FY09.

Presence in high growth market
JK Cement’s sales contribution is 33% from Haryana, 27% from Delhi and UP, 21% from Rajasthan and 19% from Punjab, MP and Gujarat. Most states where JK Cement has a presence are growing faster than the all-India average. As against all-India consumption growth of 11% in April-May 2009, consumption has grown by 27% YoY in UP, 16% in Gujarat & Haryana, 11% in MP and 9% in Gujarat. Going ahead, we expect the northern region (key market of JK Cement) to continue to grow above the all-India average due to incremental demand that will come from the
Commonwealth Games and the hydropower projects coming up in the region. In addition, the upcoming US$90- billion Delhi-Mumbai Industrial Corridor project and the 1,483-km high-speed dedicated freight corridor project will also boost cement demand in North India.

Q1 results expected to be encouraging
With 14% YoY growth in blended sales volume and 5.8% increase in blended realisation, we expect net sales to grow by 20.6% YoY to Rs 414.4 crore. We expect the EBITDA margin to increase by 570 bps to 27.9% due to decline in power & fuel cost and improvement in realisation. We expect the adjusted PAT to grow by 69.8% YoY to Rs 61.3 crore. On a QoQ basis, we expect the PAT to grow 2.6%.

Risks & concerns

Delay in ramping up of greenfield plant

Delay in ramping up of greenfield plant of 3 MT at Karnataka may lead to lower volumes.

To see full report: JK CEMENT