Tuesday, February 14, 2012

>JK CEMENT: Stellar performance, maintain Buy

JK Cement’s Q3FY12 PAT at Rs435mn was significantly above ours (est.:Rs304mn) and Bloomberg consensus estimates of Rs204mn primarily due to steep improvement in realization of grey cement (Rs3,757/tonne vs. Rs2,927/tonne in Q3FY11 and Rs3,323/tonne). EBITDA increased 120.3% YoY (and 100% QoQ) to Rs1.2bn and EBITDA margin improved 795bps YoY (and 773bps QoQ) to 19.4%. Cement prices continue to remain firm in the key markets of the company (South and North regions) and hence, grey cement realization increased Rs820/tonne YoY (up 27.9%) and Rs434/tonne QoQ (up 13% QoQ) to Rs3,757/tonne. We have factored in higher cement prices for the company due to prolonged sustainability of cement price at higher levels in the South region despite industry utilization rate of 60-65% over the past one year contrary to our expectation of a decline in cement prices due to lower utilization rate. On the back of higher realization, adjusted PAT of the company increased 9.3x YoY to Rs971mn (88% of Bloomberg consensus estimates for FY12E) in 9MFY12E and hence, we believe that consensus estimates of the company would see a significant revision. We have revised our EPS estimates by 39.5%/38.1%/2.6% for FY12E/FY13E/FY14E to Rs21.9/Rs24.8/Rs28 respectively considering higher realization of grey cement. We maintain Buy on the stock with a revised price target of Rs204 (earlier: Rs167), an upside of 50.9% from CMP.

 Improvement in grey cement realization and sales volume lead to higher revenues….: Revenue of the company increased 29.9% YoY to Rs6.2bn led by 27.9% YoY growth in grey cement realization to Rs3,757/tonne and 18.7% YoY growth in white cement realization to Rs15,537/tonne. Grey cement sales volume grew 6.5% YoY to 1.27mt (including Clinker sales of 0.04mt).

 ….. Leading to significant increase in EBITDA and profits: Driven by improvement in realization of both grey and white cement, EBITDA of the company increased 120.3% YoY (and 100% QoQ) to Rs1.2bn. EBITDA margin improved 795bps YoY (and 773bps QoQ) to 19.4%. Profit of the company increased 23.8% YoY (and 12.2% QoQ) to Rs435mn.

 Significant improvement in earnings in 9MFY12: Profits of the company increased 9.3x YoY to Rs971mn in 9MFY12 primarily due to 16% YoY increase in grey cement realization in the same period. EPS of the company for 9MFY12 stands at Rs13.9 against Rs1.5 in the same period last year.

 Earnings estimates revised upwards: We revise EBITDA estimates upwards by 17.2%/17.9%/2% to Rs4.5bn/Rs4.7bn/Rs5bn for FY12E/FY13E/FY14E to factor in higher realizations in key markets of the company. Our EPS estimates stand revised upwards by 39.5%/38.1%/2.6% to Rs21.9/Rs24.8/Rs28 for
FY12E/FY13E/FY14E respectively.

 Maintain Buy on attractive valuations: At the CMP, the stock trades at 4.8x FY14E EPS, 3x EV/EBITDA and EV/tonne of US$46.1. We maintain Buy on the stock with a revised price target of Rs204 from Rs167 earlier considering the improvement in realizations and operating margins due to lower pet coke price and higher realizations.