ICICI Direct: Buy JK Lakshmi Cement

JK Lakshmi Cement (JKL), a north-based cement player with a total capacity of 4.75 million tonne (MT)and has a 36 MW captive power plant at Sirohi. The company has major presence in Rajasthan, Gujarat, Maharashtra and North India markets. North India, Rajasthan and Gujarat contribute around 30% each to the total sales while Maharashtra contributes the remaining 10% of the total sales. North Indian markets include J&K, Himachal Pradesh, Punjab, Haryana, Delhi and west UP.

Investment rationale

Capacity addition to drive Volumes: JKL has increased its cement capacity by 30% from 3.65MT in FY2008 to 4.75MT in March 2009 by adding two grinding units of 0.55 MT each at Sirohi, Rajasthan and Kalol, Gujarat. The company is further planning to set up a green field plant 2.7 MT plant at Durg, Chhattisgarh at project cost for the expansion is Rs 1100 crore. The plant is expected to come on stream by mid- FY13. Thus capacity addition will drive the volumes of the company.

Cost Savings to help cushion Margins JKL mainly uses petcoke as a fuel for its operations. It has contracted the fuel at lower prices until October 2009 at Rs 4000 per tonne. Domestic petcoke price in June were hovering around Rs 4800 per tonne. The company is also expanding its captive power capacity to 48 MW by setting up a 12 MW waste heat recovery plant at Sirohi, Rajasthan. The variable cost per unit will be only Rs 0.3-0.4 per unit and will generate carbon credit income. Captive Power will meet 70% of the power requirement of the company.

For balance power requirement, Company has also entered into strategic tie ups with KSK group company, VS Lignite for the purchase of 21MW power every year at a cost of Rs3.2/unit for 20 year.(JKL as of now sources power at Rs4.6/unit from grid). This would translate into a savings of Rs1.4/unit from October 2009 onwards. Power and fuel constitute about 34% of the cost of production. Contracting of power and fuel at low cost has increased the earning visibility. Presence in high growth North India market

JKL has significant presences in North India. Cement consumption in Northern region grew at impressive 14.5% as compared to all India average of 11.6%. On account strong consumption growth prices in key markets of JKL has
remained firm. Going ahead, we expect the northern region 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.

Healthy Balance sheet JKL has a cash and Investments of Rs 416 crore (Rs 68 per share) It has comfortable a net debt equity ratio of 0.35X. Company is presently. The company is evaluating option of deploying cash by setting up merchant based power plant.

Risks & concerns

Delay in Capacity Expansions JK Lakshmi is on the verge of capacity expansions for cement and Captive Power. Any delay in capacity expansions plans will have a Negative Impact on the earnings of the company Slowdown in Demand Any slowdown in the demand from the end user industries like Housing, construction and Infrastructure will put more than expected pressure on the prices.

Valuations

At the CMP of Rs 127 per share, the stock is trading at 4.5x its FY09 earnings and 0.99x its FY09 book value. On an EV/EBITDA basis, the stock is trading at 3.1x while on an EV/tonne basis, it is trading at $46.7 of its FY09 capacity. Since JKL is trading at less than half of its replacement cost and its large cap pears, despite having healthy return ratios (RoNW of 25.2% & RoCE of 19.5%) we expect 10% upside from the stock in 3-6 months.

Technical Outlook

The Stock is forming rising peaks and troughs on the weekly charts which define an up trend. The stock began fresh up move last week after five weeks of consolidation. Sustained trading above 127 would trigger further upsides for the stock. We place short term target of 140 and 143, with stop loss at 119. Earlier, the Stock has corrected from its Dec’07 highs of 223 and made a good base around 35 levels. Then from mid March’09 it started its uptrend accompanied by rising volumes.

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