JK Cements – Cycle Turning?
Company Name – JK Cements Limited (JK Cements)
Current Share Price – INR 2,818 (March 9, 2023)
Market Cap – INR 21,788 cr
1. What is interesting about the stock?
Cement is important to humans because it is a binder, a chemical substance used for construction that sets, hardens, and adheres to other materials to bind them together. It is a major component of building materials such as concrete and mortar, which are used in the production of many structures including buildings, bridges, harbors, runways, and roads. Additionally, concrete is one of the best building materials to use when avoiding waste is important, as it can be produced in the exact amounts needed for a job to ensure that no excess goes to waste. When the concrete structure is no longer needed, it can be broken down and reused elsewhere. One leading company in India is JK Cements.
JK Cements Limited is engaged in the manufacturing and selling of cement and cement-related products with over 4 decades of experience in cement manufacturing. It is an affiliate of the multi-disciplinary industrial conglomerate JK Organisation.
The Company is a Grey Cement manufacturer with a capacity of 14.7 MTPA. It is one of the world’s leading White Cement manufacturers with a capacity of 2.8 MTPA including a 0.6 MTPA facility in the UAE. Further, it is also one of the largest Wall Putty manufacturers in India. The Company has 7 grey cement plants located in Rajasthan, Karnataka, Haryana, Uttar Pradesh, Gujarat, and Madhya Pradesh. Additionally, it has 2 white cement plants, 1 each in Rajasthan and UAE, and 2 wall putty plants located in Rajasthan and Madhya Pradesh.
Company’s products and brands include:
Grey cement (77%): Under this segment, the company operates brands like JK Super Cement - OPC, JK Super Cement - PPC, JK Super Cement - PSC, JK Super Strong Cement, and JK Super Strong Weather Shield Cement, among others.
White cement and allied products (23%): Under this segment, the company has brands like JKCement WhiteMaxX, JKCement WallMaxX, JKCement ShieldMaxX, JKCement GypsoMaxx, JKCement RepairMaxX, JKCement SmoothMaxX, JKCement LevelMaxX, JKCement TileMaxX Adhesives & grouts, and JK Wood Amore.
The Company has also entered the paints business by acquiring the majority of Acro Paints with the commitment of acquiring the full stake within this year. This marks the Company’s entry into the paints industry.
The key factors that affect this investment include:
Revenue mix between grey and white cement as the realization in the latter is significantly higher. In 3QFY23, it was 74:26
Ability to pass on costs to customers to offset higher input costs – cement companies have been party to various fines for price collusion but have been able to pass on hikes based on the demand. In 3QFY23, the Company could take INR 25/bag hike in North India but nothing in South India
Power and fuel costs are significant input costs in the process and any variation in their prices affects margins. Companies are moving to green fuels to reduce their dependence on coal and fuel prices
Freight costs are nearly 15-20% and therefore, setting up capacities in locations that can reduce the lead distance between production and consumption locations can make a big difference. JK Cement has set up plants in strategic locations and has commissioned a new capacity in Panna (Madhya Pradesh) in 3QFY23
Company has been committing capex to increase capacity for cement as well as clinkers to debottleneck its plants and improve capacity utilization, which stood at 92% for 3QFY23
2. Key Historical Financials
Company revenue and profit have been growing 15% and 31% on a CAGR basis respectively in the last 5 years
EBITDA margin has come down from 21-24% in FY20 and FY21 to 19% in FY22. Furthermore, the margin is down to 10% in Q3FY23 due to an increase in power & fuel cost, raw material price, and freight cost
JK Cements has net D/E ratio of ~0.8x and interest coverage ratio of 5.6x
Working capital days significantly increased in FY22 leading to a poor cash flow conversion (CFO/EBITDA) ratio
ROE and ROCE were at 17% in FY22
3. What is my view on company valuation?
The Company is trading at a P/E of ~43x as against the 5-year median P/E of ~25x on account of expected growth on the back of its aggressive capex plans and efficient management of these expansion projects. The sectoral median is also ~30x currently which is high as the margin across the industry is coming down due to higher power & fuel and freight costs.
Long-term investors could evaluate entering a near 5-year median P/E as the euphoria due to its entry into the paints segment and the capex should also moderate.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Central India is currently the best-performing region driven by strong Government impetus. Any socio-political change in the region and reduction in infrastructure expenditure could affect the demand
Cement manufacturers have been imposed with fines by the Competition Commission of India on charges of price collusion and anti-competitive behavior, which has been challenged in court. But this regulatory challenge will persist in the sector
Company has invested in non-core businesses such as paints. The investment is currently marginal but any increase in the same would need to be monitored
If inflationary cost trends persist and the Company cannot pass it on to its customers, they pose a risk to the margins of the business
About the Author
I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.