Availability of low-cost inventory saved the day for JK Cement Ltd in the June quarter. As a result, on standalone EBITDA 400.1 crore in Q1FY23 was higher than analysts’ estimates. Ebitda is short for earnings before interest, taxes, depreciation and amortization. At a time when many cement makers are battling high cost of living, JK Cement’s relatively low operating expenses provided some respite to its investors.
Unfortunately, the benefits of low-cost inventory will soon wear off.
The company’s management expects the impact of higher cost fuel inventories to be visible in the September quarter, impacting its profitability. Investors will also keep an eye on its expansion plans.
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JK Cement aims to add 4 million tonnes per annum (MTPA) capacity in central India by the third quarter of FY23. The company aims to reach 25 MTPA capacity by FY25. “Increased diversification in central India, attractive regional prices and increased demand prospects make the expansion project value-additional,” said analysts at Kotak Institutional Equities.
Timely ramp-up of these units is critical to drive volume growth, especially as peers are also adding capacity in the segment.
However, following the recent rally in the stock price, valuations have become costlier, especially given the weak performance of its white cement business and concerns about more cash-burning in the early stages of its paint venture.
The company’s shares hit a 52-week low 2,003.70 on 23 June 2022. From those levels, the stock is up 37% in just two months. Analysts say this uptrend is related to the shift in market sentiment in favor of the cement sector as costs are coming down and not just company-specific factors.
Bloomberg data shows the stock is trading at 12x FY24 EV/Ebitda. EV is short for Enterprise Value.
Rajesh Ravi, Institutional Research Analyst, said, “While JK Cement is doing very well in its gray cement business, providing both capacity and margin expansion, the white cement business is seeing increased competition from paint companies, increasing its margins and margins. Profits are pulling up contributions.” HDFC Securities.
JK Cement’s recent move into the highly competitive paint business may also reduce its profits and should put a hold on re-rating of valuations, he added.
Meanwhile, the company’s management said that it is setting up a paint plant in Uttar Pradesh which will be made operational by the end of FY24. The total capital expenditure of the company will be 600 crores for paint business in five years.
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