JK Lakshmi Cement: Sharekhan retains a Buy rating with revised price target of Rs 525

JK Lakshmi Cement had reported strong performance for Q3FY2021 earnings, led by strong volume offtake (+15.8% yoy, +13.0% qoq) and rise in EBITDA/ tonne (+9.0% yoy, -9.1% qoq). The company witnessed strong demand in its key regions of operations in Q3 which is expected to sustain in Q4 as well which is expected to lead to a 7% volume growth for FY21 (+4.0% 9M FY21 volume offtake). JK Lakshmi Cement share price today is Rs 436, up Rs 2 or 0.5%.

Further, as per Sharekhan channel checks; average cement prices in the Western and Northern regions (together account of 75% sales mix) during Q4 FY21 till date are up 3.7% and 2.0%, respectively versus Q4FY2020. Further, prices in the eastern region rose sharply by 7.4% mom during February-end till date leading to an improvement in cement prices by 1.4% qoq for Q4 FY21 till date. Firm cement prices in the North and West and a sharp improvement in the East bodes well for JK Lakshmi.

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Further, the rise in non-trade demand in North and West and trade environment in East is expected to lead to healthy volume offtake for the company. Its trade mix is expected to remain stable at 50% and targets revenue of Rs 500 cr from value-added products in FY2022. The company is undertaking 1.5 mtpa additional clinker unit with a WHRS and a 2.5 mtpa grinding unit in its subsidiary Udaipur Cement Works (UCW) at an estimated cost of Rs 1500 cr (debt of Rs 1000 cr). Financial closure of the project is expected during H1 FY22 post which it will take three more years before commencing operations. The equity portion of Rs 500 cr is expected to be funded majorly through raising of equity at UCW level through a rights issue.

As of December 2020, JK Lakshmi Cement has a strong cash surplus of Rs. 900 crore while net debt stands at Rs. 550 cr. The planned capex is likely to ease clinker and capacity constraints for JK Lakshmi. JK Lakshmi Cement is one of their preferred picks in the cement sector owing to its healthy balance sheet, efficient operations, favourable regional operations and attractive valuation. JKL is currently trading at an EV/EBITDA of 5.6x its FY2023E earnings, which is lower than its historical average considering healthy net earnings CAGR over FY2021E-FY2023E. Hence, Sharekhan retains a Buy rating on the stock with revised price target of Rs 525.