Stock Market Update on JK Lakshmi Cement for 4QFY2011

Stock Market Update on JK Lakshmi Cement for 4QFY2011 with a Buy recommendation and a Target Price of `57 (12 months)
 

    JK Lakshmi Cements (JKLC) reported a 54.4% yoy decline in its bottom line during 4QFY2011 due to a 10.7% drop in volumes. However, realisations improved by 4.6% yoy (14.0% qoq) due to price hikes taken by cement manufacturers during the quarter by adopting production discipline. EBITDA per tonne stood at `619, down 15.3% yoy. On a sequential basis, the company reported strong bottom-line growth on a low base, due to higher dispatches (up 15.1%) and better realisations. Dispatches rose sequentially due to pick-up in demand from the northern region. We maintain our Buy recommendation on the stock.

    Top line down 5.5% yoy: JKLC registered a 5.5% yoy top-line decline to `417cr, primarily due to a 10.4% decrease in dispatches to 1.26mn tonnes. Cement realisations improved by 4.6% yoy to `3,298/tonne. The company’s margin declined by 456bp yoy to 18.6% due to higher power and fuel and freight costs. Per tonne power and fuel and freight costs increased by 44.1% yoy and 24.2% yoy, respectively, during the quarter.

    Outlook and valuation: We expect JKLC to post a decent 14% CAGR in its top line over FY2011–13E, aided by a 10% CAGR in dispatches over the period. However, we expect margin pressure due to moderate growth in realisations and escalations in cost. At the CMP, the stock is trading cheaply at EV/EBITDA of 2.6x and EV/tonne of US$29 based on FY2013E. We have valued the stock at EV/EBITDA of 3x on FY2013E to arrive at a target price of `57. Although weak fundamentals would remain an overhang in the near term, we maintain our Buy recommendation on the stock primarily due to its cheap valuations.