Ambit has initiated coverage in JK Cement with a buy rating.
The target price is Rs 1,600 (an upside of 55 per cent on a CMP of Rs 1034) over 12 months.
JK is committed to building scale and has a strong project management capability.
The company has leadership in white cement - putty but among grey cement peers, it remains an average performer in capacity and volume.
It is completing its 4.2MTPA grey cement expansion under phase I of its plan to raise capacity to 18MTPA and has already acquired most of the land for its Greenfield expansion in Madhya Pradesh (3-3.5MTPA) under phase II.The companys share price moved up by 1.72 per cent from its previous close of Rs 919.75.
The last traded price is Rs 935.55.
Incorporated in 1994, JK Cement has a market cap of Rs 7259.74 crore.Investment RationaleJK reorganized into separate business heads for grey and white business in 2014 and improved people - processes in FY14-16.
Over FY20-22E, the brokerage expects 21 per cent CAGR in grey EBITDA and 8 per cent CAGR in white EBITDA driven by putty expansion.
Along with growth and strong margins/RoCE, by FY22, the company would be able to build on efficiencies and undertake expansions without more debt.
The target price offers 55 per cent upside, implying 9 times FY21E EV/EBITDA for grey and 21 times FY21E P/E for white business.The brokerage says strong EBITDA growth and increased operating cash flow (OCF) will drive upside.
Improved grey margins and strong growth in white, led to JKs stock outperforming the sector.
Further upside will be partly from strong EBITDA growth (16 per cent CAGR FY20-22E) and through potential re-rating from (1) improved unitary EBITDA profile for grey (>Rs 900/t in FY22); (2) appreciation of scalable-process set by promoters-cum-professional management; (3) higher OCF scale.
The brokerage values the grey business (Rs 76 billion, 53 per cent of SOTP) implying Rs 5,200/t.
FinancialsFor the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1471.78 crore, up 11.70 per cent from last quarter sales of Rs 1317.63 crore and up 10.81 per cent from last year's same quarter sales of Rs 1328.23 crore.
The company reported net profit after tax of Rs 124.30 crore in the latest quarter.