Low cost helps JK Cement in the first quarter, but rich valuation is a drag

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The availability of low cost inventory saved the day for JK Cement Ltd during the June quarter. As a result, standalone EBITDA at 400.1 crores in Q1FY23 exceeded analysts’ estimates. Ebitda is the abbreviation of earnings before interest, taxes, depreciation and amortization. At a time when many cement manufacturers are struggling with high input costs, JK Cement’s relatively low operating costs have provided relief to its investors.

Unfortunately, the advantage of low cost inventory would soon fade.

The company’s management expects the impact of high-cost fuel inventory to be reflected in the September quarter, weighing on its profitability. Investors are also reportedly watching its expansion plans closely.

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JK Cement aims to add 4 million tonnes per annum (mtpa) capacity in central India by Q3FY23. The company aims to reach a capacity of 25 mtpy by FY25. “Increased diversification in central India, attractive regional pricing and prospects for demand growth make the expansion project value-creating,” analysts at Kotak Institutional Equities said.

A rapid ramp-up of these units is crucial to drive volume growth, especially when peers are also adding capacity in this region.

However, after the recent surge in the share price, valuation has become costly, especially given the poor performance of its white cement business and the fear of higher cash burn in the phase. initial of his painting company.

Shares of the company hit a 52-week low of 2,003.70 on June 23, 2022. From these levels, the stock has risen 37% in just two months. Analysts said the rally had more to do with market sentiment turning in the cement sector’s favor as costs fall, rather than company-specific factors.

Bloomberg data shows the stock trading at FY24 EV/Ebitda of 12x. EV is short for enterprise value.

“While JK Cement has performed very well in its gray cement business, delivering both capacity and margin increases, the white cement business is witnessing increased competition from paint companies , which weighs on its margin and its contribution to earnings,” said analyst Rajesh Ravi, of Institutional Research, HDFC Securities.

JK Cement’s recent foray into the highly competitive paints business could also hurt its profitability, which should limit revaluation, he said.

Meanwhile, company management said it is setting up a paint plant in Uttar Pradesh which will be commissioned by the end of FY24. total investment of 600 crores for the paints sector over five years.

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