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BSE   26 May 17 | 12:00 AM

480.35 3.85 (0.81%)
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Code: 500380
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NSE   26 May 17 | 12:00 AM

481.15 3.1 (0.65%)
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Code: JKLAKSHMI
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1 Week : Rs 472.15 (1.74%)
1 Month : Rs 462.70 (3.81%)
1 Year : Rs 345.70 (38.95%)
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Opportunity in mid-cap cement space

Ujjval Jauhari / Mumbai 25 May 15 | 05:50 PM

After a subdued March quarter, North-centric mid-cap cement stocks have seen deep correction. JK Lakshmi Cement, JK Cement and Mangalam Cement have fallen 21-30 per cent from their highs, to Rs 338, Rs 605 and Rs 250, respectively.

This offers a good opportunity to invest in these stocks, considering the valuations these are trading at and the prospects.

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Cement demand has been subdued. There isn't much uptick seen in the current quarter. The average price of a 50-kg bag was down by about five per cent to Rs 253 during the March quarter in the north. In central India, it was down three per cent, to Rs 286. In the west, though, it was marginally up at Rs 295 from Rs 285 in the year-ago quarter. The prices remain subdued in the current quarter.

Shailendra Chouksey, whole-time director at JK Lakshmi Cement, says weak demand has had an impact on volumes and realisations in the quarter ending March and there isn't much improvement on the ground till now. However, he expects demand to improve during the second half, pushed by the Rs 100,000 crore of infra spending by the government and demand from the housing sector and rural areas.

JK Lakshmi had seen a 10 per cent year-on-year decline in volumes to about 1.5 million tonnes and a 29 per cent decline in Ebitda (earnings before interest, taxes, depreciation and amortisation) per tonne to Rs 466. Nevertheless, it has geared up and increased its capacity to about six mt in the north and started 1.8 mt of capacity at Durg, to be upgraded to 2.7 mt for catering to the eastern markets. At an enterprise value (EV)/tonne of $80, it trades at attractive levels and analysts at Kotak Institutional Equities expect the Ebitda to grow at a compounded annual rate (CAGR) of 42 per cent and earnings by 69 per cent over FY15-17. The brokerage has a price target of Rs 435, indicating a 29 per cent upside from current levels.

Mangalam Cement's total cement capacity has reached 3.25 mt after additions. It is adding grinding capacity of 0.5 mt, likely to get commissioned over a few quarters. Helped by capacity expansion, its grey cement sales volume grew 13.2 per cent year-on-year, whereas, clinker sales volume was down 10.3 per cent. Realisation was down 0.5 per cent in the subdued pricing environment. However, the impact at the operating level was more, due to higher costs.

As realisations improve, Sanjeev Kumar Singh at Emkay Global expects Mangalam's Ebitda and grey cement sales volume to clock a CAGR of 72 per cent and 12 per cent over FY15-17. Analysts at ICICI Securities say, "On an EV/tonne basis, the stock is trading at $55 on capacity of 3.25 MT, a 42 per cent discount to its mid-cap peers." While ICICI Securities has a target price of Rs 322, Emkay's is Rs 356, indicating an upside of 29-42 per cent.

North-centric JK Cement, with some exposure to Karnataka, is also the largest in white cement and wallcare putty. The company saw a 1.5 MT grey cement plant commissioned in Rajasthan during September 2014, taking its total capacity to 10.5 mt. It also commissioned a white cement capacity of 0.6 mt in the UAE, along with a 1 mt grey cement capacity. The white cement portfolio keeps its profitability stable, contributing about half to the Ebitda.

Thus, while Ebidta per tonne of the grey cement business remained soft in the March quarter at Rs 543, the blended cement Ebitda per tonne at Rs 832 (including white cement) was comparatively stronger and led overall Ebitda to remain stable. Analysts believe that though pressure will continue in the first half of FY16, the second half will be much better. The target price of about Rs 770 of Kotak Institutional Equities indicates a 27 per cent upside from current levels.

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