JK Lakshmi Cement: Buy

The cement industry, which has been reporting sagging volumes, falling realisation and rising costs, is set for revival. The year’s normal monsoon is expected to stoke rural income and increase the demand for cement. Already, the Cabinet Committee on Investment has approved 103 projects amounting to $57 billion. Also, if the bumper harvest brings down inflation, interest rates may do an about-turn and help kick off investments.

It’s the right time to pick up beaten down stocks from the cement sector. JK Lakshmi Cement, which operates in the north and west of the country, will be a value pick now.

At Rs 74, the stock discounts its estimated earnings of FY15 by around six times. Historically, the stock has traded in the PE band of 4-16. Though, there has been a rally in the stock in the last two weeks, it is still significantly lower from its one-year high of Rs 172.

JK Lakshmi Cement recorded a 7 per cent increase in despatches in the recent September quarter, even as the industry recorded a meagre 3.5 per cent growth. A change in geographical mix and a gain in market share following an aggressive marketing campaign helped the company do better than peers. However, the sharp drop in cement prices in the July-September period hurt profitability and net profit declined 80 per cent, year-on-year. Investors with a long-term perspective can still buy the stock of JK Lakshmi as FY15 is likely to be a better year for the company.

Cement prices have recovered from the lows of October and there are also signs of demand recovery. With State Assembly elections having ended in Rajasthan and Chhattisgarh, infrastructure building activities in this belt may pick up soon. Also, restrictions on sand mining in Rajasthan, which hit the demand for cement in the State, have been partially relaxed now. In the September quarter, JK Lakshmi Cement’s revenues dropped 9 per cent following an almost 14 per cent fall in realisation. Cement prices in most parts of the country had corrected sharply during this period with construction activity grinding to a standstill with early onset of the monsoon.

The lacklustre growth in orders from the infrastructure space too weighed on cement prices.

But, going ahead, things are set to improve, as cement prices have begun to head north. In Central India, which contributes around 12-15 per cent of volumes for JK Lakshmi Cement, prices have increased by almost Rs 20/bag in November month-on-month to Rs 295/bag. Delhi, Ahmedabad and Surat have also seen prices increase, though by a lower Rs 5-10/bag. Price increases have followed a pick-up in demand, say cement dealers. November despatches are likely to be 4 per cent higher over last year, inching up from a 1 per cent growth in October. If the demand recovery sustains, prices may go up even further.

For cement demand to sustain, investments by both public and private sector players should revive. And even minimum efforts by the new government that will take charge at the Centre in mid-2014 could lift the economy from its current situation as the industry is already plumbing record lows. Also, as a bumper harvest is expected, the affordability of rural households will inch up next year.

With housing making up over 60 per cent of cement demand and 40 per cent of this coming from rural India, the boost to rural income will definitely help. JK Lakshmi’s sales in the rural markets had increased to 37 per cent of trade sales (that happen through the dealer network) in FY13 compared to 32 per cent last year.

The company’s 2.7-million tonnes per annum new unit in Durg, Chhattisgarh, is expected to be completed by the third quarter of FY15. The expansion of grinding capacities in Haryana, Gujarat and Rajasthan are also expected to be completed over the next one year. When this happens, the demand-supply situation in the industry will turn more favourable. The current capacity utilisation is close to 90 per cent.

JK Lakshmi is one of the low-cost cement manufacturers in the country. In continuation of its efforts to cut costs, last quarter, JK Lakshmi changed its fuel mix and optimised the waste heat recovery system. In the quarter ending September too, the company was able to cut power and fuel costs by 9 per cent Y-o-Y. But these efforts helped little following a sharp decline in cement prices and significant increase in raw material costs. JK Lakshmi’s operating margin declined to 11.2 per cent, from 20 per cent in the same quarter last year.

If cement prices continue to maintain their rising trend seen in November, the efforts by JK Lakshmi Cement to check costs will begin to pay off. The company’s debt-to-equity ratio stands at a comfortable 0.9 times. It intends to fund its capex largely from internal accruals.

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