Indian Cement Industry Outlook
India is the second-largest producer of Grey Cement with an overall capacity of 541 Mn TPA and it is expected to add around 24 Mn TPA in fiscal 2021‑22 to reach 565 Mn TPA. The Indian cement industry has enormous growth potential because India has abundant and high-quality limestone reserves throughout the country. The Government of India has taken several initiatives to boost the cement industry. As per Union Budget 2021-22, the government allocated INR 13,750 Crores for AMRUT & Smart Cities mission and INR 27,500 Crores for PM Awas Yojana (PMAY) also PM Ghramin Sadak Yojna boosting the demand for Cement.
The National Infrastructure Pipeline expanded to 7,400 projects from 6,853 projects which will drive cement demand for FY 2021-22.
Cement demand, in the long run, would be majorly driven by the infrastructure and housing segment.
Considering Per Capita Consumption of the World
India stands at 200 – 250 kg which is still half of the Average Consumption. This Indicates, there’s Tremendous Scope for expansion.
About JK Cement
The JK family is currently divided into three main groups headed by Dr. Gaur Hari Singhania based in Kanpur, Shri Hari Shankar Singhania based in Delhi and Shri Vijaypat Singhania based in Mumbai.
The Kanpur family runs JK Cement Ltd and JK Technosoft, which provides technology solutions to organizations. The Delhi family runs JK Tyre, JK Paper, JK Lakshmi Cement, JK Fenner India Ltd, Umang Dairies Ltd, JK Seeds, Global Strategic Technologies (military solutions and equipment division), JK Risk Managers & Insurance Brokers. The Mumbai family runs the Raymond of companies. Though run independently of each other, the various companies that are part of the organization all use the JK Group Logo, in recognition of the family's history.
J.K. Cement Limited is engaged in the cement business. It is one of the largest cement players in North India. It manufactures grey cement [capacity is 10.5MTPA], white cement [capacity is 0.6MTPA] and white cement-based wall putty [capacity of 0.7MTPA].JK Cement was the first company to install a captive power plant in the year 1987 at Bamania, Rajasthan, and the first cement company to install a waste heat recovery power plant to take care of the need for green power. It has also expanded its grey cement capacity by 3 MTPA through two split grinding units (1.5 MTPA each), one at Mangrol (Rajasthan) and another at Jhajjar (Haryana).
JK Cement is the 3rd largest producer of White Cement in the World and 2nd Largest in India with a 40% Market Share in India. White Cement contributes 33% of the Total Revenue whereas Grey Cement contributes 67% of Revenues.
JKCE has approved setting up a Greenfield 4 Mn TPA cement capacity in Central India, improving volume growth visibility. This would help the company expand its reach across Central, spanning Uttar Pradesh (UP) and Madhya Pradesh (MP). Currently, it is present only in a western UP and western MP.
Currently, India's demand for cement is 250 - 300 Mn TPA & the company plans on reaching an annual capacity of 18MTPA by FY23 which can be easily consumed.
Any Cement Company has 3 major Cost Heads |
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JK cement is Working on reducing all three expenses.
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Also, it has increased the proportion of imported coal in the kiln fuel mix to mitigate the impact of rising pet coke prices. |
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Financials Source: Screener.in
Let’s look at the CAGR Growth rate
EBITDA has grown at a much higher rate than Sales, which means the company has made great efforts in reducing its operational Expenses.
Peer Comparison - JK dominates its peers in 3yr and 5yr Profit growth also ROE seems to be the highest. Only Debt to Equity is concerning. Borrowing has increased at a CAGR of 10.26% in the last 10 years. Having said this, their reserves have also grown at a CAGR of 10.69% during the same period. Also, the company has enough Free Cash Flow. Thus the debt burden seems to be mitigating.
Potential Risks:
Futuristic Approach – |
After expanding its capacity in North by 4.2 MTPA, JKCE has announced another lucrative 4 MTPA expansion in Central. These expansions bring three significant advantages to the company:
Once the Panna capacity is commissioned (likely by 1QFY24), the company’s capacity share would increase to ~20% in Central, while it would reduce to ~60% in North and ~15% (from ~20%) in South.
Amid COVID uncertainty, JKCE has decided to not pursue Panna expansion during FY21E, to reduce balance sheet stress.
Once this capacity is commissioned (not likely before FY24), the company's capacity share would increase in central India, while it would reduce its dependency in the north and the south.
Upgrade and expansion of existing kiln at Nimbahera to improve EBITDA:
JKCE is increasing the production capacity of one of its kilns at Nimbahera to 6,000tpd from 5,000tpd currently. This would help extend GST benefits for the company up to 2027. Currently, the company enjoys GST benefits for its Mangrol plant – these are due to expire in 2021.
The putty capacity expansion provides growth visibility:
JKCE has recently expanded its wall putty capacity in Katni by 0.3mtpa, increasing the overall putty capacity to 1.2mtpa. White cement and putty currently contribute around one-third to JKCE’s overall EBITDA. This is a high-margin business and has been growing at over 10% CAGR in the past few years
Valuations
The company is trading at 28.3 whereas industry PE is 18.5 and EV/EBITDA is approx. 15. These 2 ratios state that the stock is slightly overvalued. But PEG is at 0.44 stating the company has significant growth potential.
Conclusion
India’s Cement per capita consumption is at the lower spectrum, while there are tremendous development and infrastructure activities that are yet to be carried out. We expect that the company will get benefit from a strong position in the grey as well as white cement market. Also, the company is focusing on increasing CAPEX & capacity utilization with effective cost rationalization techniques. These are going to be the growth drivers for the company.
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