JK Cement: Strong Capacity Addition Plans Ahead

JK Cements is a grey and white cement manufacturer trying to diversify its geographical presence across India. It has regularly augmented its capacity over the years making it a formidable player in the cement industry. Future growth lies in ramping up capacity utilization levels across plants.

JK Cement, founded by Lala Kamlapat Singhania, is a manufacturer of grey and white cement as well as wall putty. It commenced the production of cement from its grey cement plant at Nimbahera, Rajasthan in 1975. Over the years, the company set up 2 more units at Mangrol and Gotan in Rajasthan.

In 2009, it extended its footprint by setting up a green-field unit in Muddapur, Karnataka. The company further expanded its capacity in North India in 2014 with a brownfield expansion of 1.5 MTPA integrated unit at Mangrol and a split grinding unit of 1.5 MTPA at Jhajjar.

In FY21, JK Cement completed an expansion of 4.2 MTPA grey cement capacity, taking the total installed grey cement capacity to 14.7 MTPA and White cement and Wall Putty capacity to2.5 MTPA.

Before diving deep into JK Cements, it is important to have a sense of the industry and how it works.

Industry Overview

Cement is a commodity of national importance given its intricate relation with the overall economy. India is the 2nd largest producer as well as the 2nd largest consumer of cement in the world after China. Cement is a low value bulky commodity and its transportation across large distances is unviable. Thus, a country is, to a great extent, insulted from global demand-supply situation and the internal conditions are what drive the industry. Within India, cement industry is divided into five regions, North, South, East, West and Central India.

How is cement made?

Cement manufacturing is a two-step process. The first step is formation of clinker and the 2nd step is crushing of clinker to obtain cement. Clinker is formed when limestone, along with some other materials, is heated at a high temperature (~1500^oc). The resultant is a lumpy aggregate known as clinker. Limestone is the obvious raw material here and a company which has captured high value limestone reserves is at an advantage.

The clinker is crushed in a grinding unit along with gypsum to obtain cement. Gypsum is what provides the binding property to cement.

Limestone is located around clusters in India and more than 50% of India’s limestone is found in MP, Gujrat, Rajasthan, Chhattisgarh and Andhra Pradesh.

Freight cost is a key driver here and cement plants can either be set up near limestone reserves or near the end user market depending upon the cost and benefit.

The amount of limestone used in the production of cement can be changed and this introduces different varieties of cement namely, OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement (PSC). India has mainly been into OPC but that is changing.

PPC/ PSC are blended cement in which a reduced quantity of limestone is used and it is substituted by Fly ash/Slag. Fly ash is the finely divided residue that results from the combustion of pulverized coal in a thermal power plant while slag is obtained during steel production as a by-product.

On the demand side, reginal economic factors strongly determine the situation of the cement manufacturers present in that region. The higher the infrastructural and industrial development demand in a region, more the benefit from setting up a cement manufacturing plant in that region. Cement manufacturers generally try to diversify their presence across regions. There is also inter-regional movement of cement to the extent economically viable.

Some of the demand drivers for cement in India in the near to medium term time frame include housing construction under Pradhan Mantri Awas Yojana (Rural and Urban), pick up in real estate projects in key regions, National Infrastructure Pipeline which envisages the execution of various infrastructure projects at an estimated investment of 111 trillion rupees etc.

That was a short primer on the dynamics of the Indian cement industry. Now, why JK Cements?

Widening Geographic Reach

JK Cements has established manufacturing capacities across North, South, Central and West India. It has 3 facilities in Rajasthan and 1 each in Gujarat, Uttar Pradesh, Karnataka and Haryana. The capacity is currently concentrated around North India with current capacity mix across North/South/Centre/West India at 62%/9%/11%/18%. The markets in which the company’s grey cement is sold include 19 states of India.

Over the past few years, the company has expanded its existing capacity of Nimbahera, Rajasthan from 3.25 MTPA to 4.25 MTPA, Mangrol, Rajasthan from 2.25 MTPA to 3.25 MTPA and set up a green field facility of 1.5 MTPA grinding unit at Aligarh, UP for a total outlay of 1739 crores.

Capacity expansion at regular intervals has nearly doubled the company’s capacity between FY14 and FY21, from 7.5 MTPA to 14.7 MTPA. The company has further announced a greenfield expansion of 4 MTPA at Panna, Madhya Pradesh with split grinding unit at Hamirpur, Uttar Pradesh for a total capex outlay of 2,971 Crores. Work has started at site and 270 Crores have been spent till 31st March 2021. Project expenditure would be 800 Crores in FY 2021-22, 1,600 Crores in FY 2022-23, and balance of 300 Crores in FY 2023-24.

The new capex projects will increase JK Cements prominence in Central India which has shown greater demand resilience compared to other regional markets. On a per capita basis also the consumption in central India remains low providing further reasons to be bullish on the expansion.

The company already has strong presence in northern region and is amongst top five cement manufacturers in the region with Rajasthan, Haryana, Punjab and Delhi contributing more than 40% of the total sales of the company.

Presence in Margin Accretive White Cement Business

JK Cements is the second-largest white cement manufacturer in India with an installed capacity of 0.6 MTPA (also 0.6 MTPA white cement capacity in UAE). The company is also present in the wall putty segment with an installed capacity of 1.2 MTPA and is the largest manufacturer of wall putty in India. The white cement segment commands premium pricing (almost 2x than blended realizations) which ensures consistently better operating performance compared to grey cement. The market size for white cement and wall putty is small with room for limited number of players to operate profitably. Wall putty is increasingly gaining acceptance in households due to its features like water resistance, enhanced wall looks etc.

The share of white cement and wall putty in total revenues of the company has remained around 30% while its share in company’s EBITDA has been around 50%. With regular capacity addition in grey cement business planned, the share of white cement and wall putty will decline but its margin accretive nature will continue to provide stability to earnings profile of JK Cements.

Introduction of Value-Added Products

The company has been trying to increase the share of value-added products in its portfolio with continuous product launches. The company entered the Wood-paint segment with the launch of Wood Amore, a range of premium Italian wood finishes in a range of Polyurethane (PU) products ensuring outstanding finish, appealing aesthetics and higher durability for wood surfaces, introduced in matte and glossy finishes and 2,000 different colours. Wood Amore has been formulated in collaboration with Italian wood coatings and finishes pioneer Sivam Coatings.

The company also launched JK Cement RepairMaxX, a ready to use white masonry cement which can fill cracks and gaps on the interior and exterior surfaces. It is formulated with an advanced Bonding Agent that ensures incomparable crack bridging the ability for plaster cracks upto 10 mm.

Other value added products include JK Cement GypsoMaxX, which is premium plaster made from the purest form of natural gypsum and is suitable for applications on internal surfaces such as walls and ceilings and JK Cement ShieldMaxX, which is a white cement based Universal Waterproof Putty with Active SiH4 molecules that protects the walls from dampness and provides a velvety finish, along with higher coverage.

Wide Distribution Network

The company has a strong channel network of over 17,000+ dealers and retailers for marketing grey cement products and around 67,000+ dealers and retailers for marketing White cement products. White cement and putty is currently exported to 39 countries, strengthening the brand positioning of the company. The company has undertaken various initiatives to effectively manage dealer channel networks to drive growth in its key relevant markets like cash prizes, trophies, tours etc.

Negatives:

High Debt: Cement industry is an asset heavy industry with players having to invest regularly in their capacities. Capacities built from ground up require a lot of capital and debt funded capex is a normal occurrence here.

Over the last 10 years the minimum D/E JK Cements has operated at has been 0.8x while maximum has been 2.1x. Such leverage is bound to spook a number of conservative investors away as it should. Further, for its growth plans till FY24, the company has planned to borrow 1,700 crores. Out of this 400 Crores would be drawn in FY22, 1,000 Crores in FY23 and balance 300 Crores in FY24.

The borrowing plans indicate that the company will operate at around 1x D/E in near future. The company however should not face any difficulty in servicing its debt obligations owing to improved profitability following its recent commissioning of enhanced capacity.

UAE Subsidiary a Drain

The company has a subsidiary in UAE - JK Cement (Fujairah) FZC. The company has a total investment of 692 crores in the subsidiary. JK Cement (Fujairah) FZC (step down subsidiary) is continuously incurring losses and its entire net worth is eroded. The company carried out an impairment assessment on carrying value of these investments.  Accordingly, during FY21, based on business valuation of J.K. Cement Works (Fujairah) FZC by an independent external valuer, the Company has recognized provision towards diminution of carrying amount of investment in JK Cement (Fujairah) FZC of 167 crores (Previous Year 161 crores).

As a result of weak financial position of the subsidiary, JK Cement has to continuously infuse funds to sustain its operations, which acts as a financial drain for JK Cements.

Rise in Input Costs

The last few months has witnessed a sustained increase in key raw material prices like coal, pet coke, limestone, fly ash and slags, power and fuel. A prolonged stretch of heightened raw material prices will adversely impact the margin of the company given limited ability to pass on the hikes due to intense competition.

Financials:

The growth in topline of cement companies usually follows that of the growth rate of the economy. JK Cements’ revenues has increased at a CAGR of 9% over the last 5 years from 4361 crores in FY16 to 6606 crores in FY21.

EBITDA has compounded at a CAGR of 24% during the same period. Owing to its presence in white cement and wall putty segments, JK Cements has been able to maintain decent profitability and EBITDA margins have improved from 12.5% in FY16 to 24% in FY21.

Net profit has increased at a CAGR of 67% between FY16 and FY21 from 55 crores to 703 crores. The company has generated significant cash from operations during this period and PAT-to-CFO conversion has stayed north of 225% and has compounded at 22% during FY16 and FY21.

Fixed asset turnover has remained around 1.1x during the last several years while inventory turnover has stayed around 8x. Receivable days has inched up slightly to 20 days from a historical average of 18 days.

ROE and ROCE have been on an upward trend from around 10.4% and 10.1% in FY17 to 19% and 17.4% in FY21.

Valuation

JK Cement has been rewarded by the markets for successful commissioning of its various expansion projects in the past few years, improved profitability and strong growth plans. The median P/E for JK Cements for the last 5 years has been 28x while it is currently trading at ~33x its TTM earnings. While such a P/E for a company operating in a commodity sector may seem expensive but market has been ready to pay that for some companies like Shree Cement and Ultratech cement, operating in the same sector. It is also true however that these companies have shown resilient profitability over a longer timeframe as well as controlled debt levels.

JK Cements’ current valuation is based on the strong growth plans it has as well as general optimism around capex cycle. The current valuation demands caution and the last 5 years median P/E would be a good point to look at the company.

Articles

Comments