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JK Cement + Tata Chemicals – BUY

July 9, 2007

ICICI Research has an Outperform recommendation on JK Cements Ltd and Tata Chemicals Ltd.

JK Cement Ltd:
JK Cement is a play on the booming cement market in the northern region. The company’s aggressive expansion-cum-cost-cutting plan coupled with low valuations make the stock a good medium to long-term investment.

On EV/tonne basis, JK Cement is quoting at $65 per tonne, which is lowest compared to the deals that have happened recently ($150-$200 per tonne). The scrip currently quotes at 3.29x EV/EBITDA of FY09E. ICICI has valued JK Cement at 4.83x EV/EBITDA of FY09E, which yields a value of Rs 255 per share. At the target price, the stock would be valued at an EV/tonne of $107, which is still at a considerable discount to the market. Buy with a 12 Month target price of Rs 255, 71% upside potential from current levels. JK Cement is expected to report an EPS of Rs 27 for FY08 and Rs 33 for FY09.

Tata Chemicals Ltd:
Tata Chemicals Q3FY07 results were in line with expectations. Standalone net sales grew 4% y-o-y to Rs 1307 crore while standalone net profit was 19% higher (y-o-y) at Rs 117 crore on the back of better realizations and higher volume.

Tata Chemicals consolidated revenue to grow at a CAGR of 25% to Rs 6,044.01 crore over FY05-FY08E. Consolidated net profit should grow at a CAGR of over 20% to Rs 593.10 crore during the same period.

Tata Chemicals is trading 8.32x FY08E consolidated EPS of Rs 27.57 and 9.58x FY07E consolidated EPS of Rs 24. ICICI is not changing estimates and sticks to sum-of-parts valuation, wherein the fair value is Rs 374. Target price gives us an upside of 65% from the current levels. ICICI reiterates an OUTPERFORMER rating.

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