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Strength in JK Cement – Buy

February 26, 2010

J.K. Cement Ltd (JKCL) is a prominent cement player in North India (in top 6) and the second largest manufacturer of white cement in India after Grasim. JKCL is set to become a pan India player with its new cement capacity (3 mnT) in South. JKCL’s total cement capacity is likely to reach at 7.5 mnT in April’10 apart from 0.40 mnT of white cement.

Expect JKCIL’s volume to be 4.21 mnT in FY10 and 6.0 mnT in FY11E (42% yoy growth), leading to a topline growth 33% yoy to Rs22.7 bn despite assuming 6% realization drop in FY11. JKCL intends to sell 70% of the output from the new plant in Maharashtra markets as the plant is located close to the western region. Due to this proximity to the western market, we feel JKCI will not be severely affected by oversupply in the southern region.

JKCL is trading at 5.0x times of FY10E [EPS of Rs 34] and 4.0x times of FY11E [EPS of Rs 42] earnings. On an EV per tonne basis it is trading at USD 69 in FY10E and USD 61 in FY11E (a significant discount of 40% to the replacement cost). HDFC Institutional Research expect JKCL’s topline to grow at a CAGR of ~17% over FY09-FY12E and its earnings are earnings expected to grow ~24% CAGR over FY09-FY12E. HDFC maintains a BUY with a Target Price of Rs 207.

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