Investors with a two-year perspective can consider buying the stock of JK Lakshmi Cement (JKLC). The company has witnessed a strong turnaround in its financials in the last three quarters.

At the current market price of ₹466, the valuation is attractive with an enterprise value of $105 per tonne compared to the replacement value of $150.

With its capex almost over, debt levels are expected to reduce once cash-flow improves. Being operationally efficient in the past, it has managed to run its plants consistently at higher capacity utilisation than the industry.

JKLC is also well placed to benefit from revival in cement offtake as demand for rural homes and the Centre’s infrastructure spending increase.

JKLC has a production capacity of 10 million tonnes with a large footprint in the northern markets of Rajasthan and Haryana (70 per cent ), west (Gujarat) as well as eastern markets.

The management has plans to ramp up capacity to 11.5 million tonnes by FY18, while its subsidiary Udaipur Cement Works may add another 1.6 million tonnes at Udaipur, which will take the group’s total production capacity to about 13 million tonnes by FY18.

Improving financials

During FY16, sales were up 14 per cent to ₹2,635 crore, but net profit declined 85 per cent to ₹15 crore.

The company was hit by higher burden of interest and depreciation from commissioning of its cement plant at Durg in March 2015.

However, since the fourth quarter of FY16, things have stabilised, aided by higher production and sales growth as well as lower operational costs. Revenue growth in the second quarter of 2016-17 was, however, low at 1.4 per cent due to the onslaught of monsoon.

Its net profit in the September quarter was however a robust ₹25 crore as against a loss of ₹8.4 crore in the corresponding previous quarter.

In the last three quarters, the company reported significant profits (₹28 crore in the June 2016 quarter and ₹48 crore in the March 2016 quarter as against losses reported in each of the first three quarters of FY16.

The operating margins were higher at 17 per cent during the second quarter of FY17 as against 11.7 per cent during the corresponding quarter of the previous year. The company’s debt-to-equity ratio is currently at 1.6, which is on the high side. The company has further capex planned to the tune of ₹500 crore, of which ₹200 crore would be undertaken by its subsidiary. By FY18, when most of its capex would be complete, debt levels are expected to come down due to improved cash-flow.

Cheap valuations

The share price is up 28 per cent in the last one year. Yet, at an enterprise value of $105 per tonne, it quotes cheaper than its peers JK Cement ($125) and Ramco Cements ($198 per tonne). Moreover, post-expansion, its valuation would be even cheaper at $91 per tonne. JKLC is one of the most cost-effective players in the industry, thanks to the company shifting from coal to low-cost pet-coke. Moreover, captive power in its non-eastern operations, lowered the power and fuel expenses.

While in the North, its operations have peaked in terms of efficiency, the East has scope to reduce costs. The company’s capacity utilisation was above-industry average — 79 per cent in FY16 against 65 per cent for the industry. Its eastern operations are running close to 100 per cent, in Chhattisgarh and Odisha.

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