27 March 2017
A
nnual
R
eport
T
hreadbare
JK LAKSHMI CEMENT
Weak performance dents ROE
JKLC’s FY16 annual report highlights a weak operating performance,
with EBITDA declining 23% to INR2.7b (FY15: INR3.5b) on the back of
an 8% cut in realizations to INR3.6k/tonne, but volumes growing 23%
to 7.3 MMT. Rising finance cost and depreciation post capitalization of
the Durg plant led to a pre-tax loss of INR0.4b (FY15 PBT: INR1.1b).
However, the company recognized DTA worth INR0.5b on unabsorbed
depreciation to report PAT of INR0.2b (FY15: INR1.1b). FCF remained
negative due to high capex and deterioration in the cash conversion
cycle to 18 days (FY15: 3 days). D/E increased to 1.7x (FY15: 1.5x).
RoCE/RoE declined to 5%/1% due to rising capital intensity and a
weak performance. Together with other subsidiaries, JKLC’s exposure
to its subsidiary, Udaipur Cements Works (a sick company earlier),
grew to INR5b (FY15: INR1.5b). Adjusted contingent liabilities
increased to INR2.9b, 22% of net worth (FY15: INR1.5b), primarily due
to fresh excise duty notices worth INR1b.
The
ART
of annual report analysis
EBITDA declined 23% to
INR2.7b (FY15: INR3.5b) due
to a steep 8% cut in
realizations, while volumes
grew 23% post commissioning
of the Durg plant.
FCF remained negative due to
high capex, while cash
conversion cycle deteriorated
further to 18 days (FY15: 3
days).
Exposure to revive Udaipur Cement Works rose to
INR5b (FY15: INR1.5b).
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b) / (USD b)
JKLC IN
435
117.7
514 / 317
9/-15/14
53.0/0.8
Operating performance remains weak:
EBITDA fell 23% to
INR2.7b (FY15: INR3.5b), as healthy 23% volume growth
(contribution from the Durg plant visible in FY16) was offset
by a steep 8% cut in realizations to INR3.6k/ tonne (FY15:
INR3.9k). Further, EBITDA declined to INR370/tonne (FY15:
INR 593/tonne), which is lower than peers.
High finance and depreciation cost mars profitability:
The
company witnessed an increase in finance cost to INR2b
(FY15: INR0.9b) and depreciation charge to INR1.7b (FY15:
INR1.1b) post capitalization of the Durg plant. This led to a
pre-tax loss of INR0.4b (FY15 PBT: INR1.1b), as well as
creation of DTA worth INR0.5b, with unabsorbed
depreciation leading to PAT of INR0.2b (FY15: INR1.1b).
FCF remains negative; OCF supported by other
liabilities:
High capex led to free cash flows being negative
for the fifth consecutive year, which were funded via debt,
and consequently, D/E rose to 1.7x (FY15: 1.5x). OCF
declined to INR3.1b (FY15: INR3.3b), led by lower support
from an increase in non-trade liabilities at INR1.2b in FY16
(FY15: 1.8b). Further, cash conversion increased to 18 days
(FY15: 3 days) due to falling payable days.
Return ratios remain subdued:
Rising capital intensity with a
weak operating performance led to poor return ratios, with
RoCE (ex-cwip)/RoE at 6%/1% v/s 11%/8% in FY15.
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Dec-16
45.9
22.1
11.2
20.8
Sep-16
45.9
21.0
12.2
20.9
Dec-15
45.9
19.4
13.7
21.0
Note: FII Includes depository receipts
Auditor’s name
Lodha & Co, Chartered Accountants
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 39825544
Mehul Parikh
(Mehul.Parikh@MotilalOswal.com); +9122 3010 2492
Somil Shah
(Somil Shah@MotilalOswal com); +91 22 3312 4975
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
21 March 2017
1

ART
|
JK Lakshmi Cement
ART #1
ACCOUNTING / AUDITING MATTERS
Lower realizations and rising finance cost mar profitability
Lower realizations offset
volume growth of 23% and lead
to a 23% contraction in EBITDA.
DTA recognition of INR0.5b led to
PAT turning positive at INR0.2b.
JKLC recorded volume growth of 23% (FY15: 6%) to 7.3MMT (FY15: 5.9MMT), as
contribution from the Durg plant (commissioned in March 2015) was visible in
FY16. However, revenue from operations grew only 14% to INR26.4b (FY15:
INR23.2b), as realizations fell 8% to INR3,595/tonne (FY15: INR3,894/tonne).
EBITDA declined 23% to INR2.7b (FY15: INR3.5b), while EBITDA/tonne dropped
60% to INR370/tonne (lower than peers) with realizations falling 8% and freight
cost increasing 3% to INR913/tonne (FY15: INR884/tonne).
EBITDA declined despite fuel cost (~20% of revenue) falling 10% on per tonne
basis during the year. Further, the 60% rally in petcoke prices post balance sheet
date might further pressurize margins, unless countered by an increase in
realizations.
Finance cost adjusted for capitalization rose 4% to INR2.2b (FY15: INR2.1b).
However, with cessation of capitalization post commissioning of the Durg plant
in March 2015, finance cost expensed grew 110% to INR2.5b (FY15: INR0.9b),
which further dampened profitability.
Non-operating income – up 136% to INR0.7b (FY15: INR0.3b) – continued to
support profitability.
Capacity utilization remained unchanged at 82% (FY15: 82%), which is relatively
better than peers.
JKLC recognized deferred tax asset (DTA) mainly on account of unabsorbed
depreciation worth INR0.5b (INR0.1b in subsidiary), which led to positive PAT of
INR0.2b (FY15: INR1.1b).
Exhibit 1: Operating performance weak due to lower realizations (INR b)
Particulars
Net Revenue (Operations)
Raw Materials Consumed
Gross Margin
Power & Fuel
Freight charges
Other operating expenses
Personnel Cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT (Before Exceptional Items)
Exceptional Items
PBT
Tax
PAT
FY12
17.2
3.7
13.5
4.1
3.3
1.8
1.0
3.3
1.3
2.0
0.8
1.2
0.6
1.8
(0.4)
1.4
0.3
1.1
%
100
21.4
78.6
24.1
19.3
10.4
5.7
19.1
7.6
11.5
4.6
6.9
3.7
10.6
(2.3)
8.3
2.0
6.3
FY13
20.5
4.9
15.7
4.1
4.2
2.0
1.1
4.3
1.5
2.8
0.8
2.0
0.6
2.5
(0.2)
2.4
0.6
1.8
%
100
23.7
76.3
19.8
20.5
9.7
5.5
20.9
7.2
13.6
4.1
9.6
2.7
12.2
(0.8)
11.5
2.9
8.6
FY14
20.6
5.5
15.1
4.2
4.6
2.0
1.2
3.0
1.4
1.7
0.8
0.9
0.4
1.3
(0.2)
1.2
0.2
0.9
%
100
26.8
73.2
20.5
22.2
9.8
6.0
14.7
6.6
8.1
3.8
4.4
2.2
6.5
(0.9)
5.6
1.1
4.5
FY15
23.2
5.7
17.5
5.0
5.3
2.2
1.5
3.5
1.1
2.4
0.9
1.4
0.3
1.7
(0.6)
1.1
0.0
1.1
%
100
24.6
75.4
21.6
22.7
9.5
6.4
15.2
4.9
10.3
4.1
6.2
1.2
7.4
(2.7)
4.7
0.2
4.6
FY16
26.4
6.8
19.5
5.5
6.7
2.6
2.0
2.7
1.7
1.1
2.0
(0.9)
0.7
(0.3)
(0.1)
(0.35)
(0.54)
0.2
%
100
25.9
74.1
20.9
25.4
9.9
7.6
10.3
6.3
4.0
7.5
(3.5)
2.5
(1.0)
(0.3)
(1.3)
(2.0)
0.7
Source: Company Annual Report, MOSL
27 March 2017
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JK Lakshmi Cement
Exhibit 2: Strong volumes with falling realizations…
Volume (MMT)
3.9
3.7
3.5
4.9
FY12
5.3
FY13
5.6
FY14
5.9
FY15
7.3
FY16
FY12
FY13
FY14
FY15
FY16
Realization ('000)/ tonne
3.9
812
690
536
3.6
593
370
Exhibit 3: …lead to contraction in EBITDA/tonne
EBITDA per tonne
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 4:
Steep fall in fuel cost/tonne in FY16…
P&F/tonne
1,118
1,128
1,093
1,107
10%
945
Exhibit 5: …but rally in petcoke prices may pressurize
margins
Retail petcoke prices (INR/tonne)
5,600
4,000
4,650
6,250
6,350
FY12
FY13
FY14
FY15
FY16
Mar 2016
May 2016
July 2016
Sep 2016
Dec 2016
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 6: Lower realizations weaken EBITDA (INR/tonne)
Particulars
Realization
Raw materials
Power & Fuel cost
Freight charges
EBITDA per tonne
FY13
3,894
922
770
799
812
FY14
3,653
979
750
811
536
FY15
3,894
956
840
884
593
FY16
3,595
932
752
913
370
Exhibit 7: EBITDA/tonne remains inferior to peers (INR)
SRCM
763
647
593
JKC
JKLC
787
662
370
Source: Company
Annual Report, MOSL
FY15
FY16
Source: Company Annual Report, MOSL
Exhibit 8:
Other income remains significant (INR b)
Particulars
Other income
% of PBT
*Loss at PBT level in FY16.
FY12
0.6
35%
FY13
0.6
22%
FY14
0.4
33%
FY15
0.3
16%
FY16
0.7
*NA
Source: Company Annual Report, MOSL
27 March 2017
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JK Lakshmi Cement
Exhibit 9: Capacity utilization (%) better than peers
JKLC
100%
90%
71%
94% 92%
76%
99%
81%
72%
82%
69%
82%
60%
74%
66%
SRCM
JKCE
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Exhibit 10: Creation of deferred tax asset supports earnings (INR M)
Particulars
PBT
Current tax
Deferred tax charge/(credit)
MAT entitlement
Tax relating to earlier years
Total tax expense
PAT (before MI)
Standalone
FY15
1,118
272
75
(272)
87
162
956
FY16
(355)
-
(418)
-
0
(418)
63
Derived subsidiary
FY15
(23)
-
(121)
-
-
(121)
98
FY16
2
-
(119)
-
-
(119)
120
Consolidated
FY15
1,095
272
(47)
(272)
87
41
1,054
FY16
(353)
-
(537)
-
0
(537)
183
Source: Company Annual Report, MOSL
Non-trade payables support CFO; FCF remains negative due to high capex
Cash flow from operations declined marginally to INR3.1b (FY15: INR3.3b) due to
working capital changes, while non-trade liabilities continued to support CFO.
Continued capex and high finance cost led to FCF post interest remaining negative
for the fifth straight year.
The cash conversion cycle deteriorated to 18 days (FY15: 3 days), mainly due to a
steep decline in payable days to 56 from 72 in FY15.
Free cash flows post interest
remained negative for the fifth
consecutive year due to high
capex.
Exhibit 11: FCF remains negative (INR b)
Particulars
PBT
Add/Less: Non-cash adjustments
Add/Less: Non-operating adjustments
Less: Direct Taxes Paid
Operating Profit Before Working Capital Changes
Trade & Other Receivables
Inventories
Trade Payable & Other Liabilities
Working capital changes
Cash Generated from Operations after Tax
Less: Financial Cost paid
Free Cash Flow from Operations post Interest
Less: Capital Expenditure
Free Cash Flows post interest
FY12
1.8
1.3
0.2
(0.4)
2.9
(0.3)
(0.0)
1.2
0.9
3.8
(0.8)
3.0
(4.9)
(1.9)
FY13
2.5
1.4
0.4
(0.5)
3.8
(0.6)
0.1
0.1
(0.5)
3.3
(0.8)
2.5
(5.9)
(3.4)
FY14
1.3
1.3
0.3
(0.1)
2.8
(0.3)
0.1
0.9
0.7
3.5
(0.8)
2.8
(5.0)
(2.3)
FY15
1.7
1.1
0.1
(0.2)
2.7
(0.9)
(1.2)
2.7
0.6
3.3
(2.1)
1.2
(5.4)
(4.2)
FY16
(0.3)
1.7
1.3
(0.0)
2.7
(0.3)
(0.2)
1.0
0.4
3.1
(2.0)
1.1
(4.6)
(3.5)
Source: Company Annual Report, MOSL
27 March 2017
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JK Lakshmi Cement
Exhibit 12: Other liabilities continue to support CFO (INR b)
Particulars
Trade liabilities
Other liabilities (balancing figure)
Total
Increase/(Decrease) in
FY15
FY16
0.9
(0.2)
1.8
1.2
2.7
1.0
Source: Company Annual Report, MOSL
Exhibit 13: Cash conversion cycle deteriorates on falling payables (days)
Particulars
Inventory
Receivable
Advance from customers
Payables
Cash conversion cycle
Note : On Closing basis
FY12
51
8
8
45
6
FY13
43
9
5
48
-1
FY14
38
10
6
47
-5
FY15
72
9
6
72
3
FY16
68
13
7
56
18
Source: Company Annual Report, MOSL
Exhibit 14: Continued capex keeps FCF negative (INR b)
Capex
4.9
5.9
5.0
Free cash flows
5.4
4.6
(1.9)
FY12
(3.4)
FY13
(2.3)
FY14
(4.2)
FY15
(3.5)
FY16
Source: Company Annual Report, MOSL
Capex funded by CFO and borrowings
Over FY12-16, cash flow from operations (CFO) contributed 50% of total sources
of funds, while borrowings contributed 34%.
76% of such funds were allocated toward capex and 22% toward finance cost.
Exhibit 16: …which were used to support capex and
discharge finance cost
Exhibit 15: CFO contributed 50% to sources of funds in FY12-16…
Borrowings,
36%
CFO, 50%
Capex, 76%
Others, 1%
Dividend,
5%
Others, 2%
Investments,
11%
Finance
cost, 19%
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
27 March 2017
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JK Lakshmi Cement
Adjusted debt on the rise, finance cost remains elevated
The lack of free cash flows led to heavy reliance on borrowings (adjusted for
capital creditors), which soared from INR11.1b in FY12 to INR23.1b in FY16. D/E
(adjusted for revaluation reserve) went up to 1.7x from 1x in FY12.
Finance cost has remained high at 11% (FY15: 12%).
Falling realizations and high leverage weighed on return ratios. RoCE (pre-
tax)/RoE stood just at 5%/1% respectively (FY15: 8%/8%).
Exhibit 18: …and finance cost remains high
D/E *
1.7
9%
Borrowings (INR b)
11%
Finance cost (%)
12%
11%
Exhibit 17: D/E rising…
Adjusted Borrowings (INR b)
1.3
1.5
1.0
1.1
10%
11.1
13.5
17.2
20.1
23.1
10.7
FY12
13.4
FY13
16.8
FY14
19.5
FY15
22.7
FY16
FY12
FY13
FY14
FY15
FY16
* adjusted for revaluation reserve
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 19: Return ratios take a knock...
ROCE-ex CWIP
18%
14%
15%
11%
8% 7%
11%
8% 8%
ROCE
ROE
Exhibit 20: …low profit margin the real cause
Particulars
Net profit margin
Assets Turnover
Equity multiplier
6% 5%
1%
ROE
FY12
6%
0.66
2.26
9%
FY13
9%
0.69
2.39
14%
FY14
5%
0.61
2.50
8%
FY15
4%
0.59
2.78
8%
FY16
1%
0.59
3.14
1%
Source: Company Annual Report, MOSL
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Exposure to (revive) Udaipur Cement Works rises to INR5b
INR3.5b raised via debt
advanced to Udaipur Cements
in FY16; total exposure rises to
INR5b.
JKLC is implementing a revival and rehabilitation scheme at its subsidiary
Udaipur Cement Works (UCWL), for which several investments are being made.
Equity worth INR1.5b was infused till FY16. Consequently, UCWL is out of the
purview of BIFR, effective January 2016.
JKLC’s 100% subsidiary – Hansdeep Industries & Trading Company Limited (HITC)
– raised INR3.5b via debenture issue (carrying interest @ 11.25%), which was
advanced to UCWL to part-finance the rehabilitation scheme. Consequently,
exposure of JKLC along with group company to UCWL stands at INR5b (FY15:
INR1.5b) or 37% (FY15: 11%) of net worth.
UCWL’s reported profit over last three years was primarily supported by
exceptional gains and deferred tax credits.
JKLC plans to revive the existing cement capacities in UCWL at a budgeted cost
of INR7b, as management asserts the following advantages: (a) readily available
limestone mines, (b) installed railway sidings, (c) accumulated tax losses of
INR1b to set off future income and (d) investment cost at USD70/MMT, as
against USD120/MMT for a fresh greenfield plant.
27 March 2017
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JK Lakshmi Cement
Exhibit 21: Exposure to Udaipur Cement Works Limited (INR b)
Particulars
Exposure
% of standalone net worth
FY13
0.1
1%
FY14
FY15
FY16
0.9
1.5
5.0
7%
11%
37%
Source: Company Annual Report, MOSL
Exhibit 22: Aggregate exposure of INR5b to UCWL at end of FY16
Source: Company Annual Report, MOSL
Exhibit 23: Reported profits of UCWL led by exceptional gains and DTA (INR b)
Particulars
Reported Profit
Exceptional gain
Deferred tax credit
Adjusted profit
18 months ended
31.3.2014
0.2
0.7
-
(0.5)
12 months ended 12 months ended
31.3.2015
31.3.2016
1.0
1.2
0.1
0.2
1.2
1.2
(0.3)
(0.2)
Source: Company Annual Report, MOSL
Contingent liabilities rises
Contingent liabilities shot up to INR2.9b (FY15: INR1.5b), mainly due to fresh
excise duty notices worth INR1.0.This aggfgregates to 22% of net worth (FY15:
11% of net worth).
Fresh excise duty show-cause
notices worth INR1.0b
received in FY16.
Exhibit 24: Contingent liabilities @ 22% of net worth (INR b)
Particulars
Sales Tax and Interest
Others
Contingent liabilities
Excise duty *
Adjusted contingent liabilities
% of net worth
FY13
0.1
0.2
0.3
-
0.3
2%
FY14
0.6
0.4
1.0
-
1.0
8%
FY15
1.3
0.2
1.5
-
1.5
11%
FY16
1.4
0.6
1.9
1.0
2.9
22%
Source: Company Annual Report, MOSL
*
Show cause notices worth INR0.99b were not considered as contingent liability by the company
27 March 2017
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JK Lakshmi Cement
ART #2
GOVERNANCE MATTERS
Auditor rotation likely as per amended Companies Act
Lodha & Co. has been JKLC’s statutory auditor for more than 10 years. The
Companies Act (2013) mandates rotation of auditors for listed entities after
serving for 10 consecutive years. The Act further provides a period of three years
from April 1, 2014 to comply with this requirement.
All directors regular in attending board meetings
The board comprises 10 members, of which five are independent directors.
The company is regular in calling board meetings. In FY16, four board meeting
were held. All directors have been generally regular in attending the board
meetings.
Independent directors Mr B.V. Bhargava and Mr. Nand Gopal Khaitan have been
on the board for more than 10 years. The Companies Act 2013 mandates
compulsory rotation of independent directors after 10 years, prospectively from
the date of implementation of the statute.
Exhibit 25: Directors regular in attending board meeting
No. of
Meetings
held
4
4
4
4
4
4
4
4
4
4
No. of
Board
Meetings
Attended
4
4
3
4
4
3
4
4
4
4
Name of Director
Mr. Bharat Hari Singhania
Mrs, Vinita Singhania
Mr. Raghupati Singhania
Mr. Shailendra Chouksey
Mr. Sushil Kumar Wali
Mr. B.V. Bhargava
Mr. Kashi Nath Memani
Mr. Nand Gopal Khaitan
Mr. Pradeep Dinodia
Mr. Ravi Jhunjhunwala
Category of Directorship
Chairman & Managing Director
Vice Chairman & Managing Director
Non-Executive and Non Independent
Director
Executive and Non- Independent Director
Executive and Non- Independent Director
Non-Executive and Independent Director
Non-Executive and Independent Director
Non-Executive and Independent Director
Non-Executive and Independent Director
Non-Executive and Independent Director
Source: Company Annual Report, MOSL
27 March 2017
8

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JK Lakshmi Cement
NOTES
27 March 2017
9

Disclosures
This document has been prepared by MotilalOswal Securities Limited (hereinafter referred to as Most) to provide information about the company (ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its
ART
|
JK
not constitute
Cement
affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does
Lakshmi
an offer, invitation or
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MotilalOswal Securities Ltd
27 March 2017
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