2 November 2016
2QFY17 Results Update | Sector: Cement
J K Cement
Buy
BSE SENSEX
27,527
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
8,514
JKCE IN
69.9
63.5 / 1.0
990 / 425
5/48/34
22
33.0
2018E
46.2
9.0
4.0
56.9
59.8
311.0
19.9
11.9
14.4
15.9
2.9
9.2
CMP: INR909
TP: INR1,107 (+22%)
Revenues strengthened by white cement
Stable realizations and better performance in white cement drive profits:
2QFY17 revenues grew 5% YoY to INR9.1b (13% above estimate). Grey cement
revenue was flat YoY at INR6b, while white cement revenue increased 19% YoY
to INR3.1b (highest quarterly revenue). Grey cement volume growth of 3.6%
YoY was led by better performance in north, partially offset by lower volume in
south. White cement volume growth was strong at 16% YoY. Blended
realizations improved 1% QoQ (flat YoY), led by better pricing in north. PAT
increased 181% YoY to INR409m, led by lower tax outgo.
Margin expansion led by cost savings:
EBITDA grew 43% YoY (-12% QoQ) to
INR1.46b, translating into margins of 16% (-2.7pp QoQ, +4.2pp YoY). Grey
cement margin contracted 6.1% QoQ (+3.9pp YoY) to 10.9% on account of
rehab-related cost for south operations and one-time cost of INR100m in
2QFY17. White cement margin expanded 5.9pp YoY to 30%. Blended
EBITDA/ton stood at INR761 (-13% QoQ, +36% YoY), while grey cement
EBITDA/ton was INR398 (+49% YoY, -35% QoQ).
Management commentary
: 1)
White cement volume likely to grow at
~22%/15% YoY for FY17/FY18E. 2) White cement capacity can be enhanced by
0.2m tons at north operations to cater to higher demand. 3) West market and
Karnataka have witnessed price increases of INR40/bag and INR20/bag,
respectively, since Aug-16. This should bode well for its south operations. 4) RIL
has reduced petcoke prices by INR200/t effective 1-Nov-16.
Preferred leverage play on earnings growth in north-west markets:
With
lower immediate capex and FCFE of INR3.5-4b in FY17-18, there remains
visibility of deleveraging from the FY16 peak of INR27b (1.6x). We maintain our
Buy
rating with a target price of INR1,107 (EV of USD127/ton on blended
capacity, 10x FY18E grey cement EBITDA and 9x FY18E white cement EBITDA).
Financials & Valuations (INR b)
2016 2017E
Y/E Mar
Sales
35.3
39.7
EBITDA
4.9
6.9
NP
1.0
2.5
Adj EPS (INR)
14.5
35.6
EPS Gr. (%)
-18.8 145.5
BV/Sh. (INR)
232.4 262.2
RoE (%)
6.3
14.4
RoCE (%)
6.2
9.2
Payout (%)
32.2
16.4
P/E (x)
62.6
25.5
P/BV (x)
3.9
3.5
EV/EBITDA (x)
17.8
12.5
Estimate change
TP change
Rating change
Abhishek Ghosh
(Abhishek.Ghosh@motilaloswal.com); +91 22 3982 5436
Varun Gadia
(Varun.gadia@motilaloswal.com); +91 22 3982 5446
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

J K Cement
Valuation and views
Medium-term growth levers strong:
Post 3mt expansion, JKCE’s North capacity
is operating at ~66% utilization (new plant at near maximum and older units at
~50%). This coupled with 60% utilization in the South plant provides headroom
to outperform industry growth. Market mix is healthy, with North & West India
accounting for ~70% of its dispatches and likely to benefit from incremental
demand from mega infrastructure projects. JKCE has limestone reserve of
375mt to add a further 5-6mt in its North line with low incremental capex.
Vintage issues partially offset by induced efficiencies:
JKCE’s grey cement
profitability lagged peers in the past due to (a) older plants (low operating
efficiency) and (b) higher lead distance/freight cost (absence of split grinding).
New plants at Mangrol and Jhajjar offer better cost structure (energy/total cost
lower by INR150/300 per ton); railway siding enables savings on in-bound
logistics. While blended operating efficiency may be diluted, its grey cement
cost structure would remain better than past, with induced efficiencies and
economies of scale.
White cement a cash cow:
It is the second largest player in the duopolistic white
cement industry in India, with 40% market share. Moderation in white cement
growth (owing to lower exports to the Middle East) would be offset by healthy
growth in putty and 0.2mt expansion in Katni (Madhya Pradesh) by FY16-end.
With INR3b-3.5b of steady EBITDA cushion, white cement business remains a
cash cow.
Middle East a drag on return ratios:
UAE white cement plant (0.6mt) has been a
drag on return ratios (INR9b capital employed 20% of overall capital employed),
with net loss due to (a) weaker demand in the Middle East (oil price fall), and (b)
unavailability of grid power hurting profitability (resolution nearing).
Preferred leverage play on earning growth of north-west market:
With lower
immediate capex and FCFE of INR3.5-4b in FY17-18, there remains visibility of
deleveraging from the FY16 peak of INR27b (1.6x). We maintain our
Buy
rating
with a target price of INR1107 (EV of USD127/ton on blended capacity, 10x
FY18E grey cement EBITDA and 9x FY18E white cement EBITDA).
Exhibit 1: Key performance indicators (blended)
INR/Ton
Net realization
RM Cost
Employee Expenses
Power, Oil & Fuel
Freight
Other Expenses
Total Exp
EBITDA
2QFY17
4,743
919
356
790
925
992
3,982
761
2QFY16
4,733
974
316
1,061
984
838
4,173
560
YoY (%)
0.2
-5.6
12.7
-25.6
-6.0
18.4
-4.6
35.8
1QFY17
4,698
901
349
736
902
932
3,820
879
QoQ (%)
0.9
2
2
7
3
6
4
-13
Source: Company, MOSL
2 November 2016
2

J K Cement
Exhibit 2: JKCE: Sum of the parts valuation
Grey Cement
White Cement
UAE White Cement
EV (INR m)
Consol Net debt (INR m)
Equity value (INR m)
Equity value (INR/Shr)
Implied EV/Ton (blended)
EV/EBITDA
10.0
9
7
FY18E
55,608
33,515
7,691
96,814
19,399
77,414
1,107
127
Exhibit 3: Revenue mix (%)
White
Grey
Exhibit 4: Strong Grey Cement volume growth for North (%)
18
2
-5
-16
-7
Grey Volume (mt)
22 22
5
0
Growth(%)
15
11
16
4 3
13
1.4 3.6
13
6
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: White cement mix (%)
White Cement
Wall Care Putty
Exhibit 6: Grey Cement EBITDA/ton decreased to INR398
Grey EBITDA/ton
Source: Company, MOSL
Source: Company, MOSL
Exhibit 7: White cement volume gaining strength (%)
42
30
17
21
Exhibit 8: White cement realizations were higher QoQ
(INR/ton)
White (incl Putty)
25
19
23
12 13 12
16
7
9
5 4
11
25
19
16
Source: Company, MOSL
2 November 2016
Source: Company, MOSL
3

J K Cement
Exhibit 9: Strong growth in White cement profitability led by
increase in realizations (INR/ton)
White (incl Putty)
Exhibit 10: Blended EBITDA/ton down by 13% QoQ due to
increase in Power and Fuel and Raw Material costs
Blended EBITDA/Ton
Source: Company, MOSL
Source: Company, MOSL
2 November 2016
4

J K Cement
Story in charts
Exhibit 11: Strong volume lever in place with expanded
capacity
Capacity (mt)
94
68
71
76
72
76
60
66
69
40
18
18
15
60
49
Volume mix
Source: Company, MOSL
Dispatch (mt)
Utilization (%)
Exhibit 12:
Market mix getting better (%)
North
South
East
West
Central
57
FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
Capacity mix
Exhibit 13: Grey cement EBITDA/ton to improve as
operating leverage and cost triggers kick in (INR)
Exhibit 14: Trend in EBITDA (INR b)
Grey
White (Domestic)
White (UAE)
1.1
0.7
0.4
1.0
3.6
1.2
1.6
1.6
3.6
2.0
3.6
2.2
1.6
0.2
2.5
3.0
3.8
3.4
5.6
3.7
1,010 835
306
667
637
298
332
309
525
701
FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
2.1 2.1
-0.1
FY08 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY18E
Source: Company, MOSL
3.8
Exhibit 15: Gearing peaked out
Net debt (INR b)
1.3
0.8
0.6
10.6
8.5
0.5
8.4
23.0 25.8 26.7 25.9 25.4
1.6
DER (x)
1.6
1.4
1.2
0.7
0.4
4.4
9.4
Exhibit 16: RoE and RoCE Trend (%)
30
25
20
15
10
5
0
RoE
RoCE
FY08 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Source: Company, MOSL
Source: Company, MOSL
2 November 2016
5

J K Cement
Financials and Valuations
Income Statement
Y/E March
Net Sales
Change (%)
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT bef. EO Exp.
EO Expense/(Income)
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Reported PAT
PAT Adj for EO items
Change (%)
Margin (%)
Less: Mionrity Interest
Net Profit
2012
25,379
21.8
20,329
80.1
5,050
19.9
1,256
3,794
1,443
558
2,908
78
2,830
902
182
38.3
1,746
1,794
214.2
7.1
0
1,794
2013
29,040
14.4
23,547
81.1
5,493
18.9
1,287
4,206
1,398
567
3,375
0
3,375
1,071
0
31.7
2,305
2,305
28.5
7.9
-3.083
2,308
2014
27,815
-4.2
24,431
87.8
3,384
12.2
1,342
2,042
1,526
626
1,142
0
1,142
392
0
34.4
749
749
-67.5
2.7
-22.1
772
2015
33,874
21.8
29,566
87.3
4,308
12.7
1,461
2,847
2,291
713
1,269
-172
1,441
22
0
1.5
1,419
1,250
66.8
3.7
-17.2
1,267
2016
35,310
4.2
30,413
86.1
4,897
13.9
1,563
3,334
2,696
793
1,431
0
1,431
416
0
29.1
1,015
1,015
-18.8
2.9
0.0
1,015
2017E
39,738
12.5
32,809
82.6
6,928
17.4
1,732
5,196
2,699
826
3,323
0
3,323
997
-166
25.0
2,492
2,492
145.5
6.3
0.0
2,492
(INR Million)
2018E
46,234
16.3
37,208
80.5
9,026
19.5
1,745
7,281
2,765
793
5,309
0
5,309
1,593
-265
25.0
3,982
3,982
59.8
8.6
0.0
3,982
Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
2012
699
14,522
15,221
2,291
12,963
30,475
29,013
5,845
23,167
904
92
11,596
3,628
837
4,332
2,799
5,284
2,286
630
6,312
30,476
2013
699
16,206
16,905
2,490
12,482
31,925
30,822
7,132
23,690
2,546
324
13,518
4,614
1,153
3,753
3,998
8,152
1,966
799
5,365
31,925
2014
699
16,762
17,462
2,685
27,750
48,041
31,743
8,474
23,269
17,875
675
15,814
5,420
1,117
4,086
5,191
9,592
4,401
497
6,222
48,041
2015
699
15,470
16,170
2,798
30,308
49,404
50,671
9,935
40,736
3,373
365
16,027
5,415
1,771
4,171
4,670
11,097
3,071
673
4,929
49,404
2016
699
15,556
16,255
3,284
32,272
51,910
53,716
11,498
42,218
3,211
806
16,909
5,384
2,113
4,807
4,604
11,235
3,047
707
5,674
51,910
2017E
699
17,639
18,338
3,118
31,272
52,826
55,927
13,230
42,697
3,000
675
17,183
5,305
2,381
4,698
4,799
10,729
3,031
498
6,454
52,826
(INR Million)
2018E
699
21,048
21,747
2,853
30,272
54,970
57,927
14,975
42,952
3,000
675
19,989
5,731
2,770
6,198
5,290
11,646
3,527
478
8,343
54,970
2 November 2016
6

J K Cement
Financials and Valuations
Ratios
Y/E March
Basic (INR) *
Consol EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x) *
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
EV/Ton (US$)
Dividend Yield (%)
Return Ratios (%)
RoIC
RoE
RoCE
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
2012
25.7
43.6
217.7
5.0
23.3
2013
33.0
51.4
241.7
6.5
23.1
2014
10.7
29.9
249.7
3.0
32.7
2015
17.9
38.8
231.2
4.0
23.1
50.8
23.4
3.9
2.5
19.9
114
0.4
9.2
12.3
9.6
0.8
52.2
11
2.2
0.9
11.4
14.4
11.3
0.9
58.0
13
1.7
0.7
5.3
4.5
4.7
0.6
71.1
13
1.6
1.6
8.4
7.5
7.6
0.7
58.3
17
1.4
1.9
2016
14.5
36.9
232.4
4.0
32.2
62.6
24.6
3.9
2.5
17.8
115
0.4
5.6
6.3
6.2
0.7
55.7
19
1.5
2.0
2017E
35.6
60.4
262.2
5.0
16.4
25.5
15.0
3.5
2.2
12.5
114
0.6
8.9
14.4
9.2
0.8
48.7
19
1.6
1.7
2018E
56.9
81.9
311.0
7.0
14.4
15.9
11.1
2.9
1.8
9.3
110
0.8
12.2
19.9
11.9
0.8
45.2
19
1.7
1.4
Cash Flow Statement
Y/E March
Oper. Profit/(Loss) before Tax
Interest/Dividends Recd.
Depreciation
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO expense
CF from Operating incl EO
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from investments
Issue of Shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2012
3,794
558
1,256
-902
633
5,338
29
5,368
-1,439
3,929
-50
-1,489
-68
-845
-1,443
-406
-2,761
1,117
3,215
4,332
2013
4,206
567
1,287
-872
419
5,608
-1
5,607
-3,451
2,156
-232
-3,683
-91
-481
-1,398
-532
-2,503
-579
4,332
3,753
2014
2,042
626
1,342
-198
-528
3,284
4
3,288
-16,250
-12,962
-351
-16,601
30
15,268
-1,526
-245
13,527
214
3,753
3,967
2015
2,847
713
1,461
91
1,550
6,662
0
6,662
-4,426
2,237
310
-4,116
-2,401
2,558
-2,291
-327
-2,462
85
4,086
4,171
2016
3,334
793
1,563
70
-109
5,651
0
5,651
-2,883
2,768
-441
-3,324
-602
1,965
-2,696
-327
-1,661
666
4,171
4,837
(INR Million)
2017E
5,196
826
1,732
-997
-889
5,868
0
5,868
-2,000
3,868
131
-1,869
0
-1,000
-2,699
-409
-4,109
-109
4,807
4,698
2018E
7,281
793
1,745
-1,593
-389
7,837
0
7,837
-2,000
5,837
0
-2,000
0
-1,000
-2,765
-573
-4,337
1,500
4,698
6,198
2 November 2016
7

J K Cement
Corporate profile
Company description
JKCE is one of India's leading cement producers,
with 7.5mtpa of gray cement capacity -4.5mtpa in
the North (Rajasthan) and 3mtpa in the South
(Karnataka). It is the second largest white cement
manufacturer in India, with a capacity of 0.4mtpa
(0.6mtpa by FY14). Its ongoing 3mtpa split grinding
expansion in the North would take its gray cement
capacity to 10.5mtpa by FY15. JKCE is also
expanding its international footprint through a
0.6mtpa Greenfield white cement plant in UAE to
address rising international demand.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Sep-16
Promoter
DII
FII
Others
67.0
14.1
11.2
7.6
Jun-16
67.0
13.7
11.3
7.9
Sep-15
67.0
14.0
11.0
8.1
Source: Capitaline
Exhibit 3: Top holders
Holder Name
Fidellity Investment Trust Fidelity Series
HDFC Standard Life Insurance Co.Ltd
Franklin Templeton Investment Funds
Franklin Templetion Mutual Fund A/c
Templeton Global Investment Trust
% Holding
4.6
3.8
3.2
1.9
1.1
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Yadupati Singhania
Shambhu Singh
Designation
Chairman
&
Managing
Director
Company Secretary
Exhibit 5: Directors
Name
Achintya Karati
K B Agarwal
Paul Hugentobler
Suparas Bhandari
S L Bansal
Name
Jayant Narayan Godbole
Kailash Nath Khandelwal
Raj Kumar Lohia
Sushila Devi Singhania
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
K G Goyal & Co
P L Tandon & Co
Type
Cost Auditor
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
MOSL
forecast
35.6
56.9
Consensus
forecast
34.8
55.3
Variation (%)
2.3
3.0
Source: Bloomberg
Source: Capitaline
2 November 2016
8

J K Cement
NOTES
2 November 2016
9

Disclosures
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J K Cement
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
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Contact : (+65) 68189232
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Motilal Oswal Securities Ltd
2 November 2016
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