Stock Story : J K Lakshmi Cement

Introduction

One critical aspect of infrastructure growth is Cement. As infrastructure activity, be it urban infrastructure, roads development or rural housing picks up, it creates an uptick in cement demand. So this is one of the leading sectors to track revival in economic activity.

Before going into investing, it is important to know the cement manufacturing process and familiarize yourself with the likes of “Kiln” and “Clinker” . A ready primer is available here.

Typically veteran investors would always advice to avoid to “invest” in a “cyclical” sector like cement, as this being a mere commodity is subject to the vagaries of supply – demand dynamics. Typically at the start of the infra growth cycle you would see stable capacities and increasing demand >> which would lead to demand outpacing supplies – leading to volume and value growth for some time >> new capacities come on stream and demand – supply gap normalizes >> till the point demand catches up and prices crash. And the cycle repeats all over again.

A look at Ultratech Cement’s price chart during the infra cycle of (2005-2009) helps one understand the typical story a bit better. So prices which rose from say Rs 350 in 2005 to Rs 1135 in 2007-08 and crashed back to Rs 350 all over again at the end of the cycle. So this is how most cement stocks behave in a typical cycle. Thus if one can get in early, there is potential of strong returns, provided one times the exit accordingly. Cement, or for that matter any other cyclical stocks are NOT BUY-and-HOLD candidates.

     Ultratech Cement : Stock price during 2005-2009

Another interesting aspect of cyclical investing is reverse P/E. Contrary to regular stocks, where buying into lower P/E and selling into higher P/E is the norm, in case of cyclical stocks one takes just the opposite route. So buy when P/E is the highest and sale when P/E is the lowest.

This is because towards the beginning of the cycle, economic de-growth has bottomed out, earnings are most depressed, debt is at the highest levels hence P/E appears to be optically higher. While at the higher end of the boom cycle, earnings are at its peak which optically deflates the P/E to record low levels.

Again let’s study Ultra Tech cement, as in our current example.

	Mar-2005	Mar-2006	Mar-2007	Mar-2008	Mar-2009
Sales (Cr)	2,607	3,299	4,910	5,509	6,383
Profit(Cr)	3	230	782	1,008	977
EPS	0.12	18.22	62.28	80.09	77.63
Price (Mar  end)	352	620	770	760	520
P/E (Mar  end)	2933	34.02	12.36	9.48	6.69

Of course, the 2008-2009 period is a bit of exception due to the market meltdown from the US housing bubble led crisis, however the numbers serve just fine as an illustrative example of the point narrated just before.

With this very brief primer on cement industry let’s get started on to the stock we are here to discuss today – one of the prominent names from Midcap cement space — J K Lakshmi Cement.

About

JK Lakshmi Cement Ltd. (JKL hence forth) formerly known as JK Corp, is a flagship company of the Hari Shankar Singhania group. It commenced its cement operations in 1982, with an installed capacity of 0.5 million tonne (MT, a metric we would be using frequently to refer capacity henceforth) in Jaykaypuram (wherefrom it got its name!), Sirohi district, Rajasthan.

Today JKL caters to 13 states across North, West and Eastern India with a network of over 3800 dealers. Apart from cements, it has forayed into readymade concrete(RMC), plaster of paris(PoP), cement blocks. Interestingly all products are available to order on e-commerce sites. Link

Vital Stats

As on Date 27.05.2016.

Source: https://www.screener.in/company/JKLAKSHMI/

Market Cap.                     : ₹ 4,068.44 Cr.
Current Price                   : ₹ 345.75
Book Value                       : ₹ 113.62
Stock P/E                         : 239.17
Dividend Yield                  : 0.58%
Face Value                       : 5.00
52 Week High/Low            : ₹ 387.80 / ₹ 253.95

Days Receivables Outstanding: 61.11
Debt to equity                  : 1.43
WCap to Sales                   : -0.09%

Price to Book ratio             : 3.04

Sales growth 5Years           : 9.13%
Profit growth 5Years          : -12.17%

OPM last year                    : 9.8%
NPM last year                    : 0%
Return on equity               : 9.45%
Return on capital employed: 9.49%

Promoter shareholding       : 45.94%

 

The Story – JK Lakshmi over last few years

	Mar-06	Mar-07	Mar-08	Mar-09	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16
Net Sales	582.50	843.80	1107.6	1224.5	1493.4	1319	1711	2054.9	2056.6	2315	2619.9
YOY Gr %		45%	31%	11%	22%	-12%	30%	20%	0%	13%	13%
Op Profit	120.9	256	351.3	317.15	424.60	183.34	326.80	428.70	302.00	352.60	270.10
Op Margin %	21%	30%	32%	26%	28%	14%	19%	21%	15%	15%	10%
PAT	55.4	178.1	223.7	178.5	241.1	59	109	192	93	167.4	6
PAT Margin %	10%	21%	20%	15%	16%	4%	6%	9%	5%	7%	0%
Equity	39.8	57.1	61.2	61.2	61.2	61.2	61.2	61.2	61.2	61.2	61.2
ROCE %	8%	18%	21%	16%	18%	5%	8%	12%	7%	6%	0%
RONW %	26%	38%	34%	20%	24%	4%	9%	14%	7%	12%	4%

JK Lakshmi - the last few years in numbers.

FY2010, was probably the best year in recent history with company realizing pick operating margins and profitability, another thing to note for cement companies is their balance sheets look pristine during these peak years (like FY10 for JKL with a D/E of 0.2 from as high as 1.32 in FY07) and they take up further expansions!

Like JKL emerged on major expansions i) 0.55 MT split grinding unit at Jhajjar, Haryana to be operational by Dec 2011 and ii) a major greenfield expansion of 2.7 MT in Durg, Chattisgarh at a cost overlay of 1200 Cr to be operational by FY12 end.

As seen with typical cyclical industry, the healthy growth of 10.2% for cement industry in India as a whole in FY2010 lifted all players – big and small – into big expansions only to face the oversupply and poor demand in the next few years.

Also cement is a very local industry, as in higher supplies in the western market cannot be transferred to eastern India, as transport costs become unviable. So once supply outpaces demand, prices crash. Then why is that prudent managements go on expansion spree knowing of these issues very well?

The answer lies perhaps in long term potential. AR 2011 cites a McKinsey survey mentioning the following

“…..Cement demand which traditionally has shown strong correlation with overall economic growth both in India as well as internationally by all account is expected to reach to in excess of 500 million tons in a year by the year 2020 and in excess of 1500 million tons a year by the year 2030.

Global trends studied for more than 20 years in developing world indicate that per capita cement consumption and cement demand grow in tandem with economic growth till per capita income reaches $ 15000. Average Annual Per capita income in India in terms of Purchasing Power Parity stood at approx. $ 3000 in the year 2009 and with expected average annual economic growth of 8 – 8.5% till the year 2030, it shall be little over $ 15000 in 2030.

Hence therefore it can reasonably be concluded that except for some minor aberrations and course corrections, cement as a commodity shall remain on strong growth trajectory for next 15 – 20 years….”

Thus the management clearly justifies (!!!) the supply gluts as something temporary in nature and embarks on the expansion plan.

Move to FY2012, company moved well on expansion plans as revenues improved slightly over FY10 and showed high jump over the lower base of FY11. The 0.55 MT unit in Haryana got completed by April 2012, raising production capacity to 5.3 MT.

The greenfield expansion in Durg got pushed both by cost and timelines. Company however added two additional split location grinding units mainly positioning for eastern India markets.

Also, post BIFR approval of the rehabilitation scheme for the Udaipur unit, earlier declared sick, JKL decided an overall revival plan adding the 1.2 MT capacity for effective use over next two years.

JKL continue to add the value added products with further expansion to ready made concrete (RMC) plants taking number to 14 and capacity to 7 lac cubic meter per annum.

During FY2013, the industry continue to reel under the supply glut with capacity additions being 17 MT and demand growth of only 13 MT over the last fiscal.

JKL again forays into value additive products in FY13, with the introduction of Aerated Autoclaved Concrete (AAC) Blocks with the brand name "JK SMART BLOX".

This is an interesting development on value addition and prevalent in developed markets, here is further insight on AAC

“….The AAC blocks, though relatively new in the country, are being extensively used in the developed countries and are a preferred alternative to the traditional red clay bricks (made by using top layer of precious agriculture land). These AAC blocks are light in weight and offer high thermal insulation. With these inherent characteristics, this product will offer recurring lifelong savings in the power consumption besides savings in construction time and labor cost…”

The dismal growth and supply glut continued well over in FY2014, the MD’s commentary lucidly captures the situation,

“…The capacities built by cement companies during the last 3-4 years, with the hope of continued double-digit growth, ended up only widening the demand and supply gap leading to fierce competition and unremunerative pricing in the market place. Consequently, the margins of cement companies fell and we were no exception….”

The much touted Greenfield project at Durg finally was completed during FY2015 at an overall cost of Rs 1700 Cr. It lead to 27% jump in capacity to 8.4 MT. The initial capacity commissioned is 1.7 MT which can later be expanded to the planned 2.7 MT and beyond.

Company had again ventured into value addition with the introduction of JK Lakshmi PRO+ - a premium cement brand majorly for the new eastern market and also for existing markets in West and North.

Company was able to reach stable utilization for the Durg plant in FY2016 on the 1.7 MT capacity. However, company had to face challenges on the realization front due to higher logistics and fuel cost. The volumes shown a jump of 23% in FY16.

	FY11	FY12	FY13	FY14	FY15	FY16
Sales volume (MT)	4.3	4.89	5.28	5.63	5.96	7.32
YOY Gr %		14%	8%	7%	6%	23%
Net Realization	3062	3498	3889	3653	3874	3579
YOY Gr %		14%	11%	-6%	6%	-8%
EBITDA/tonne	431	656	808	536	587	369
YOY Gr %		52%	23%	-34%	9%	-37%

Production metrcs for last few fiscal years

Outlook - The road ahead

One can listen to the Q4FY16 Concall commentary here :

• Expansion in Odisha: Although land acquisition and approvals are in place. Company is facing resistance from local population for the grinding unit at Odisha and instead focusing on expansion at Durg.

•  Expansion in Durg: 
  JKL now plans to increase the Durg plant’s capacity to 2.4 MT from current 1.7 MT by Q4FY17 and further to 2.7 MT by Q2FY18. Capex estimated at 50 Cr.
  
  
  Durg plant is operating at EBITDA break even for now and move to cash profit level from further savings in power and logistics cost.
  
  Power Saving: currently on grid power. Waster heat recovery of 7 MW at cost of 90 Cr will replace 30% requirement. Expected to be commissioned by Q3FY17.
  Logistics: Railway sliding completion planed by FY18 will help in better savings.
• 
  
•  Expansion in Udaipur:The current capacity of 0.9 MT is of no use and it is depending on JKL’s other plants for Clinker. Once the 1.2 MT clinker comes online by Q3FY17, the capacity can be used effectively. Ongoing capacity ramp up on grinding unit expected to 1.6 MT.
  
  Out of the total planned capex of 700 Cr, 450 Cr is spent and balance to be completed by Q3FY17. Funds from internal accrual and equity raised.
   
• Grinding Unit at Surat: Grinding unit with capacity of 1 MT shall be completed by Q2FY17
• Debt Scenario: Company is reaching peak gearing of 1.43x (Gross) and 1.25x (Net Debt). Hence management seeks consolidation of Balance sheet for some time before setting on further brownfield expansion. Company plans to repay 200 Cr debt every year.
  
• Future Expansion: JKL has potential for brownfield expansion in all 3 places – Sirohi, Durg and Udaipur taking overall capacity from 13 MT by FY18 to 20 MT over the next few years as need arises.
  
•  RMC Capacity and sales: RMC volumes at 450 lac cubic meters and sales of 150 Cr has been stagnant YoY. 

More about investing in Cement:

Read here for more info on Cement sector and right metrics to value cement stocks.