Project Report- An Fundamental Analysis Of JK

cement

Submitted To: Dr SHEEBA KAPIL

Submitted By: SWAROOP DHARIWAL

SUBODH KUMAR
SHIPRA
SUDHIR KUMAR
SURBHI DESWAL
 COMPANY BACKGROUND

JK Cement was formed following the de-merger of JK Synthetics in November 2004. JK

Synthetics was involved in manufacturing man-made fibres and cement. However, it
incurred heavy losses and its net worth was eroded. Subsequently, it de-merged its
cement division into a new company, JK Cement. The company is one of the leading grey
cement manufacturers in northern region. It has plants at two locations in Rajasthan —
Nimbahera with three kilns and 2.8 million tonnes per annum (mtpa) capacity, and
Mangrol with a capacity of 0.75 mtpa. Recently, the company expanded its grey cement
capacity by 0.5 mtpa, increasing installed capacity for grey cement to 4.05 mtpa. JK
Cement is also the second largest white cement manufacturer in the country with an
installed capacity of 0.3 mtpa. Recently, it expanded white cement capacity by 0.5 lac
tpa. All its plants are located close to its mining reserves. Mining reserves are estimated
to have a lifespan of 40 years. The company has a strong dedicated marketing network.

INVESTMENT RATIONALE
I) Emerging as a focussed cement player
JK Cement acquired the cement business of JK Synthetics following the de-merger. It
took over the grey cement plants at Nimbahera and Mangrol, captive power plant at
Bamania and white cement plant at Gotan ‘as a going concern’ in November 2004.
The company recorded a profit before tax of Rs 52.21 crore on a turnover of Rs 1108.68
crore in FY06 resulting EPS at Rs 6.37. Its net worth as on March 31, 2006, was Rs 354.0
crore compared to Rs 54.59 crore as at March 31,2005. Capacity utilisation stands at
98.9%.
Grey cement: The company currently operates two grey cement plants at Nimbahera and
Mangrol with an aggregate capacity of 3.55 mtpa. It recently expanded its grey cement
capacity by 0.5 million tonnes.
White cement: The white cement plant has a capacity of 0.3 mtpa. Capacity at this plant
has also been expanded which will take the total installed capacity to 0.35 mtpa.
II) Captive power plant to boost earnings
Power is a key cost component for cement plants. JK Cement has addressed this key issue
by setting up its own captive power unit. Currently, the company pays Rs 4.70 per unit of
power. It sources its requirement from the Rajasthan State Electricity Board and a small
part from captive diesel generating sets. After the captive power plants are commissioned,
it expect cost of generation to come down to Rs 2 per unit. So assuming the company
uses the current 88 units of power consumption per tonne, it expect savings of
approximately Rs 240 a tonne, which will be reflected during FY08. This plant will meet
the company’s entire power requirement and will help it reduce power costs. Savings
from the captive power plant are expected to be around Rs 76 crore from FY08onwards.

SOURCE:www.jkcement.com

JK Cement’s power cost is higher than the industry at Rs 413.6 per tonne, which
makes its EBITDA margin lowest in the industry.
After the commissing of the captive power plant, power cost is expected to come
down to Rs 76 per tonne, which will be the second lowest in the industry.

III) Aggressive expansion plan to double capacity by 2009

The company plans to set up a green-field plant of 2.5-3 million tonnes in northern
Karnataka. The project will be funded through debt and internal accruals in a 50:50
proportion. There are not many cement plants in the region the company will be able to
cater to Karnataka, Goa and parts of Maharashtra. The location will also shield it from
region-specific downturns apart from giving it a presence in the southern region. It will
also enhance the company’s stature from a regional player to a national player.

IV) Proximity and access to large limestone reserves

JK Cement has access to large reserves of limestone for producing both grey and white
cement. Based on independent geological surveys of different mines during 1996 to 2001,
the limestone reserves are sufficient to support its current and planned capacity for
approximately 40 years. Further, the manufacturing plants are located close to the
limestone reserves, resulting in lower transportation costs. The mines that supply the
white cement plant at Gotan also have white clay, an important additive necessary for
white cement production.
V) Quality products and strong brand name
The company has built a strong reputation by consistently providing high quality
products. There is strong customer awareness of the company’s brands, JK Cement
(Sarvashaktiman) for grey cement in its principal market in northern India, and JK White
(Camel) for white cement across India. Its brand name and reputation provides the
company with a competitive advantage in ensuring that cement dealers carry products.

Cement Industry outlook

Cement demand in the country is growing at approximately 1.5x GDP growth. The
cement industry is likely to grow at a CAGR of 10% in the medium-term on account of
housing demand and increased thrust on infrastructure development, and industrial
projects. Further, initiatives taken under the National Highway Development Programme
for building highways and roads, the Pradhan Mantri Gram Sadak Yojana for
constructing pucca roads in rural areas, and Bharat Nirman for promoting irrigation,
water supply, roads, housing, electrification and telephone connectivity are likely to be
the major growth drivers for cement demand.

Demand-supply dynamics in northern region

Northern India is a cement-deficient region. However, due to high capacity utilisation by
cement plants located in the region, prices have been stable for quite sometime. About
half of the new capacity additions across the country over the next three years will be in
this region. The 2010 Commonwealth Games in New Delhi will give a massive fillip to
construction activities in the region. This will generate increased demand for cement.
Current demand in the region is estimated to be 30 million tonnes. A 10% growth in
annual demand will translate into an additional demand for 3 million tonnes. Capacities
coming up in FY09 will manufacture about 15-17 million tonnes. Cement demand in the
region is increase from 26.75 million tonnes in FY05 to 34.62 million tonnes in FY07-08.
Total installed capacity is increase from 150 mtpa to 168.9 mtpa during FY05-08. During
the same period, total production is to go up from 125 mtpa to 158 mtpa utilisation levels
of around 94%.
Demand drivers to remain strong
The government has decided to give a major thrust to highway and road development.
Among the major projects currently underway are:
• North-South-East-West Corridor (7300 km)
• 48 new road projects (10,000 km),
All these projects are expended to lead to increased demand for cement. It is estimated
that the projects currently underway will require up to 3 mtpa to 4 mtpa of cement alone.

Housing demand
India faces a shortfall of around 20 million dwelling units, but only 1.5 million units are
being built every year. An average size unit of 400 square feet requires 10 tonnes of
cements. This coupled with the government’s tax incentive policy for housing, extension
of tax rebates on housing loans, low-interest rates and rise in per capita GDP levels will
act as catalyst for housing demand.

Low per capita consumption

Though India is the second largest manufacturer of cement, per capita consumption is
very low at 115 kg per annum, which well below international average of 260 kg. Hence,
there exists tremendous scope for increasing consumption.

Infrastructure
Higher spending on infrastructure by the government will also be a key driver in boosting
demand. The government has opened the door for private sector players to participate in
infrastructure projects and is easing norms to facilitate entry of FDI into the sector. All
these measures will lead to increased activities in the infrastructure sector boosting
demand for cement.

Cost structure scenario

The cement industry has seen a rise in transportation and fuel costs on account of truck
overloading issue and rising prices of petroleum-derived products. However, given the
strong demand growth and higher capacity utilisation, the company will be able to pass
cost increase to end consumer.

Pricing scenario in northern region

Cement price in the northern region is expected to remain on upturn due to sustained
demand from housing, infrastructure development. It will be expected that the capacity
addition in the northern region by 08 will get absorbed gradually with additional demand
from commonwealth (3-4 million tones) which is scheduled in 2010, keeping cement
price upturn.

KEY CONCERNS
Inflationary pet coke prices
JK Cement has plans to run its plant on 90% pet coke. So any change in pet coke price
will impact profitability. So due to rise in the price of coke, there is decrease in the
profitability. That is why cement company is increase the cost of cement.
Change in government policy
Cement is a low-value, bulky commodity. Transportation costs account for a significant
expenditure to the industry. Further, most transportation regulations (like roads and
railways) are governed by government policies. Any increase in cost resulting from
change in government policy may have adverse effect on the profitability of the company.
Slow down in Real Estate sector
Increases in the interest rates mainly affect the real estate sector. Also increase in coke
price and the cost of raw material, the cement companies have to increase the price. Due
to this one they are less demand in market.
Also due to recession Real estate sector is affect very much. That why cement sector is
affected.
Key development in JK cement
JK Cement is planning to invest around Rs 2,500 crore to increase its capacity three-fold
to 15 million tonne in five years. This will be in addition to the Rs 1,100 crore.

J.K. Cement Limited announced that pursuant to an order made on July 11, 2008, the
high court has directed that a meeting of the equity shareholders and creditors of the
Company will be held on September 06, 2008, inter alia, for the purpose of considering,
and if though fit, approving, with or without modification, the proposed scheme of
amalgamation between the Jaykaycem Ltd with JK Cement Ltd.

J.K. Cement Limited announced that it has recommended a dividend of INR 5 per equity
share for the financial year ended on March 31, 2008. The Board has approved the
merger of Jaykaycem Ltd. (a wholly owned subsidiary of the Company) with the
Company

JK Cement to set up unit in UAE. JK Cement, one of the leading north-based cement
makers, is planning to set up a cement facility in Fujairah, one of the seven emirates
comprising the United Arab Emirates (UAE).

J K Cement has posted a net profit increase of 59 per cent at Rs 52.5 crore for the quarter
ended June 30 compared with Rs 33 crore in the previous corresponding quarter. Its net
sales grew to Rs 326..

FINANCIALS

Sales to show healthy growth

i) JK Cement is set to witness strong growth in turnover on account of additional
production due to enhancement in grey and white cement capacity from June 2006.
Higher blended cement, firm trend in cement prices in the northern region and the
cyclical upturn in the northern and central regions will also boost sales.
ii) Company shows the net sales to grow from Rs 873.70 crore in FY06 to Rs 1140.36
crore in FY07, and further to Rs 1395.44 crore in FY08 at a CAGR of 26.37%.

FY06 FY07 FY08

SOURCE : Emkay research

Operating margins to improve

i) JK Cement’s operating profit margin to improve from 16.01% in FY06 to 23.39% in
FY08. Operating profits increase from Rs 132.02 crore in FY06 to Rs 318.18 crore in
FY08.
ii) The benefits of working capital facilities sanctioned (Rs 65 crore) in Dec 2005 and the
commissioning of 10 MW turbine in Dec 2006 will help improve margins.
iii) Reduced cost due to captive power plant and improved price realisations will help the
company improve operating margin level despite increase in power and fuel cost.
iv) The captive power plant will add a significant cost saving over the units using grid
power. Cost savings for the plant per unit are estimated to be Rs 2.70 per kW.
SOURCE: Emkay research

JK Cement is a play on the booming cement market in the northern region. The
company’s aggressive expansion-cum-cost-cutting plan coupled with low valuations
make the stock a good medium to long-term investment.

• Emerging as a focussed cement player

JK Synthetics (JKSL) de-merged its cement business in Nov 2004. Consequent to the de-
merger, a new company, JK Cement, was formed to handle the cement business. Now JK
Cement is a pure cement play with no baggage of accumulated losses.

• Cost restructuring to boost profitability

JK Cement’s low valuations were largely attributed to its high operating costs. The
company is addressing this issue by setting up its own captive power plant. Savings are
be around Rs 76 crore in FY08. This will increase operating margin to 23.39%, similar to
those of other cement players.

• White cement business – a stabilising factor

Entry barriers into the white cement business are high due to the nonavailability of
quality limestone. Demand, too, is not cyclical and prices are 2½ times that of grey
cement. JK Cement and Grasim are the only two major players in this segment. This
lends stability to the business in times of cyclical downturn.
Key Financials
Year to March 31st FY06 FY07 FY08
PAT (Rs cr) 32.56 68.37 131.83
Shares in issue (in cr) 6.99 6.99 6.99
EPS (Rs) 4.66 9.78 21.71
% Growth 109.96 122.06
P/E (x) 30.92 14.73 6.63
Price / Book (x) 1.49 1.39 1.17
EV/EBIDTA (x) 9.02 7.40 4.54
Source: ICICIdirect.com
FINANCIAL SUMMARY ( RS. CRORE)
Profit and Loss Account
Year ended March FY08 FY07 FY06
31st
Net Sales 1395.44 1140.36 873.70
% Growth 20.50% 27.40%
Total Expenses 1077.26 970.56 741.68
Operating Profit 318.18 169.81 132.02
% Growth 87.38% 28.62%
Other Income 10.81 17.47 9.38
EBIT 328.99 187.27 141.40
% change 75.67% 32.44%
Interest 53.96 51.74 58.18
EBT 220.04 99.09 52.20
% change 122.06% 90.09%
Tax 68.21 30.72 19.64
Extraordinary 4.00 6.00 12.39
Income
PAT 151.83 68.37 32.56
% Growth 122.06% 9.06%
Share O/S 6.99 6.99 6.99
EPS (Rs) 21.71 9.78 4.66
Source: ICICIdirect.com
Sales is growing at a CAGR of over 26.37% over FY06 to FY 08.

EPS moves up at a CAGR of 215.9% over FY06to FY08.

Quarterly results in brief (Rs crore)

Jun ' 08 Mar ' 08 Dec ' 07 Sep ' 07

Sales 343.52 385.60 389.90 356.40
Operating
76.30 102.60 116.20 100.40
profit
Interest 10.15 9.10 9.10 8.60
Gross profit 67.00 95.90 109.00 93.80
EPS (Rs) 5.17 8.56 11.47 10.40

Q1 result

BRIEF: For the three months ended 30 June 2008, J.K.Cement Ltd's revenues increased
5% to RS3.44B. Net income before extraordinay items decreased 31% to RS361.3M.
Revenues reflect an increase in income from groups operation. Net income was offset by
increased consumption of raw materials, higher employees cost, increased freight &
handling outwards, higher other expenditure, increased power and fuel expenses and
decreased operating margins.

Consensus Estimates Trends

Sales and Profit Figures in India Rupee (INR)

Earnings and Dividend figures in India Rupee (INR)
Current
Year Ending Mar-09 15,625.00
Year Ending Mar-10 22,108.50
Year Ending Mar-09(EPS) 36.67
Year Ending Mar-10(EPS) 46.70

Sales are to grow at 11% in FY09 and grow at a CAGR of over 25.87% over FY08 to
FY10. EPS is to grow at a CAGR of 46.66% over FY08 to FY10.
Balance Sheet (Rs. Crore)
FY08 FY07 FY06
Sources of Funds
Share Capital 69.93 69.93 69.93
Reserves & 795.77 655.90 605.82
Surplus
Secured Loans 513.14 403.14 443.14
Unsecured Loans 114.96 126.99 139.03
Current Liabilities 248.62 231.62 212.66
& Prov.
Total 1742.42 1487.58 1470.58
Uses of Funds
Net Block 1017.05 896.03 904.29
Capital Work In 336.90 236.90 56.90
Progress
Cash 141.92 122.38 285.41
Trade Receivables 53.17 49.43 46.13
Loans& Advances 86.10 88.70 92.67
Inventory-other 107.28 94.13 85.18
Total 1742.42 1487.58 1470.58
Source: ICICIdirect.com

JK Cement is post a net profit of Rs 151.83 crore in FY08 from Rs 32.56 crore in FY06
at a CAGR of 215% on the basis of improved realisation, capacity additions and cost
savings. The closing cash balance is come down due the capex plan from Rs. 285.41
crore in FY06 to Rs.141.92 crore in FY08

Ratio

For current quarter

Valuation Ratios
Price/Earnings 1.91
Price/Sales 0.32
Price/Book 0.45
Price/Cashflow 1.49

Profitability Ratios (%)

Gross Margin 57.93
Operating Margin 21.70
Net Profit Margin 16.78

Financial Strength
Quick Ratio 1.16
Current Ratio 1.54
LT Debt/Equity 58.54
Total Debt/Equity 59.45

Ratios
FY08 FY07 FY06
Book Value Per Share 123.59 103.59 96.43
(Rs.)
Enterprise Value (Rs. cr) 1493.14 1414.70 1303.70
Enterprise Value/Sales 1.07 1.24 1.49
EnterpriseValue/EBITDA 4.54 7.55 9.22
Market Cap/Sales 0.72 0.38 1.15
Price/Book Value 1.17 1.39 1.49
Operating Margin (%) 23.39% 16.17% 16.01%
Net Profit Margin (%) 10.80% 5.91% 3.69%
Return On Net-Worth 19.11% 9.78% 6.11%
Return On Capital 19.35% 11.34% 8.47%
Employed
Debt/Equity 0.75 0.76 0.90
Current Ratio 1.70 1.68 2.65
Quick Ratio 0.62 0.58 1.48

Estimates

YEAR 2009(E) 2010(E)

ROCE % 21.8 23.5
RONW % 30.7 29.9
P/E (X) 2.6 1.9
EV/SALES 0.7 0.5
EV/EBITD 2.2 1.4

JK Cement is expected to register robust volumes even in the face of imminent supply
shortage. The company is expected to add 0.4mntn(Million tonne) from April ’08.
Further, the company’s 3mnte Karnataka project is likely to be operational by mid
FY10E. Consequently, the company would continue posting impressive volumes in both
FY09E and FY10E.
JK Cement has invested Rs2.5bn towards costcutting measures, which involve a 20MW
pet coke-based captive power plant and 13.2MW waste-heat recovery plant as well as
replacement of its 7.5MW turbine with a 10MW one. The company is expected to operate
with 100% captive power on the back of these measures. Full benefits from captive
power would start flowing from beginning FY09E, thereby minimising impact of rising
fuel costs. JK Cement to register a strong 20% bottomline growth over FY08-10E, aided
primarily by cost-reduction measures.
JK Cement valuations seem attractive at FY09E and FY10E P/E of 2.6x and 1.9x
respectively. The company is likely to see a re-rating, with savings from power expected
to improve margins.

Performance review of Q1
JKLC's net sales were flat YoY in Q1FY09 at Rs3 bn, on account of inability to command
higher net realizations (Rs3,027/mt compared to Rs3,007/mt) and a negligible rise in
despatches to 0.89mn mt (0.87mn mt). However, a jump in operational costs by 14% to
Rs2.1bn pulled down the operating profits by 25% to Rs650mn. A spike in power & fuel
cost contributed by steep rise in pet coke prices (JKCL uses pet coke as its main fuel) and
higher wage bill resulted in operating costs spiralling northwards. Pet coke prices firmed
up 15% sequentially to Rs6.5k/mt and the same is likely to stay firm/escalate over the
next 2 quarters.
JKCL sold cement mainly in the western (~ 70%) and northern (~ 30%) states viz.
Rajasthan, Gujarat and Maharashtra. Its average lead distance was 450-500 kms with ~
55% of the cement carried by rail.
JKCL sold 0.89 mn mt of cement and 50k mt of clinker in Q1FY09 (v/s 0.86 mn mt of
cement and 30k mt of clinker in Q1FY08). Net sales realizations were flat at Rs3,027/mt.
High operating cost would continue to exert pressure on OPM
JKLC's operating profits in Q1FY09 were adversely impacted by the steep rise in the
power & fuel costs. The latter surged to Rs863/mt (+26% YoY & +32% QoQ) on back of
surging pet coke prices. The average pet coke price in Q4FY08 was Rs5.7k/mt, which
vaulted to Rs6.5/mt in Q1FY09 (+15%). Going forward, prices of pet coke are expected
to settle at ~Rs7k/mt in Q2FY09 (+9% QoQ). In order to mitigate the same, JKLC is
increasing blending of imported coal with pet coke and hopes to achieve a better mix
(30-35% of imported coal) v/s a mix of 83:17 (petcoke:imported coal) in Q4FY08.
However the price of imported coal is currently on an uptrend and likely to maintain an
upward bias in the coming quarters. This phenomenon, coupled with flat realizations
and volumes could strain the operating profits in the residual quarters of FY09E.

Capacity additions likely to keep sales realizations under pressure

An incremental capacity of 38mn mt is expected to be added in FY09 and 40 mn mt in
FY10. Most of these capacities are lined in North India, where consumption trends in key
markets have been mixed for Apr-May’08. Markets like Delhi have grown by 47% YoY,
Maharashtra by 10% while there has been no growth in consumption in Gujarat. The
demand-supply equilibrium is likely to be disturbed in H2FY09 and FY10, leading to a
strain on cement realizations.

Share price and market cap of other cement company

Company Last (Rs) Mkt Cap (Rs cr)

Prism Cement 15.2 453
Sanghi Ind 37.25 819
Mysore Cements 13.25 209
Guj Sidhee Cem 7.93 115
Birla Corpn 81.75 630
JK Lakshmi 33.7 206
Saurashtra Cem 12.4 63
Burnpur Cement 9.13 39

Report card
PE ratio 1.56 23/10/08
EPS (Rs) 37.94 Mar, 08
Sales (Rs crore) 343.52 Jun, 08
Face Value (Rs) 10
Net profit margin (%) 17.89 Mar, 08
Last dividend (%) 50 21/05/08
Return on average equity 34.87 Mar, 08

Stock Details

Current price 54.95 as on 24th oct.

Prev Close 59.3
Day''s H/L (Rs) 59.95 - 53.05
Mkt Cap (Rs Cr) 384.10
52wk H/L (Rs) 256.70 – 54.95