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Better Operating Performance on Lower Freight Cost
JK Lakshmi Cement (JKLC) has reported a better-than-expected performance in 2QFY19 with its EBITDA coming in at Rs916mn (-4% YoY and -2% QoQ) vs. our estimate of Rs824mn led by unexpected decline in freight cost (-1% YoY and -18% QoQ) owing to ~30kms reduction in lead distance. EBITDA/tonne stood at Rs431 vs. Rs505 and Rs410 in 2QFY18 and 1QFY19, respectively. While operating cost/tonne stood at Rs3,572 (-0.9% YoY and -1.7% QoQ), input cost/tonne increased by 7% YoY and 2% QoQ to Rs1,944 mainly due to increase in Power & Fuel cost. Average NSR declined by 2.6% YoY and 0.9% QoQ at Rs4003/tonne, while sales volume grew by a strong 12.5% YoY to 2.13mnT. Though we marginally cut our EBITDA estimate by 3% for FY19E mainly to factor in soft realisation, we maintain our FY20E EBITDA estimate considering likely savings owing to recent decline in the fuel prices and full benefits from CPP and SGU. We continue to remain positive on JKLC given initiatives undertaken to improve operating efficiencies in Eastern operations and attractive valuations. Hence, we maintain our BUY recommendation on the stock with an unrevised Target Price of Rs380.
Decent Sales Volume Drives Revenue Growth
JKLC’s revenue grew ~10% YoY (-8% QoQ) to Rs8.5bn mainly led by healthy 12.5% YoY growth in sales volume to 2.13mnT (including clinker of 0.26mnT). As per the Management, reduction in price gap between trade and non-trade segments and healthy demand environment in Eastern markets as well as Gujarat and Northern markets aided volume growth. Further, JKLC’s RMC revenue stood at Rs390mn.
Reduction in Freight Cost Aided Operating Performance
A steep decline in freight cost/tonne (-12.2% YoY and -11.5% QoQ) aided JKLC to report a betterthan-estimated operating performance. Reported EBITDA stood at Rs916mn vs. our estimate of Rs824mn. JKLC stated that a meaningful reduction in lead distance (up to 30kms) aided JKLC to save on freight cost and negated the impact of soaring diesel prices during the quarter. Further, loose cement transportation, higher axle load benefit in the Eastern markets (up to 50%) and increase in ex-factory freight also helped to contain freight cost. Net profit came in at Rs78mn (-41% YoY and -43% QoQ) exceeding our estimate of Rs62mn.
Outlook & Valuation
Considering the initiatives undertaken by the Company to improve operations in Eastern markets by means of 20MW CPPs and SGU in Odisha, we expect its operating performance to witness improvement from FY20E onwards. Current valuations at 7.1x EBITDA and US$49 EV/tonne for FY20E look attractive after recent correction. We maintain BUY recommendation on the stock with an unrevised Target Price of Rs380 (9x FY20 EBITDA).
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