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J K Cement: Bottomline outperforms topline - Views on News from Equitymaster
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J K Cement: Bottomline outperforms topline
Feb 11, 2008

Performance summary
  • Topline grows by 22% YoY, led by higher volumes and realisations.
  • Production of grey cement reported 6.6% YoY growth, while white cement grew by 4.2% YoY, during 3QFY08.

  • Operating costs grew at a slower pace compared to topline resulting into 32% YoY growth in operating profits.

  • Expansion in operating margins, lower tax outgo expenses and higher other income, lead to a 60% YoY growth in net profits.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 3,190 3,899 22.2% 8,667 10,727 23.8%
Expenditure 2,307 2,737 18.6% 6,492 7,596 17.0%
Operating profit (EBITDA) 883 1,162 31.6% 2,175 3,131 44.0%
EBITDA margin 27.7% 29.8%   25.1% 29.2%  
Other income 15 19 26.7% 73 55 -24.7%
Interest 81 91 12.3% 255 268 5.1%
Depreciation 82 108 31.7% 245 299 22.0%
Profit before tax/(loss) 735 982 33.6% 1,748 2,619 49.8%
Tax 233 180 -22.7% 576 565 -1.9%
Profit after tax/(loss) 502 802 59.8% 1,172 2,054 75.3%
Net margin 15.7% 20.6%   13.5% 19.1%  
No of shares (m)       70 70  
Diluted EPS (Rs)*         38.2  
P/E (times)         4.5  
*trailing twelve month earnings

What has driven performance in 3QFY08?
  • The company achieved 22% YoY growth in topline in 3QFY08. This was backed by the continued strong demand for the commodity, which in turn led to better realisations. Sales volumes also remained higher. Production of grey cement reported 6.6% YoY growth, while white cement grew by 4.2% YoY, during the 3QFY08.

    Cost break-up
    ( % of net sales) 3QFY07 3QFY08 9mFY07 9mFY08
    Increase / Decrease in stock 1.5% -2.1% -0.1% 0.7%
    Raw material consumed 9.6% 9.9% 10.3% 9.4%
    Purchase of traded goods 0.0% 0.0% 0.0% 0.0%
    Staff costs 3.9% 4.5% 4.2% 4.5%
    Power & Fuel 24.2% 23.8% 25.9% 22.2%
    Transportation & handling 18.6% 20.4% 19.7% 19.5%
    Other expenditure 14.5% 13.7% 14.9% 14.5%

  • Though costs continue to scale up, the growth in operating costs was slower compared to topline growth resulting into 32% YoY growth in operating profits. The company has started reaping benefits of cost reduction measures. The benefit of implementation of 20 MW petcoke based captive power plant has to some extent offset the impact of increase in the total production cost (prices of coal/petcoke, employee cost and freight cost). Setting up captive power plants reduces the dependence on grid power and ensures smooth functioning. However, rising input costs restrict margin expansion. The sweet fruits of the cost reduction measures coupled with continued healthy topline growth resulted into 2.1% expansion in operating margins.

  • Net profit reported whopping 60% YoY growth in 3QFY08. Healthy growth in operating profits, coupled with higher other income and lower tax outgo resulted into net profit exceeding topline growth.

What to expect?
The company has chalked out huge expansion plans to improve and/or maintain its market share, de-risk revenues by diversifying its presence, setting up 3MT plant in south, and reduce costs by setting up captive power plants. The completion of balance 10 MW of waste heat recovery plant, which would be commissioned in 4QFY08, would result in further cost savings. While the benefits of restructuring have duly kicked in, it must be borne in mind that the realisations are at all time highs. Further, most cement producers have lined up capacity expansion plans either by brownfield or greenfield expansion route. Thus, once the announced capacities come onstream, the realisations are expected to come under pressure. Any decline in realisations will affect company adversely as the current growth is largely price led.

At the current price of Rs 172, the stock is trading at fair valuation of US$ 97 on the enterprise value per tonne (EV/tonne) basis as per FY07 numbers.

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