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J K Lakshmi Cement: Conference call extracts - Views on News from Equitymaster

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J K Lakshmi Cement: Conference call extracts
Feb 23, 2010

Cement is a regional industry. While southern region witnessed pricing pressure, northern region is in a good shape and players within the region are reaping the benefits of nearly neck to neck demand supply situation. In order to understand the prospects of the cement industry and future plans of one of the established northern cement players - J K Lakshmi Cement, we held a conference call with the company. Here are the key takeaways.

Company overview: J K Lakshmi Cement is a North India based J K group company with a total current capacity of 4.7 MTPA. It caters to northern and western region and has captive power capacity of 38 MW that satisfies 60% of the company's power requirements. It has a large network of around 2,200 dealers spread across various states such as Gujarat, Rajasthan, Haryana, Delhi, Uttaranchal, Punjab, U.P., J&K, Mumbai and Pune. Considering the changing needs of customers and keeping in touch with global construction trend, it has set up ready mix concrete unit under the brand name J K Lakshmi Power Mix. The company has 10 fully operational plants in Western and Northern regions of the country and is further expanding in this area. The another value added product launched by the company is the first premium branded Plaster of Paris (POP) in Northern India for discerning customers under the brand name JK Lakshmiplast.

Having gone through the company's profile, let's find out how the company has fared over the years.

Over the years: The company has reported annual growth of 28% over the past three years on the topline front, while the bottomline has grown at a faster pace of 59% annually over the same period (FY06-FY09). Such robust growth was backed by growth in volumes, improved realisations and on account of cost control measures initiated by the company (setting up captive power plants). With upturn in the cement cycle (witnessed in recent past few years) cash flows to the company improved. The same helped the company reduce its debt burden (D/E - down to 0.5 in FY09 from highs of 5 in FY04) considerably which reduced burden on net margins (from -4.1% in FY04 to 14.6% in FY09). Recently, cement realisations have started coming under pressure with new capacities becoming operational, dent in profitability in FY09.

This was a brief about the company's historical numbers. Now let's take a look at future plans.

Expansion plans: The capacity addition plans at the upturn of the cycle helped company reap benefits of improving demand for the commodity and strengthen its position in the markets of operation. To sustain its market share and bank upon infrastructure growth story it further plans to scale up its capacity. The company has outlined plans to scale to increase its capacity by setting up a 2.7 MT plant in Chhattisgarh at a cost of around Rs 1,200 m. This is in addition to clinker and grinding unit expansion plans outlined by the company. By the end of 2012 the company sees it as an 8 MT cement manufacturer. In order to cater to the increase in power requirements the company plans to set up captive power plants. It has planned to set up 18 MW of thermal power plant at a cost of Rs 800m and a 12 MW of waste heat recovery system for an investment of Rs 1,200 m. The initiative to set up waster heat recovery system will reduce operational costs and will also fetch carbon credits for the company.

Our view: These moves are positive from a long term perspective. However, in the medium term the company's margins are likely to come under pressure. This is on account of lower realisations. Cement prices are further likely to come under pressure with new capacities coming on stream. Moreover, the company has outlined ambitious expansion plans, which will further pressurise net margins. For the outlined expansion plans, the company will have to increase borrowings. This will result in increase in finance charges at a time when profitability will be lower.

Valuation: At the current price of Rs 73, the stock is trading below its replacement cost at over Rs 1,500 on the enterprise value per tonne (EV/tonne) basis as per FY09 numbers. However, from an investment perspective where time frame spans over two years, we believe the stock does not provide significant upside from current levels. This is taking into account cement industry prospects and the company's ambitious expansion plans.

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