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JK Cement: Financial overview

Dec 31, 2007

In the previous articles, we made an attempt to portray JK Cement's journey and analysed it on the basis of five-force model of Michael Porter. Now in this article, let us take a look at numbers of the past two to three years and what do they indicate. JK Cement was incorporated in November 04 by acquiring the assets of the cement division of JK Synthetics. Following the separation, the company was sanctioned a working capital loan of Rs. 650 m. The company continued to implement modifications to its kilns, outlined capacity expansion plans and set up captive power plants to reduce cost pressure on margins.

Glance at operations: The company manufactures both grey and white cement. Today, the company is one of the largest cement manufacturers in Northern India and also the second largest white cement manufacturer in India by production capacity. However, in recent past white cement segment is facing major threats from competing products, thereby threatening the very existence of this industry. Cement paint industry is feeling the heat due to the entry of the new generation polymer based exterior paints. The fact that this segment is less crowded compared to grey segment and increased demand for the commodity resulted in the white cement division operating at capacity utilisation in the range of 60% to 65% in the past 2 years. However, considering the robust demand for the grey cement, the company's grey cement division continued to operate at almost 100% capacity utilization levels.

What do the numbers say? Owing to upturn in the cement cycle and the restructuring programme that the company underwent, net sales have grown at a CAGR of almost 94% in the past 2 years while operating profits have reported whopping growth of 194% during the same period under consideration. As mentioned earlier, demand for the commodity by the end user industries has resulted in improved sales and realisations. Sale is a factor of production into price. While the company reported almost 60% CAGR in total production and total sales (total= grey + white), realisation improved by almost 21% during the same period resulting into such an impressive topline growth.

Particulars FY05 FY06 FY07
Sales (Rs m) 3,294 8,737 12,333
% growth N.A. 165.2% 41.2%
% OPM 11.6% 15.1% 26.7%
% NPM 1.9% 3.7% 14.5%
Apart from improved realisations, the company was able to improve its overall physical performance, which has helped expand margins. The 8-fold growth in operating profits was achieved as the operating costs grew at a slower place (CAGR of 76% in past 2 years) compared to topline growth. The company was able to control its cost by improving blending ratio, increased capacity utilization, improved realisations and continuous focus on cost reduction.

The company's power cost per tonne basis almost witnessed flat growth, while raw material costs and selling and distribution expenses on a cost per tonne basis witnessed 15% and 17% CAGR respectively. The increase in costs can be attributed to the rising freight charges and coal prices (another key input).

Way forward… Thus, owing to these reasons the company was able to report impressive numbers. Currently the company is going through a vital stage. The company has chalked out huge expansion plans to improve and/or maintain its market share, de-risk revenue by diversifying its presence, setting up 3MT plant in south, and reduce costs by setting up captive power plants. Geographical diversification is a useful strategy for a commodity business like cement. However, the company has planned to set a greenfiled plant in the southern region, which has historically witnessed excess supply.

On the demand front, we expect the northern region to grow in line with the industry. North India is expected to witness demand growth rate of over 7%, driven in part by the forthcoming commonwealth games, which will result in increased spending on infrastructure by the government. However, with the growth in the Cement sector and waning demand supply gap, producers have lined up capacity expansion plans either by brownfield or greenfield expansion route.

While the benefits of restructuring have duly kicked in, it must be borne in mind that the realisations are at all time highs. At the current price of Rs 224, the stock is trading at fair valuation of US$ 120 on the enterprise value per tonne (EV/tonne) basis as per FY07 numbers.

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