J K Cement: Significant discount to replacement cost makes it a good long-term bet
JK Cement surprised the street with its numbers for the fourth quarter (Q4) of financial year 2013-14 (FY14). The comany’s net sales grew by 7.6 per cent on a year-on-year (y-o-y) basis and 22.7 per cent on a quarter-on-quarter (q-o-q) basis.
The total volume of grey cement produced y-o-y, however, remained flat because the drop in production from its plant in the South offset the gains in volume produced in the northern region plant, which was already under pressure due to capacity constraints. However, increased realisation in the grey cement segment — up by 4.8 per cent y-o-y and 12.8 per cent q-o-q — and a sharp increase in volume in the value- added segment (wall putty), helped J K Cement report good numbers.
The Q4 earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin improved by 190 basis point on a y-o-y basis and 830 basis point q-o-q, on the back of a decline in production costs (the cost per tonne fell by 1.6 per cent q-o-q). An improved margin and higher income from other sources saw its net profit surge by 36 per cent on a y-o-y basis and 581 per cent on a q-o-q basis. In addition to bringing down its power consumption costs, the company also managed to sell surplus power during the quarter.
Analysts say good days are here for J K Cement. First, the demand for cement is expected to increase in the coming quarters following a pick up in construction activities triggered by an economic revival and the overall positive sentiment generated by a stable and business-friendly government at the Centre. Second, with the capital expenditure projects in Haryana and Rajasthan expected to go on stream soon, volume should surge by 11 per cent, annualised, over the next two years. Third, J K Cement has shown an improvement in its margin in the last quarter and the positive impact of a strong rupee on its fuel and raw material costs (for putty), will better its prospects in the coming quarters as well.
Though the stock price has surged in the recent past due to the broader market buoyancy, analysts believe further upside is possible for the stock from its current levels because the company has a strong presence in the high-margin white cement business and the vertical is growing very fast (white cement business grew by 26 per cent y-o-y in the last quarter). Despite this, the stock is still trading at a significant discount compared to its peers and also with its own replacement cost. Therefore, it is an ideal candidate for further re-rating.
Selection methodology: We pick a stock that has shown maximum increase in "consensus analyst rating" during the last one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 strong buy, 4 buy, 3 hold, 2 sell and 1 strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To ensure we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.