Jefferies India downgrades JK Cement to 'hold' on expensive valuations

Brokerage firm Jefferies India has downgraded JK Cement to 'hold' from 'buy' amid expensive valuations after recent gains in the stock price. The brokerage firm has raised its target price by 5 percent to Rs 3,260 a share from Rs 3,200 earlier.

In the last four months, the stock has surged nearly 23 percent compared to 5.7 percent rise in Sensex.

"While we continue to like the strong growth prospects of the company, we believe that the growth is reflecting in valuations at 12.5x FY25, post the sustained run-up in the stock. We retain EBITDA estimates, but downgrade JK Cement from buy to hold," Jefferies India said in its latest note.

JK Cement put up a robust fourth-quarter performance with a 200 percent sequential jump in net profit to Rs 110 crore and 15 percent on-quarter growth in revenue to Rs 2,725 crore. Margins improved 280 basis points to 13.2 percent from 10.4 percent sequentially.

During the post-results call, the management highlighted the company's plans for a rapid ramp-up of its new greenfield central region capacity. They also expressed optimism about achieving profitability, fuelled by the robust industry demand trends.

The JK Cement management anticipates a 15 percent on-year growth in grey cement volume for FY24. They have set a target of achieving 2.5-3 million tonnes of volumes from the central region plant, with a utilisation rate of 65 percent. While JK Cement's central region capacities have started operations ahead of its competitors such as ACC and the relaunch of volumes following Dalmia's acquisition of JP Associate plants, the improvement in profitability of this plant will be a crucial aspect to monitor. This is because competitors are also ramping up their operations in the central region over the next 12-18 months.

In FY23, JK Cement successfully commissioned a 6 million tonnes per annum (MTPA) capacity, resulting in a total grey cement capacity of approximately 20 MTPA. Additionally, they have ongoing work for a 3.5 MTPA grinding capacity, including projects in Ujjain (expected to be commissioned by the end of FY24) and Prayagraj (land acquired, expected to be commissioned by 2QFY25).

The company has set a capital expenditure target of Rs 12-14 billion for FY24 and Rs 7-8 billion for FY25. JK Cement is working to secure clearance for the Jaisalmer limestone mine and will make a decision on the project based on the balance sheet and market conditions."We estimate the volume CAGR at 11 percent over FY23-FY25, and unit EBITDA at Rs1,078/tonne for FY25 versus Rs 810/tonne for FY23. We expect strength in rural housing demand to continue and recovery in urban and non-trade segments to sustain. The government infra spend and push on 'housing for all' scheme should support this growth. Resultant operating EBITDA should see an EBITDA CAGR at 28 percent over FY23- FY25," Jefferies report added.