JK Cement - FPO

Focusing on reducing power cost

The price band tries to factor in benefits of lower power cost more than a year in advance

JK Cement (JKC) is one of the largest cement manufacturers in north India and second largest white cement producer in India. The company has two grey cement plants in Rajasthan, with production capacities of 2.8 million tonnes and 0.75 million tonnes per annum, respectively, and a white cement plant in Rajasthan with a capacity of 0.30 million tonnes per annum.

Catering to the northern region (13% market share for grey cement), JKC holds leadership position in Haryana, with a market share of 18.4% (nine months ended December 2005). Its other markets are Delhi, Rajasthan and Punjab, where it ranks in the top six players.

JKC’s cement manufacturing facilities and operations were originally owned and operated by JK Synthetics (JKSL), which had two businesses: man-made fibre and cement. In 1990s, the man-made fibre division accumulated losses while the cement division was still profitable. Under the rehabilitation scheme, JKSL’s cement division was demerged into JK Cement from 4 November 2004.

The proceeds of the current issue are to be used to (a) install waste heat recovery power plant of 13.2 MW capacity; (b) set up a 20-MW pet coke-based captive power plant; (c) replace a 7.5-MW steam turbo-generator set at its existing captive power plant with a 10- MW steam turbo-generator set; (d) increase the grinding capacity; and (e) scale up the white cement plant capacity by 0.10 million tonnes to 0.40 million tonnes.

Strengths

1. JKC has a presence in the lucrative northern region. The demand for the region in the first nine months (April-December 2005) has grown by 8% and is expected to grow at the same rate in FY07 as well.
2. On implementation of the proposed projects by June 2007, the total captive power capacity of the company will increase by 43.2 MW, resulting in a substantial saving in power cost, which is currently one of the highest among cement plants.

Weaknesses

1. We expect a capacity build-up in the northern region of about 8-10 million tonnes by FY 2008, thereby reducing the demand-supply gap, which could pressurise prices. This is the year when JKC’s power costs will come down. So the benefit of lower power cost may not inflate profit to the extent perceived now.
2. Promoters (Gaur Hari Singhania and Yadupati Singhania) have a poor track record.
3. JKC does not own or have registered trademarks and logo under which it operates and sells its cement.
4. JKSL owes Rs 62 crore to JKC. Its recovery is doubtful.

Valuation

JKC will not enjoy any significant volume growth in future. For earnings growth, it will be solely dependent on better price realisation in FY 2007 and fall in power cost in FY 2008.

The scrip currently trades around Rs 170 with a 52-week High/Low of Rs 101 to Rs 200. At the offer price band of Rs 145 – Rs 155, JKC’s PE works out to 60 – 65 x H1 FY 2006 annualised earning on the post-issue equity. TTM PE for the Cement -- North sector is 29. Market leaders of the northern region and highly cost-efficient players Shree Cement and Gujarat Ambuja are trading at a TTM PE of 30.3 and 26.5, respectively.