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Stock Insight: Concrete Future

JK Cement is on course to fill the gaps in its business model by expanding capacity and reducing input costs

JK Cement (Idirect Code: JKCEME) has an interesting beginning.

Its origins are traced to JK Synthetics, a company involved in manufacturing man-made fibres and cement. Heavy losses saw its net worth eroded and the hence decision to de-merge the two businesses. Subsequently, the cement division was de-merged and a new company was born in November 2004 - JK Cement.

Now, a pure and focused cement player, the company is identified as one of the leading grey cement players in north India and the second-largest white cement manufacturer in India.

The company currently operates two grey cement plants in Rajasthan - Nimbahera and Mangrol - with an aggregate capacity of 3.55 mtpa. It recently expanded its grey cement capacity by 0.5 mtpa, increasing its installed capacity for grey cement to 4.05 mtpa.

The white cement plant has a capacity of 0.3 mtpa which has been expanded to take the total installed capacity to 0.35 mtpa. JK Cement's white cement business accounts for almost 17 per cent of total revenue.

Entry barriers to the white cement business are high due to the non-availability of quality limestone. JK Cement has access to large reserves of limestone for producing both grey and white cement. Based on independent geological surveys of different mines between 1996 and 2001, the limestone reserves are sufficient to support its current and planned capacity for approximately 40 years. Further, the manufacturing plants are located close to the limestone reserves, resulting in lower transportation costs. The mines that supply the white cement plant at Gotan also have white clay, an important additive necessary for white cement production.

Demand too is not cyclical and prices are 2.5 times higher than that of grey cement. JK Cement and Grasim are the only two big players in this segment with a national presence. Travancore Cement is restricted to Kerala and Tamil Nadu. Though the sale of white cement is predominantly in domestic market, JK Cement also exports to other countries in Asia, Africa and South Africa.

The domestic white cement industry grew by around 3.6 per cent during 2005-06 over 2004-05 and there has also been growth in exports. In the coming years, applications such as white cement underbed for a marble floor and cement wash applications are likely to see a higher demand. Another application of wall putty is poised for significant growth in which JK is a pioneer.

Since power is a key cost component for cement plants, it has addressed this by setting up its own captive power unit. Currently, the company pays Rs 4.70 per unit of power and sources its requirement from the Rajasthan State Electricity Board and a small part from captive diesel generating sets. Once the captive power plants are commissioned, the cost of generation could come down to Rs 2 per unit. So assuming the company uses the current 88 units of power consumption per tonne, it would translate to savings of approximately Rs 240 a tonne, which will be reflected during FY'08. This plant will meet the company's entire power requirement and will help reduce power costs. Savings from the captive power plant are expected to be around Rs 76 crore from FY08E onwards.

The company has recorded a PBT of Rs 52.21 crore on a turnover of Rs 1,108.68 crore in FY'06 resulting in an EPS of Rs 6.37. Its net worth as on March 31, 2006, was Rs 354 crore, compared to Rs 54.59 crore the previous year. Since capacity utilisation stands at 98.9 per cent, the company has aggressive expansion plans to double capacity by 2009 by setting up a green-field plant of 2.5-3 million tonnes in north Karnataka. The project will be funded through debt and internal accruals in a 50:50 ratio. This will help the company establish a southern presence and target the Karnataka, Goa and Maharashtra markets.

Cement demand in this country is growing at approximately 1.5 x GDP growth. The cement industry is likely to grow at a CAGR of 10 per cent in the medium term on account of housing demand and thrust on infrastructure development and industrial projects. Further, initiatives taken under the NHDP for building highways and roads and the Pradhan Mantri Gram Sadak Yojana for constructing pucca roads in rural areas and Bharat Nirman for promoting irrigation, roads and housing, among other things, are likely to be the major growth drivers for cement demand. The 2010 Commonwealth Games in New Delhi should also give a major fillip to construction in the near future. Though India is the second largest manufacturer of cement, per capita consumption is very low at 115 kg per annum, which is well below the international average of 260 kg. JK Cement is set to witness strong growth in turnover on account of additional production due to enhancement in grey and white cement capacity from June 2006. Higher blended cement (which the company is working on), firm trend in cement prices in the northern region and the cyclical upturn in the northern and central regions will also boost sales. Its net sales could grow from under Rs 900 crore in FY'06 to over Rs 1,100 crore in FY'07E and further cross the Rs 1,400 crore mark by FY'08. There are a few potential risks though. The company plans to run its plant on 90 per cent pet coke. Hence, any change in pet coke price will impact profitability.

Cement is a low-value, bulky commodity for which transportation costs account for a significant expenditure. Change in transport cost would hinder profitability. Further, most transportation regulations (like roads and railways) are governed by government policies. Any increase in cost resulting from change in government policy may have adverse effect on the profitability of the company.

Source: Idirect