JK Cement gets capex cheer, but the sector has a pricing problem

“JK Cement has delivered on its commitment to commission 4mtpa greenfield capacity in central India by Q3FY23,” said Navin Sahadeo, director, institutional equities at Nuvama Research. The company is going to add another 5.5mtpa cement grinding capacity.

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Consistent capacity addition bodes well for its volume growth outlook. Thus, Sahadeo expects JK Cement’s volume growth over the next two years to be driven by capex completion. Overall, the company aims to reach 25mtpa grinding capacity by FY25.

In the September quarter (Q2FY23), despite seasonality, overall volume at 3.64mt rose sequentially and year-on-year. However, elevated operating costs and muted realization disappointed.

Nevertheless, the company’s white cement business is seen as a cushion against earnings volatility in grey cement. JK Cement is the second-largest domestic company in the white cement and wall putty market, which has high margins of 23-25%, said analysts at Emkay Global Financial Services Ltd. “The business contributes 25-30% of consolidated Ebitda, in our estimate. We view this segment as a steady cash generator for JK Cement, with cash flows to continue being utilized for expanding its grey-cement business,” said an Emkay report dated 27 November.

Meanwhile, in the last one month, the stock has rallied 16%, which can partly be attributed to hopes of cement companies raising prices in November. However, investors need to be mindful of what lies ahead. The positives of timely capacity addition seem to be largely captured in the stock price. So, the ramp-up of these capacities is crucial and depends on how demand pans out.

“Downside risk for the stock arises from sector headwinds of weak pricing power and uncertainty because of the entry of the Adani Group,” Sahdeo said.

That apart, a concrete update on its paint business is still awaited. In March this year, the company announced its foray into the paint business. The management expects to have definitive plans on the paint business by the end of CY22. In the post Q2 earnings call, the management had said that no capital expenditure has been undertaken for the paint business yet. Given the rising competitive intensity and high entry barrier in the paint sector, a large capex commitment could be a dampener for the JK Cement stock.