02 Nov , 2021 By : Kanchan Joshi
JK Lakshmi Cement's September quarter earnings were unexciting. A key disappointment for investors was the 3% year-on-year and 13% sequential decline in volumes, which was driven by losses in eastern markets due to a truckers' strike. The company’s management said the strike spilled over to the Q3, impacting 17 days of sales in the geography. Analysts note that the impact of this strike was more severe on companies like JK Lakshmi, which do not have railway siding.
Also, akin to peers, cost inflation weighed on the company’s operating performance. On a per tonne basis, cost at Rs4,119 rose more than 8% sequentially and over 15% y-o-y hit, by negative operating leverage, higher fuel and freight costs.
“Given its overdependence on prices, we believe that margins for the company would remain capped due to significant cost pressures, limited scope for cost reduction and high lead distance," analysts at Prabhudas Lilladher Pvt. Ltd said in a report.
However, going ahead, analysts say, investors in this stock should focus on the company’s expansion plans, which is seen as a trigger for the stock. “JKLC is facing regional capacity mismatch, with capacity constraints in North India forcing it to purchase clinker in that region while it is selling clinker in East India due to surplus. The next set of capex by its subsidiary, Udaipur Cement Works (UCW) is expected to take 2-2.5 more years and hence volume growth and profitability will lag industry parameters in the meantime, in our opinion," analysts at Nirmal Bang Securities Ltd said in a report.
Analysts say its 2.5mtpa expansion project in UCW will address the growth concerns. Mtpa is short for million tonnes per annum. The expansion will be executed in phases over next three years and is expected to cost Rs1,400 crore, to be funded through a mix of debt and equity. Also, its 10 megawatt waste heat recovery system plant at Sirohi, which is likely to be commissioned by December 2021, which will reduce electricity costs further.
“At current market price, the stock has a free cash flow yield of around 9%. In addition to the expansion, its cost competitiveness (one of the lowest cost producers) will drive the return ratio profile improvement," said analysts at JM Financial Institutional Securities Ltd.
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