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Indsec Securities & Finance Ltd.

Indsec Securities & Finance Ltd.


Share Price
:Rs.183

BSE Sensex
: 13340

Nifty : 3815

Sector
: Cement

High / Low
: 231.2/108.6

Year end : : March

Listed on
: BSE,NSE

Market Lot
: 1

BSE Scrip Code : 532644

NSE Scrip Code : JKCEMENT

Shares in issue : 69.9Mn

Shareholding
: SEPT 2006

Promoters :61.56%
Institutions :10.92%
Public & Others :16.00%
Foreign :11.53%


All currency in INR unless otherwise
stated

Analysts:
Hetal Sanghrajka
hetals@indsec.co.in

9867978383
Milan Wadkar
milanw@indsec.co.in

9819833345


INVESTMENT ARGUMENT


We are initiating coverage on JK Cement Ltd, which was formed due to
rehabilitation of JK Synthetics a BIFR company. The company has an
installed capacity of 3.55MnT of grey cement and 0.35MnT of white
cement.

We recommend Buy on JK Cement due to the following reasons:

JKCL is amongst the top four cement players in northern region
along with ACC, Grasim and GACL and also the second largest
player in white cement market after Grasim.

The company operates in the supply deficit northern region,
which is likely to continue in medium term. The capacity
utilization levels will continue to remain high despite capacity
build up owing to additional demand arising from infrastructure
projects and Common Wealth Games in 2010.

In the post commissioning of captive power plant, JKCL will see
radical decline in its power cost from Rs.4.4/unit to Rs.2.50/unit,
which alone will add Rs.5 to FY08E EPS. Going ahead it will add
Rs.11 to FY09E EPS.

Moreover, the realizations for grey cement have surged from
Rs.2009/Tonne in Q1'07 to Rs.2752/Tonne in Q2'07 whereas the
realizations for white cement have increased from Rs.6367/Tonne
in Q1'07 to Rs.7262/Tonne in Q2'07, thereby improving the
operating margin for the company.

The company has embarked a Greenfield capacity of 3MnT in
Karnataka at an investment of Rs.10,000Mn to diversify its
presence in the southern markets, which ranks first in cement
consumption.

At CMP of Rs.183, the stock trades, at PER of 6x and 5x for FY07E and
FY08E respectively. We recommend a Buy on JK Cement Ltd with a 12-month
target price of Rs.240. Thus placing JKCL at 50% discount to the large players in
the industry.

JK Cement Limited
Recommendation: Buy December 20, 2006

...
I
Indsec Securities & Finance Ltd.



Earnings Table
Income
(Rs mn)
Op. Profit
(Rs mn)
PBT
(Rs mn)
PAT
(Rs mn)
EPS
(Rs)
CEPS
(Rs)
P/E
(x)
FY2005 3387
476
107
62
1.24
3.77
142
FY2006 8830
1414
522
326
4.66
9.10
38
FY2007 (P)
12453
3838
2997
1988
29.78
34.84
6
FY2008 (P)
14615
4404
3553
2356
39.03
45.43
5


INDSEC
.
II
Indsec Securities & Finance Ltd.

The Company:

JK cement ltd came into existence through the restructuring exercise of JK synthetics by which the
cement division was hived off as a separate company in June 2005. Being a prominent player in the north,
JKCL's primary markets are Haryana (18.2% Mkt Share), Delhi (13.4% Mkt Share), Rajasthan (11% Mkt
Share) and Punjab (4% Mkt Share).

JKCL is also the second largest player after Grasim Industries in 2-player white cement market in India
with an installed capacity of 0.35 MnT of white cement. White cement is sold in the domestic market as
well as in the export market including countries like South Africa, Nigeria, Singapore, Bahrain,
Bangladesh, Sri Lanka, Kenya, Tanzania, UAE and Nepal. The white cement industry in India is highly
concentrated with the two largest players accounting for the substantial majority of Indias production
capacity. Consequently, prices of white cement have been relatively less volatile and hence sales of white
cement have generated stable cash flows for JKCL.

Demand Supply Scenario:


In its dominant northern region, JKCL has witnessed utilization levels of over 90% during the last five
years. At the end of FY06 the installed capacity for the region stood at 28MnT whereas cement
consumption has surpassed the installed capacity pushing the utilization levels over 100%. Going ahead,
the volume growth is expected to be of 8-10% in the region. With the additional capacities coming up in
the region, the capacity would enhance to 40.6 MnT by the FY'08. Thus the deficit is expected to prevail
over medium term, which will keep the prices of cement as well as realizations firm. We believe, despite
the build up of capacities in FY'08, the housing and infrastructure activity will go up following the
Government policy initiatives to allow investments including the proposed FDI in housing and
commercial real estate sectors to meet the future demand growth. For instance, the forthcoming Common
Wealth Games to be held in India in the year 2010 would generate more demands for hotel rooms,
housing and sports complex.

Reduction in Power Cost to boost the margins:

At present, JKCL sources over 70% of its power requirement from grid while the rest is coal and diesel
based captive power. Owing to this, the effective cost of power is quite high (Rs.4.4/unit) and has been
eating into the company's earnings. Thus the management has precisely decided to replace the same with
captive power plant. The company would be investing Rs.20cr for replacing a 10 MW turbine in its
existing thermal power at the Bamania cement unit (commission Dec 2006). Further JKCL is setting upon
a 13.2MW plant based on the waste heat recovery technology at Nimbahera plant (commission June
2007). The company is setting up another 20MW captive power plant based on pet coke at Nimbahera
plant (commission June 2007). The commissioning of the captive power plants will bring down the
company's energy costs by almost 50% to Rs.2.5/unit and a saving of Rs.200/Ton, which works out to
Rs.800Mn for 4MnT of capacity. Our calculations show that power savings alone would add Rs.11 to the
IPS in FY08. This reduction in power cost will play a key role in escalating the company's margins
from16% in FY'06 to 34% in FY'08. The total outlay for the power projects is expected to be in the tune
of Rs.2160Mn, which is being funded through the proceeds of public issue (Rs.3000Mn) concluded in
March 2006.


INDSEC
.
III
Indsec Securities & Finance Ltd.


Capacity Expansion:

The company is increasing its white cement production capacity by 0.10mt, at its existing site at Gotan
and of this, 0.05mt has already commissioned in Mar'06. This will increase its white cement capacity to
0.40mt.

The southern market recently witnessed an upsurge in cement consumption following urbanization of
towns. Sensing a high growth opportunities, JKCL has embarked upon a capex plan of Rs.10, 000Mn for
setting up a Greenfield plant in Karnataka with an installed cement capacity of 3MnT which includes
2.2MnT of clinker capacity. The plant, being set up under the company's wholly owned subsidiary Jay Kay
Cem Ltd, will be operative by end of FY08 thus increasing the company's consolidated grey cement
capacity to 7MnT from the present 3.55MnT.However the value to be generated from the proposed
capacity expansion is not incorporated in our calculations, as the company is still in its process of
finalizing various aspects of the project.


Carbon Credit:

Post-commencement of Waste Heat Recovery plant in July'07, the company would be eligible for carbon
credits. The management is expected to sell around 73000 units of carbon credits at forward rates of Euro
12.80/unit approximately. However we have not taken into consideration carbon credit earnings for our
projections.

Strong Realizations to drive the Margins:

The company's EBITDA margins for FY'06 stood at 16% compared to 14% in FY'05. For Q2'07, the
EBITDA margins stood at 26% vis-�-vis 24% in
the Q107
. This higher margin were achieved despite the
fact that the dispatches for grey cement declined by 7% to 0.81MnT in the quarter compared to 0.87MnT
in last quarter of FY06.