JK Cement Rating “Buy”; Medium-term positive paint entry

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It can ensure the stability of the overall income; ‘Buy’ retained with an unchanged TP of Rs 3,935

JK Cement (JKCE) has announced plans to diversify into the paint business and invest up to Rs 6 billion in it over the next five years. It plans to leverage its strong (i) JK White cement/putty brand, (ii) a distribution network of over 50,000 white cement/putty dealers (many of which also sell paints) and (iii) long-standing relationships with property developers.

Although the company’s diversification into painting activities may raise capital allocation issues (given barriers to entry, increased competition and the likelihood of a minor Ebitda loss over the early years), it can, in our view, provide stable growth/stable revenues in the medium term. In addition, painting is likely to remain a relatively small business for JKCE and will constitute less than 5% of capital employed, revenue and Ebitda over the next five years. Maintain long stock with an unchanged TP of Rs 3,935/sh (14x FY24E EV/E). Main risks: decline in demand/prices and sharp increase in costs.

Entry into paints may raise capital allocation issues given the many barriers to entry, increased competition and the likelihood of minor Ebitda loss in the first few years and therefore an overall dilutive impact on RoCE. During FY14, JKCE had invested ~Rs 8 billion in white cement business outside India in Fujairah, UAE, and this business is still at a net loss, with the business building a cumulative impairment provision of approximately Rs 3.2 billion for FY20-21.

Establishing the “right to win” for JKCE: JKCE could commercialize the proposed paint business in FY24 and focus only on its core markets of Northern and Central regions instead of all of India (similar to its market positioning in gray cement).

The paint business can provide steady growth/stable revenue in the medium term, in our view: Unlike its peers, JKCE was able to use its white cement/mastic Ebitda to fund its gray cement expansion and gain market share. In addition, the company’s white cement/mastic activity generates a relatively stable Ebitda, which ensures the stability of the overall Ebitda despite the high volatility of the gray cement activity. Likewise, the proposed paint business could also ensure the stability of JKCE’s overall revenue in the medium term.

Gray cement expansion plans are unlikely to be affected by entry into the paint business. JKCE’s balance sheet remains strong and its consolidated net debt is not expected to exceed 25 billion rupees and the “net debt to Ebitda” could remain below 1.5 times even after an investment of 6 billion rupees in the paint industry over the next five years.

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