Latest dealers channel checks by various brokerages show that cement demand has started to improve. In this backdrop, completion of a 4.2mtpa grey cement expansion is timely for JK Cement Ltd. Mtpa is short for million tonnes per annum.
Last week, the company commissioned a 0.7mtpa grey cement grinding capacity in Gujarat and also began commercial dispatches. This expansion takes JK Cement’s total grey cement capacity to 14.67mtpa across Rajasthan, Uttar Pradesh and Gujarat.
Cement demand in north India is said to be relatively less impacted by the pandemic. Even so, the north is a crowded market and foraying into other regions will give a fillip to the company’s volumes in the long-term, analysts said.
“We believe after having completed the major expansion, the outlook for the company in FY22/FY23 is robust as ramping up of these extended capacities will drive volume and revenue growth for the company,” said Axis Securities Ltd.
Reacting to this development, shares of JK Cement have been gaining pace since last week. The stock hit a fresh 52-week intraday high of ₹1,725 on the NSE on Tuesday.
But before getting excited by the stock’s sharp rally, a look at some near-term risks is a must.
Analysts remain wary of JK Cement’s operations in Fujairah, UAE. Slow offtake in this unit along with high debt has been a drag on its profitability, analysts said. As per the management’s June quarter commentary, the UAE operations have an outstanding debt of around ₹400 crore. This is in addition to JK Cement’s standalone gross debt of ₹2,600 crore at the end of the June quarter.
The second worry is of rising prices of key input materials—petroleum coke and coal. Internationally, petroleum coke prices have risen from around $60/tonne in the June quarter to around $97/tonne currently, analysts said. As per the management’s June quarter commentary, major savings from power and fuel cost aren’t expected going ahead.
“Cost inflation will be a problem for all cement companies eventually. But this company’s management in the March quarter had pointed out about having high-cost inventory. If they have to continue to procure at elevated prices, they could see steeper margin erosion than others,” said an analyst with a domestic brokerage firm requesting anonymity.
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