JK Cement is an affiliate of the industrial conglomerate JK Organisation, which was founded by Mr Lala Singhania. For over 4 decades, JK Cement has been one of the most popular cement brands in India. The company’s operations commenced with commercial production at thier first grey cement plant at Nimbahera, Rajasthan in May 1975.
The company’s shares have 52 weeks price band of INR 1615-795 and a total market capitalization of INR 115 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 23.3 and a dividend yield of 0.5%
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
You can get the complete excel model used for this analysis from below:
1.Economic Moat (★ ★ ★ ☆ ☆)
The cement business does not have a highly distinguished product, so operational efficiency gives price dominance in the market. The cement manufacturing process is such that the cost of electricity and transport comes to around 35% of the total cost. JK Cement has an installed grey cement capacity of 14+ MnTPA which makes it one of the top cement manufacturers in the country. Further JK White Cement, a division of JK Cement, enjoys a PAN India presence and is a leading producer of Wall Putty in the country.
The Company is the second-largest manufacturer of white cement in India, with an annual capacity of 600,000 tonnes. JK White Cement is sold across 43+ countries around the globe and has now become one of largest producers of White Cement in the world, with a total white cement capacity of 1.20 MnTPA and wall putty capacity of 0.9 MnTP. This overall shows a good economic moat for the company. Therefore this category gets only 3 stars in JK Cement fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model is such that cost leadership provides market dominance. The cost of electricity, storage and transport eat away most of the operating margin. Many cement companies, therefore, have a dedicated power plant to meet their electricity needs. JK Cement was the first company to install a captive power plant in the year 1987 at Bamania, Rajasthan. It was also the first cement company to install a waste heat recovery power plant. Today, the company has a captive power generation capacity of over 125.7+ MWs which includes 23.2+ MW of waste heat recovery power plants.
The company has also set up a green-field dual-process White Cement-cum-Grey Cement plant in the free trade zone at Fujairah, U.A.E to cater to the GCC and African market. JK cement is also steadily enhancing their capacity, diversifying products, applying new technology and expanding thier presence in the global market. This overall shows good upcoming growth for the company.
Mr Yadupati Singhania was the Chairman and Managing Director of the company before is demise recently. He had played a pivotal role in the introduction of international quality white cement in India. Mr Raghavpat Singhania is the Executive Director (Corporate and White Cement). He is also the Dy. Managing Director of JK Cement Works, (Fujairah) FZC, which is a subsidiary of JK Cement. Overall the company has seen stable management and no previous instances of principal-agent conflicts. Therefore this category gets only 4 stars in JK Cement fundamental analysis.
3. Growth Ratios (★ ★ ★ ★ ☆)
The revenue has shown a stable growth rate of 12.29% CAGR over the last 10 years. The operating and Net income has also shown good improvement over the years. The capital expenditure has also been stable and the working capital has shown a linear increase. This overall shows good growth for the company in the past as well as in the coming years. Therefore this category gets 4 stars in JK Cement fundamental analysis.
4. Profitability Ratios (★ ★ ★ ★ ☆)
The profitability margins of the company have seen stability even with the increased scale of operations and high depreciation. This is because of the economies of scale and higher asset utilization. The fluctuations in the margins are due to the cyclic demand of the market and are normal in cement companies. Therefore this category gets only 4 stars in JK Cement fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
Both the Net Income and Capital expenditure has shown some improvement in recent years. This indicates good growth prospects. The Free cash flow has remained positive and the operating cash flow growth has shown a nominal decline. Overall the company has seen a slight deterioration of its cash position. Therefore this category gets only 3 stars in JK Cement fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)
The current ratio has shown some recovery in recent years and is still above the minimum requirement of 1. This shows the company has a surplus of current assets over current liabilities. The financial leverage and debt to equity have declined over the years and the profitability margins have been stable. This improves the solvency of the company. Therefore this category gets only 5 stars in JK Cement fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ★)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the efficiency has shown significant improvement over recent years. The payables period has gone up significantly from 86 days to 224 days. This shows increasing power over its suppliers. The receivables period has gone up slightly and days inventory has also increased from 137 days to 197 days. However, the company managed to achieve a negative cash conversion cycle, which is a good indicator of improving efficiency. Therefore this category gets only 5 stars in JK Cement fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ☆)
The company has shown improving valuation, this means the market has started pricing their shares at higher price multiples. This is because of stable profitability and international expansion. JK Cement has also shown significant growth prospects in the coming years with the relaunch of its brands and new product offerings in the premium segment. Therefore this category gets only 4 stars in JK Cement fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ☆)
The leverage ratio has declined over the years. This shows a decrease in debt financing for expansion. The company has also shown stable profitability. The operating margin has also improved and interest burden ratio has increased. The tax efficiency has also been stable. Overall this has made the ROE almost stable. Therefore this category gets only 4 stars in JK Cement fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The COVID-19 lockdown will have a severe impact on cement consumption due to the halt on construction sites. However, this is only a temporary situation and construction is expected to resume especially for large projects after the lockdown. The retail cement consumption will show some decline in FY2021.
- Cement prices have raised by approximate INR 10/bag in North India post lifting of the Covid-19 lockdown. There is also expectations of a further rise in the near future. The company has also given guidelines for fixed cost reduction of INR 600-700 Million in FY 2021.
- The company has commissioned Cap-Ex and other investments for capacity expansion. The estimated increase in capacity is Nimbahera Cement Grinding (1.0 mtpa), Mangrol Clinkerization (2.6 mtpa) and Cement Grinding (1mtpa), and Aligarh Cement Grinding (1.5mtpa)
The company has shown some indicators of good upcoming growth. The management has also taken a few steps to improve the financial position of the company. Therefore this category gets only 4 stars in JK Cement fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
JK CEMENT SHARES (4.0/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
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|JK Cement Shares|
|Economic Moat||★ ★ ★ ☆ ☆|
|Business & Management||★ ★ ★ ★ ☆|
|Growth Ratios||★ ★ ★ ★ ☆|
|Profitability Ratios||★ ★ ★ ★ ☆|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ★|
|Efficiency Ratios||★ ★ ★ ★ ★|
|Valuation Ratios||★ ★ ★ ★ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|
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