Near-term challenges to deter JK Lakshmi Cement’s debt repayment plans

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JK Lakshmi Cement Ltd’s leverage has begun to worry some analysts, with some of them valuing the firm at a slight discount to its historical average. The company plans to address this, and has aimed to repay 400 crore debt in all in fiscal 2021 and 2022.

At the end of the June quarter, its standalone gross debt stood at 1500 crore and net debt at 800 crore. Given the short-term challenges on demand and pricing fronts, meeting this target would be a tall ask, analysts say.

In a post earnings conference call, the management said, its expansion plan in the North has been put on hold for now. Depending on how the lockdown situation unfolds, it may announce an expansion of 2.5 million tonnes per annum (MTPA) brownfield project by next quarter.

Analysts caution that increase in capital expenditure would keep debt elevated. Also, the balance sheet would remain under pressure in the initial phase till capacity stablises at this plant.

It should be noted that competitors are ramping up capacities in the North, so JK Lakshmi may not be able to benefit from any potential demand improvement. As a result of the increased competition, it may end up losing market share and volumes. The management expects volumes to be flat in financial year 2021 on a year-on-year basis.

Secondly, realisations are anticipated to be muted, hit by oversupply in the east and severe competition in the western markets. The company gets more than 50% volumes from the East, followed by West and North.

Dealers channel check by Kotak Institutional Equities showed that cement prices in the East declined by 3/bag to Rs338/bag in August.

“Heavy rainfall in the region has led to fall in the rural demand. Moreover, increasing spread of Covid-19 in the region has led to more stringent lockdowns hampering construction activity. Shortage of migrant labor and onset of festive seasons are also impacting demand. Dealers expect trade prices to remain under pressure in the near-term,” said the Kotak report on 24 August.

September is a seasonally weak quarter for the sector, so realisations would be subdued in this quarter as well.

Additionally, its practice of lending to the holding company, although limited to 40 crore, adds to the discomfort, analysts said. As per the management, this money was placed via inter-corporate deposit of the group company for a period of one year ending August. The company may redeploy it in the similar instrument next year as well, the management added.

The stock trades at a one-year forward EV/Ebitda of around fiv times, shows Bloomberg’s estimates. EV stands for enterprise value. Ebitda is short for earnings before interest, tax, depreciation and amortisation. Given its leveraged balance sheet and unfavourable geographical mix, valuations may not improve in a hurry.

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