JK Cement reported in-line Q1FY18 numbers with 13% y-o-y blended volume growth largely led by higher clinker sales and low base effect in South. White cement + putty volumes were flat, due to GST led destocking, with lower (24%) margins, which is expected to correct in Q2. Grey cement EBITDA improved 12% y-o-y, 4% q-o-q as 8% y-o-y, 9% q-o-q realization improvement was partly offset by higher energy and freight cost. We leave estimates unchanged. Maintain ‘buy’. Led by 19% volume growth from southern operations, low base impact due to y-o-y partial shutdown, JK Cement (JKCE) reported a 7% y-o-y growth in grey cement volumes. North volumes grew 3% y-o-y, while white segment was flat. However, overall volumes grew 13% due to one-off export of 0.1 mt clinker to Nepal. Management expects 7-8% grey volume growth in FY18. Grey cement, including clinker, realization improved 8% y-o-y, 9% q-o-q due to North price improvement and firmness in south prices. In spite of cost increases, EBITDA per tonne improved 12% y-o-y, 4% q-o-q, which is highest in a while.

However, prices have declined pan-India in July (v/s June) by Rs 3-8 per bag due to monsoon season, low demand and government pressure. White segment reported 10% y-o-y, 23% q-o-q decline in EBITDA/tonne due to lower volumes from GST led destocking by dealers. We expect volumes to improve in Q2 and price hikes taken recently will normalise profitability as well. JKCE saw benefit of low-cost pet coke inventory in Q1FY18, limiting the full impact of spike in pet coke prices.

Average energy cost in Q1 was $70/tonne v/s present imports being contracted at $95/tonne. Although domestic prices have been reduced in July/ August by Rs 400 per tonne, Q2 will have higher energy costs compared to Q1. Freight costs increased 13% y-o-y on blended basis due to clinker sales to Nepal. Management did not give any clear guidance on further expansion plans or end-use of Rs 10 bn it expects to raise.

We have left our estimates unchanged. We believe JKCE is a niche play in cement which provides grey cement earnings upside, but, more importantly, has downside protection from stable white business. Maintain ‘buy’ with a TP of Rs 1,254 valuing the stock at 12x FY19 EV/ EBITDA on a blended basis, 10% higher than last five-year average due to better demand growth scenario. Risks: slowdown in grey cement demand.