JKCE’s 10.5 mt grey cement capacity is available at an EV/t of $40-70 (64-34% discount to midcap cement) on FY19 basis, if we value its white cement business at 14-10x FY19e EV/Ebitda. Its white cement business deserves a premium over its grey cement business, given raw material constraint, JKCE’s 45% market share, and superior profitability. The company is strategically placed, with 70-75% exposure to North markets as also considerable exposure to key markets of West and South India. North markets are likely to see the highest price improvement, driven by increase in utilisation on favourable base, limited supply addition and demand stabilisation. With its grey cement business scaling up to ~14 mt over the next 3-4 years, JKCE could see a multiple re-rating.
Grey cement business at significant discount to peers: In our view, despite its inefficient assets, the steep 34-64% discount is not warranted, as the residual assets are earning good profitability for the segment.
White cement business deserves a premium: We believe that JKCE’s white cement business deserves a premium over its grey cement business, as (i) raw material for white cement is scarce, and only two players—JKCE and UTCEM—have access to the same, (ii) JKCE commands 40-45% market share, and (iii) profitability of the white cement business is far superior to the grey cement business.
Valuation and view: JKCE is strategically placed to benefit from the expected price improvement in the North due to limited supply addition. Incrementally, the grey cement division should see marked improvement in profitability due to higher proportion of volumes from new efficient units. The white cement business has gained meaningful scale and deserves premium valuations. We value the white cement segment at an EV/Ebitda of 11.5x FY20e and the grey cement business at an EV/Ebitda of 8x (FY20e) to arrive at a target price of Rs 1,196. Buy.