JK Cement Reports Strong Numbers For March Quarter

JK Cement, a Rajasthan-based cement manufacturing company, has announced strong results for the March 2012 quarter. The net sales of the company has increased significantly by 19 per cent YoY and 30 per cent on a QoQ basis to Rs 809 crore. The net profit has seen strong improvement and has jumped by 53 per cent on a YoY basis and 84 per cent on a QoQ basis to Rs 80 crore. This was mainly on account of the increase in the cement prices on an average by Rs 20-25 per 50 kg bag during the quarter. Moreover, higher sales volume due to elections in the northern region and an increase in the infrastructure activity helped the company to report strong results during the quarter.

On the operating side the company has shown significant improvement. The operating profit of the company has increased by 57 per cent on a YoY basis. Moreover, despite an increase in the raw material cost and freight charges the operating margins improved by 600 bps on a YoY basis to 25 per cent. And the net profit improved by 200 bps on a YoY basis to 9.69 per cent. The improvement is largely because of the increase in the realisation during the quarter. However, the increase in net profit is also due to an increase in the ‘other’ income that jumped by almost 200 per cent to Rs 19 crore during the quarter.

In conclusion, we believe that the company has posted strong results for the March quarter which cyclically also remains a strong quarter as the infrastructure and construction activities are at their peak levels. However, with the onset of the monsoon the demand will slow down and subsequently we will see a drop in the cement prices. Both these factors will lead to a subdued quarter for the cement companies. The pressure will be on the margins too due to higher raw material and freight costs.

Post the results, the scrip jumped up by almost 20 per cent to Rs 150, trading at a PE multiple of 6x on an annualised EPS of Rs 23. At this valuation the stocks look undervalued and given the growth expected in FY13 we recommend a ‘buy’ from a long-term perspective.