JK Lakshmi Cement capacity expansion supports growth despite near-term margin pressure

Investment View and Valuation

ICICI Direct Research retains a HOLD rating on JK Lakshmi Cement and revises the target price to Rs 650, based on 9x FY28E EV/EBITDA, compared with the current market price of Rs 573. The broker believes long-term volume-growth visibility remains intact, supported by the company's capacity-expansion programme. Profitability is expected to improve from H2FY27E through operating-efficiency measures.

However, net debt to EBITDA is expected to remain elevated at 2.5x by FY28E because of ongoing capital expenditure. Near-term margin pressure and uncertainty over the extent of price-hike pass-through remain key concerns.

Capacity Expansion and Volume Growth

JK Lakshmi Cement has consolidated cement capacity of 18 million tonnes per annum and serves northern, western and eastern Indian markets. Its plants are located at Sirohi and Udaipur in Rajasthan, Durg in Chhattisgarh, Surat and Kalol in Gujarat, Jhajjar in Haryana, and Cuttack in Odisha.

ICICI Direct forecasts a volume CAGR of around 7 per cent over FY26 to FY28E, supported by firm demand and capacity ramp-up. The current 4.6 million tonnes per annum expansion is expected to start by the end of FY28E and increase capacity to 22.6 million tonnes per annum.

• The expansion comprises 1.2 million tonnes per annum each at Durg, Madhubani and Prayagraj, along with 1 million tonnes per annum in Jharkhand.
• The company remains committed to reaching around 30 million tonnes of capacity by FY30.
• Potential additions in Assam, Rajasthan and Gujarat are being considered, although project details are awaited.

Q1FY27 Financial Performance

Consolidated revenue increased 9.4 per cent year on year to Rs 1,904.8 crore in Q1FY27, supported by 8.2 per cent volume growth to 3.60 million tonnes and a 1.1 per cent improvement in realisations. Volume declined 7.6 per cent sequentially, while realisation increased 8.5 per cent sequentially.

Total cost per tonne increased 6.4 per cent year on year, driven by higher raw-material, power-and-fuel, and packaging costs.

Demand, Pricing and Operating Trends

Management expects Indian cement-industry growth of around 8 per cent in FY27, supported by infrastructure spending and housing demand. Q1FY27 realisation improved through geo-mix optimisation and higher non-trade prices. A roughly 20 km reduction in average lead distance delivered a benefit of Rs 60 to Rs 70 per tonne.

• Trade sales mix improved to around 59 per cent.
• Blended cement mix increased to 64 per cent.
• Higher blended-cement volumes increased the need to procure fly ash and other cementitious materials from costlier L2 sources.

Margin Outlook and Cost Pressures

Near-term margin pressure remains a key concern. Fuel cost increased to Rs 1.65 per kcal in Q1FY27 from Rs 1.54 per kcal in Q4FY26, and management expects it to reach Rs 1.80 to Rs 1.85 per kcal in Q2FY27.

Management also expects more than Rs 150 per tonne of sequential variable-cost inflation in Q2FY27 from fuel and packaging. This is expected to coincide with seasonal demand weakness, maintenance and operating deleverage. Price hikes may partly offset the inflation, but the extent of pass-through remains uncertain.

ICICI Direct expects EBITDA per tonne to decline in FY27E before improving to Rs 826 per tonne in FY28E, compared with Rs 757 per tonne in FY26. The expected improvement is attributed to geo-mix and product-mix optimisation, higher renewable-energy use, indigenous fuel, alternative-fuel usage and logistics initiatives.

Renewable Energy and Capital Expenditure

Renewable energy accounted for around 49 per cent of energy consumption in Q1FY27, supported by 129 MW of solar capacity, 45 MW of waste-heat recovery capacity and 4 MW of wind capacity. Management targets a renewable-energy share of 60 per cent by FY30.

The company is investing around Rs 20 crore in a 42 MW captive solar special purpose vehicle, which is expected to reduce power costs compared with grid supply.

The capital-expenditure guidance excludes land acquisition for Kutch and Nagaur.

Key Risks

• Demand slowdown
• Delays in capacity expansion
• Higher commodity prices
• Intense competition