It might present stability to general earnings; ‘Buy’ retained with unchanged TP of Rs 3,935
JK Cement (JKCE) introduced its plan to diversify into paint enterprise and make investments as much as Rs 6 bn in it over the following 5 years. It plans to leverage its robust (i) JK White cement/putty model, (ii) 50,000+ distribution community of white cement/ putty sellers (massive portion of which additionally sells paints), and (iii) longstanding relationship with actual property builders.
While the corporate’s diversification into paint enterprise might elevate capital allocation issues (given entry obstacles, heightened competitors and chance of minor Ebitda loss within the preliminary years), it could present steady-state progress/steady earnings over the medium time period, in our view. Besides, paint remains to be more likely to stay a comparatively small enterprise for JKCE and represent <5% of capital employed, income and Ebitda over the following 5 years. Maintain Buy on the inventory with an unchanged TP of Rs 3,935/sh (14x FY24E EV/E). Key dangers: decrease demand/pricing, and sharp price escalations.
Entry into paints might elevate capital allocation issues given the various entry obstacles, heightened competitors and chance of minor Ebitda loss within the preliminary years and therefore an general RoCE-dilutive affect. In FY14, JKCE had invested ~Rs 8 bn in white cement enterprise exterior India in Fujairah, UAE, and that enterprise remains to be incurring loss at internet degree with the agency making cumulative impairment provision of ~Rs 3.2 bn for FY20-FY21.
Establishing ‘right to win’ for JKCE: JKCE might commercialise the proposed paint enterprise in FY24 and focus solely on its core markets of North and Central areas as a substitute of pan-India (much like its market positioning in gray cement).
Paint enterprise might present steady-state progress/steady earnings within the medium time period, in our view: Unlike friends, JKCE has been capable of utilise its white cement/putty Ebitda to fund its gray cement enlargement and acquire market share. Besides, the corporate’s white cement/putty enterprise generates a comparatively steady-state Ebitda, which offers stability to general Ebitda regardless of sharp volatility in gray cement enterprise. Similarly, the proposed paint enterprise too might present stability to JKCE’s general earnings within the medium time period.
Grey cement enlargement plans unlikely to be affected by entry into paint enterprise. JKCE’s steadiness sheet stays robust and its consolidated internet debt is unlikely to exceed Rs 25 billion and ‘net debt to Ebitda’ might stay under 1.5x even after Rs 6-billion funding into the paint enterprise over the following 5 years.