JK Cement Rating ‘Buy’; Paints entry positive in the medium term

It can provide stability to total income; Keep ‘Buy’ with unchanged TP of Rs 3,935

JK Cement (JKCE) announced its plan to diversify into paint business and invest up to Rs 6 billion in it over the next five years. It plans to leverage its strong (i) JK White cement/putty brand, (ii) 50,000+ distribution network of white cement/putty dealers (many of which also sell paints), and (iii) long-standing relationship with real estate developers .

While the company’s diversification into the paints business may raise capital allocation concerns (given the barriers to entry, increased competition and the possibility of a small EBITDA loss in the early years), we believe it could in the medium term provide stable growth/stable income. In addition, for JKCE, paint will likely still remain a relatively small business, accounting for <5% of capital employed, revenue and EBITDA over the next five years. Maintain Buy on the stock with an unchanged TP of Rs 3,935/sh (14x FY24E EV/E). Key risks: lower demand/prices and sharp cost escalations.

Entering paints could trigger capital allocations given the many entry barriers, increased competition and the likelihood of a small EBITDA loss in the early years and thus an overall RoCE dilutive effect. In FY14, JKCE had invested ~Rs 8 billion in white cement operations outside India in Fujairah, UAE, and that company is still making a net loss, with the company taking a cumulative impairment charge of ~Rs 3.2 billion for FY20-FY21 .

Establishing ‘Right to Win’ for JKCE: JKCE will be able to commercialize the proposed paint business in FY24 and focus solely on its core markets in the Northern and Central regions rather than pan-India (similar to its market positioning in gray cement).

We believe that the paint business can provide stable growth/stable income in the medium term: Unlike its competitors, JKCE has been able to use its white cement/putty Ebitda to finance its gray cement expansion and gain market share. In addition, the company’s white cement/filler business generates a relatively stable EBITDA, providing stability to the overall EBITDA despite strong volatility in the gray cement business. Likewise, the proposed painting activity can also provide stability to JKCE’s total income in the medium term.

Gray cement expansion plans are unlikely to be affected by entering the paint industry. JKCE’s balance sheet remains strong and consolidated net debt is unlikely to exceed Rs 25 billion and ‘net debt to EBITDA’ could remain below 1.5x even after investing Rs 6 billion in the paint business in the coming months. five years.

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