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JK Lakshmi Cement: Optimistic on sequential volume growth

We recently interacted with the management of JK Lakshmi Cement (JK) to get an update on the company’s ongoing expansion plan and its future prospects. During the call the management confirmed that the work on the cement expansion plan (a 2.7MT capacity is being set up in Chhattisgarh) is running as per schedule and the 30MW power plant will commence in March 2011. The company has also started procuring power from KSK Energy from November 2010 (21MW @ Rs3.2 per unit as per the agreement). As the company will become surplus in power capacity from Q1FY2012, the management is expecting additional revenue through the sale of power units. In terms of valuation, the stock is trading at enterprise value (EV)/tonne of ~$45-47 (on the FY2011 capacity), which is at over 30-35% discount to the stock’s historical average valuation. Downside from the current level is expected to be limited. Moreover, the company is expected to deliver a better volume growth in the coming two quarters; this along with the commissioning of the power plant could provide an impetus to narrow down the gap between its present valuation and its historical average valuation.