Vaibhav Agarwal of PhillipCapital assess the potential of JKLC.

JK Lakshmi (JKLC) currently has a total installed capacity of 12.5 MTPA, which is spread across the geographies of North (inclusive of Gujarat) and East India. North India has a total capacity of 9.8 MTPA of which 1.6 MTPA is at UCWL – JKLC’s 71 per cent subsidiary. UCWL plant has been very recently commissioned and the utilisations of this plant are being ramped up -currently operates at approximately 50-60 per cent. East India has a capacity of 2.7 MTPA (of which 0.9 MTPA of grinding recently commissioned production in Q1FY18). Another 0.6 MTPA of capacity addition (grinding unit) is due to be added in Odisha (East India) and slated to be commissioned by mid FY19. Once this is commissioned, JKLC’s total capacity will increase to 13.1 MTPA – 9.8 MTPA in North India and 3.3 MTPA in East India.

Current capacity utilisation
JKLC’s north unit are currently operating at an average utilisation of 70 per cent versus industry’s capacity utilisation of 68 per cent in this region. Similarly, JKLC’s east India plants are currently operating at 79 per cent utilisations as against industry capacity utilisation of 67 per cent. As per our understanding, UCWL and the newer grinding unit of JKLC in North (Gujarat) and East India respectively are yet to scale up capacity utilisations and currently operate at just about 50-60 per cent capacity utilisations.

Volume growth trajectory and utilisation roadmap is driven by capacity additions over the past few years JKLC’s volume’s has been robust over the past few years (7-17 per cent). As we now see the capacity additions getting muted for JKLC we expect the volume growth to taper down and grow in the range of 5-6 per cent over the next two years. But, we also expect capacity utilisations of newer units of JKLC to ramp up to the existing levels by end of FY19 (a key to drive cost savings) and expect overall utilisations of the company as a whole at approximately 83 per cent by end of FY19/H1FY20.

Contributors to cost savings for JKLC will derive cost savings from multiple factors – power cost, utilisation ramp up and logistics costs. Waste Heat recovery at East India has commissioned commercial production in Q3FY18 and the management has indicated a savings of about Rs 100/tonne already being delivered from this initiative. UCWL is also due to commission a WHR and thermal power plant. In East India, thermal power plants are due for commissioning in H2FY19.

Major chunk of the savings will come from here in H2FY19 and onwards. JKLC has acknowledged that it needs to make its logistics more effective and is working towards a cost saving of Rs 100-150/tonne. Though a major chunk of this will be again from East India operations, North will also contribute to logistics savings as and when we see utilisation ramp up of UCWL and newer grinding units (Surat) in this zone. Utilisation ramp up will help scale efficiencies. As per the interactions, the least which can be expected as a ballpark is about Rs10/tonne of savings with every percentage increase of utilisation ramp up. This can be higher and will vary on case to case basis.

Utilisations and volume roadmap
JKLC currently operates its capacities at an average capacity utilisation of 72 per cent. It estimates for JKLC factor in an overall utilisation improvement of about 10 per cent over the next two years. As nearly 25 per cent of JKLC’s existing capacity is new, we believe this utilisation ramp up is possible. It can also be seen from the graphs below that JKLC is always ahead of industry capacity utilisations in all regions of its operations.

Though the utilisations are being ramped up by nearly 10 per cent over the next two years, but from volume growth perspective, the volume growth will taper down at 5-6 per cent yoy as JKLC exits its capex mode and fall in-line to industry discipline. Low volume growth is largely because of base effect and a more realistic assumption. Despite a low volume growth, JKLC will start deriving all the cost savings in FY19 and onwards as all the support infrastructure such as captive power, better logistics etc. will be available to the company by mid FY19. We will now discuss the cost saving drivers individually.

Cost savings drivers, power
As far as efficiencies are concerned, JKLC is already best placed on consumption parameters. It consumes approximately 70-74 units of power per tonne of cement across all locations, which is largely in-line with best of industry parameters. The key hurdle is absence of power plants in two of its existing locations – East India site and UCWL. Our interactions suggests us that for Eastern operations, the cost of power for JKLC is as high as Rs 7.5-8 per unit as against an internal cost of generation of approximately Rs 3.5-4/unit. This translates to savings of approximately Rs 4 per unit of power and approximately Rs 280-300/tonne for East India operations standalone. At UCWL as well, JKLC is likely to deliver a savings of approximately Rs 2.5 per unit as and when its captive power unit starts generation. This is all likely to be completed by mid FY19.

Waste Heat Recovery at East India has already commissioned commercial production in Q3FY18. Management has indicated a savings of about Rs 100/tonne already accumulating from Q3FY18 for eastern operations. This number has the potential to increase as we see capacity ramp-up of the newer grinding unit at East India. On our current volume assumptions for FY20, JKLC is likely to deliver power savings of approximately Rs 1.16 billion by end of FY20, which converges to an EBITDA/tonne of approximately Rs 110 per tonne at consolidated company level. We are also factoring in a 20 per cent reduction in Waste Heat Recovery savings as the WHR will reach optimum utilisations with ramp up of capacity utilisations.

Utilisation scale up
As a ballpark, the minimum savings expected out of every percentage increase in capacity utilisation is Rs 10 per tonne. This is the least and the savings can be much higher and will vary on case to case basis. At consolidated level, for JKLC, we expect utilisations to improve by nearly 10 per cent . However, the picture looks different on a plant-wise basis.

JKLC’s UCWL plant is likely to see utilisation ramp up of 20-25 per cent while the other two plants in North and East India will see an increase of utilisations of 1-10 per cent. Most of the utilisation ramp up will be a function of recent capacity additions. At Rs 10 per tonne of cost savings with scale efficiencies, JKLC will deliver a cost savings of approximately Rs 920 million by FY20 translating to savings of about Rs 90 per tonne.

Logistics
On logistics front, JKLC has opportunities of installing railway sidings at East India. It is also recalibrating its lead distances and relooking and renegotiating its contracts and arrangements with transporters. As a company, JKLC has guided for cost savings of approximately Rs100-150 per tonne in logistics over the next 12-18 months.

Opportunities will logistics costs savings will become more visible as and when all the newer plants of JKLC reach optimum utilisations.

We will now summarise the potential of cost savings for each of the cost heads on a plant wise basis. Our estimates in the following table are conservative and we have not yet factored in any incremental savings on account of further reduction in power consumption/tonne (which is quite possible as JKLC increases production of blended cement – especially composite cement). We have assumed only Rs10 per tonne of savings with every percentage increase in capacity utilisations which can also be higher. We have factored in only 50 per cent of the minimum targeted savings in logistics by the management (Rs 100-150per tonne). Our calculations suggest that we can remain fairly confident of minimum Rs 250per tonne of cost savings through internal measures.