Low Carbon Capacity Expansion And Cost Efficiencies Will Drive Long Term Cement Demand Upside

Catalysts

About JSW Cement

JSW Cement is a fast growing, low carbon building materials company focused on cement and GGBS, with a pan India footprint expanding through integrated and grinding capacity additions.

What are the underlying business or industry changes driving this perspective?

• Large, front loaded public infrastructure spending combined with stable GDP growth in JSW Cement’s core regions should sustain mid single digit to high single digit volume growth, supporting steady revenue expansion and operating leverage on the new capacities.
• Planned capacity increase to 33.85 million tonnes of grinding and 9.74 million tonnes of clinker by calendar 2028, including Nagaur, Sambalpur, Punjab, MP and UP, positions the company to capture demand in structurally underpenetrated North and Central markets, lifting long term revenue and absolute EBITDA.
• Industry leading low clinker factor and CO2 intensity, along with higher GGBS adoption by RMC and infrastructure players, should deepen customer preference for blended and low carbon products, improving pricing resilience and sustaining EBITDA per tonne.
• Execution of roughly INR 400 per tonne cost reduction through renewable power, AFR, lead distance optimization and logistics efficiencies is expected to structurally compress unit costs. This supports higher EBITDA margins even in periods of flat pricing.
• State incentive schemes in Rajasthan, Punjab, MP and UP, along with the potential benefit of lower fuel costs relative to current guidance, can meaningfully offset capital and operating outlays for new plants. This may improve net margins and accelerate growth in earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming JSW Cement's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -20.9% today to 13.9% in 3 years time.
• Analysts expect earnings to reach ₹14.5 billion (and earnings per share of ₹5.54) by about December 2028, up from ₹-13.0 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, up from -12.1x today. This future PE is lower than the current PE for the IN Basic Materials industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 2.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.31%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sector wide capacity additions, including JSW Cement’s own aggressive expansion to 41.85 million tonnes of grinding and 13.04 million tonnes of clinker, could outpace underlying demand growth in the long run, pressuring pricing power and lowering revenue and EBITDA per tonne.
• Sustained elevation in imported and domestic pet coke or other fuel costs beyond current assumptions of INR 1.4 per Mcal, combined with higher logistics costs if lead distance reductions stall, would erode the targeted INR 400 per tonne cost savings and compress EBITDA margins and net margins.
• Delays, cost overruns or weaker than expected ramp up at Nagaur, Sambalpur, Punjab, MP and UP, or changes to state incentive schemes and GST structures, could materially reduce the anticipated subsidy benefits and operating leverage, leading to lower free cash flow and slower earnings growth.
• If adoption of GGBS and blended products by RMC and infrastructure customers grows more slowly than planned, or if competitive intensity forces further price cuts to defend volume, the current strategy of keeping GGBS prices flat could limit mix led upsides and weigh on consolidated realizations, EBITDA per tonne and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹149.62 for JSW Cement based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹170.0, and the most bearish reporting a price target of just ₹135.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹104.0 billion, earnings will come to ₹14.5 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹118.44, the analyst price target of ₹149.62 is 20.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.