Prism Johnson Ltd: Research Report By SMIFS

Prism Johnson Ltd. (PJL), is an integrated building material company with presence in cement, ready-mix-concrete (RMC), and H&R Johnson India (Tiling and building material business). Its cement business has a capacity of 5.6 MMT at Satna cluster in Central India, with sales mix skewed towards central India. It currently has total WHRS and solar capacity of 22.4 MW and 22.5 MW, respectively. PJL manufactures cement with the brand name ‘Champion’ and premium quality grade of cement under ‘Champion Plus’ and ‘DURATECH’ brand.

We believe that cement division would continue to be key contributor in the company’s profitability on expectations of

a) robust volume growth in high growth markets (Eastern UP, MP and Bihar)

b) the debottlenecking of cement capacity by 0.9 MMT by June’22 and expansion of grinding capacity by 1 MMT at Satna by Sep’23

c) continual rise in share of premium products (~28% in FY21) and d) addition of WHRS (22.4 MW) and solar power capacity (10 MW) would provide substantial and sustainable reduction in power & fuel costs.

Furthermore, HRJ division of the company seems to have turned around with sharp volume recovery and more importantly an improvement in EBITDA margin to ~8.7% vs 3.8% (YoY) in FY21. Therefore, we initiate a coverage on the stock with a “STRONG BUY” rating. Our key investment thesis are as follows.

Cement division to drive growth- Company has a cement capacity of 5.6 MMT and in past, company has been able to sell volumes of 6 MMT plus with change in product mix. In cement business, PJL is debottlenecking at Satna plant in Madhya Pradesh, with an increase in cement capacity by 0.9 MMT by June’22. The company further plans to increase grinding capacity (1.0 MMT at Satna by Sep’23 for a capex of Rs 2.5bn). These expansions will help the company to maintain volume growth going forward. Furthermore, strategic location of it’s plant will provide efficient access to the larger market while quicker and larger supplies will strengthen trade partner’s relationship even further. Post expansion cement production capacity will increase to 7.5 MMT.

HRJ division continues to be one of the leading players in tiles with a vast distribution network and premium brand image – H&R Johnson is one of the leading ceramic / vitrified tiles manufacturers in the country with a capacity of ~60 million square meters per annum across 11 manufacturing plants (including those under subsidiaries and joint ventures) as on March 31, 2021. Segment margins have improved to 8.7% in FY21 as it benefitted from operating leverage and other cost saving initiatives. The company has shown tremendous resilience in difficult times and we expect HRJ division to maintain double digit margins in ~10-11% range, going forward. PJL announced a greenfield tile capacity expansion of 2.5 msm at Panhagarh, West Bengal for incremental capex of Rs 550 mn and another expansion of 6 msm at its JV entities for an estimated capex of Rs 700 mn, both likely to commission by Q4FY23. The tile production capacity will increase from 60 msm to 68 msm, post both these expansions.

Balance sheet deleveraging to be strong despite capex– PJL is expanding its cement capacity by 1.9 MMT to 7.5 MMT, and tiles capacity by 8.5 msm to 68.5 msm. Management is likely to fund FY22E capex of ~Rs 4,000-5,000 mn from primarily internal accruals. Debt reduction continues to be on track as net debt reduced by Rs 6,205 mn in FY21 to Rs 11,827 mn as of Mar’21. We expect Net debt-to-EBITDA to improve from 1.9x in FY21 to 0.8x by FY23E, backed by better traction in cement & HRJ divisions. Further, Raheja QBE General Insurance (RQBE) JV stake sale is still awaiting regulatory approvals, which would further reduce net debt by Rs 3,000-3,500 mn plus any incremental capital invested by the company in JV.

We expect the company to benefit from strong regional presence in cement, improving utilization, and cost efficiencies, apart from industry triggers like higher realizations. We prefer PJL due to its improving margins on the back of substantial ongoing cost reduction and future growth visibility on the back of expansion plans. However, in the short to medium term, demand recovery in core markets continues to be the key monitorable. Also, the divestment of the insurance business should help improve liquidity and profitability. We have valued the stock on SOTP basis valuing cement, HRJ & RMC business at 9x/10x/5x FY23E EV/EBITDA, Raheja QBE general insurance at its proposed divestment value and recommend a “STRONG BUY” on the stock with a target price of Rs 172.