THEME REPORT

CEMENT SECTOR
Sensex: 29095

Nifty: 8806

Cement at the cusp of new growth phase - Southern region favourably placed
Cement industry being one of the essential sectors for economic growth in India remains a long term play. After two
years of low single digit growth, we expect +11.3% CAGR in demand over next couple of years as infrastructure
projects and initiatives announced by the new government (Swachh Bharat Abhiyan, Freight corridors, Concrete
roads, "Housing for All", Smart cities projects, etc) comes on stream. Cement/GDP multiplier after declining to 0.98x
over FY10-14 (lowest levels for a full 5 year term of a government in the past 30 years) is expected to bounce back
sharply to 1.82x over FY14-17.
Pace of capacity addition will witness structural slowdown (+50 mt over FY14-17E vis--vis +114 mt over FY10-14)
as new projects at prevailing profitability levels are unlikely to be planned. Resultantly, industry utilizations will
bottom out at 71.5% in FY14 (lowest since 1990) and improve at scorching pace to 85.8% in FY17 owing to expected
improvement in demand and considerable decline in capacity additions.
Consolidation is expected to gain momentum as a) large cement producers having cash rich balance sheet would
prefer inorganic route to expand owing to various bottlenecks in organic expansion, b) balance sheet of mid cap
companies are over leveraged resulting in sub-par profitability levels, c) expectations of sellers have tapered off
late (as evident in recent M&A deals which have been done at <1.1x replacement costs). Further, subdued cost inflation
coupled with likely firm cement prices offer strong support to profitability and hence return ratios are expected to
head northwards.
Unlike the recent past, we expect south based cement companies to participate dominantly in next leg of growth as
working environment would be more conductive for firms operating in that region. This is owing to:a) Sharper demand improvement (23 mt incremental demand over FY14-17 vis--vis 21 mt in North, 18 mt in West and
15 mt each in East and Central region) as infrastructure builds out in the newly created states,
b) Least incremental capacity addition (at 2.2% CAGR over FY14-17 vis--vis 6.3% CAGR ex-south),
c) +26 ppts gain in utilization levels as it partially caters to incremental demand needs of Maharashtra and eastern
region, owing to lack of sufficient capacity in both the regions, and
d) Highly sensitive to movement in imported coal prices as most of them are dependent on imported coal.
Though improving regional outlook would bring cheers to all south based cement companies, we initiate coverage
on 2 companies that are best placed to benefit from recovery in southern region. Competitive positioning of firms,
efficiency in operations, financial metrics, leverage levels and cash flow generating ability of companies were
given due weightage. Orient Cement and The Ramco Cement are our top picks.

Valuation Summary
Companies

CMP Target
INR
INR

MCAP
INR bn

APAT (INR mn)

RoE (%)
P/E (x)
EV/EBIDTA (x)
EV/Tonne (INR mn)
FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E

Orient Cement

175

224

35.84

1760 2045 2829

19.85 20.21 24.13

20.36 17.52 12.67

14.96 10.25

6.90

9676 6160 5801

The Ramco Cement

328

421

78.02

2392 3653 5968

9.29 13.02 18.79

32.62 21.36 13.07

13.31 11.06

7.37

6499 6023 5824

Source: SPA Research

5980
Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

TABLE OF CONTENTS
Investment Rationale

3-14

Cement/GDP multiplier to bounce back from 0.59x in FY14 to 1.61x in FY17

Cement demand to grow at 10.5% CAGR over next 3 years

4-6

Swachh Bharat Abhiyan

Concretization of roads

Dedicated freight corridor project

"Housing for All" with higher allocation for rural housing

Stress on low-cost housing programme

Rural Roads under Pradhan Mantri Gram Sadak Yojana

Metro projects

Smart cities projects

Rising entry barriers limiting new capacity additions

7-10

Average set up time for green-field plant has doubled

Increasing cost of setting up new unit resulting in single digit RoCE

Smaller cement companies - leveraged balance sheet & Large producers to prefer inorganic route

Linkages of raw materials like limestone also serve as an entry barrier

Industry utilizations bottomed out, substantial improvement in south imminent

11

New State formation leads to more than double digit growth

12

Southern Region - Muted demand to be a history

12

Costs pressure ebbing, margin improvement on anvil

13

Outlook

15

Companies Section

16-22

Orient Cement

17-19

The Ramco Cements Ltd

20-22

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

Investment Rationale
Cement/GDP multiplier to bounce back from 0.59x in FY14 to 1.61x in FY17
Cement demand has historically grown in tandem with economic growth owing to high correlation
with gross domestic product (GDP) growth - directly as well as indirectly. Directly, because
infrastructure investment and construction activity, accounting for +40% of cement demand, are
the key components of GDP. Indirectly, because housing (both rural and urban), again a key
determinant accounting for ~60% of cement demand, depends on agricultural productivity and
income levels, which in turn are the key components of GDP.
Cement demand in India has historically increased at 1.2x the GDP growth rate over the past two
decades. The Cement demand/GDP growth ratio has remained highly volatile throughout, expanding
to 2.4x of GDP during the upcycle and contracting to 0.5x of GDP during the downcycle. This growth
multiplier has declined to 0.98x over FY10-14 and was at the lowest levels for a full 5 year term of
a government in the past 30 years.

Cement/GDP multiplier expands

from 0.5x during downcycle to 2.4x
during upcycle.

20.0

2.5

Cement/GDP multiplier to recover from lows

2.0

15.0

1.5

10.0

1.0

5.0

0.5
0.0

0.0

-0.5

-5.0

GDP (%)

Cement Demand (%)

FY17E

FY16E

FY15E

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

-1.0

Multiplier (RHS)

Source: CMA, RBI, SPA Research

to bounce back sharply to 1.82x

over FY14-17

Golden Quadrilateral project resulted

in +15 mt incremental cement demand
during execution period..

Given the new government's significant focus on large infrastructure development, Freight corridors,
Concrete roads, "Housing for All", Smart cities projects, etc in addition to expected recovery in
demand from ailing South India, we expect the cement/GDP multiplier to bounce back sharply to
1.82x over FY14-17 (from 2.8% demand growth in FY14 to 13.2% in FY17). Historically we have
witnessed similar demand pull with the launch of golden Quadrilateral project (connecting 4
major metros) and other major highway projects during the NDA regime a decade ago.
Demand boost from Golden Quadrilateral project

2500

14
12

2000

10

1500

1000

6
4

500

0
FY01

FY02

FY03

FY04

Completion (kms)

FY05

FY06

FY07

Cement Growth (%)

Source: SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

Cement demand to grow at 10.5% CAGR over next 3 years

Cement demand after remaining subdued for the past two years (sub 4%) is expected to rebound
sharply by clocking a growth of ~11.3% over FY14-17. While consumption is expected to improve by
7.3% YoY in FY15 (owing to low base last year), we expect sharp uptick of 13.6% in FY16 and 13.2%
in FY17 as infrastructure projects and initiatives announced by the new government comes on
stream. We provide a bottom up framework of key demand drivers of cement below:........8.8 mtpa of incremental demand

a) Swachh Bharat Abhiyan - Government is looking to build 110 mn toilets across rural India in next
5 years. Incremental cement demand owing to this sanitation drive would be ~44 mt (8.8 mt p.a),
given 8 bags of cement are required per toilet.
Clean India campaign
No. of toilets to be built across Rural India (mn)
Cost of setting up a toilet (INR)
No. of cement bags required/toilet
Cement demand over 5 years (mt)
Cement demand p.a (mt)

........8.1 mtpa of incremental demand

110
20000
8
44
8.8

b) Concretization of roads - Government is planning to construct 45000 km of concrete roads over

next 5 years. Incremental cement demand owing to this would be 40 mt (8.1 mt p.a), given quantity
of cement used for concrete roads/km is 900 tons (vis a vis 170 tons of bitumen).
Usage of cement to make concrete roads
Concrete roads to built over 5 years (km)

45000

Quantity of cement used for concrete roads/km (tons)

........7.6 mtpa of incremental demand

900

Cement demand over 5 years (mt)

41

Cement demand p.a (mt)

8.1

c) Dedicated freight corridor project - DFCCI is expected to build 3323 km long dedicated freight
corridor (DFC) between Eastern and Western regions as part of two such corridors proposed in
East - West and North -South India. Total opportunity size is INR 958 bn and full commissioning of
both the eastern (EDFC) and western (WDFC) corridors is likely between March and December
2019. Out of this, total amount to be incurred on Civil works is ~INR 665 bn based on INR 200 mn/
km. Amount to be incurred on cement consumption is INR 166 bn (25% of civil work). Therefore
incremental demand of cement over next 4 years @ INR 270/bag is 31 mn tn i.e 7.6 mt p.a.
Dedicated Freight Corridor

Length of dedicated freight corridor (km)

3323

Amount to be Spent (bn)

958

Exp. on Civil works @ INR 200 mn/km (bn)

665

Exp. on Cement @ 25% of civil work

166

Cemand demand over 4 years @ 270/bag (mt)

Cement demand p.a (mt)

Western DFC:
Haryana
Rajasthan
Gujarat
Maharashtra

30

192 kms
553 kms
588kms
150 kms

Eastern DFC:
Punjab
Haryana
Uttar Pradesh
Bihar
W-Bengal/Jharkhand

7.6

88kms
72 kms
1049 kms
93 kms
538kms

Source: DFCCIL, SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

........16.1
demand

mtpa

of

incremental

d) "Housing for All" with higher allocation for rural housing - Rural housing demand accounts for
+30% of overall cement consumption and is largely driven by conversion of 'Kutcha' homes (mud or
thatch) into Cemented homes. With an aim to provide "pucca houses to all" by 2022, government
has launched new more powerful rural housing scheme, National Gramin Awaas Mission, wherein
it has doubled the allocation per house to INR 1.5 lakh and increased the unit size to 30 sq mt (20
sq mt previously) with toilet and bathing space as its integral part. The government proposes to
construct 32 mn houses over a period of 8 years with a minimum annual target of 2.5 mn houses.
Incremental cement demand owing to this thrust would be 129 mt over the next 8 years (16.1 mtpa),
given 4 tonnes of cement is required per house.
Cement requirement under new rural housing scheme GRAM
Total housing shortage (mn)

32

Min . annual target of new houses (mn)

2.5

Minium size (sq mt)

30

Govt assistance (Rs)

150000

Cost of house (Rs)

225000

Cement component %

10%

Cement required (tonnes/house)

4.0

Cement demand over 8 years (mt)

129

e) Stress on low-cost housing programme - In-line with their manifesto, government has been
promoting low cost housing by providing various exemptions inform of increasing interest exemption
on housing loans by INR 50000 and sanctioning INR 40 bn to the National Housing Board for
promoting affordable housing. Currently India faces a shortage of 22 mn houses which is expected
to escalate to 30 mn by 2020 owing to increasing urbanization. Incremental cement demand would
be immense given ~40kg of cement is required per sq ft of residential building.
35

Urban Housing Shortage (mn)

30

25

25
20

30

19

18

22

21

19

15

15
10
5
0
2001

2005

2007

2008

2010

2012

2014E

2020E

Source: MHUPA 2012, SPA Research

........1.4 mtpa of incremental demand

f) Rural Roads under Pradhan Mantri Gram Sadak Yojana (PMGSY) - 35000 km of new rural roads are
to be built under Pradhan Mantri Gram Sadak Yojana (PMGSY) each year. Assuming 20% of total
rural roads to be made concrete, incremental cement demand per year owing to this works out to
1.4 mtpa, given 200 tons of cement is used per km
Rural Roads under Pradhan Mantri Gram Sadak Yojana (PMGSY)
km of new rural roads to be built pa

35000

Cement used per km (tonnes)

km of concrete roads @ 20%

200
7000

Cement required (mt)

Cement Sector

Contents

Investment Rationale

1.4

Outlook

Orient Cement

The Ramco Cement

g) Metro projects - Around 931 kms of new metro lines are under different stages of planning/
implementation, which if allotted, would lead to addition cement demand of 23 mt given 25000
tons of cement is required per km.

........23 mt of incremental demand

Growing number of Metro Projects

Source: IBEF, SPA Research

h) Smart cities projects - The government plans to build smart cities across the country and has
allocated INR 71 bn for 100 smart cities. The plan provides a fillip to infrastructure development,
housing and in turn would boost cement demand.

..+45 mtpa of incremental demand

vis--vis less than 25 mtpa for past
several years

Broadly taking into account all the above factors, incremental cement demand per year would be
more than 45 mt. It is important to note that normally, yearly demand increase of more than 25 mt
has not been witnessed in past several years. Taking cues from past, mega infrastructure projects
have always driven cement demand during execution period. Golden quadrilateral project (20012012, but ~90% completed by FY06) which comprised connecting 4 metros through 4/6-lane national
highway network of total length of 5846 km had led to incremental cement demand to the tune of
~15 mt during execution period aiding 2-3% additional annual growth.
60

Incremental demand outpacing supply (mt)

50
40
30
20
10
0
FY08

FY09

FY10

FY11

FY12

Incremental Supply

FY13

FY14

FY15E

FY16E

FY17E

Incremental Demand

Source: CMA, SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

Rising entry barriers limiting new capacity additions

We expect pace of capacity addition to structurally slowdown in coming years on the back of increasing
gestation period, difficulty in getting various clearances, coal linkages, limestone availability and
sub-par returns enjoyed based on current replacement cost. We highlight some of the major issues
which will create hurdles for cement producers to add further new capacities over next 4 years:-

.....threat of new capacity addition

remains low over next 4 years

a) Average set up time for green-field plant has doubled - The time required to set up a green-field
cement plant has more than doubled from ~3 years earlier to over 6 years now, owing to severe
'policy paralysis' of the erstwhile central government, which made land acquisition difficult (The
clause requiring mandatory consent of 80% of owners for private projects and consent of 70% landowners
for PPP projects under the 'Land Acquisition Bill' 2013, has made acquisition of land more difficult),
obtaining environment/forest clearances time consuming in addition to difficulties in obtaining
mining licenses, sand mining bans, coal linkage issues etc. While some of this is expected to be
resolved by new government, threat of new capacity addition in the next 3-4 years remains low.
Increasing time period to set up a new cement unit
Previously

Now

~12 months

~12 months

~36 months

~30 months

~20 months

Land Acquisition

~34 months

Environmental clearances

Plant build up

Source: A.T.Kearney Analysis, SPA Research

.....replacement cost has surged to INR

7500/tn

RoCE 4.2% at 80% caut @ INR 300/bag.

Pricing needed to cover capital cost
INR 352/bag

b) Increasing cost of setting up new unit resulting in single digit RoCE - Cost of setting up new
integrated cement unit has increased at +7% CAGR over last 4 years to INR 7500/tn largely driven by
surging land prices, increasing construction costs and general inflation. This in addition to rising
operational cost will deter players to add further capacities given the current cement prices. At
current realisations of INR 300/bag (INR 6000/tn) and assuming new green-field capacity works at
capacity utilization of 80%, RoCE works out to mere 4.2%. The same improves to 8.7% if the realisation
improves to INR 330/bag. Assuming cost of capital if 12%, cement realisations need to improve to
INR 352/bag for the investment to become viable.
Single digit return at prevailing prices
Capacity (mt)
Capex (INR mn) @ INR 7500/tn
D/E
CAUT (%)
Production/Sales
Gross Realisations/tn
Net Realisations/tn
Revenue
Operating Cost @ INR 3400/tn
EBIDTA
Dep Exp. @ 5%
EBIT
RoCE

Cement Sector

Contents

Investment Rationale

2.0
15000
0.7
80%
1.6
6000
4260
6816
5440
1376
750
626
4.2%

Outlook

Orient Cement

2.0
15000
0.7
80%
1.6
6600
4686
7498
5440
2058
750
1308
8.7%

2.0
15000
0.7
80%
1.6
7040
4998
7997
5440
2557
750
1807
12.0%

The Ramco Cement

~INR 1125/tn of EBIDTA needed to

break-even vis-a-vis current EBIDTA/tn
of INR 820

Break-even EBIDTA, for a 1 mtpa capacity, operating at 80% utilization, and assuming a 70:30 debt
to equity ratio, works out to ~INR 1125/tonne. In other words, this is the minimum a new cement
capacity must earn in order to provide for depreciation and interest costs. However average annual
EBITDA/tonne earned by the industry over past 4 year is ~INR 820/tonne. Hence setting up new
capacities will not be feasible until cement demand and prices head northwards.
Break even analysis for a new green-field unit
Capacity Utilization assumed (%)

100%

80%

100%

80%

Project Cost @ 1 mt (INR mn)

7500

7500

7500

7500

Debt (%)

70%

70%

50%

50%

Debt (INR mn)

5250

5250

3750

3750

Equity (INR mn)

2250

2250

3750

3750

Dep Cost @ 5% of Gross Block

375

375

375

375

Int Cost @ 10% of Loan

525

525

375

375

Total capital cost (INR mn)

900

900

750

750

Breakeven EBITDA (Rs mn)

900

900

750

750

Breakeven EBITDA per MT (INR)

900

1125

750

938

c) Smaller cement companies - leveraged balance sheet & Large producers to prefer inorganic route
- Around 63 mt of new capacities has been added over the past three years out of which more than
60% of capacity addition has been done by mid-cap cement companies. This has resulted in over
leveraging of their balance sheet making incremental expansion challenging.

....recent M&A deals

replacement costs

at

<1.1x

Further although large cement producers enjoy strong cash rich balance sheets, we believe they
would go for inorganic route for expanding capacities as expectations of sellers have tapered off a
bit (as evident in recent M&A deals which have been done at <1.1x replacement costs i.e $125),
thereby making acquisition more preferable than setting up green-field capacity. This will enable
firms to save on more than 6 years of gestation period and take advantage of expected revival in
cement demand over next 3 years. The firm would also gain from established dealer network and
already known brand resulting in lower advertising & distribution expenses.
Recent M&A deals
Date

Seller

Buyer

Region

Mar-14 Jaiprakash Associates

Dalmia Cement

East

2.1

91

74.0%

Mar-14 Sagar Cements stake in JV

Vicat

South

2.8

121

47.0%

Mar-14 Anjani Portland Cement Ltd

Chettinad Cement

South

1.2

49

100.0%

Jul-14

Sagar Cements stake in JV

Capacity

$ ton

Stake Acquired

Vicat

South

2.8

150

47.0%

Aug-14 Jaiprakash Associates

Shree Cement

North

1.5

38

100.0%

Sep-14 BMM

Sagar Cement

South

90

100.0%

Oct-14 Bhilai Jaypee Cement Ltd

Shree Cement

East

2.2

136

74.0%

Dec-14 Jaiprakash Associates

Ultratech

Central

4.9

175

100.0%

Source: SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

d) Linkages of raw materials like limestone also serve as an entry barrier - Availability of limestone,
which is a key raw material in manufacturing cement, is limited to few states like Andhra Pradesh,
Karnataka, Rajasthan, Gujarat and Madhya Pradesh, thus resulting in concentration of cement
units in these states. Southern region which accounts for 49% of limestone resources is already
flooded with large surplus cement capacities and hence is unlikely to witness any large capacity
addition (2.2% CAGR over FY14-17). Further total available cement grade limestone reserves in the
country is ~90 bn tonnes and are expected to last only for another 35-41 years.
Cement Clusters largely concentrated in southern region

Source: CMA, SPA Research

.....99% of gypsum reserves in

Rajasthan, enough to last till 2022 end

Cement Sector

Contents

Again domestic reserves of gypsum which is another key input material for cement production is
fast depleting. Reserves currently stand at ~125 mt, 99% of which is in Rajasthan, and is good
enough to last only till 2022 end.

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

Domestic coal supply has also become a major bottleneck. Post 2007, cement manufacturers have
not been granted new coal linkages. Even in cases where linkages have been granted, actual supply
against linkages is very poor. Recently, there have been scams in coal block allocation and several
blocks which were allotted earlier were cancelled. Given this scenario, we believe that acquiring
new linkages will be more difficult going forward and manufacturers will have to import coal for
their needs.
140%

Linkage coal availability declining (% mtpa)

120%
19
8%
17%
5%

100%
80%
60%
40%

70%

23

29

26

30

13%
15%
7%

11%
21%

16%
26%

18%
15%

17%

32%

41%

35%

FY10

FY12

17%

65%

50%

20%
0%
FY04

FY06
Linkage

FY08
Open Market

Import

Lignite/petcoke

Source: A.T.Kearney Analysis, SPA Research

We henceforth expect pace of capacity additions to slow down to a CAGR of 4.7% for FY14-FY17E
(10.7% over FY10-14), as new projects at prevailing profitability levels are unlikely to be planned.
Although we expect 50 mt of new capacity to be added over 3 years (vis--vis 114 mt over FY10-14),
there is a downside risk to our estimates owing to likehood of some delays as has been the case
historically.
60

Capacity additions declining

140%

50

90%

40
30

40%

20
-10%

10

-60%

0
FY09

FY10

FY11

FY12

FY13

Capacity Addition

FY14

FY15E

FY16E

FY17E

% Increase

Source: CMA, SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

10

Industry utilizations bottomed out, substantial improvement in south imminent

.....FY14-17 Consumption CAGR 11.3%

& Capacity addition CAGR 4.7%, result
in 1430 bps surge in caut to 85.8% in
FY17

With all India cement consumption slated to grow at 11.3% CAGR over FY14-17 and capacity
addition to rise at mere 4.7% during the same period, industry utilization has bottomed out at
71.5% in FY14 (lowest levels since FY1990, Capacity CAGR 10.7% over FY10-14 - 2.2x demand CAGR).
While incremental supply of 50 mt is expected over FY14-17, improving demand environment
would result in incremental demand of 92 mt. As a result we expect capacity utilization to improve
gradually to 79.8% in FY16 and to 85.8% in FY17. The surplus capacity (as a % of effective supply)
is expected to decline from 28.5% in FY14 to 14.2% in FY17.
Demand improving, Utilizations bottoming out
Particulars
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E
Installed Capacity (mt)
166
198
221
274
307
321
340
358
376
393
Effective Capacity (mt)
165
176
203
227
278
307
326
341
361
381
% Growth
5.0% 8.0% 14.0% 17.0% 22.1% 10.4% 6.4% 4.5% 5.7%
5.8%
Production (mt)
154
168
181
201
211
228
235
244
261
304
% Growth
5.0% 8.0% 14.0% 17.0% 4.9% 8.1% 3.2% 3.6% 7.2% 16.4%
Capacity utilisation
93.3% 95.5% 89.2% 88.5% 76.0% 74.4% 72.1% 71.5% 72.5% 79.8%
Consumption
148
164
177
201
212
227
236
242
260
295
% Growth
10.0% 10.8% 7.9% 13.6% 5.3% 7.0% 3.9% 2.8% 7.3% 13.6%

FY17E
399
391
2.6%
336
10.4%
85.8%
334
13.2%

Source: CMA, SPA Research

South India witnessing highest

incremental demand of 23 mt....

Unlike previous years, demand pick up is expected to be broad based across India with South India
witnessing highest incremental demand of 23 mt over FY14-17 as compared to 21 mt in North, 18 mt
in West and 15 mt each in East and Central region.
Broad based demand pick up
Region
North
South
East
West
Central

FY07
30
44
24
28
22

FY08
34
49
25
32
24

FY09
35
54
28
34
26

FY10
38
56
33
44
31

FY11
42
56
35
45
34

FY12
46
55
39
51
36

FY13
48
58
41
51
38

FY14
51
58
42
53
39

FY15E
55
61
45
56
42

FY16E
63
70
51
64
48

FY17E
71
80
57
71
54

Source: CMA, SPA Research

.....will result in 26 ppt gain in caut to

77% in FY17

In terms of capacity utilization, Southern region, which witnessed sub-par utilization of 51% in FY14
(owing to 13.1% CAGR in capacity built up vis-a vis mere 0.9% CAGR in demand over FY10-14), is
expected to register 26 ppts gain utilization levels to 77% in FY17 aided by demand pick up post the
creation of two new states from the erstwhile Andhra Pradesh. Also southern region having large
surplus capacity is expected to meet some of demand requirement of Maharashtra (imported 15
mt in FY14, 40% from South) and eastern region (imported 4 mt in FY14), owing to lack of sufficient
capacity in both the regions.
In contrast to the South, while Eastern region is expected to operate at 85% utilization levels, rest of
the regions are expected to operate in excess of 90% utilisation levels on the back of better demand
and lower capacity addition.
Ramp up in utlisations fuelled by sharp improvement in southern region
Region

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

North
South
East
West

99%
93%
88%
94%

100%
96%
87%
98%

86%
89%
87%
89%

94%
76%
87%
97%

82%
61%
81%
83%

87%
55%
81%
85%

88%
52%
81%
86%

87%
51%
80%
88%

87%
52%
82%
89%

85%
66%
86%
94%

91%
77%
85%
94%

Central

94%

97%

99%

105%

97%

93%

86%

82%

80%

88%

94%

Source: CMA, SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

11

New State formation leads to more than double digit growth

Historically we have seen that new state formations result in significant increase in cement demand
owing to pick up in construction activities in both the parent and the new state. This was seen in 3
different cases when states of Chattisgarh, Jharkhand and Uttarakhand came out of states of
Madhya Pradesh, Bihar and Uttar Pradesh respectively, wherein consumption in all cases had
registered significant growth after creation of new states.
Cement Consumption - Before formation of New States

Cement Consumption - After formation of New States

Source: CMA, SPA Research

+INR 10 bn to be incurred on cement

consumption in Telengana over next 5
yrs. 6 mtpa of incremental cement
demand.

We believe this is a strong evidence and expect similar demand pull in Andhra Pradesh (AP) with the
formation of Telengana as more than INR 10 bn is expected to be incurred on cement consumption
over next 5 years (since INR 200 bn has been earmarked for next 5 years and at-least 5% is assumed
to be on cement), which translates into incremental cement demand of 6 mtpa. This is significant
considering AP's cement demand has declined by 22% over past five years to mere 14 mt in FY14 as
against peak demand of 18 mt in FY09.

Southern Region - Muted demand to be a history

South India after negligible demand growth over past 5 years is expected to grow by leaps and
bounds post bifurcation of Andhra Pradesh - the largest manufacturing and consuming market in
the southern region - into Telangana and Seemandhra.
Some of the factors that would drive the cement demand in the region are
a) Creation of new capital city (investment in airport, public infrastructure, etc) and associated
infrastructure to be built for Seemandhra,
b) +INR 1.5 trillion worth of irrigation projects in AP and Telangana over 7-8 years (cumulative
demand of ~38 mt),
c) the Vizag-Chennai Industrial Corridor (investment of +INR 1000 bn),
d) Planned power generation capacity expansion in both Andhra Pradesh and Telangana,
e) developing Kakinada as a hardware manufacturing hub
f) Launch of low cost housing program by the Telangana and AP government,
g) building a smart city in Krishnapatnam in the Nellore district of Andhra Pradesh as part of the
Chennai-Bangalore Industrial Corridor
h) Robust pent-up demand and revival in investment cycle,
i) Revival in the real estate market (property transactions recorded 28% growth in Hyderabad post
the split) and
j) Stable government at the centre.
With business friendly Mr. Chandrababu Naidu as Chief Minister of Seemandhra, it is only a matter
of time that big projects are being implemented. During his earlier term as Chief Minister of AP,
cement demand grew at +20% on an average every year.
Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

12

Strong demand recovery of 11.8% CAGR between FY14-FY17 in Southern region (0.9% over FY1014) in addition to 2.2% CAGR in capacity additions (13.1% over FY10-14), would result in sharp
improvement in capacity utilizations from 51% in FY14 to 77% in FY17. While we don't expect an
immediate sharp pick-up in cement dispatches in the region, we see a meaningful improvement in
infrastructure led demand from H2FY16.
Worst over for Southern Region
Particulars

FY08

FY09

FY10

FY11

FY12

FY13

FY16E

FY17E

Effective Capacity (mt)

% Growth
Production (mt)
% Growth

57
8%
54
10%

67
18%
60
11%

81
21%
62
3%

102
26%
62
1%

117
14%
65
4%

128
9%
66
2%

FY14 FY15E
133
4%
68
2%

137
3%
71
5%

141
3%
93
30%

142
0%
109
18%

Capacity utilisation
Consumption
% Growth

95%
49
11%

90%
54
10%

76%
56
3%

61%
56
1%

55%
55
-2%

52%
58
5%

51%
58
0%

52%
61
5%

66%
70
15%

77%
80
16%

Source: CMA, SPA Research

Costs pressure ebbing, margin improvement on anvil

Cement Industry has been facing severe cost pressure over the past five years (cost/tonne has
escalated at +9% CAGR from FY08 onwards) largely owing to surge in Power & Fuel and Freight rates
which together accounts for 57% of overall operating cost (P&F 29% + Freight 28%).
While P&F costs have escalated (by ~8% CAGR over FY08-14) owing to a) reduction in linkage coal
and (from 64% in FY07 to 38% in FY14, given no new linkage coal was allotted post FY07) rise in eauction coal prices b) surge in imported coal prices (almost doubled over FY08-14) and c) rupee
depreciation, freight rates have soared (by +11% CAGR over FY08-14) owing to a) increasing diesel
prices (+9% CAGR) leading to higher road transportation cost and increase in railway freight rates
b) longer lead distance. This coupled with sharp decline in utilization levels for past few years has
made matter worse for cement players.
However the tide has changed in favour of cement industry off-late with the industry expected to
benefit from all fronts.
a) Firstly, trend of increasing international coal price is behind us. With +12% decline over average
FY14 prices, we expect coal prices to remain subdued owing to weak demand from developed
countries & dwindling growth prospects in China, the world's biggest user, producer and importer
of coal. IEA sees coal demand to grow at 2.1% CAGR through 2019. This bodes well for cement
companies importing coal from Indonesia, South Africa and pet coke from the US gulf region,
more so in current times when there is severe shortage of coal availability domestically. Further
this benefit of lower coal/pet coke prices are expected to get reflected in P&L from current
quarter onwards as cement companies usually holds 4-6 months on coal inventory.
Landed coal prices......

8,000

.....Power & Fuel cost moving in tandem

6000

6,000

1500

4000

1000

2,000

2000

500

0
Apr-14

Nov-14

Sep-13

Jul-12

Feb-13

Dec-11

Oct-10

May-11

Mar-10

Jan-09

Aug-09

Jun-08

Apr-07

Nov-07

Sep-06

Jul-05

Feb-06

Dec-04

4,000

0
FY08

FY09

FY10

FY11

FY12

Imported Coal price (INR/ton)

FY13

FY14 H1FY15

Energy Cost (INR/ton) - RHS

Source: SPA Research

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

13

b) Secondly, freight costs (~28% of total costs) depend on diesel costs which in turn depend on
global oil prices. Given the sharp decline in crude oil prices, diesel prices have declined by
+15% (under recoveries over) and this is expected to percolate to freight rates. The industry will
benefit from lower rates on two counts - when selling cement to end users and when raw
material is transported to cement plants. The quantum of cost decline will depend on mode on
transportation i.e by road or by railway. Of the total cement produced in India, 64% of the
cement dispatches are done through roads, whereas the balance is mainly transported through
railways.
Road transportation rates have stayed firm as of now despite correction in diesel prices as a)
transporters earlier suffered owing to increasing diesel prices as they were unable to pass on
the cost increase due to weak economic environment; b) restrictions on truck over-loading in
last few months. Hence we expect road freight rates to decline albeit slowly as transporters
start to pass on this price decline with a lag to cement companies.
Railway freight rates, which are determined through fuel adjustment component (FAC) and are
revised every six months, i.e., April and October, have increased +30% since March 2012. Next
review is due on Q4FY15. We do not expect railway freight rates to rise materially in near term.
Declining diesel prices to reduce transportation costs

70

Diesel Prices cooling off (INR/lt).....

60

.....Freight cost having direct correlation

1200

70
60
50

1000

50

800

40

600

20

400

10

200

0
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14

30

40
30
20
10
0
FY09

FY10

FY11

Freight Cost (INR/ton)

FY12

FY13

FY14

H1FY15

Diesel Price (INR/lt) - RHS

Source: SPA Research

c) Thirdly Packaging material cost (~4% of total costs) has already declined by +20% owing to
global decline in polypropylene prices and is expected to remain under pressure given subdued
crude oil prices.
d) Fourthly fixed costs per tonne which accounts for 18% of operating cost/INR 600 per tonne, is
expected to moderate given expected improvement in utilizations levels by 1430 bps to 85.8% in
FY17.
Hence with subdued cost inflation outlook coupled with improving demand and cement prices, we
expect margins and return ratios of cement companies to head northwards.

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

14

Outlook
We continue to remain positive on Indian Cement Industry as utilisation levels across the industry
is set to accelerate at scorching pace owing to expected improvement in demand and considerable
decline in capacity additions. After two years of low single digit growth, we model a demand CAGR
of 11.3% over FY14-17 as infrastructure projects and initiatives announced by the new government
comes on stream. Unlike the recent past, we expect south based cement companies to participate
dominantly in next leg of growth as working environment would be more conductive for firms
operating in that region. This is owing to: Firstly, demand improvement would be sharper in southern region as infrastructure builds out
in the newly created states.
Secondly, owing to already surplus capacity, new addition would be least in South (at 2.2%
CAGR over FY14-17 vis--vis 6.3% CAGR ex-south).
Thirdly, surplus capacity would come in handy as companies based in southern region will
partially cater to incremental demand from Maharashtra and eastern region, owing to lack of
sufficient capacity in both the regions.
Fourthly, since South Indian cement players are largely dependent on imported coal, declining
coal prices would provide comfort on energy front.
We henceforth initiate coverage on Orient Cement and The Ramco Cement as they remain best
placed to benefit from recovery in southern region.
We choose to ignore India Cements owing to its mounting debt of INR 34 bn (Debt/EBIDTA 7.0x) and
inefficient operations. ICL's return ratios would continue to remain depressed in low single digits
as more than 35% of company's balance sheet remains invested in non-core assets like advances/
investments in various related party entities resulting in miss-allocation of capital. Despite the
ongoing restructuring activities in the company to pare debts, since nothing concrete is expected in
near term that will materially address cash flow concerns from consolidated entity point of view.
Plans of monetizing its non-core assets have not yielded any fruits till date. Board's approval for
QIP of INR 5 bn if done at prevailing rates (INR 89) would result in dilution of more than 18%.
Dalmia Cement too was ignored as it continues to remain in investment phase with expected peak
net debt of ~INR 59 bn resulting Debt/EBIDTA of 12.4x. While utilization levels are expected to
improve, free cash flows would continue to remain weak owing to higher interest outgo. Though it
will also benefit from expected recovery in south demand, given the sharp run up and weak balance
sheet, risk reward at current valuations, is unfavorable.

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

15

MCAP
(INR bn)

CMP
(INR)

Target
(INR)

Orient Cement

35.84

175

224

The Ramco Cement

78.02

328

421

Company

Companies
Section

Cement Sector

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

16

Orient Cement Ltd.

CMP: INR 175

Target: INR 224

Orient Cement, a CK Birla group company incorporated in 1979, is a mid-sized south based cement manufacturer with a capacity
of 5 mtpa (3 mt in AP & 2 mt in Maharashtra) and captive power capacity of 50MW. One of the lowest cost producer, OCL, has a
dealer network of +2750 dealers & enjoys +25% market share in AP, Telengana & pockets of Maharashtra. We recommend a BUY
on the stock with a target of INR 224.

Market Presence - Encouraging demand outlook

OCL's market mix is skewed to Maharashtra and Telangana (market
leader in Khandesh, Marathwada, Vidarbha in Maharashtra and
Telengana, with +25% MS) which together account for 80-85% of
its cement sales. It is well placed to benefit from demand recovery
in South India given 60% of its current capacity is located in the
region & additional 3 mt capacity will be commissioned at
Karnataka by Q1FY16. Also existing plants at Devapur and Jalgaon
will dispatch some of their output to newer markets of MP and
Chhattisgarh. Resolution of Telengana-Seemandhra dispute along
with progressive state governments in OCL's key markets will
drive cement demand going forward. We expect OCL to register
volume CAGR of 15.3% over FY14-17.

Capacity expansion to aid growth

To fuel next leg of growth, OCL is expanding its cement capacity by
60% by setting up 3 mt integrated green-field unit in Karnataka along
with 45 MW CPP & 7 MW WHRP at a capex of INR 17 bn. The plant is
expected to commence operations by Q1FY16 and has sufficient
limestone reserves to go for a further 3 mt expansion at the same site.

Targeting to be 15 mt company by 2020

OCL is targeting to be 15 mt cement company by 2020. Although
nothing concrete has been finalized yet, OCL is eyeing a Greenfield
expansion of ~2 mt in North, acquisition of ~2 mt in Central India
and ~3 mt brownfield expansion in Devapur/Gulbarga.

Most cost efficient producer

OCL is amongst the most cost efficient cement company with
9MFY15 cost/tonne of ~INR 3051 (industry avg. INR 3200/tonne)
owing to (a) Proximity to both input resources and end-market
Shareholding (%)

Dec-14

Promoters

37.50

FIIs

7.35

DIIs

30.33

Others

24.82

Jan-15

Dec-14

Oct-14

Nov-14

Sep-14

Jul-14

Aug-14

Jun-14

May-14

Apr-14

Feb-14

Mar-14

INR mn

ORIENTCEM

Bloomberg Code

ORCMNT IN

52 Week H/L
Jan-14

OCL with its large distribution network, remains best placed to

benifit from demand revival in AP & Telengana region. Being
amongst the lowest cost cement producer, OCL enjoys industry
leading return ratios and has successfully captured higher market
share despite muted industry growth. With capacity expansion
on track, we expect revenue and net profit to register a CAGR of
30.2% and 26.8% respectively over FY15-17E. Any visible progress
on plans of becoming a 15 mt company by 2020 would lead to
rerating of the company. We recommend a BUY on the stock with
a target of INR 224 based on an average of 9.0x FY17 EV/EBIDTA &
FY17 EV/tonne of INR 6600.

NSE Code

Mcap (INR bn)

2W Avg. Qty, NSE

Free Float (INR bn)

ORCE.BO
204.90
1
35.84
200.00/36.75
239896

FY14

FY15E

FY16E FY17E

Net Sales

14385

16342

21312

Growth (%)

-4.20% 13.61% 30.41% 29.97%

EBITDA Margin %

14.93% 19.45% 22.29% 24.06%

APAT

1014

Growth (%)

1760

2045

27698

2829

-37.39% 73.55% 16.16% 38.34%

EPS

4.95

8.59

9.98

13.81

P/E

9.66

20.36

17.52

12.67

P / BV

1.18

3.79

3.32

2.83

EV/EBIDTA

5.47

14.96

10.25

6.90

Net Debt-Equity

0.30

1.33

1.25

0.83

22.40

RoACE (%)

16.25

16.30

16.89

22.64

1.12

RoAE (%)

12.80

19.85

20.21

24.13

Sensex

Beta

Cement Sector

Outlook & Valuation

535754

Face Value

Orient Cem

OCL is expected to register revenue CAGR of 30.2% over FY15-17

aided by 22.5% & 6.5% CAGR in cement volumes & realisations
respectively. Operating margins are expected to improve by 461
bps to 24.1% in FY17 on the back of 18.2% CAGR in improvement
in EBIDTA/tonne to INR 1033 owing to benign operating costs. Net
Profit is expected to register a CAGR of 26.8% owing to surge in
interest & depreciation expenses post expansion.

BSE Code

Shares O/S (mn)

550
500
450
400
350
300
250
200
150
100

Financial Outlook

Key Data

Reuters Code

Relative Price Performance

thus capitalising on the best pricing scenario across regions

and resulting in lower lead distance of 300km; (b) Proximity
to captive limestone (2 km away from the Devapur plant) and
coal mines (sourced from Singareni Collieries which is 40 km
from the Devapur plant); (c) Higher PPC mix of 73-75%
(>industry ~60%) ensuring higher CC conversion ratio; (d) 50
MW CPP with power consumption of ~70 unit /tn & coal
consumption of ~720 kCal/tn.

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

17

Valuation Snapshot:
Particulars

Value/Share

A) Replacement Cost
No of shares (mn)

204.9

Capacity (MTPA) - FY17

8.0

EV/Tonne Multiple

6600

Target EV (INR mn)

52800

Less: Net Debt

10567

Target

42233

258
206

B) EV/EBIDTA
EBIDTA (mn) - FY17

6664

EV/EBIDTA Multiple

Target EV (INR mn)

59977

Less: Net Debt

10567

Target

49410

293
241

Target Price

224

9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

Expansion aiding volume growth

100%

5000

80%

4000

60%

3000

40%

2000

20%

1000

1200

Demand surge + Benign costs = Improved Profitability

1000
800
600

0%
FY12

FY13

Capacity (mt)

FY14

FY15E

FY16E

Volumes (mt)

FY13

FY14

FY15E

Net Debt (INR bn)

Cement Sector

Contents

FY16E

0
FY13

Utilisation (%)

Realisations (INR/tn)

Increase in leverage owing to expansion

16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

200

FY17E

1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

9MFY15

FY15E

FY16E

FY17E

Cost (INR/tn)

EBIDTA/tn

Costs broadly flat....

3000
2500
2000
1500
1000
500
0
FY13

FY17E

COGS

Net DER (x)

Investment Rationale

FY14

3500

INR/tn

FY11

400

Outlook

FY14
P&F

FY15E
Series4

Orient Cement

FY16E

S&A Exp.

FY17E

Other Exp.

The Ramco Cement

18

Financials
Income Statement
Y/E March (INR mn)

Balance Sheet
FY14

FY15E

FY16E

FY17E

Y/E March (INR mn)

Net Sales
14385
Growth (%)
-4.20%
Power & Fuel Cost
3893
Selling & Dist Exp
4068
Total Expenditure
12237
EBIDTA (without OI)
2147
Growth (%)
-32.61%
EBITDA Margin %
14.9%
Depreciation
563.8
EBIT
1584
EBIT Margin %
11.0%
Interest Expenses
144
Other Income
93
EBT
1532
Tax Expenses
522
PAT
1010
Exceptional/Extraordinary Items
(4)
APAT
1014
Growth (%)
-37.39%
APAT Margin (%)
7.05%

16342
13.61%
4301
4494
13164
3178
47.99%
19.4%
469.6
2708
16.6%
150
55
2613
853
1760
0
1760
73.55%
10.77%

21312
30.41%
5464
5570
16563
4749
49.45%
22.3%
809.2
3940
18.5%
956
60
3044
999
2045
0
2045
16.16%
9.60%

27698
29.97%
6949
7084
21034
6664
40.32%
24.1%
1136.3
5528
20.0%
1362
63
4229
1400
2829
0
2829
38.34%
10.21%

SOURCES OF FUNDS

FY14

FY15E

FY16E

FY17E

4.95

8.59

9.98

13.81

CEPS

7.57

10.79

13.84

19.29

DPS

1.50

2.50

3.00

4.00

BVPS

40.45

46.13

52.63

61.79

16.25

16.30

16.89

22.64

Key Ratios
Y/E March

Return Ratios
RoACE (%)
RoAE (%)

Share Capital

205

205

205

205

9248

10579

12455

Total Networth

8288

9453

10784

12660

824

7884

8678

9018

2463

5003

5568

2678

3286

12886

14245

11695

11574

22339

25029

24355

Minority Interest
Secured Loans
Unsecured Loans
Total Debt
Total Liabilities
APPLICATION OF FUNDS
Net Block

8256

8008

24629

23743

Capital Work in Progress

3276

16376

720

800

Total Current Assets

4081

3744

5322

6668

Total Current Liabilities

2773

4503

4339

5539

Net Current Assets

1308

(759)

983

1128

Investments

Net Deferred Tax

(1266)

(1286)

(1303)

(1316)

Total Assets

11574

22339

25029

24355

Y/E March (INR mn)

FY14

FY15E

FY16E

FY17E

EBT

1532

2613

3044

4229

564

470

809

1136
1362

12.80

19.85

20.21

24.13

Depreciation
Interest

144

150

956

Inc./Dec. in working capital

160

1596

(1283)

179

(550)

(873)

(1017)

(1412)

Tax paid
Other Income
Cash from operations (a)

Net Debt-Equity Ratio

0.30

1.33

1.25

0.83

Change in Fixed Assets

Current Ratio

1.47

0.83

1.23

1.20

Change in CWIP

11.65

18.43

4.19

4.11

Others

1.39

0.96

0.90

1.12

Inventory Days

21

22

23

22

Debtors Days

18

15

13

12

Creditors Days

38

41

36

36

9.66

20.36

17.52

12.67

Efficiency Ratios

P / BV
Dividend Yield (%)

1.18

3.79

3.32

2.83

3.14%

1.43%

1.72%

2.29%

(63)
5431

(17430)

(250)

(2878)

(13100)

15656

(80)

37

15

20

23

(3010)

(13307)

(1755)

(307)

Inc./Dec. in debts

1797

9600

1359

(2550)

Dividend paid

(307)

(512)

(615)

(820)

Interest paid

(144)

(150)

(956)

(1362)

Inc./Dec. in capital

Others

(41)

(3)

(25)

(68)

Financial cash flow ( c )

1305

8935

(236)

(4799)

Opening cash balance

763

816

345

804

53

(471)

459

324

816

345

804

1128

0.68

2.19

1.68

1.29

EV/EBIDTA

5.47

14.96

10.25

6.90

Closing cash balance

Investment Rationale

(60)
2449

(222)

Market Cap / Sales

Contents

(55)
3901

(0)

Cash Flow during the year (a+b+c)

Cement Sector

(93)
1758
(169)

Cash from investments (b)

Valuations
P/E

FY17E

8083

Inc./Dec. in investments

Total asset turnover

FY16E

Reserves

Balance Sheet Ratios

Interest Cover Ratio

FY15E

Cash Flow

Per Share Data (INR)

Adjusted EPS

FY14

Outlook

Orient Cement

The Ramco Cement

19

The Ramco Cements Ltd.

CMP: INR 328

Target: INR 421

The Ramco Cements Ltd., established in 1961, is the fifth largest cement producer in the country and the second largest in south,
with an integrated grinding capacity of 15.5 mtpa & CPP of 157 MW. It also produces Ready Mix Concrete & Dry Mortar products
and operates one of the India's largest wind farms with a capacity of 159 MW. TRCL remains the best bet to play the cement
demand recovery theme across South India. We henceforth recommend a BUY on the stock with a target of INR 421.

Best placed in southern region

coal to meet their energy requirements (Fuel mix - 75% imported

coal & balance through mix of petcoke & e-auction). +12% decline
in international coal prices (vis--vis avg. FY14 prices) would
result in ~INR 50/tonne savings on P&F cost front.

TRCL, being the 2nd largest player with +12% MS in South India
(Mix - TN 38%, Kerala 26%, AP 9%, KTK 11%, WB 10%, Others 6%) is
best placed to benefit from revival in cement demand. Its ability
to clock 5.6% volume growth over FY11-14 vs. 0.7% demand CAGR
in South India, illustrates its superior brand presence (Tier-I brand
enjoying higher prices, 60% retail segment).

Capex plans almost over

TRCL after more than doubling its capacities to 15.5 mt over the
last 5 years will complete most of its capex plans in the current
quarter. Debt levels will decline by INR 5.0 bn to INR 24.2 bn in
FY17, led by improved profitability and strong operating cash
flows. Net D/E is expected to steadily decline to 0.7x in FY17E
vis-a-vis 1.2x in FY14. Subsequently, return ratios are expected
to improve by more than 3x to ~19% levels in FY17.

Cost efficient producer

TRCL is one of the most cost efficient cement producers in South
India, with cost advantage emerging from having CPP of 157
MW, reducing energy consumption (down by 3 unit/tn to 81
unit/tn) and strategic plant location (split grinding unit near
the markets and clinker plant near the mines). In addition TRCL
also has a windmill capacity of 126 MW, out of which it is able
to produce and sell ~32 MW @ ~INR 3.2/unit to TNSEB.

Financial Outlook
TRCL is expected to register revenue CAGR of 19.7% over FY15-17
aided by 11.7% & 9.5% CAGR in cement volumes & realisations
respectively. Operating margins are expected to improve by 493
bps to 24.3% in FY17 owing to 20.1% CAGR in improvement in
EBIDTA/tonne to INR 1318 on the back of benign operating costs.
This along with declining interest expenses will result in 58.0%
CAGR in Net profit over the same period.

1 mt grinding unit & CPP - Cost savings lined up

TRCL has adopted a strategy of setting up split grinding units
closer to high growth markets and fly ash abundant areas (in
TN, Karnataka and WB). This enables it to cater to demand in a
timely manner and results in saving in transportation cost as it
needs to transport only clinker (sources fly ash from nearby
region at negligible costs). TRCL is setting up a 1 mt grinding unit
in Vizag (AP) at a capex of INR 3.5 bn by Q4FY15, to reduce the
lead distance of transporting cement from TN to Orissa (by 500
km from 1100 km currently).
In addition TRCL is also expanding thermal capacity in Alathiyur,
Ariyalur and Jayanthipuram by adding one more turbine of 6 MW
each, thereby increasing the CPP capacity by 10% to 175 MW at a
capex of INR 1.25 bn.

Outlook & Valuation

TRCL remains one of our best mid cap bets to play to the cement
demand recovery theme in South India. Superior operating
profitability, dominant market share backed by strong brand
recognition ensures buoyant growth prospects for the company.
Having split grinding unit near to high consumption markets
minimizes transportation costs and helps in timely servicing of
the demand. Return ratios too are expected to improve as RCL has
already completed majority of its capex plans. We recommend a
BUY on the stock with a target of INR 421 based on an average of
9x FY17 EV/EBIDTA & FY17 EV/tonne of INR 6900.

Dependency on imported coal - Blessing in disguise

Dependency on imported coal would prove to be blessing in
disguise for players like TRCL that depends largely on imported
Shareholding (%)

Dec-14

Promoters

42.31

FIIs

18.02

DIIs

15.85

Others

23.82

Key Data

INR mn

BSE Code

500260

NSE Code

RAMCOCEM

Bloomberg Code

TRCL IN

Reuters Code

Relative Price Performance

TRCE.BO

Shares O/S (mn)

238.00

250

Face Value

200
150

Mcap (INR bn)

100

52 Week H/L

Cement Sector

Sensex

Contents

Jan-15

Dec-14

Oct-14

Nov-14

Sep-14

Jul-14

Aug-14

Jun-14

Apr-14

May-14

Feb-14

Mar-14

Jan-14

Ramco Cem

Investment Rationale

Net Sales

36835

36769

42730

Growth (%)

-3.84%

-0.18% 16.21% 23.34%

EBIDTA Margin (%)

15.31% 19.37% 19.95% 24.30%

APAT

1230

Growth (%)

2392

3653

52704

5968

-69.60% 94.46% 52.71% 63.38%

10.05

15.35

25.07

P/E

41.58

32.62

21.36

13.07

2.06

2.93

2.65

2.29

12.31

13.31

11.06

7.37

Net Debt-Equity Ratio

1.16

0.99

0.85

0.67

45.01

RoACE (%)

6.57

9.85

12.05

19.02

0.87

RoAE (%)

5.07

9.29

13.02

18.79

380.00/159.85

Beta

FY16E FY17E

5.17

78.02

Free Float (INR bn)

FY15E

EPS
1

2W Avg. Qty, NSE

50

FY14

160872

Outlook

P / BV
EV/EBIDTA

Orient Cement

The Ramco Cement

20

Valuation Snapshot:
Particulars

Value/Share

A) Replacement Cost
No of shares (mn)

238.0

Capacity (MTPA) - FY17

16.5

EV/Tonne Multiple

6900

Target EV (INR mn)

114126

Less: Net Debt

18320

Target

95806

480
403

B) EV/EBIDTA
EBIDTA (mn) - FY17

13658

EV/EBIDTA Multiple

Target EV (INR mn)

122919

Less: Net Debt

516

18320

Target

104599

439

Target Price

421

Improving demand to drive volume growth

20.0

80%
70%
60%
50%
40%
30%
20%
10%
0%

15.0
10.0
5.0
0.0
FY11

FY12

FY13

Capacity (mt)

5000

FY14

FY15E

Volumes (mt)

FY16E

6000

Demand surge + Benign costs = Improved Profitability

1200

5000

1000

4000

800

3000

600

2000

400

1000

200
0

FY17E

FY13

Utilisation (%)

4000
3000
2000
1000
0

FY14

9MFY15

Realisations (INR/tn)

35.0

Costs broadly flat....

FY15E

FY16E

Cost (INR/tn)

FY17E
EBIDTA/tn

1.4

Capex over - Debt to ease....

30.0

1.2

25.0

1.0

20.0

0.8

15.0

0.6

10.0

0.4

5.0

0.2

0.0
FY13
COGS

Cement Sector

FY14
P&F

FY15E
Employee Exp.

Contents

FY16E
S&A Exp.

FY17E

0.0
FY13

Other Exp.

Investment Rationale

1400

FY14

FY15E

Net Debt (INR bn)

Outlook

Orient Cement

FY16E

FY17E

Net DER (x)

The Ramco Cement

21

Financials
Income Statement
Y/E March (INR mn)

Balance Sheet
FY14

FY15E

FY16E

FY17E

Y/E March (INR mn)

Net Sales
36835
Growth (%)
-3.84%
Cost of goods sold
6897
Power & Fuel Cost
8324
Employees Cost
2218
Total Expenditure
31197
EBIDTA (without OI)
5639
Growth (%)
-43.97%
EBITDA Margin %
15.31%
Depreciation
3063
EBIT
2576
EBIT Margin %
6.99%
Interest Expenses
1890
Other Income
857
EBT
1543
Tax Expenses
166
PAT
1377
Exceptional/Extraordinary Items
147
APAT
1230
Growth (%)
-69.60%
APAT Margin (%)
3.34%

36769
-0.18%
7087
7239
2171
29647
7121
26.30%
19.37%
2558
4563
12.41%
1952
720
3332
940
2392
0
2392
94.46%
6.51%

42730
16.21%
8077
8235
2511
34204
8526
19.73%
19.95%
2793
5733
13.42%
1772
785
4747
1094
3653
0
3653
52.71%
8.55%

52704
23.34%
9335
9485
2930
39896
12808
50.22%
24.30%
2874
9933
18.85%
1696
850
9087
3120
5968
0
5968
63.38%
11.32%

SOURCES OF FUNDS

FY14

FY15E

FY16E

FY17E

5.17

10.05

15.35

25.07

CEPS

18.92

23.59

27.16

37.28

DPS

1.00

2.00

3.00

5.00

104.29

111.99

123.81

143.01

6.57

9.85

12.05

19.02

Key Ratios
Y/E March

BVPS
Return Ratios
RoACE (%)
RoAE (%)

FY15E

FY16E

FY17E

238

238

238

238

Reserves

24583

26415

29229

33798

Total Networth

24821

26653

29467

34036

Total Debt

29288

26473

25638

24244

Total Liabilities

54109

53127

55105

58280

46411

48603

46011

43437

Capital Work in Progress

3542

2000

3500

4000

Investments

2834

3337

3337

4337

15898

14310

16714

21456

Total Current Liabilities

7203

8415

7768

8291

Net Current Assets

8695

5895

8946

13165

Net Deferred Tax

(7374)

(6709)

(6689)

(6659)

Total Assets

54109

53127

55105

58280

Y/E March (INR mn)

FY14

FY15E

FY16E

FY17E

EBT

1543

3332

4747

9087

Depreciation

3063

2558

2793

2874

Share Capital

APPLICATION OF FUNDS
Net Block

Total Current Assets

Cash Flow

Per Share Data (INR)

Adjusted EPS

FY14

5.07

9.29

13.02

18.79

Interest

1890

1952

1772

1696

(1410)

2509

(2515)

(3323)

Tax paid

(323)

(833)

(1424)

(3090)

Other Income

(857)

(720)

(785)

(850)

Cash flow from operations (a)

3905

8797

4587

6395

Inc./Dec. in working capital

Balance Sheet Ratios

Inc./Dec. in investments

(176)

(503)

(1000)

Net Debt-Equity Ratio

1.16

0.99

0.85

0.67

Change in Fixed Assets

(2425)

(4750)

(200)

(300)

Current Ratio

2.21

1.70

2.15

2.59

Change in CWIP

(1972)

1542

(1500)

(500)

Interest Cover Ratio

1.82

2.71

3.68

6.36

Others

70

75

75

75

(4504)

(3636)

(1625)

(1725)

0.71

0.69

0.79

0.93

Inventory Days

75

81

72

71

2618

(2815)

(835)

(1394)

Debtors Days

30

30

27

25

Creditors Days

19

22

20

20

41.58

32.62

21.36

13.07

Efficiency Ratios
Total Asset Turnover

Cash flow from investing (b)

Valuations
P/E
P / BV
Dividend Yield (%)
Market Cap / Sales
EV/EBIDTA

Cement Sector

2.06

2.93

2.65

2.29

0.47%

0.61%

0.92%

1.53%

Inc./Dec. in capital
Inc./Dec. in debts
Dividend paid

(238)

(476)

(714)

(1190)

Interest paid

(1890)

(1952)

(1772)

(1696)

Others

15

(210)

895

507

Cash flow from financing ( c )

505

(5453)

(2426)

(3774)

Opening cash balance

540

446

155

691

(93)

(292)

536

896

446

155

691

1587

1.39

2.12

1.83

1.48

Cash Flow during the year (a+b+c)

12.31

13.31

11.06

7.37

Closing cash balance

Contents

Investment Rationale

Outlook

Orient Cement

The Ramco Cement

22

Sharad Avasthi

Head - Equity Research

sharad.avasthi@spagroupindia.com

Tel.: +91-33-4011 4800

Ext.832

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23