DB - Indian Cement Sector

GEMS: Asia India
Resources Construction Materials

Company
FITT Research
12 July 2007
Fundamental, Industry, Thematic,
Indian Cement
Thought Leading
Deutsche Bank Company Research's
Global Markets Research
Investment Policy Committee has

deemed this work F.I.T.T for investors
Sector
seeking differentiated ideas. Contrary to
prevailing market opinion, we believe the
Indian cement sector will experience a
sustained upcycle lasting a few years.
Street concerns on oversupply, demand
slowdown, pricing and valuations are
overdone, representing a buying
opportunity in our view. Our FY09 (Mar)
We’re in the midst of a EPS estimates are 30-100% above

consensus.
supercycle – staying bullish

Fundamental – Analyzing the economic
attractiveness of the sector
Industry – Sector earnings to grow at a

22% CAGR over the next three years
Thematic – Demand-supply mismatch

may well extend much beyond 2010
Thought leading – Entering a sustainable

earnings era
Top large-cap picks: ACC and Ambuja;

top mid-cap pick: India Cements
Manish Saxena
Research Analyst
(91) 22 6658 4034
manish.saxena@db.com
Deutsche Bank Securities Inc.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
GEMS: Asia India
12 July 2007
FITT Research
Indian Cement Sector Top picks
We’re in the midst of a ACC (ACC.BO),INR1,072.40

Grasim (GRAS.BO),INR2,819.55
Ambuja Cements Ltd (ACEM.BO),INR127.80
Buy
Buy
Buy
India Cements (ICMN.BO),INR220.20 Buy
supercycle – staying bullish Shree Cements (SHCM.BO),INR1,335.20

UltraTech Cement Limited (ULTC.BO),INR899.30
Buy
Buy
Manish Saxena
Research Analyst
(91) 22 6658 4034
manish.saxena@db.com
Fundamental, Industry, Thematic, Thought Leading

Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing
market opinion, we believe the Indian cement sector will experience a sustained
upcycle lasting a few years. Street concerns on oversupply, demand slowdown,
pricing and valuations are overdone, representing a buying opportunity in our view.
Our FY09 (Mar) EPS estimates are 30-100% above consensus.
Fundamental – Analyzing the economic attractiveness of the sector

In this report, we analyze the industry utilization of the sector, the bargaining
power of players and their relative margin/return attractiveness. Our analysis
suggests that (1) utilization rates in the sector are likely to remain at 90% over
FY07-10E, resulting in five continuous years of peak operating rates – the first-time
ever in the last 100 years, and (2) the companies which are integrated and low-
cost producers enjoy RoCE/RoE profiles that are among the best globally.
Industry – Sector earnings to grow at a 22% CAGR over the next three years
We believe the sharp increase in India’s infrastructure capex alone can sustain
10% annual cement volume growth. Real estate growth and pre-election spending
should also help. Consequently, we prefer companies that (1) are expanding
capacity and have the ability to bring capacities on stream, (2) are less vulnerable
to energy cost inflation, and (3) are in attractive regional markets within India.
Thematic – Demand-supply mismatch may well extend much beyond 2010

We have performed a comprehensive review of new capacities being
implemented in India. Our analysis shows that only 51m tonnes, i.e. 67% of the
ordered capacity and 47% of the announced capacity, will get commissioned till
FY2010 (Mar). Imports are unlikely to pose a threat due to tight regional demand-
supply and port bottlenecks. Even though our demand-supply scenario assumes
all the ordered capacity will come through, India would have only a minor surplus
in FY10. Our estimate of cement prices increasing by 3% in FY08 from the current
levels and a further 4% in FY09 may end up being overly conservative.
Thought leading – Entering a sustainable earnings era

Longer term, we expect Indian cement prices to increase in line with inflation –
note that India’s low per capita consumption is near an inflection point and the
industry is gradually consolidating. Energy cost inflation and scalability of output at
limestone mines would be the key challenges.
Top large-cap picks: ACC and Ambuja; top mid-cap pick: India Cements
We believe ACC is the most integrated direct cement play that will also benefit
from local sourcing of coal. India Cements and UltraTech also look attractive due
to their greater exposure in the more attractive south India. We maintain our Buy
on Ambuja Cements, Grasim and Shree Cement.

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
12 July 2007 Construction Materials Indian Cement Sector
Table of Contents
Look beyond the obvious ................................................................. 3

Multiple constraints in capacity addition!.................................................................................. 3
Equipment orders placed for 68% of announced capacity ....................................................... 3
Regulatory approvals for 21% of announced capacity pending ................................................ 4
Financial closure seems difficult for 27% of announced capacity ............................................ 4
Project delays add a different twist to likely capacity additions ................................................ 5
Supplies to India from other regions are unlikely ...................................................................... 6
Demand growth in top gear ............................................................. 8

Despite strong historical growth, per capita consumption is low ............................................. 8
Indian cement demand skewed towards housing .................................................................... 8
Infrastructure to give demand a big boost ................................................................................ 9
Infrastructure spending to propel the growth in medium term............................................... 10
Pre-election spends can spice up demand growth ................................................................. 10
Pan-India cement demand to grow at 10% CAGR over FY07-10............................................ 11
Deficit to continue till 1HFY10........................................................ 13

Estimates corroborate deficit forecasts till H1FY10/CY09....................................................... 13
Cement prices on a roll again......................................................... 15

Data-points suggest strong price momentum to continue ..................................................... 15
Steady rise in consolidation .................................................................................................... 15
Price estimates lower than landed cost of imports................................................................. 17
Asymmetric margin improvement ................................................. 18

Cost pressures to differentiate companies’ earnings.............................................................. 18
Valuations are attractive................................................................. 20

Stocks yet to touch Jan-07 levels ........................................................................................... 20
Our estimates for FY09e are now 30-100% higher than consensus....................................... 21
Valuations at discount to the region........................................................................................ 21
Target multiples assumed at discount to region and historical band ...................................... 22
ACC ................................................................................................... 23
Ambuja Cements Ltd....................................................................... 28
Grasim .............................................................................................. 36
India Cements .................................................................................. 41
Shree Cements................................................................................. 46
UltraTech Cement Limited.............................................................. 52
Appendix A....................................................................................... 57
Capacity ordered..................................................................................................................... 57
Page 2 Deutsche Bank Securities Inc.

Look beyond the obvious

Multiple constraints in capacity addition!
Cement prices spiraling to a decadal high have left most Indian cement producers scrambling
for new capacity additions at a frenzied pace for the first time in the last two decades. But in
our opinion, most Indian producers have found the going tough. As in any project
implementation, there are multiple constraints in expanding capacities. The actual capacity
addition that can be realized would be the one fulfilling all of the multiple constraints that
need to be met.
Considering only three Figure 1 shows that even considering only three constraints - ordering, financial and
constraints, i.e. ordering, regulatory approval - of the five possible ones, the maximum realizable new cement capacity
financial and regulatory that could come up in India during FY07-FY10 is 51MTPA. Also, the maximum realizable
approval, of the five possible clinker capacity addition based on our analysis can be no more than 39MTPA. This implies
ones, the maximum
that only less than 50% of the announced capacity additions in India of 108m tonnes could
see the light of day over FY07-10.
realizable new cement
capacity that could come up
Figure 1: Multiple constraints on realizing announced capacity
in India during FY07-FY10E
is 51 MTPA Realizable
capacity, 51.3 MTPA
Financial closure
possible, 146.4MTPA
Regulatory
approved, 81.1
MTPA
Ordered,
73.7 MTPA
Source Ministry of Forest, Ministry of environment, CMA, Deutsche Bank
The three quantifiable constraints which overlap are:
Equipment orders placed for 68% of announced capacity

Actual placement of orders with equipment suppliers should be taken as confirmed with the
first advance payment or letter of intent. While almost all equipment suppliers recognise a
letter of intent as a confirmation of new orders, we believe that the first advance payment
received by them is a better metric to measure equipment orders. Be that as it may, letters
of intent received by cement equipment suppliers point to a total of 73.7MTPA of cement
capacities to be commissioned over FY07-10. Appendix A (page 60) gives the details of
orders for capacity additions by the cement manufacturers.
Deutsche Bank Securities Inc. Page 3

Regulatory approvals for 21% of announced capacity pending

Environmental and forest clearance in India is through an open hearing system and, at times,
results in delays of more than 10 years (e.g. Sanghi Industries). Our correspondence with the
Ministry of Environment and Forests revealed that 81.1MTPA of capacity has been approved.
We are surprised that few companies have even placed orders without first obtaining
regulatory clearances. Figure 2 shows that clearances for 23MTPA of capacity (21% of
announced capacity) are still pending.
Surprisingly, a few Figure 2: Regulatory clearances

companies have placed
MTPA Approved Not approved
orders without obtaining
regulatory clearances 120 Not Ordered Announced
100
80 Ordered
60
40
20
Source: Ministry of Forest, environment, CMA, Deutsche Bank
Financial closure seems difficult for 27% of announced capacity

Cement capacity orders (unlike the power sector) in recent times have redefined the point at
which ordering is recognized by equipment suppliers.
Figure 3: Funding constraints

Financial closure possible Financial closure
MTPA not possible
120 Announced
Not Ordered
100
80 Ordered
60
40
20
Source: Prowess, CMA, Deutsche Bank

As our bottom-up analysis of the financials of each company in the sector reveals, there have
been many instances of companies ordering capacity that cannot be financed even assuming
20% equity dilution and raising debt to 1.5x equity. Figure 3 shows that approximately
29MTPA of capacity orders (27% of announced capacity) may not be commissioned due to
difficulties in financial closure.
Project delays add a different twist to likely capacity additions

Equipment suppliers have Project delays are primarily due to the manufacturing constraints of equipment suppliers and
manufacturing capability of inadequate availability of civil contractors at the site.
15-18MT for supplies in India
and Middle East 1. Capacity constraint with equipment suppliers: This is contingent on workshop and
vendors´ scalability of equipment suppliers. Our discussions with equipment suppliers
suggest that the maximum cement capacity in India for all suppliers taken together is 15-
18 MTPA. Hence equipment suppliers may prioritize supplies to players in India in a
manner that suits their long-term interests.
2. Availability of contractors to carry out civil and erection works. This depends on
construction and infrastructure work and the experience of a contractor. We have not
been able to quantify the impact of this constraint. Our talks with Indian cement
companies suggest that they are running cost over-runs to an extent of 40-50% on the
civil construction side.
Finally, even assuming that Indian companies are able to meet the above two challenges and
Effective incremental
74m tonnes of capacity is commissioned, incremental production may be only 51m tonnes
capacity addition will be far over FY07-10E. Capacity addition does not become effective spot on April 1st of each year,
less than headline capacity but is dependent on the handover of the plant. This implies that effective capacity addition in
addition numbers each year is lower than name plate capacity addition.
Figure 4: Effective capacity addition is different from name plate capacity addition
Incremental cement capacity

Effective incremental cement capacity
Incremental production
(mn tonnes)
45
40
35
30
25
20
15
10
5
0
FY05 FY06 FY07 FY08e FY09e FY10e
Source: Deutsche Ban, CMAk
Stabilization of new units Finally, the cement output from new units is subject to two conditions:
has taken 5-6 months in
recent times Stabilization of new units: This takes 5-6 months. We note that Kesoram and Binani
Cement have yet to reach peak utilisation levels despite commissioning of capacities
about 3-6 months ago.

Rise in blending ratio: This is subject to stabilization of chemical composition of clinker

output. Unless this happens, the blending ratio cannot be increased.
Supplies to India from other regions are unlikely

Global trade of cement at less than 4% of total production is limited by the extremely low
shelf life of the product. With the shelf life of cement at less than 90 days, its fast
consumption is imperative; else the material is at risk of losing its basic properties.
If India were to buy 2m More importantly, the spot trade of cement is in the range of 25-35m tonnes currently, which
tonnes of cement in global is less than 2% of global production. If India were to buy 2m tonnes of cement in the spot
spot cement market, there is market (i.e., 10% of total spot trade), spot prices may rise by 20-30%, making the buying
a possibility that spot prices completely unviable.
could rise by 20-30%
Figure 5: Global cement trade is 3-4% of production
Clinker Cement
(mn tonnes)
120
100
80
60
40
20
0
1998 1999 2000 2001 2002 2003 2004 2005
Source: Deutsche Bank, Ocean Shipping Consultant
Regional demand –supply scenario is tight as well

The Middle East is one of the fastest growing regions in the world with a demand increase of
~18% in FY07. Key centers of demand growth are the UAE, Saudi Arabia, Iran and Iraq. While
Saudi Arabia is balanced in terms of demand–supply, the problem seems to be in the UAE
following the breakdown of the Gulf Cement and Union Cement plants. In addition, new
capacities in Iran have got delayed while reconstruction demand in Iraq is quite high, resulting
in a tight demand–supply scenario. The only surplus region for supplies to India is Thailand.
Pakistani cement players, in our opinion, may look at the Middle East market which is quite
lucrative at this juncture.
Figure 6: Regional demand-supply scenario (in m tonnes)

Country Region Demand Supply Exports Surplus/Deficit
Thailand SE Asia 27 40 13 -
Indonesia SE Asia 34 42 8 -
India Indian Subcontinent 149 156 5 1
Pakistan Indian Subcontinent 27 33 6 -
The Middle East Middle East 120 100 - (20)
Source: CMA, Ocean freight liners

Port capacity for cement Port capacity in India acts as a big bottleneck for imports
imports is limited in India Cement unloading on ports in India can be done only by existing cement producers as others
do not have the equipment with a discharge rate greater than 1000 tonnes. So a demurrage
cost of USD10-15/t may have to be paid by importers of cement – other than existing players.

Demand growth in top gear

Despite strong historical growth, per capita consumption is low
Over the last twenty-five years, Indian cement demand growth (Figure 7) has been on
average 7.6%. The growth rate has shown a steady improvement in each five-year plan
period. Despite the long-term strong growth, the per capita consumption in India (Figure 8) is
quite low. With per capita income levels rising at a ~ 10% for the economy – the income
levels currently at USD 700/per person should cross USD 1000 in the next 3 years. Note in
South East Asia cement consumption showed a J-curve in demand at a level where the per-
capita income crossed USD 1000/person
Figure 7: Demand growth on a rise Figure 8: But per capita cons is low
(mn t) ((%))
India consumption % annual grwth(RHS)
250 12
200 10
900
8
150
700
6
100
4 500
50 2 300
0 - 100
FY92 FY97 FY02 FY07 FY12 E
-100
China Japan Europe World US Asia (ex India
Per capita consumption China)
Source: Deutsche Bank Source: Deutsche Bank
Indian cement demand skewed towards housing

The demand from the housing sector is ~53% of the total Indian cement demand.
Figure 9: Housing is the major driver…

Defense
Infrastructure
4%
15%
Roads
5%
Housing
Irrigation
53%
23%
Source: Deutsche Bank, NCAER
Fear of collapse of real There are fears of a slowdown in the demand from the housing sector due to a drop in real
estate prices has had estate prices in the country. The worry is that builders may postpone construction of new
virtually no impact on buildings if the property prices were to correct.
cement demand

Figure 10: …but not property prices
Cement demand growth - RHS Housing Prices (% Change YoY)

(% Change YoY)
50% 25%
40% 20%
30% 15%
20% 10%
10% 5%
0% 0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10% -5%
-20% -10%
-30% -15%
Source: Deutsche Bank, Builders Association, CMA
Proportion of cement As Figure 10 shows, historically real estate prices have had little correlation with the cement
demand from housing sector demand growth. The cement demand growth in housing is more dependent on the number
is estimated to come down of new houses being built and repairs to houses. Even assuming a 7% growth in new houses
(lower than the GDP growth), we get incremental cement demand to be about 4-5m tonnes
.per year for the next three years.
Figure 11: New house builds in India assumed to grow at 7%, a rate lower than GDP growth
Particulars FY05 FY06 FY07e FY08e FY09e FY10e
Urban pucca houses built per year (A)- mn 1.7 1.8 2.0 2.1 2.2 2.4
Cement consumption norm per house (B)-t 28.0 28.0 28.0 28.0 28.0 29.0
Cement consumed in Urban pucca houses (C)=A*B - mnt 47.6 51.4 55.5 59.4 63.0 69.1
Rural pucca houses built per year (D)-mn 2.2 2.3 2.5 2.6 2.8 2.9
Cement consumption norm per house (E)-t 6.0 6.0 6.0 6.0 6.0 7.0
Cement consumed in rural pucca houses (F)=D*E- mn t 13.2 14.0 14.8 15.7 16.7 20.6
Repair Demand (H) 3 3 5 7 9 10
Sub-total G= C+F +H 60.8 65.4 70.4 75.1 79.6 89.7
As a proportion of total demand 52 51 51 50 49 48
Source: Deutsche Bank, National Housing
Infrastructure to give demand a big boost

Assuming 10% cement Our analysis shows that Infrastructure should be the biggest growth driver for cement
intensity in projects, the top demand in the country. If we were to look only at order books of the top eight construction
eight engineering and manufacturing equipment companies in India, we find that their combined order book
companies in India would has virtually doubled over the last two years from INR1,000bn (USD25bn) to INR1,950bn
incrementally add 4-
(USD48.75bn) for completion over the next 24-30 months.
6mtonnes of demand per
annum

Figure 12: Total order book of top 8 Indian engineering and construction companies
(Rs. Bn)
2,500
2,000
1,500
1,000
500
-
FY05 FY06 FY07
Source: Deutsche Bank, BHEL, L&T, Siemens, ABB, IVRCL, Gammon, Punj Lloyd, Nagurjana,
Assuming 10% cement intensity in structures, the order book of these 8 engineering
companies would incrementally add 4-6m tonnes of demand annually.
Infrastructure spending to propel the growth in medium term

Infrastructure spending can As seen from Figure 13, India is likely to spend ~USD211bn on infrastructure over the next
drive an incremental cement five years. These investments are much lower than the government’s estimate of USD320bn
demand of 46m tonnes over of spends over the same period. Our analysis, based on the bottom-up approach, suggests
FY07-12E that the projects are likely to kick off on time. Therefore, the infrastructure investments could
drive an incremental cement demand of 46m tonnes over FY07-12E.
Figure 13: Infrastructure demand growth buoys up cement demand

(Rs billion) Cement Infrastructure investment Demand of cement
component of
Investment (%) FY97-02 FY03-07 FY07-12e FY97-02 FY03-07 FY07-12e

Airports 4.2 66 103 250 1 2 4
Irrigation 6 574 1,452 2100 12 31 45
Ports 5 50 100 300 1 2 5
Power - 866 1452 2400 13 19 36
Thermal 2 475 820 1100 3 6 8
Hydel 7 351 432 1000 9 11 25
Nuclear 3 40 200 300 0 2 3
Railways 4.2 464 606 800 7 9 12
Telecom 1 801 870 870 3 3 3
Tourism 5.5 6 29 30 0 1 1
Urban infrastructure 6 586 1,379 1700 13 30 36
Total 3,413 5,991 8,450 49 96 142
Source: Deutsche Bank, Planning Commission, NICMR
Pre-election spends can spice up demand growth

As seen in Figure 14, the ´Election effect´ has by and large pushed cement demand ahead of
the trend line. National elections are scheduled for September 2009 and several state

assembly elections are lined up for the next two years. This could spice up the total demand
growth in India.
Figure 14: ´Election effect´ to boost cement demand
Average growth in last 3 years Election year growth

(% YoY)
25
Growth can be
20 higher in FY10
Higher base in than estimated
15
2003
10
0
2002 2003 2004 2004 2005 2006 2009e
assembly assembly assembly national assembly assembly national
Source: Deutsche Bank
Pan-India cement demand to grow at 10% CAGR over FY07-10

Based on our sectoral outlook, we have marginally revised our demand growth assumptions
in India to 10% from 9%. The key reasons are:
(1) Stronger-than-expected order book of Indian construction and engineering companies
(2) No slowdown seen in construction of houses at important consumption centers
Figure 15: Robust demand growth to continue
(Mn tonnes) Domestic demand Demand growth rate - RHS

(%)
220 11%
200
10%
180
9%
160
8%
140
7%
120
100 6%
Source: Deutsche Bank, CMA
On a regional basis we expect North and West to lead the demand growth trends in India.
While South could also do well, the skewed nature of projects in North and West makes us
believe that demand growth in South could be a shade lower than other regions.

Figure 16: Regional demand growth assumptions

Regions FY06 FY07 FY08e FY09e FY10e CAGR (%) FY07-10e Remarks
North 27.1 29.9 33.4 37.0 41.1 11 Infrastructure projects like Delhi Airport, 15000MW hydro
projects to drive demand growth
East 22.6 23.9 26.2 28.8 31.6 10 Recent pick –up in infrastructure projects to drive growth
West 25.7 28.7 31.8 35.2 39.0 11 Urban infrastructure and state spends driving demand
South 37.6 43.5 47.9 52.7 57.9 10 Demand driven mainly by high income levels of population
Central 20.6 22.4 24.2 26.1 28.2 8 Elections, irrigations would act as triggers for demand
All India 133.9 148.9 163.8 180.3 198.3 10
y-o-y chg (%) 9% 11% 10% 10% 10%
Source: CMA, Deutsche Bank

Deficit to continue till 1HFY10

Estimates corroborate deficit forecasts till H1FY10/CY09
Our estimates show that the Indian cement sector will face a deficit scenario till
1HFY10/CY09. Figure 17 summarizes our estimates for cement demand and supply, and
utilization for the next three years.
Figure 17: Cement deficit till CY09

Year Net Clinker Additions in Clinker Clinker Cement : Cement Domestic Exports Exports Surplus /
capacity at year (mnt) Utilisation - Utilisation - Clinker Production Demand (mnt) cements clinker (Deficit)
start of year existing new units (%) Ratio(x) (mnt) (mnt) (mnt)
(mnt) units (%)
FY99 81 7 84 40 1.19 81.7 79.2 2.06 1.5 0.4
FY00 87 2 97 40 1.11 94.2 91.3 1.95 1.2 1.0
FY01 89 5 89 40 1.16 93.6 88.5 3.14 2.0 1.9
FY02 95 12 83 40 1.27 102.4 96.0 3.38 1.8 3.1
FY03 107 5 88 40 1.17 111.4 107.2 3.47 3.5 0.7
FY04 112 5 93 40 1.12 117.5 112.8 3.38 5.6 1.3
FY05 117 6 93 40 1.16 127.6 122.9 4.07 5.92 0.6
FY06 123 5 95 40 1.22 141.8 135.6 6.00 3.15 0.3
FY07 127 4 92 60 1.28 155.7 149.0 5.87 3.15 0.8
FY08e 131 6 91 60 1.29 162.0 163.9 5.57 3.15 (7.4)
FY09e 138 30 94 40 1.26 176.5 180.3 5.57 3.15 (9.3)
FY10e 167 18 90 40 1.30 206.8 198.3 5.57 3.96 3.0
Lack of planned While deriving our estimates for utilization levels, we are faced with the daunting task of
maintenance has resulted in trying to figure out the threat of forced outages faced by existing cement capacities. Figure
forced plant outages, risking 18 shows that the cement companies, except in South and East India, have skipped the
utilization levels of existing required one-month shutdowns for planned maintenance.
plants
Figure 18: Plants skip desired maintenance shutdowns
(%)
FY06 FY07
110%
105%
100%
95%
90%
85%
80%
75%
70%
65%
60%
North South East West Central

So we believe that existing plants may find it difficult to keep pace with demand growth.
While it is difficult to pinpoint the exact impact of such problems, the following can happen -
1. Have more forced outages of clinker units :Since almost all units are skipping the
required shut-downs for maintenance schedules, there have been increasing instances
of shut-downs due to breakdowns
2. Grinding units working at 22 hours/day versus 16 hours/day stated by norms. We

do not know how long this would continue before outages become widespread.
3. Lack of contractors to undertake O&M as labor force has been shifted to greenfield
capacities.
Based on our demand-supply analysis, cement companies will have to work at 90%+
utilisation levels for the next three years. Our worry is that if things aggravate, the demand
itself could slow down due to lack of supplies unless supplies from the Asian countries help
meet at least some cement demand in India.

Cement prices on a roll again

Data-points suggest strong price momentum to continue
Cement companies have Notwithstanding the government intervention, we are pleased that Indian cement producers
demonstrated their ability to have demonstrated their ability to pass hike in state levies to end-users. This is akin to the
pass hike in state levies to cigarette industry which has time and again demonstrated its ability to pass on the state
end-users levies. Importantly, the cement industry did not pass on the full benefit of excise reduction to
end-users thus demonstrating the current bargaining power.
We believe cement prices in India would be governed largely by the demand-supply gap and
consolidation levels in Indian markets. As seen in Figure 19, India is likely to see a deficit
scenario in cement for the next two years and a marginal surplus in FY10E.
Figure 19: Deficit to continue
(Mn tonnes) Total Despatches Production
220
Deficit ~ 5% of
200 production
180
160
140
120
100
Steady rise in consolidation

On an all India level, one would find that India has a lot to do in terms of M&A for reaching a
threshold level – wherein they could enjoy long-term sustained buying power. Currently, the
top two groups i.e. Grasim-Cemco and Holcim (ACC-Ambuja) control 45% of the country’s
cement capacity. The next largest player is India Cements, with 9.2m tonnes of capacity.
These five companies control about 48% of the effective capacity and close to 46% of the
total production. But cement being a regional business and if we were to look at the regional
level of consolidation, it is only a shade below that of Far East Asia and Europe.
We have divided the country into four regions i.e. North, South, East and West. As seen from
Figure 20the market share of the top six players in almost all regions of the country is above
70%. In fact, the North, where the top six players hold 80% of the market, looks best placed
in terms of progress on gradual consolidation. The current consolidation in the sector is only
likely to increase as most of smaller units in India may see delays in commissioning.

Figure 20: Gradual rise in consolidation
Market share of top 3 Market share of next 3

(% market share)
90
80
70
60
50
40
30
20
FY02 FY04 FY07 FY02 FY04 FY07 FY02 FY04 FY07 FY02 FY04 FY07
North East West South
Source: CMA,Deutsche Bank
Consolidation in the sector

Our estimates are based on the assumption that the pan-India average price will be Rs235
to rise as small cement
per 50kg bag in FY08E and Rs245 per 50 kg bag in FY09E.
players find difficulty in
ramping up production from
new units
Figure 21: Our assumptions factor in price increase lesser than inflation
Rs /50 kg bag All India cement prices(INR/bag)
290
270
250
230
210 Current and forecasted

price range
190
170
150
Historical price range
130
110
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Q3FY07
Q4FY07
H1FY07
Q1FY08e
Q2FY08e
Q3FY08e
Q4FY08e
Mar-09e
Mar-10e

Price estimates lower than landed cost of imports

Our estimates for cement prices look realistic as we assume cement prices are at a discount
to landed cost of imports. Historically in India, we have seen that commodity need not
always be priced lower than landed cost of imports. In times of tight utilization, commodity
prices can trade at a premium to landed cost of imports.
Figure 22: Domestic prices have been lower than landed cost of imported cement
Landed cost of imported cement Domstic prices

(Rs. per tonne)
6,000
5,000
4,000
3,000
2,000
FY04 FY05 FY06 FY07 FY08e FY09e FY10e
Source: Deutsche Bank, CMA, Company

Asymmetric margin
improvement
Cost pressures to differentiate companies’ earnings
International coal prices have hit a 10-year high though domestic coal prices have hardly
moved up.
Figure 23: Rising international coal prices
Imported Coal - SA Baltic Dry Index

(INR/t)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
1HCY03
2HCY03
1HCY04
2HCY04
1HCY05
2HCY05
1HCY06
2HCY06
1HCY07
Source: Deutsche Bank, Bloomberg
As seen in Figure 23, the players who have used international coal got a double-whammy due
to the coal and freight costs.
Currently, the domestic coal prices are at a 40-45% discount to landed cost of imported coal
(adjusted for the calorific value). The usage pattern of domestic and international coal is
mainly driven by plant locations and coal mine linkage.
Figure 24: Coal usage pattern

Companies Proportion of International coal use (%) Prop. of Domestic coal/lignite use (%) Pet coke usage (%)
Associated Cement Cos. Ltd. 15 85 0

Ambuja Cements Ltd. 40 60 0
Grasim Industries Ltd. 30 30 40
India Cements Ltd. 70 30 0
Shree Cement Ltd. 20 30 50
UltraTech Cement Ltd. 40 60 0
Source: Deutsche Bank, Company
At this juncture, companies with domestic coal linkages would be at an advantage vis-à-vis
those tied up with supplies of imported coal. ACC, with the highest proportion of usage of
domestic coal, is also likely to report the maximum increase in EBITDA margins.

Figure 25: EBITDA margins (FY05- FY10E)

Company FY05 FY06 FY07 FY08e YoY Change FY09e YoY Change FY10e YoY Change
(bps) (bps) (bps)
Associated Cement Cos. Ltd.# 16.9 18.2 29.4 38.5 912 41.2 264 36.7 (449)
Ambuja Cements Ltd.# 30.3 34.9 41.6 666 47.1 554 39.6 (747)
Grasim Industries Ltd. 24.2 24.4 30.4 32.9 249 36.7 379 31.8 (488)
India Cements Ltd. 12.8 17.4 32.8 37.9 511 36.3 (156) 29.0 (731)
Shree Cement Ltd. 29.0 29.4 46.3 47.8 150 50.3 257 40.7 (963)
UltraTech Cement Ltd. 14.0 17.9 30.0 35.1 505 41.2 618 37.6 (363)
Source: Deutsche Bank, Company, #Dec year ending, CY06=Mar 07
Grasim and Shree Cement Limited will be in a relatively advantageous position as both the
companies use pet coke, which is insulated from global freight cost movements and is more
dependent on crude oil prices.
There could be cost savings accruing to players who are investing in lignite/coal-based power
plants in lieu of furnace oil based DG sets. UltraTech Cemco is implementing a 92MW lignite-
based power plant, while Grasim is commissioning a 95MW thermal power plant.
Apart from the energy cost savings, companies are also looking at improving their distribution
efficiencies. The lead distance for most cement players would also shrink as most cement
players start looking at regional markets for better profitability. These savings could reduce
the freight costs. Finally, the discount between trade sale and non-trade sale would also
come down. Broadly, for the industry, this is as important as the price rise.

Valuations are attractive

Stocks yet to touch Jan-07 levels
Indian cement stocks have rebounded sharply after the Indian finance minister stated that
there was no price freeze in the sector. The stocks have risen by 20-25% over the last two
weeks; but are still below the Jan-07 levels.
Figure 26: Performance of cement stocks vs BSE Sensex
ACC Ambuja Cem Grasim Ultratech

India Cem Shree Cem Sensex
320
290
260
230
200
170
140
110
80
Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07
Source: Deutsche Bank, Bloomberg
Figure 27 shows that the impact of the government’s statements on stock prices has
lessened.
Figure 27: Government statements have increasingly lesser impact on stock performance
Date Event Abs Perf of DB cement Rel perf of DB Remarks
Index (%) cement Index (%)
One day Three One day Three
days days
22nd Jan 07 Imports duties on cement cut to zero from 12.5% (5.5) (5.0) (4.3) (5.6) Biggest single-day correction
28th Feb 07 Govt raises excise duty on higher priced cement (2.6) (6.2) (4.3) (2.2) Biggest three-day correction
2nd March 07 Cement prices rise higher than incremental excise duties (2.3) (4.7) 1.4 (2.3) Cement stocks o/p market
6th March 07 Industry Minister (IM) asks manufacturers to cut prices (4.3) (5.2) (3.4) (6.7) Pains seen in sector
7th March 07 First meeting of cement manufactures and FM 5.1 (4.6) 1.4 (7.1) Expectations of agreement brings
relief
9th March 07 IM and manufactures agree for a one-year price freeze (3.7) (2.7) (3.8) 0.0 Fears of earnings downgrades
19th March 07 FM asks cement industry to reduce prices 3.3 1.3 2.8 (3.9) Surprisingly stocks end positive
22nd March 07 Second meeting of FM and cement manufactures (0.7) (2.8) (0.5) 0.4 Deadlock remains
25th March 07 Second meeting of industry minister and cement (1.0) (2.0) 0.2 0.3 Both sides ask for concessions
manufactures
3rd April 07 FM exempts domestic levies on imported cement (1.4) 3.7 (2.7) (0.7) Few stocks end positive
6th April 07 Manufacturers say one-year price freeze no longer valid 3.7 3.4 1.2 0.8 Stocks react positively
7th April 07 Press reports of imports of cement from Pakistan 3.7 3.4 1.2 0.8 Stocks react positively
3rd May 07 Introduction of three-tier excise duty structure (0.2) (0.8) 0.79 0.22 Few stocks end positive
27th June 07 FM clarifies that there is no price freeze 6.9 7.6 6.4 6.0 Biggest single-day gains
Source: Deutsche Bank, Bloomberg * Bench –marked the DB cement index to BSE_30

Our estimates for FY09e are now 30-100% higher than consensus
Based on our new price and volume estimates, our earnings estimates are significantly above
the consensus. We believe our forecasts are realistic and factor in inflationary impact of coal
and freight costs. Also, our pan-India cement prices for FY08E are estimated at 14% higher
than FY07 and 3-4% higher for FY09E over FY08E cement prices. This looks conservative in
view of the tight demand–supply scenario in the country.
Figure 28: DB vs Consensus estimates

Company ---Consensus EPS*---- ----DB EPS----- --------Variance (%) -------
FY08 FY09 FY08 FY09 FY08 FY09
ACC# 70.3 67.5 93.6 114.1 33 69

GACL# 9.8 9.4 10.1 13.2 3 41
Grasim 209.1 239.1 294.8 394.2 41 65
India Cement 22.0 19.9 28.9 27.0 32 35
Shree Cement 119.5 132.1 130.9 212.9 10 61
Shree Cement Cash EPS 183.3 223.8 234.2 299.0 28 34
UltraTech 70.8 71.2 97.8 144.4 38 103
Source: Deutsche Bank, # Dec year ending, CY06=FY07, *w.e.f 1st April 07
Valuations at discount to the region

Indian companies are trading at a discount to global peers. We believe that cement stocks
will see superior earnings growth and RoE, resulting in a re-rating of stocks.
Figure 29: Comparative valuations of Indian companies vs global peers

9-Jul-07 ------EPS (INR)----- -------P/E (x)-------- ---EV/Ebitda (x)---- --EPS Growth (%)--
Company Currency Price (INR) FY08e FY09e FY08e FY09e FY08e FY09e FY08e FY09e
Indian Companies
Associated Cement Cos. Ltd. INR 1,046 92 112 11 9 7 5 63 26
Grasim Industries Ltd. INR 2,765 304 412 9 7 6 4 37 34
Ambuja Cements INR 132 10 13 13 10 8 6 19 41
India Cements Ltd. INR 222 29 27 8 8 5 4 37 -7
Shree Cement Ltd. INR 1,334 131 213 10 6 5 3 158 63
UltraTech Cement Ltd. INR 893 98 144 9 7 7 4 34 53
Average of Indian Companies 11 8 6 4
Global Companies
Adelaide Brighton AUD 4 0.2 0.2 17 15 10 9 11 13
Anhui Conch Cement HKD 52 2 3 30 20 17 13 40 48
Cimsa TRY 10 1 1 8 8 6 5 16 4
CRH PLC EUR 38 2 3 15 14 9 8 10 10
Holcim PHP 8 0 1 22 14 10 7 91 55
Holcim Ltd CHF 137 9 10 15 13 7 6 7 9
Indocement IDR 6,300 277 422 23 15 11 8 72 53
Lafarge EUR 135 9 11 15 13 8 7 12 20
Semen Gresik IDR 51,300 2,743 3,617 19 14 10 7 26 32
Siam Cement THB 292 22 22 13 13 9 9 -14 -1
Average of Global Companies 16 13 9 8
Source: Deutsche Bank estimates, Company, #Dec 06 considered as Mar 07, Global companies year ending is Dec; these companies are not covered by the author of this report, for further details please see
https://gm.db.com/Equities

We believe that these advantages will unfold in the next two years, leading to accelerated
earnings growth.
Target multiples assumed at discount to region and historical

band
As shown in Figure 30, EPS growth rates of Indian cement companies are forecasted to be
better than those in the region and across the globe. Despite such high growth in earnings
and higher RoE/RoCE, we have assumed that Indian cement companies would trade at 12-
14X PER and 7-8x EV/EBIDTA one-year forward, which is a marginal discount to that of
international peers. This is also at the lower end of 12-year trading bands of the stocks.
Figure 30: Target price summary

Company Name Target Price Recommendation Target PER (x) Target EV/E (x) EV/Ton USD Prices as on 9th Upside /
July Downside (%)
ACC# 1,350 BUY 14.0 8.0 283 1,046 29

Ambuja Cements# 158 BUY 14.0 8.0 212 132 20
Grasim 3,320 BUY 14.0 NA 161 2,765 20
India Cement 300 BUY 12.0 7.5 225 222 35
Shree Cement 1,750 BUY 12.0 7.5 209 1,334 31
Ultratech 1,140 BUY 12.0 7.5 189 893 28
Source: Deutsche Bank, Dec year ending, CY06=FY07
Top picks are ACC and Ambuja Cement in large caps and Shree Cement and India Cement
among mid-caps. Figure 31 gives a snapshot of key financials of cement companies under
our coverage. Shree Cement and Grasim will likely have the highest volume growth. Ambuja
Cements and UltraTech will have the highest growth in realisations.
Figure 31: Key financial metrics

Company Name Volume Growth Avg. Realization ----EBITDA Margin (%) ---- EBITDA/t ----------RoE (%) ---------- ----------RoCE (%) --------
FY08
CAGR-FY07-09e CAGR-FY07-09e FY07 FY08e FY09e USD FY07 FY08e FY09e FY07 FY08e FY09e
ACC# 8 9 29 39 41 34 41 47 42 33 37 35
Ambuja Cements# 13 21 43 47 40 34 36 38 24 27 29 18
Grasim 16 7 30 33 37 36 31 31 31 22 25 27
India Cement 7 9 33 38 36 30 22 29 22 17 28 25
Shree Cement 33 14 46 48 50 35 46 69 67 22 45 60
Ultratech 14 17 30 35 41 31 56 55 55 36 40 46
Source: Deutsche Bank, #Dec year ending, CY06=FY07

GEMS: Asia India

11 July 2007
ACC Buy
Price at 12 Jul 2007 (INR) 1,072.40
Reuters: ACC.BO Bloomberg: ACC IN Price target - 12mth (INR) 1,350.00
52-week range (INR) 1,172.60 - 704.65
Top pick in the sector BSE 30
Key changes
14,911
Price target 886.00 to 1,350.00 Ç 52.4%

Sales (FYE) 68,232 to 74,099 Ç 8.6%
Op prof margin (FYE) 31.3 to 33.7 Ç 7.7%
Raising TP to Rs1,350(+30% upside) Net profit (FYE) 16,008.8 to 17,116.0 Ç 6.9%
Our new EPS estimates for ACC are Rs93.6/share (+8% vs previous estimate) in Price/price relative
CY07 and Rs114/share (+18% vs previous estimate) in CY08. These are 33%
(CY07E) and 69% (CY08E) higher than consensus. We assume cement prices in 200 1500
CY08 would be higher by ~9.6% than those in CY07. Despite, the recent run-up, 150
1000
the stock is trading at the bottom of its historical valuation band. We reiterate Buy
100
with a new TP of Rs1,350 which implies a CY08E PE of 11.8x. 500
50
Earnings to benefit from tight cement supply scenario 0 0
We forecast realizations for ACC to rise by 8.5% YoY in CY07e and a further 13%
YoY in CY08e. Accordingly, ACC could report net sales CAGR of 21% in CY06-08E
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
driving earnings CAGR of 32% over the same period. ROE is estimated to rise to Rel. to BSE 30 (L.H. Scale)
47% in CY07E. ACC (R.H. Scale)
ACC’s margin expansion could be the best in Indian cement industry Performance (%) 1m 3m 12m
We estimate ACC to report 1,176bps expansion in margins for CY06-08E which is Absolute 32.9 47.7 28.4
BSE 30 5.5 13.7 36.4
amongst the highest in India driven by an insignificant impact from the rise in
imported coal prices as ACC’s proportion of purchase of imported coal versus Stock data
domestic coal is amongst the lowest in peer group. In addition, the margin Market cap (INRm) 199,894
expansion could be even better if the following were to pan out: (1) Further Market cap (USDm) 4,947
narrowing of the differential between retail and wholesale prices and (2)Further Shares outstanding (m) 186.6
decline in landed cost of coal as freight cost for coal shipments could decline. Major shareholders –
Free float (%) 65
TP of Rs1,350 based on 3-year average PE and EV/EBITDA multiples Avg daily value traded (USDm) 6.6
Our target price assumes an average PE multiple of 14x FY08E and EV/EBITDA of
8.0x FY08E. Our target PE and EV/EBITDA multiples are based on the average PE Key indicators (FY1)
ROE (%) 47.4
and EV/EBITDA of the last three years and are in the lower quartile of the 10-year Net debt/equity (%) -12.9
forward valuation band. At our target price, the implied EV/t of USD232 is Book value/share (INR) 228.84
reasonable considering that the stock traded in the USD250-450/t range in the Price/book (x) 4.69
previous up-cycle. Key risks are lower-than-expected utilization levels and higher- Net interest cover (x) 34.7
Operating profit margin (%) 33.7
than-expected energy costs. Note that a 5% rise in energy cost could lower
earnings by ~1%. Also, a 5% lower-than-expected realization can result in a 13%
drop in earnings.
Forecasts and ratios
Year End Dec 31 2005A 2006A 2007E 2008E 2009E
Sales (INRm) 32,207.0 58,034.8 74,099.0 84,465.5 86,725.0
EBITDA (INRm) 5,356.8 16,233.5 27,508.0 33,625.2 30,550.2
Reported NPAT (INRm) 2,168.3 10,119.7 17,116.0 20,932.4 18,687.0
Reported EPS FD(INR) 11.84 55.02 91.73 112.18 100.15
DB EPS FD(INR) 11.84 55.02 91.73 112.18 100.15
OLD DB EPS FD(INR) 11.56 56.91 83.72 93.17 0.00
% Change 2.4% -3.3% 9.6% 20.4% –
DB EPS growth (%) -32.5 364.7 66.7 22.3 -10.7
PER (x) 35.5 15.4 11.7 9.6 10.7
EV/EBITDA (x) 16.2 9.1 6.9 5.4 5.9
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
Source: Deutsche Bank estimates, company data
1
DB EPS is fully diluted and excludes non-recurring items
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the
year end close

Model updated:11 July 2007

#$% &' ())& ())* ())+ ()), ())-% ()).% ())/%

DB EPS (INR) 10.13 17.53 11.84 55.02 91.73 112.18 100.15
India P/E (x) 17.5 15.1 35.5 15.4 11.7 9.6 10.7
DB EPS growth (%) ¯ 73.0 -32.5 364.7 66.7 22.3 -10.7

EPS FD (INR) 10.13 17.53 11.84 55.02 91.73 112.18 100.15
P/E FD (x) 17.5 15.1 35.5 15.4 11.7 9.6 10.7
CFPS (INR) 25.79 10.73 30.73 127.18 72.83 124.43 126.11
Free CFPS (INR) 14.79 -19.84 6.52 98.47 44.44 59.96 45.56
Reuters Code ACC.BO P/CFPS (x) 6.9 24.6 13.7 6.7 14.7 8.6 8.5
DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 12 July INR BV/Share (INR) 64.79 78.95 108.56 158.35 228.84 310.81 368.72
1,072.40 Price/BV (x) 3.8 4.3 4.9 6.9 4.7 3.5 2.9
Price Target INR Weighted average shares (m) 176 183 183 184 187 187 187
Average market cap (INRm) 31,103 48,224 77,067 156,182 199,894 199,894 199,894
1,350.00
Enterprise value (INRm) 42,649 60,435 87,010 148,343 188,963 181,886 179,738
Web Site EV/Sales (x) 1.3 1.5 2.7 2.6 2.6 2.2 2.1
http://www.acclimited.com EV/EBITDA 11.3 9.9 16.2 9.1 6.9 5.4 5.9
EV/EBIT 21.2 14.3 23.4 10.8 7.6 5.9 6.7

EV/Op. Capital (x) 1.7 2.1 2.7 5.8 5.3 4.0 3.2
Associated Cement Companies (ACC) is one of the oldest
cement companies in India. ACC`s main businesses
comprise manufacturing and marketing of cement,
0 102
ready-mixed concrete, bulk cement and refractory products. Sales revenue 32,845 39,021 32,207 58,035 74,099 84,465 86,725
Operating EBITDA 3,777 6,103 5,357 16,234 27,508 33,625 30,550
Depreciation 1,769 1,869 1,644 2,543 2,529 2,995 3,618
Amortization 0 0 0 0 0 0 0
Operating EBIT 2,008 4,235 3,713 13,691 24,979 30,630 26,932
Net interest income (expense) -929 -882 -638 -520 -720 -720 -720
Associates/affiliates 0 0 0 0 0 0 0
Investment and other income/expense 1,224 480 492 826 1,032 1,140 1,248
Exceptionals/extraordinaries 0 0 0 0 0 0 0

Income tax expense 536 657 1,399 3,877 8,175 10,118 8,773
Minorities/preference dividends 0 0 0 0 0 0 0

!
+91 22 6658 4811 manish.saxena@db.com Net income 1,767 3,175 2,168 10,120 17,116 20,932 18,687
""

34 102
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 4,535 1,958 5,627 23,392 13,589 23,218 23,532
Movement in Net Working Capital 0 0 0 0 0 0 0
Capex -1,934 -5,579 -4,433 -5,281 -5,296 -12,030 -15,030
Free cash flow 2,600 -3,622 1,195 18,110 8,293 11,188 8,502
Other investing activities -2,542 553 -71 -2,093 0 0 0
Equity raised/(bought back) 240 142 76 22 -252 -2 -2
Dividends paid -433 -275 -855 -733 -3,203 -2,816 -4,694
Net inc/(dec) in borrowings 3,593 4,229 -4,861 -3,003 288 0 0
Other financing cash flows 0 0 663 -217 -1,247 -1,292 -1,658
Total cash flows from financing 3,401 4,096 -4,977 -3,930 -4,413 -4,110 -6,354
Net cash flow 3,459 1,028 -3,853 12,087 3,880 7,078 2,148
Movement in net debt/(cash) 134 3,201 -1,007 -15,090 -3,592 -7,078 -2,148

102
Cash and other liquid assets 3,807 4,835 981 13,068 16,948 24,026 26,173
Tangible fixed assets 24,721 28,431 31,220 33,959 36,726 45,762 57,173
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Associates/investments 3,820 3,267 3,338 5,431 5,431 5,431 5,431
Other assets 9,751 11,564 13,184 13,861 19,296 21,241 21,665
Total assets 42,099 48,097 48,723 66,319 78,401 96,459 110,442
Interest bearing debt 19,173 20,312 14,262 10,660 11,448 11,448 11,448
Other liabilities 11,264 13,178 14,786 26,112 24,253 27,016 30,194
Total liabilities 30,437 33,491 29,048 36,771 35,701 38,465 41,642
Shareholders' equity 11,662 14,606 19,675 29,547 42,700 57,995 68,801
Minorities 0 0 0 0 0 0 0
Total shareholders' equity 11,662 14,606 19,675 29,547 42,700 57,995 68,801
Net working capital -1,173 -366 -818 -9,588 -3,012 -1,874 -2,660
Net debt/(cash) 15,366 15,478 13,281 -2,408 -5,500 -12,577 -14,725
Capital 27,028 30,084 32,956 27,139 37,200 45,417 54,076

Sales growth (%) NM 18.8 -17.5 80.2 27.7 14.0 2.7
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 11.5 15.6 16.6 28.0 37.1 39.8 35.2
32.9% 43.4% 28.4%
EBIT Margin (%) 6.1 10.9 11.5 23.6 33.7 36.3 31.1
52-week Range INR 704.65 - 1,172.60 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 199,894 m ROE (%) 16.7 24.2 12.7 41.1 47.4 41.6 29.5
USD 4,947 m Return on capital (%) 13.3 13.3 8.3 34.9 54.8 51.9 38.6
Operating return on capital (%) 8.2 11.0 8.5 33.3 57.4 53.0 37.1
Company Identifiers
Capex/sales (%) 5.9 14.3 13.8 9.1 7.1 14.2 17.3
Bloomberg ACC IN
Capex/depreciation (x) 1.1 3.0 2.7 2.1 2.1 4.0 4.2
Cusip ¯ Net debt/equity (%) 131.8 106.0 67.5 -8.2 -12.9 -21.7 -21.4
SEDOL 6155915 Net interest cover (x) 2.2 4.8 5.8 26.3 34.7 42.5 37.4

Investment thesis
Outlook
We rate ACC a Buy due to the following: (1) We expect the company to report earnings
CAGR of 32% over CY06-08E and ROE of 47% in CY07E. (2) Net cash balance sheet with
CY07E RoE at 47% and free cash flow yield of ~6-10% in the forecast period. (3) Our
estimates are 33% (CY07) and 69% (CY08) higher than consensus and we expect the
consensus earnings upgrade to drive the stock outperformance. (4) Benefits flowing from
superior bargaining power driven by our forecast of tight utilization levels over FY07-10E.
(5) Our revised target price of Rs1,350 per share offers 30%upside potential.
Note our new estimates are based on revision our pan-India cement price forecast for CY07
to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (+9.6% YoY). ACC
could also report the maximum jump in margins as its proportion of use of Indian coal is the
highest amongst peers. Indian coal is at a 35-40% discount to landed cost of imported coal.
Valuation
We have thus used an average PE multiple of 14x (earlier assumed 10xCY07E) FY08E (Mar)
and 8.0xEV/EBITDA (earlier assumed 7xCY07E) FY08E (Mar) to arrive at the target price of
INR1,350/share. It is important to note that these multiples are similar to those used by us
prior to risk to long-term earnings emerging from threats from government intervention in
pricing cement in India. This concern stands reduced due to the following: (1) Indian cement
companies were successful in demonstrating that they can pass on government levies to
end-users and (2) Indian finance minister has stated that there is no price-freeze and the
prices of cement will be dictated purely by demand and supply forces.
Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for
cement prices. However, as seen from the trading bands below, the stock is trading virtually
at the bottom – an anomaly which we expect the market to correct. We note that our target
multiples are at the bottom of quartile of 10-year price bands and are also lower than the
current valuations of the regional peers.
Figure 32: 12-month forward rolling P/E bands Figure 33: 12-month forward rolling EV/EBITDA band
Price (INR) 6 9 12 15
Price (INR) 10 12 15 17
2,700
1,800
2,400
1,600
2,100
1,400
1,200 1,800
1,000 1,500
800 1,200
600 900
400 600
200 300
0
0
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
We note that EV/t at our target price of Rs1,350 is USD232 in CY08E. This looks reasonable
vis-à-vis the position of the cycle. In the previous up-cycle (in 1994-1996), the stock traded in

the range of USD250-450/t when the EBITDA/t was 10-16USD/t. In the current up-cycle, the
EBITDA/t is likely to be in the region of USD 30-34/t. Note that post-capex free cash for the
next three years is 33% of the market capitalization. This could be used for a higher dividend
payout. In such a case, dividend yield can go up to ~4%. Also the ROE at 47% should be
amongst the best in the industry.
Figure 34: 12-month forward EV/t (x) and EBITDA/t (x)

250 EV/Ton - LHS Ebitda/Ton - RHS 35
30
200
25
150
20
15
100
10
50
5
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Source: Bloomberg company data, Deutsche Bank
Risks
ACC is a high-beta stock and any risk on the liquidity front would impact stock returns. The
key variables impacting the earnings are:
(1) Assumptions on cement realizations: Our positive bias on the sector is based on
expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over
FY07-10E In case the actual demand is lower than estimates and supply greater than
estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity
analysis on our earnings models indicates that a 5% lower-than-expected price realization
reduces our earnings estimates by ~13%. On the positive side, 92% of ACC’s cement sales
are that of blended cement. The price of blended cement is about 3-5% lower than that of
ordinary cement. As utilization rates pick up, difference between the two categories of
cement would dip and ACC would stand to gain the most.
(2) Assumptions on coal prices: Indian base coal prices have not been revised for the last
two years. There is a possibility of the revision of coal prices sooner than later. We have
assumed 11% CAGR rise in coal cost for the next three years. Any increase over and above
and our base case estimates would impact the company’s earnings. Based on our sensitivity
analysis we estimate that a 5% increase in fuel cost over our estimates would depress the
earnings by ~1% in CY07E and ~2% in CY08E.
Figure 35: Sensitivity analysis

CY2007e CY2008e CY2009e
Base case estimates-EPS(Rs/share) 93.6.0 114.1 102.0

If cement prices are 5% higher than estimates 105.9 128.1 116.5
Chg with respect to base case estimates (%) 13.1 12.3 14.2
If cement prices are 5% lower than estimates 81.4 100.0 87.6
Chg with respect to base case estimates (%) (13.1) (12.3) (14.2)
If fuel prices are 5% higher than estimates 92.5 112.2 99.9

Assumptions and forecasts

Key assumptions
Based on our revised price forecasts, we expect average realisation to be higher by 8.5% for
CY07E and by 13% for CY08E over our earlier estimates. It is important to note that we have
not changed our sales volume assumptions for the next two years. Figure 36 underlines our
main assumptions. We have increased our cost estimates on the raw material front as ACC
has enhanced the blending ratio from 84% to 92% in FY07E.
Figure 36: Key assumptions

------------------------CY07E---------------------------- -------------------------CY08E-----------------------
Particulars Old Estimates New Estimates Change (%) Old Estimates New Estimates Change (%)
Sales volume (m tonnes) 20.52 20.52 - 21.75 21.75 -
Average realisation (INR/tonne) 3,157 3,427 8.5 3,276 3,709 13.2
Cost (INR/tonne)
Raw Material 332 382 14.9 336 397 18.1
Freight 550 500 (9.1) 578 525 (9.1)-
Power and fuel 552 537 (2.6) 565 551 (2.4)
Forecast strong earnings ahead

Our revised earnings estimates, based on higher price realizations, are 8% and 18.8% higher
than previous estimates for CY07E and CY08E respectively. We thus forecast a net sales
growth of 21% CAGR for CY06-08E, driving net profit growth of 32% CAGR over the same
period.
Figure 37: Key financials at a glance

---------------------CY07E-------------------------- ------------------------CY08E----------------------
Particulars (INR mn) Old Estimates New Estimates Change (%) Old Estimates New Estimates Change (%)
Net sales 69,590 74,099 6.5 76,128 84,465 11.0

Expenditure 45,430 46,591 2.6 49,214 50,840 3.3
EBITDA 25,191 28,540 13.3 28,054 34,765 23.9
Depreciation 2,529 2,529 - 2,785 2,785 -
Interest 400 720 80.0 400 720 80.0
PBT 22,613 25,642 13.4 25,220 31,611 25.3
Tax 6,456 8,175 26.6 7,212 10,189 41.3
PAT 16,157 17,467 8.1 18,008 21,422 19.0
EPS (INR) 86.7 93.6 8.0 96.6 114.8 18.8
Ratios
EBITDA/tonne (INR) 1,158 1,391 20.1 1,217 1,427 17.3
ROE (%) (#) 44 47 345 35 42 631
RoCE (%) (#) 35 37 193 31 35 396
# indicates change in bps


GEMS: Asia India

11 July 2007
Ambuja Cements Ltd Buy

Price at 11 Jul 2007 (INR) 127.80
Reuters: ACEM.BO Bloomberg: ACEM IN
Price target - 12mth (INR) 158.00
Huge FCF- Buy

52-week range (INR) 148.40 - 99.55
BSE 30 14,911
Key changes
Price target 128.00 to 158.00 Ç 23.4%
Sales (FYE) 56,648 to 58,244 Ç 2.8%
Revising target price upwards to INR158/share (+20% upside)
Our new estimates for CY08 are 46% higher than our earlier estimates and 41% Price/price relative
higher than the consensus. Ambuja Cements has a strong balance sheet with
150 200
CY07E net cash of INR3.5bn. While operating free cash flow post-capex for next
150
three years is 23% of the market capitalization, the total free cash flow to be 100
generated in CY07E alone would be INR.44bn. This cash can be used by the 100
50
company either for a buyback or a special dividends. Also even if the parent 50
decides to make an open offer, the cost of open offer would stand greatly 0 0
reduced. Reiterate Buy with a target price of Rs158/share.
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
It’s official – the price-freeze was just a mirage Rel. to BSE 30 (L.H. Scale)
As highlighted in our sector note, we are now more sanguine on Indian tight
Ambuja Cements Ltd (R.H. Scale)
supply scenario lasting till CY09E and accordingly in line with our sector price
outlook, we have revised the cement price forecast for Ambuja by ~4% for CY07 Performance (%) 1m 3m 12m
and 21% for CY08. We note that despite fears of price-freeze, net average India Absolute 17.0 18.5 20.9
BSE 30 5.9 13.1 40.5
price has moved up by 5% over that of March 07 with about 2-3% gains coming
in the current month. Accordingly, we forecast an EPS of INR10.1 (up 10.2%) for Stock data
CY07E and INR13.2 (up 46.2%) for CY08E. Our estimates are in line with Market cap (INRm) 173,664
consensus for CY07E but 38% above consensus for CY08E. Market cap (USDm) 4,298
Shares outstanding (m) 1,517.1
Stock is trading at bottom of trading band Major shareholders –
Despite the recent run-up in the stock price, the stock is trading at the lower end Free float (%) 76
of the valuation band. Our new target price is derived by using an average of Avg daily value traded (USDm) 4.9
target P/E to 14x FY08E and target EV/E to 8x FY08E. Note these multiples are
Key indicators (FY1)
same as those used by us prior to risk to long-term earnings emerging from fears
ROE (%) 35.6
of effects of government intervention on long-term profitability. With cement Net debt/equity (%) -7.2
companies demonstrating their ability to pass on cost inflation etc to end-users, Book value/share (INR) 31.16
we believe that these concerns have mitigated. Price/book (x) 4.00
Net interest cover (x) 38.0
Key risks Operating profit margin (%) 35.9
Key risks are volatility in the cement prices and rise in fuel prices. Our sensitivity
analysis shows that a rise of 5% in power and fuel costs would impact earnings
by ~2%. Also a 5% rise/drop in cement prices would result in ~15% rise/drop in
earnings in CY07E.
Year End Jun 30 2005A 2006A 2007E 2008E 2009E
Sales (INRm) 25,970.5 63,931.3 58,243.8 69,669.5 67,981.9
EBITDA (INRm) 7,124.0 21,348.0 24,041.0 31,848.6 25,976.7
DB EPS FD(INR) 3.50 10.66 10.39 13.23 9.72
DB EPS growth (%) 48.7 204.5 -2.5 27.3 -26.6
PER (x) 15.0 7.9 12.3 9.7 13.2
EV/EBITDA (x) 9.6 5.2 6.4 4.5 5.5
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
1
2
year end close


%&' () * +)), +))- +)). +))/' +))0' +))1'
#
DB EPS (INR) 2.35 3.50 10.66 10.39 13.23 9.72
India P/E (x) 15.9 15.0 7.9 12.3 9.7 13.2
DB EPS growth (%) ¯ 48.7 204.5 -2.5 27.3 -26.6

EPS FD (INR) 2.35 3.50 10.66 10.39 13.23 9.72
P/E FD (x) 15.9 15.0 7.9 12.3 9.7 13.2
CFPS (INR) 8.09 4.76 14.73 12.47 17.26 10.64
Free CFPS (INR) 2.89 4.31 7.03 10.07 11.99 5.37
Reuters Code ACEM.BO P/CFPS (x) 4.6 11.0 5.7 10.2 7.4 12.0
DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 11 July INR 127.80 BV/Share (INR) 14.91 17.11 25.66 31.16 38.35 43.64
Price Target INR 158.00 Price/BV (x) 2.5 3.4 3.9 4.0 3.3 2.9
Weighted average shares (m) 1,259 1,350 1,434 1,517 1,517 1,517
Web Site Average market cap (INRm) 47,163 70,901 121,108 173,664 173,664 173,664
http://www.gujaratambuja.com/ Enterprise value (INRm) 49,062 68,678 110,681 153,910 144,872 143,455
! ! EV/Sales (x) 2.5 2.6 1.7 2.6 2.1 2.1
EV/EBITDA 9.1 9.6 5.2 6.4 4.5 5.5
GACL is Indias third largest cement company with a
capacity of 12.5 mn tons, Holcim, the second largest EV/EBIT 13.3 13.3 6.1 7.4 5.1 6.5
cement manufacturer in the world, bought 14.8 per cent EV/Op. Capital (x) 2.2 3.3 3.9 5.6 4.9 4.0
promoters stake in the GACL for Rs 21.4 billion
2 # 324
Sales revenue 19,621 25,971 63,931 58,244 69,670 67,982
Operating EBITDA 5,365 7,124 21,348 24,041 31,849 25,977
Depreciation 1,686 1,954 3,280 3,108 3,572 4,036
Amortization 0 0 0 0 0 0
Operating EBIT 3,679 5,170 18,069 20,933 28,276 21,940
Net interest income (expense) -784 -848 -802 -550 -515 -515
Associates/affiliates 0 0 0 0 0 0

"
Investment and other income/expense 428 746 957 957 957 957

#$ Exceptionals/extraordinaries 0 0 0 0 0 0
+91 22 6658 4811 manish.saxena@db.com Income tax expense 467 503 3,394 6,006 8,646 7,641
Minorities/preference dividends 0 0 0 0 0 0

Net income 2,856 4,566 14,830 15,333 20,072 14,742
+91 22-6658-4824 aniruddha.bhosale@db.com

56 # 324
Cash flow from operations 10,192 6,420 21,116 18,916 26,192 16,140
Movement in Net Working Capital 0 0 0 0 0 0
Capex -6,549 -606 -11,041 -3,645 -8,000 -8,000
Free cash flow 3,643 5,815 10,075 15,271 18,192 8,140
Other investing activities 907 -1,141 -2,229 -1,033 0 0
Equity raised/(bought back) 196 934 318 0 0 0
Dividends paid -1,179 -2,273 -5,259 -6,994 -9,155 -6,724
Net inc/(dec) in borrowings -4,816 -1,422 -3,670 0 0 0
Other financing cash flows 1,627 -354 2,281 1 1 1
Total cash flows from financing -4,172 -3,116 -6,331 -6,993 -9,154 -6,723
Net cash flow 379 1,558 1,515 7,245 9,038 1,417
Movement in net debt/(cash) -5,195 -2,981 -5,186 -7,245 -9,038 -1,417
#
324
Cash and other liquid assets 688 2,247 3,780 11,025 20,063 21,479
Tangible fixed assets 24,982 23,634 31,396 31,932 36,360 40,323
Goodwill 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0
Associates/investments 10,110 11,251 15,301 16,334 16,334 16,334
Other assets 4,227 5,013 7,994 10,137 10,178 10,901
Total assets 40,007 42,144 58,470 69,428 82,934 89,037
Interest bearing debt 12,697 11,275 8,654 7,604 7,604 7,604
Other liabilities 7,181 7,768 10,886 14,554 17,141 15,227
Total liabilities 19,878 19,043 19,540 22,158 24,746 22,831
Shareholders' equity 20,129 23,101 38,930 47,270 58,188 66,206
Minorities 0 0 0 0 0 0
Total shareholders' equity 20,129 23,101 38,930 47,270 58,188 66,206
Net working capital 217 757 -320 3,467 3,081 3,288
Net debt/(cash) 12,009 9,028 4,874 -3,421 -12,458 -13,875
Capital 32,137 32,129 43,804 43,850 45,729 52,331

Sales growth (%) NM 32.4 146.2 -8.9 19.6 -2.4
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 27.3 27.4 33.4 41.3 45.7 38.2
16.1% 17.7% 17.1%
EBIT Margin (%) 18.7 19.9 28.3 35.9 40.6 32.3
52-week Range INR 99.55 - 148.40 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 173,664 m ROE (%) 15.8 21.1 47.8 35.6 38.1 23.7
USD 4,298 m Return on capital (%) 14.1 16.1 40.5 35.9 45.6 30.8
Operating return on capital (%) 13.5 16.9 51.2 52.3 69.6 47.0
Company Identifiers
Capex/sales (%) 33.4 2.3 17.3 6.3 11.5 11.8
Bloomberg ACEM IN
Capex/depreciation (x) 3.9 0.3 3.4 1.2 2.2 2.0
Cusip ¯ Net debt/equity (%) 59.7 39.1 12.5 -7.2 -21.4 -21.0
SEDOL B09QQ11 Net interest cover (x) 4.7 6.1 22.5 38.0 54.9 42.6

Investment thesis
Outlook
We reiterate Buy on Ambuja Cements with a revised target price of Rs158 per share (+20%
upside). We expect the company to report earnings CAGR of ~34%over CY06-08E and ROE
of 33% and 38% in CY07E and CY08E respectively. Our earnings estimates are in line with
consensus for CY07E and 38% higher than consensus for CY08E. We expect the Indian
cement industry to operate at peak utilisation levels as new capacity commissioning is
delayed and demand continues to grow at 9-10% annually. The cement companies are
expected to report higher average realisations due to tight demand-supply scenario expected
to persist till 1HFY10/CY09. We further note that cement sales have moved from 30 days
credit to an upfront payment for next 30 days delivery. Accordingly, we have revised our pan-
India cement price forecast for CY07 to Rs227/50kg bag (4% higher than our previous
assumption) and CY08 forecast to Rs249/50kg bag (21% higher than our earlier assumption).
Note that Holcim is looking to enhance its stake in the company through all possible options.
Valuation
We have thus used an average PE multiple of 14x FY08E (earlier assumed 10x CY07E) and
8.0x FY08E EV/EBITDA (earlier assumed 7x CY07E) to arrive at the target price of
INR152/share. It is important to note that these multiples are similar to those used by us prior
to risk to long-term earnings emerging from threats from government intervention in pricing
cement in India. The concerns stand reduced due to the following: (1) Indian cement
companies were successful in demonstrating that they can pass on government levies to
end-users and (2) Indian finance minister has stated that there will be no price freeze and the
prices of cement will be dictated purely by demand and supply forces. Following this, we
believe the overhang of government influence on long-term profitability stands largely abated.
cement prices. However, as seen from the trading bands below, the stock is trading virtually
at the bottom – an anomaly which we expect the market to correct.
Price (INR) 10 14 18 22 Price (INR) 6 8 10 12

300 300
250 250
200 200
150 150
100 100
50 50
0 0
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07

Ambuja cement has historically traded at EV/t of above USD250 (1994-96) at the time when
EBITDA/t was above USD23 (1994-96). Recent concerns on long-term profitability have
impacted stock performance. We expect the EBITDA/t to be above USD34. for the next three
years. Hence EV/t of USD 212 at our target price of Rs158/share looks reasonable
considering the position of the cycle.
Figure 40: 12-month forward EV/ton (x) and EBITDA/ton (x)
EV/Ton Ebitda/Ton
550 38
450 33
28
350
23
250
18
150 13
50 8
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Source: Bloomberg, company data, Deutsche Bank
Risks
Ambuja Cements is a high-beta stock and any risk on the liquidity front would impact the
stock returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If actual
demand is lower than estimates and supply greater than estimates, utilization rates could be
lower resulting in a risk to our target price.
Our sensitivity analysis indicates that a 5% lower-than-expected price realization reduces our
estimates by ~15% in CY07E and ~13.4% in CY08E and vice versa. We have assumed a
10% CAGR in coal cost for the next three years. Any increase greater than 10% would have
an impact on company’s earnings. Based on our sensitivity analysis, we estimate that a 5%
increase in fuel cost over our estimates would depress the earnings by ~2% both in CY07E
and CY08E.

CY07 CY08 CY09
Base case estimates-EPS 10.1 13.2 9.7
Source: Company data, Deutsche Bank


Key assumptions and forecasts
As stated earlier, we expect Ambuja Cements to report a 13% CAGR in sales volume over
CY06-09E. This is higher than the industry growth rate assumption of 9% pa. In case of GACL
the domestic realizations are in line with sectoral assumptions. Note that we have revised our
pan-India cement price forecast for CY07 to Rs227/50kg bag (2.3% higher than our previous
assumption) and CY08 forecast to Rs249/50kg bag (17% higher than our earlier assumption).
Based on our revised price forecasts, we expect average realisation to be higher by 3% for
CY07E and by ~16% for CY08E over our earlier estimates. We have made only minor
changes to our sales volume assumptions. For cement exports, we have increased our
assumption of FOB price to USD55/t from USD48/t for CY07E. Our assumptions for export
prices factors in appreciation of the rupee.

Particulars CY07e CY08e CY09e
Old New Chg (%) Old New Chg (%) Old New Chg (%)
Estimates Estimates Estimates Estimates Estimates Estimates
Key Assumptions
Sales volume (mn tonnes) 17.6 17.9 1.9 19.4 19.7 1.9 21.3 21.7 1.9
Average realisation (INR/tonne) 3,577 3,759 5.1 3,509 4,052 15.5 3,294 3,658 11.1
Domestic realisation (INR/tonne) 3,740 3,876 3.6 3,646 4,158 14.0 3,400 3,726 9.6
Export realisation 2,146 2,255 5.1 1,878 2,255 20.1 1,788 2,255 26.1
USD : INR 45 41 (8.3) 45 41 (8.3) 45 41 (8.3)
Cost (INR/tonne)
Raw material 193 120 (38.0) 188 119 (36.8) 182 112 (38.7)
Freight 604 564 (6.5) 619 580 (6.3) 637 597 (6.3)
Power 168 175 3.9 170 170 (0.2) 176 176 (0.2)
Coal Prices( INR/t) 3,857 4,040 4.7 4,040 4,444 10 4,233 4,888 15.5
Figure 43: Key forecasts

Particulars CY07e CY08e CY09e
INR mn Old New Chg (%) Old New Chg (%) Old New Chg (%)
Estimates Estimates Estimates Estimates Estimates Estimates
Key forecasts
Net sales 56,648 58,244 2.8 60,812 69,670 14.6 62,206 67,982 9.3
Expenditure (35,374) (34,203) (3.3) (39,454) (37,821) (4.1) (44,027) (42,005) (4.6)
EBITDA 22,232 24,998 12.4 22,314 32,806 47.0 19,136 26,934 40.7
Depreciation (3,108) (3,108) - (3,572) (3,572) - (4,036) (4,036) -
Interest (524) (550) 5.0 (400) (515) 28.6 (339) (515) 52.1
PBT 18,599 21,339 14.7 18,342 28,719 56.6 14,761 22,383 51.6
Tax (4,681) (6,006) 28.3 (4,616) (8,646) 87.3 (3,721) (7,641) 105.3
PAT 13,919 15,333 10.2 13,726 20,072 46.2 11,040 14,742 33.5
EPS (INR) 9.2 10.1 10.2 9.0 13.2 46.2 7.3 9.7 33.5
Ratios
EBITDA/tonne (INR) 28 31 10.4 26 37 44.3 20 28 38.2
EV/tonne (USD) 249 212 (14.9) 242 194 (20.3) 156 175 12.1
ROE (%) (#) 32.6 35.6 299 27.3 38.5 1,074 19.4 23.7 432
RoCE (%) (#) 24.7 26.6 197 21.1 28.5 715 15.8 18.5 272
Source: Deutsche Bank, # indicates change in bps

Based on our assumptions, Figure 43 presents a financial snapshot of the company. Our
revised estimates based on higher price and volume estimates show earnings estimates
rising by 8.6% for CY07 and 57.6% for CY08 over our earlier estimates. We forecast a net
sales growth of 17% CAGR over CY06-08E and a net profit growth of 34% CAGR over CY06-
08E.
Based on our revised forecast, we believe Ambuja Cements is likely to record a significant
improvement in its operational performance due to better prices and lower costs. The key
contributors being:
Rise in cement prices in line with assumptions of cyclical upturn

Shift towards blended cement to rise from current 70% to 92% in the next two years
Less power cost as the company commissions the thermal power captive sets in Gujarat
The EBITDA is estimated to register a CAGR of 21% over CY06-09E. Further, the operating
margins too are likely to move up from 35% in CY06 to around ~46% in CY08E.
In addition, the lower interest cost would further boost the net margins even after factoring in
higher tax rates for CY07E and CY08E. We expect the net profit to record a 34% CAGR over
CY06-08E.

Multiple options for cash use

Company is generating huge free cash
Ambuja Cements is likely to generate a cash of Rs44bn in CY07E from a combination of: (1)
Strong free cash generation from operations, (2) Cash generation from sale of non-core
assets, and (3) Cash generation from sale of stake in the holding company
Figure 44: Free cash flow vs. capex
INR mn
25,000
20,000
15,000
10,000
5,000
0
CY 06 CY 07e CY 08e CY 09e
Free Cash flow post capex Capex

The cash flows can be used to:
1. Enhance the dividend pay-out ratio: Historically, Ambuja Cements had a pay-out of 40-
50%. The management could enhance it. If the pay-out ratio is increased to 100% the
dividend yield rises to 8%.
2. Make an open offer by parent: Holcim can also, technically, further increase the stake in
the company through an open offer. This looks the least probable of events as not many
open offers have been successful in India
3. Buy-back of shares: Based on existing provisions available in the Companies Act, the
company can buy back 2% of shares in CY07 and 2.4% of shares in CY08. Buy-back of
shares could result in Holcim´s holding rising from 32% in March 07 to potentially 36.4%
by December 08.
Figure 45 gives a snapshot of the on the possible holding of Holcim in Ambuja Cements, in
case Holcim goes for a buyback. This has assumed under the following constraints
1. Cash availability: Major sources of cash available for buyback will be post-capex free
cash flow, marketable investments, sale of stake in ACIL and cash from sale of real
estate.
2. Sec 77A restrictions: Section 77A of the Companies Act puts the upper limit as 25% of
paid-up share capital + free reserves

Our analysis shows that Holcim could potentially enhance the stake to 39%by CY09 if it were
to buy back shares. The key constraint being the net worth of the company post the buy-
back.
Figure 45: What can be Holcim’s effective stake after buyback?

Particulars in INR bn CY07e CY08e CY09e
Cash in balance sheet 11 21 21

Add investments that are marketable 3 3 3
Add ACIL stake sales in GACL 11 5 0
Add cash from real estate at Kalina sale 3 - -
Add free cash pre-capex 19 26 16
Less capex 4 8 8
Total cash for buy-back or dividends 44 47 33
Number of shares (mn) at start of the year 1,517 1,428 1,333
CMP( Assuming constant stock price) 125 125 125
M- Cap (mn) 189,638 178,454 166,576
Number of shares that can be bought back (minimum of a and b) (mn) 89 93 94
a) Cash constraint 374 342 272
% of total shares 25 24 20
b) Limit set by companies act (Sec 77A) 89 95 98
% of total shares 6 7 7
Net shares at the end of the year (mn) 1,428 1,335 1,241
Holcim holding at the start of the year (%) 32.0% 34.0% 36.4%
Holcim holding at the start of the year (mn shares) 485 485 485
Holism’s probable holding at the end of the year (%) 34.0% 36.4% 39.1%

GEMS: Asia India

Conglomerates
11 July 2007
Grasim Buy
Price at 12 Jul 2007 (INR) 2,819.55
Reuters: GRAS.BO Bloomberg: GRASIM IN Price target - 12mth (INR) 3,320.00
52-week range (INR) 2,894.75 - 1,873.25
Growth with cost synergies BSE 30
Key changes
14,911
Price target 2,660.00 to 3,320.00 Ç 24.8%

Sales (FYE) 147,682 to 152,353 Ç 3.2%
Op prof margin (FYE) 28.6 to 27.2 È -4.7%
Raising the target price to Rs3,320/share (+20% upside) Net profit (FYE) 26,894.2 to 27,870.6 Ç 3.6%
Grasim, a diversified company, is also likely to post strong earnings in line with Price/price relative
pure cement plays as the VSF division (largest non-cement business in company)
is also likely to benefit from better realisations of VSF. Our assumptions are 41% 200 4000
above the street for FY08E and 65% for FY09E. Reiterate Buy 150 3000
100 2000
Volume and cost benefits also flowing through
50 1000
Grasim is expanding the cement capacity by 15m tonnes in total over the next
0 0
two years (by ~50%) - the maximum expected by any cement producer in India
over the next two years. In addition, improving gas availability would keep drive
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
up utilisation rates of sponge iron plant until 2HFY09. Additionally, ~300+MW of
10
10
Rel. to BSE 30 (L.H. Scale)
captive power plant would reduce overall cost of power by INR2.5bn and reduce
Grasim (R.H. Scale)
tax for the company. Current VSF cycle also leaves room for surprise on the
upside. Grasim will benefit from synergies from group company UltraTech Performance (%) 1m 3m 12m
Cement. Absolute 18.2 24.8 41.2
BSE 30 5.5 13.7 36.4
Earnings being revised – but leave room for upside
Overall, our EPS forecast for FY08 is Rs295/share; Rs394/share for FY09 (up 27% Stock data
vs. our earlier forecast). This assumes the price and volumes in cement as per our Market cap (INRm) 258,477
Market cap (USDm) 6,397
sector forecast. However, we have not factored in the latest 5% rise in VSF Shares outstanding (m) 91.7
realisations into our numbers and would wait for a couple of quarters to see Major shareholders –
whether the market absorbs the price hikes. Free float (%) 75
Avg daily value traded (USDm) 2.3
Raising target price to INR3,320 (+20% upside)
Our target price is based on a sum of parts (10% conglomerate discount) wherein Key indicators (FY1)
we have assumed PE multiple of 14x FY08E for cement and less than 6x FY08E ROE (%) 35.3
for non-cement divisions. We note that our target PE multiples are at discount to Net debt/equity (%) 30.1
Book value/share (INR) 996.71
the region despite the fact that the growth is likely to be significantly higher. Key Price/book (x) 2.8
risks are volatility in cement and fuel prices. Our sensitivity analysis shows that a Net interest cover (x) 13.8
1% drop in realisations over our estimates can result in a 2.5% drop in earnings in Operating profit margin (%) 27.2
FY08E.

Year End Mar 31 2006A 2007A 2008E 2009E 2010E
Sales (INRm) 102,239.4 140,951.5 152,353.2 181,674.4 202,339.0
EBITDA (INRm) 20,686.2 39,723.4 48,162.7 63,455.0 61,103.9
Reported EPS FD (INR) 131.22 214.60 303.93 411.71 558.77
DB EPS FD (INR) 131.22 214.60 303.93 411.71 558.77
OLD DB EPS FD (INR) 125.86 215.10 293.28 308.02 0.00
% Change 4.3% -0.2% 3.6% 33.7% –
DB EPS growth (%) 25.9 63.5 41.6 35.5 35.7
PER (x) 10.2 10.9 9.3 6.8 5.0
EV/EBITDA (x) 7.2 6.2 5.6 3.9 3.9
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
1
2
year end close


%&' () "
*++, *++- *++. *++/ *++0' *++1' *+)+'
#
DB EPS (INR) 83.59 104.23 131.22 214.60 303.93 411.71 558.77
India P/E (x) 8.6 11.1 10.2 10.9 9.3 6.8 5.0
DB EPS growth (%) ¯ 24.7 25.9 63.5 41.6 35.5 35.7

EPS FD (INR) 83.59 104.23 131.22 214.60 303.93 411.71 558.77
P/E FD (x) 8.6 11.1 10.2 10.9 9.3 6.8 5.0
CFPS (INR) 186.26 -14.34 173.64 286.79 378.08 559.64 491.77
Free CFPS (INR) -173.81 -48.69 73.03 -3.99 322.12 331.51 251.86
Reuters Code GRAS.BO P/CFPS (x) 3.9 NM 7.7 8.2 7.5 5.0 5.7
DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 12 July INR BV/Share (INR) 393.18 472.00 527.53 724.07 996.71 1,369.51 1,713.99
2,819.55 Price/BV (x) 2.7 2.6 3.9 2.9 2.8 2.1 1.6
Price Target INR Weighted average shares (m) 92 92 92 92 92 92 92
Average market cap (INRm) 66,064 106,089 122,285 215,342 258,477 258,477 258,477
3,320.00
Enterprise value (INRm) 84,735 130,541 148,344 246,241 268,089 250,566 240,330
Web Site EV/Sales (x) 1.6 1.5 1.5 1.7 1.8 1.4 1.2
n/a EV/EBITDA 6.7 6.8 7.2 6.2 5.6 3.9 3.9
EV/EBIT 8.6 9.3 9.8 7.3 6.5 4.5 4.6

EV/Op. Capital (x) 1.5 1.8 1.9 2.5 2.6 2.1 1.7
Grasim Industries Limited operates a diversified
manufacturing company. The Group's products include
cement, synthetic yarn and fabric textiles, steel, rayon wood
# 23
pulp, caustic soda, viscose staple fiber, chlorine and Sales revenue 52,135 89,305 102,239 140,952 152,353 181,674 202,339
ancillary chemicals. Grasim also offers a range of Operating EBITDA 12,589 19,316 20,686 39,723 48,163 63,455 61,104
engineering, consultancy, software, international marketing Depreciation 2,738 5,337 5,552 6,100 6,693 7,798 8,885
and shipping services.
Operating EBIT 9,851 13,980 15,134 33,624 41,470 55,657 52,219
Net interest income (expense) -1,539 -2,481 -2,183 -2,286 -3,014 -4,597 -5,496
Associates/affiliates 0 0 0 0 800 1,500 0
Investment and other income/expense 2,263 2,312 4,269 3,177 3,108 4,870 5,270

! Income tax expense 2,910 4,510 4,027 10,921 8,529 10,867 9,544
Minorities/preference dividends 0 -258 1,160 3,915 5,964 8,808 -8,791
"
#$
+91 22 6658 4811 manish.saxena@db.com Net income 7,665 9,558 12,033 19,679 27,871 37,755 51,240

45 # 23
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 17,080 -1,315 15,923 26,299 34,670 51,320 45,096
Capex -33,019 -3,149 -9,226 -26,665 -5,132 -20,920 -22,000
Free cash flow -15,939 -4,465 6,697 -366 29,539 30,400 23,096
Other investing activities 2,441 5,976 -3,992 -9,191 -6,636 -1,500 -1,501
Equity raised/(bought back) -53 53 2 0 -1 0 0
Dividends paid -1,571 -2,393 -2,586 -1,089 -2,069 -3,103 -3,102
Net inc/(dec) in borrowings 15,554 -851 1,370 11,898 4,301 10,000 -6,000
Other financing cash flows 1,926 -3 1,228 5,608 -6,548 -7,943 0
Total cash flows from financing 15,856 -3,194 14 16,416 -4,317 -1,046 -9,102
Net cash flow 2,358 -1,683 2,718 6,858 18,586 27,854 12,493
Movement in net debt/(cash) 13,196 831 -1,349 5,040 -14,285 -17,854 -18,493
#
23
Cash and other liquid assets 2,723 1,469 2,374 3,692 23,029 50,553 54,788
Goodwill 0 0 0 0 0 0 0
Associates/investments 15,519 9,543 13,535 22,726 28,562 28,562 28,562
Other assets 18,225 34,913 41,525 48,734 55,857 62,603 74,367
Total assets 99,136 106,406 121,590 159,874 190,607 238,000 267,115
Minorities 598 0 5,136 8,587 8,172 8,172 8,172
Net working capital 2,507 4,436 1,168 -729 5,055 6,609 8,507
Net debt/(cash) 33,592 33,995 34,459 45,039 30,003 12,479 2,243
Capital 70,245 77,278 87,970 120,024 129,576 146,238 167,592

Sales growth (%) NM 71.3 14.5 37.9 8.1 19.2 11.4
18.2% 23.3% 41.2%
EBIT Margin (%) 18.9 15.7 14.8 23.9 27.2 30.6 25.8
52-week Range INR 1,873.25 - 2,894.75 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Company Identifiers
Capex/sales (%) 63.3 3.5 9.0 18.9 3.4 11.5 10.9
Bloomberg GRASIM IN
Cusip ¯ Net debt/equity (%) 91.6 78.5 64.4 60.1 30.1 9.3 1.4

Investment thesis
Outlook
We expect Grasim’s VSF and cement businesses (together contributing 90% to the top line)
to be the key earnings drivers. The company is expanding cement capacity by 15m tonnes in
total over the next two years](by ~50%) - the maximum expected by any cement producer in
India over the next two years. It is also expanding its VSF capacity by ~95,000 tonnes
through both greenfield and brownfield expansion. In addition, improving gas availability is
driving up utilization rates of the sponge iron plant which would also drive up significant
volume growth in FY09. Further, there is a possibility of consolidating 6m tonnes of cement
capacity of the group company Century Textiles. An additional 300MW+ of captive power
plant would also reduce the overall cost of power by INR1.5bn and reduce the tax outgo for
the company. Consequently we expect the company to report a 21.6% CAGR in earnings
over FY07-10E.We note that our assumptions are 41% above the street for FY08E and 65%
for FY09E.
Indian cement prices have begun to show gradual improvement driven by tight demand-
supply scenario. We have revised our pan-India cement price forecast for FY08 to
Rs235/50kg bag (8% higher than our previous assumption) and FY09 forecast to Rs245/50kg
bag (19.0% higher than our earlier assumption). We have assumed a 5% dip in cement
realizations in FY10E to Rs232/50kg bag. Current VSF cycle also leaves room for surprise on
the upside.
Valuation
For a conglomerate like Grasim, we believe the sum of parts is the correct method of
valuation. For cement (drives 88% of total value), we have used an average PE multiple of
14x. It must be mentioned that we have factored in a potential value of 14x for the cement
division - a premium to the sector average as Grasim has benefits flowing in from volume
growth, cost savings and from synergies from group company UltraTech Cement. Based on
our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement
prices. As seen from the trading bands below, the stock is trading virtually at the bottom – an
anomaly which we expect the market to correct. We note that our target multiples are at the
bottom of 10-year price bands and are also lower than the current valuations of the regional
peers. Despite the recent run-up, Grasim is trading at 9x PER on FY08E and 5.7x EV/EBIDTA
on FY08E.
Figure 46: 12-month forward rolling P/E band (x) Figure 47: 12-month forward rolling EV/EBITDA band (x)

6,000 8,000
7,000
5,000
6,000
4,000
5,000
3,000 4,000
3,000
2,000
2,000
1,000
1,000
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Source: Bloomberg, Deutsche Bank Source: Bloomberg, Deutsche Bank

As seen in following sum of parts table, the target PE multiple for VSF is 6x FY08E while the
sponge iron business is assumed at 1x FY08E earnings. The valuation of Grasim´s holdings in
IDEA are in line with the view of our telecom analyst Srinivas Rao.
Figure 48: Sum of Parts

Sr No Business EPS in FY08E ( Target PE(x) Value/share Rationale
Rs/share)
A Cement 231 14 3,238 Valued in line with peers in India

B VSF 53 6 320 Assume peak cycle multiples
C Sponge Iron 4 1 4 Assume not much improvement in o/p
D Textiles 0 1 0 At a discount to peers
E Caustic soda 4 8 28 Assume mid-cycle multiples
F Others 2 2 5 At cost of investments
G Telecom business 8 91 Idea valued at 25% discount to Bharti
Equity Value (A)+(B)+(C)+(D)+(E) +(G) 3,685.6
Less Conglomerate Discount 10%
Value (Rs/share) 295 11.3 3,317
Risks
The key risk to Grasim’s earnings comes from lower-than-expected commodity prices in
cement and VSF businesses. Our positive bias on the cement sector is based on
expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over
FY07-10E. Our stand-alone estimates drop by 12% if cement realizations are 5% lower than
expected One other company-specific risk is the lack of availability of natural gas disrupting
operations of the sponge iron division. In our forecast, we have factored in some
improvement in supply of natural gas in FY09E. Figure 49 shows the sensitivity of earnings
and EBIDTA to cement prices and fuel costs.
Figure 49: Sensitivity of stand-alone numbers to change in prices

Sensitivity analysis FY08e FY09e FY10e
Base case estimates EPS (INR/share) 181 230 202
If cement prices are 5% higher than estimates 203 259 235
If cement prices are 5% lower than estimates 158 201 169


Figure 50 highlights our key assumptions for Grasim. Based on our regional price forecasts,
we expect Grasim’s cement price to be higher by 11% in FY08 over March 07 levels and
another 8% higher in FY09. We have factored in some gains in VSF prices as shown in the
figure. As regards the sponge iron division, we assume utilization rates to pick up in FY10..

All in INR/t FY05 FY06 FY07 FY08e FY09e FY10e
Cement
Sales in Mn tonnes 27 30 32 35 42 46
Average realisation in Rs 2,313 2,551 3,325 3,765 3,828 3,637
VSF
Sales in Mn tonnes 0.23 0.24 0.25 0.29 0.30 0.31
Sponge iron
Caustic Soda
Based on our assumptions, we expect Grasim’s net sales on a stand-alone basis to rise by
19% CAGR over FY07-09, driving a 31% EPS CAGR.
Figure 51: Key financials at a glance (stand-alone)

Key financials at a FY06 FY07 FY08e FY09e FY10e
glance (INR mn)
Net sales 62,295 66,527 86,036 94,446 111,186
Total expenditure (46,328) (52,755) (62,673) (66,083) (75,546)
EBITDA 17,839 16,841 25,380 30,972 39,260
Depreciation (2,852) (2,916) (3,179) (3,945) (4,661)
Interest (1,388) (1,034) (1,118) (1,942) (2,636)
PBT 13,599 12,932 22,254 25,085 31,963
Tax (4,510) (3,428) (6,906) (8,529) (10,867)
PAT 9,089 9,504 15,349 16,556 21,096
RoE (%) 23 20 25 24 24
RoCE (%) 17 15 20 17 18
Net Debt:/ Equity (%) 46 40 47 46 43

GEMS: Asia India

11 July 2007
India Cements Buy

Price at 12 Jul 2007 (INR) 220.20
Reuters: ICMN.BO Bloomberg: ICEM IN Price target - 12mth (INR) 300.00
52-week range (INR) 250.00 - 151.30
South Indian giant BSE 30
Key changes
14,911
Price target 198.00 to 300.00 Ç 51.5%

Sales (FYE) 27,570 to 29,389 Ç 6.6%
Op prof margin (FYE) 32.1 to 34.0 Ç 5.8%
Net profit (FYE) 6,874.6 to 7,521.0 Ç 9.4%
Raise TP to Rs300 (+37% upside) Price/price relative

Our new EPS estimates for India Cements are Rs29/share (+11.4% vs. previous
estimate) for FY08 and Rs.27/share (+38.2% vs. previous estimate.) for FY09. Our 200 300
estimates for FY08 (+32%) and FY09 (+35%) are higher than the consensus. Our 250
150
200
new target price of Rs300 implies a PE of 11x core FY09E of Rs27/share and is 100 150
reasonable considering an EPS CAGR of 25% over the next two years. We 50
100
reiterate Buy on the stock. 50
0 0
Earnings to benefit from tight supply-demand scenario
6
05
06
06
06
07
07
Based on our sectoral assumptions for demand and supply we forecast India
/0
/0
7/
1/
4/
7/
1/
4/
10
10
Cements´ realization to rise by ~17% in FY08 and a further 2% in FY09. Rel. to BSE 30 (L.H. Scale)
Accordingly we estimate that India Cement to report a CAGR of ~26% in sales India Cements (R.H. Scale)
over FY06-08, driving a core earnings (net of gains from tax benefits) CAGR of Performance (%) 1m 3m 12m
25% over the same period. ROE is estimated to rise to 33% in FY08. Absolute 27.1 38.1 23.2
BSE 30 5.5 13.7 36.4
Big beneficiary of rise in cement prices in south India
The average cement realization in south India has risen by ~10% q-o-q versus all- Stock data
India cement price rise of 5% q-o-q. The demand growth in south India has also Market cap (INRm) 45,500
been robust with demand rise of ~16% in FY07 versus pan-India demand rise of Market cap (USDm) 1,126
11%. Accordingly, India Cements, the largest player in south India, should benefit Shares outstanding (m) 260.4
Major shareholders –
greatly from upside due to operating leverage. Note that the Debt/EBITDA of India Free float (%) 71
Cements is 2x implying that entire debt can be pre-paid if required. Avg daily value traded (USDm) 2.5
TP of Rs300 based on 3-year average PE and EV/EBITDA multiples Key indicators (FY1)
Our target price assumes an average PE multiple of 12x FY09e and EV/EBITDA of ROE (%) 32.7
7.5x FY09E. Our target PE and EV/EBITDA multiples are based on the average PE Net debt/equity (%) 20.2
and EV/EBITDA of the last three years and are in the lower quartile of the long- Book value/share (INR) 99.84
term forward valuation bands. Key risks are lower-than-expected utilization levels Price/book (x) 2.21
Net interest cover (x) 12.1
resulting in lower-than-expected cement prices and higher-than-expected energy Operating profit margin (%) 34.0
costs. Note that a 5% rise in energy costs over our estimates cuts our earnings
by 3%. Also, a lower-than-expected realization of 5% can result in a 15.7% drop
in earnings over the forecast period.
Sales (INRm) 15,294.0 20,497.4 29,389.2 32,291.9 32,220.0
EBITDA (INRm) 2,527.0 6,617.3 10,894.8 11,371.9 8,989.7
Reported NPAT (INRm) 327.6 4,495.0 7,521.0 7,025.3 5,264.2
DB EPS FD(INR) 2.10 20.76 28.91 26.98 20.22
OLD DB EPS FD(INR) 1.59 16.76 25.37 19.07 0.00
% Change 32.2% 23.9% 14.0% 41.5% –
DB EPS growth (%) – 890.5 39.3 -6.7 -25.1
PER (x) 48.4 9.5 7.6 8.2 10.9
EV/EBITDA (x) 12.6 8.4 4.6 3.9 4.4
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
1
2
year end close


$%& '(
)**+ )**, )**- )**. )**/& )**0& )*(*&
"
DB EPS (INR) -9.52 -4.52 2.10 20.76 28.91 26.98 20.22
India P/E (x) NM NM 48.4 9.5 7.6 8.2 10.9
DB EPS growth (%) ¯ 52.5 ¯ 890.5 39.3 -6.7 -25.1

EPS FD (INR) -9.52 -4.52 2.10 20.76 28.91 26.98 20.22
P/E FD (x) NM NM 48.4 9.5 7.6 8.2 10.9
CFPS (INR) 3.00 -0.89 -6.46 8.41 23.68 32.69 0.00
Free CFPS (INR) -73.73 -0.89 -10.93 4.57 8.31 28.85 0.00
Reuters Code ICMN.BO P/CFPS (x) 10.1 NM NM 23.5 9.3 6.7 NM
DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 12 July INR 220.20 BV/Share (INR) 97.51 91.39 75.93 76.73 99.84 121.42 141.64
Price Target INR 300.00 Price/BV (x) 0.4 0.7 2.2 2.1 2.2 1.8 1.6
Weighted average shares (m) 140 140 173 234 260 260 260
Web Site Average market cap (INRm) 4,231 6,257 17,574 46,130 45,500 45,500 45,500
http://www.indiacements.co.in Enterprise value (INRm) 24,145 25,593 31,773 55,677 50,387 44,280 39,575
EV/Sales (x) 2.4 2.2 2.1 2.7 1.7 1.4 1.2
EV/EBITDA 22.7 18.7 12.6 8.4 4.6 3.9 4.4
South India`s largest cement producer, It is a diversified
company with interests in shipping, real estate development EV/EBIT 96.8 44.2 18.3 9.5 5.0 4.3 5.1
and a wind energy farm. EV/Op. Capital (x) 0.7 0.8 1.1 1.9 1.6 1.4 1.3
" 12

Sales revenue 10,185 11,638 15,294 20,497 29,389 32,292 32,220
Depreciation 815 788 790 777 910 1,071 1,205
Operating EBIT 250 579 1,737 5,841 9,984 10,301 7,785
Net interest income (expense) -1,617 -1,335 -1,489 -1,430 -824 -624 -624

!
Investment and other income/expense 39 125 127 102 241 360 360

"# Exceptionals/extraordinaries 0 0 0 0 0 0 0
+91 22 6658 4811 manish.saxena@db.com Income tax expense 0 0 47 17 1,880 3,011 2,256
Minorities/preference dividends 0 0 0 0 0 0 0

Net income -1,328 -631 328 4,495 7,521 7,025 5,264

34 " 12
Cash flow from operations 419 -124 -1,118 1,965 6,165 8,512 0
Capex -10,708 0 -774 -898 -4,000 -1,000 0
Free cash flow -10,289 379 -1,892 1,067 2,165 7,512 0
Other investing activities 1 501 -245 245 0 0 0
Equity raised/(bought back) 0 0 912 0 0 0 0
Dividends paid 0 0 0 0 0 0 0
Net inc/(dec) in borrowings -483 -162 -59 -1,219 0 0 0
Other financing cash flows 0 0 0 0 0 0 0
Total cash flows from financing -483 -162 852 -1,219 0 0 0
Net cash flow -10,771 215 -1,284 93 2,165 7,512 0
Movement in net debt/(cash) 10,289 -377 1,225 -1,311 -2,165 -7,512 0
"
12
Cash and other liquid assets 37 29 443 329 989 7,096 11,802
Goodwill 0 0 0 0 0 0 0
Associates/investments 365 366 611 366 366 366 366
Other assets 15,351 15,750 12,088 14,946 13,392 13,369 13,123
Total assets 39,093 38,194 35,173 37,794 39,990 46,003 51,258
Minorities 0 0 0 0 0 0 0
Net working capital 10,676 10,535 8,344 8,068 6,435 6,019 5,782
Net debt/(cash) 20,279 19,702 14,810 9,914 5,253 -853 -5,559
Capital 33,886 32,455 30,500 29,892 31,248 30,762 31,320

Sales growth (%) NM 14.3 31.4 34.0 43.4 9.9 -0.2
27.1% 31.7% 23.1%
EBIT Margin (%) 2.4 5.0 11.4 28.5 34.0 31.9 24.2
52-week Range INR 151.30 - 250.00 Payout ratio (%) NM NM 0.0 0.0 0.0 0.0 0.0
Market Cap INR 45,500 m ROE (%) -14.9 -4.8 2.3 25.2 32.7 24.4 15.4
USD 1,126 m Return on capital (%) -1.0 0.9 4.4 18.2 26.5 24.1 18.4
Company Identifiers
Capex/sales (%) 105.1 0.0 5.1 4.4 13.6 3.1 0.0
Bloomberg ICEM IN
Cusip ¯ Net debt/equity (%) 149.0 154.5 94.4 49.6 20.2 -2.7 -15.1

Investment thesis
Outlook
We rate India Cements a Buy due to the following: (1) We expect the company to report
earnings CAGR of 25% over FY07-09. (2) Our estimates for FY08 are (+32%) and FY09
(+35%) are higher than the consensus and we expect the consensus earnings upgrade to
drive the stock outperformance. (3) Benefits flowing in from superior bargaining power driven
by our forecast of tight utilisation levels over FY07-10.
(5) Our revised target price of Rs300 per share gives a potential +37 upside.
Note that our new estimates are based on revision of our pan-India cement price forecast for
CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (9.6% YoY).
Note that south India is leading the price rise with cement prices increasing by 10% q-o-q
versus 5% for the country as a whole. Consequently, India Cements Ltd, which is the largest
player in south India, is likely to reap benefits due to its operating leverage.
Valuation
We have thus used an average PE multiple of 12x core earnings (earlier assumed 10x FY08E)
and 7.5x EV/EBITDA FY09E (earlier assumed 7x FY08E) to arrive at the target price of
INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The
forward valuation multiples are similar to those used by us prior to risk to long-term earnings
emerging from threats from government intervention in pricing cement in India. The concerns
stand reduced due to the following: (1) Indian cement companies were successful in
demonstrating that they can pass on government levies to end-users (2) Indian finance
minister has stated that there is no price-freeze and the prices of cement will be dictated
purely by demand and supply forces.
cement prices. However, as seen from the trading bands (Figures 52 and 53) the stock is
trading virtually at the bottom – an anomaly which we expect the market to correct.
Figure 52: 12-month forward rolling P/E bands Figure 53: 12-month forward rolling EV/EBIDTA band

500 500
400 400
300 300
200 200
100 100
0 0
-100 -100
Dec-04
Dec-05
Dec-06
Dec-04
Dec-05
Dec-06
Mar-04
Jun-04
Sep-04
Mar-05
Jun-05
Sep-05
Mar-06
Jun-06
Sep-06
Mar-07
Jun-07
Mar-04
Jun-04
Sep-04
Mar-05
Jun-05
Sep-05
Mar-06
Jun-06
Sep-06
Mar-07
Jun-07
Source: Bloomberg, Company Data, Deutsche Bank Source: : Bloomberg, Company Data, Deutsche Bank

Risks
India Cements is a high-beta stock and any risk on the liquidity front would impact the stock
returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual
lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lower-
than-expected price realization reduces our estimates by ~5% each in FY07 and FY08.
International coal prices have shot up by 20% y-o-y over the last six months. The company is
confident that the impact of coal cost would not be much due to its long-term contracts. We
have assumed 10% CAGR in coal cost for the next three years. Any increase greater than 5%
over and above our base case estimates would have an impact on the company’s earnings.
Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our
estimates would depress the earnings by ~2% each in FY07 and FY08.
Similarly, a 1% increase in cement prices increases our EBITDA estimates by 4% for FY08
and 5% for FY09. A 5% rise/drop in coal prices reduces/increases earnings by ~2% and 4%
respectively.

FY08e FY09e FY10e
Base case EPS estimate (INR/share) 28.9 27.0 20.2
If cement prices are5% lower than estimates 24.4 22.5 15.8


Based on our revised price forecasts, we expect the average realisation to be higher by 7.7%
(vs earlier estimates) for FY08 and by 18.8% (vs earlier estimates) for FY09. We have also
marginally increased our sales volume expectations The increase in sales volume is on
account of additional output to the extent of 0.6m tonnes in FY08E (modernization of the
Shankaridurg plant) and 0.8m tonnes in FY09E (expansion of the Vishnudurg plant). However,
we have not factored in the full impact expected from capacity expansions in the next two
years. Figure 55 underlines our main assumptions.

INR/tonne --------------------------FY08E----------------------------- -------------------------------FY09E--------------------------
Particulars Old Estimates New Estimates Change (%) Old Estimates New Estimates Change (%)
Sales volume (m tonnes) 9.0 9.2 1.5 9.4 10.0 6.0
Average realisation (INR/tonne) 3,434 3,724 8.4 3,321 3,797 14.3
Cost (INR/tonne)**
Raw material 440 491 11.6 463 517 11.7
Freight 456 456 - 470 470 -
Power and fuel 725 747 3.1 911 806 (11.5)
** Cost/tonne figures do not include Visaka Cements
Based on our assumptions we forecast a net sales growth of 26% CAGR for FY07-09E,
driving net profit growth of 25% CAGR for FY07-09E.

--------------------------FY08E----------------------------- -------------------------------FY09E--------------------------
Particulars (INR mn) Old Estimates New Estimates Change (%) Old Estimates New Estimates Change (%)
Net sales 27,570 29,390 6.6 27,854 32,293 15.9
Expenditure (17,718) (18,494) 4.4 (19,063) (20,920) 9.7
EBITDA 10,093 11,137 10.3 9,151 11,733 28.2
Depreciation (1,002) (910) (9.1) (1,165) (1,071) (8.1)
Interest (824) (824) - (424) (624) 47.1
PBT 8,267 9,402 13.7 7,561 10,037 32.7
Tax (1,240) (1,880) 51.6 (2,268) (3,011) 32.7
PAT 7,027 7,522 7.0 5,293 7,026 32.7
EPS (INR) 25.9 28.9 11.4 19.5 27.0 38.2
Ratios
EBITDA/tonne (INR) 1,118 1,215 8.7 972 1,175 21.0
ROE (%) (#) 30.8 32.7 189 19.1 24.4 530
RoCE (%) (#) 29.7 31.4 170 18.3 23.6 528

GEMS: Asia India

11 July 2007
Shree Cements Buy

Price at 12 Jul 2007 (INR) 1,335.20
Reuters: SHCM.BO Bloomberg: SRCM IN
Price target - 12mth (INR) 1,750.00
80% + RoE –highest in sector

52-week range (INR) 1,524.90 - 806.55
BSE 30 14,911
Key changes
Price target 1,240.00 to 1,750.00 Ç 41.1%
Sales (FYE) 18,248 to 19,733 Ç 8.1%
Net profit (FYE) 5,270.0 to 4,573.7 È -13.2%
Volume growth when it matters the most
Price/price relative
We are upgrading our FY09 estimates for Shree Cement due to the rise in cement
prices across India, significant capacity addition and its excellent operating 250 2000
efficiency. Our FY08 estimates factor in the impact of higher provisions for 200 1500
depreciation. Cash EPS for FY08E is Rs234; Rs300 for FY09E. 150
1000
100
Cash earnings a better proxy for valuation 50 500
The cash EPS of the company is Rs234 for FY08E - 78% higher than recurring 0 0
EPS- This is on account of a unique policy of depreciating fixed assets at the
higher of the rates prescribed by the Companies Act and the Income Tax Act, on
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
WDV basis. Moreover, the ROE at 88% in FY08eE and 84% in FY09E is one of Rel. to BSE 30 (L.H. Scale)
the best in the industry. Shree Cements (R.H. Scale)
Highest ROE in the cement sector Performance (%) 1m 3m 12m

Based on our new price and revised volume forecast, we have reduced our EPS Absolute 23.1 50.6 47.4
to Rs131/share (down 14%) for FY08E, Rs213/share (up 26%) for FY09E. Our BSE 30 5.5 13.7 36.4
estimates are above consensus by 10% for FY08 and by 61% for FY09. Escalation
Stock data
in raw material costs by 74% in FY08E and by 86% in FY09E has offset the Market cap (INRm) 46,465
benefit from higher realizations. The RoE at 88% in FY08E is likely to be the one Market cap (USDm) 1,150
of the best in the sector globally. Shares outstanding (m) 34.8
Major shareholders –
Raising target price to Rs1,790 Free float (%) 36
Following the revision in estimates and more clarity on cement prices, we have Avg daily value traded (USDm) 0.3
revised our target price to Rs1,790/share (31% upside) driven by the uptick in
target P/E to 12x FY08E (earlier 8x FY08E) and target EV/E to 7.5x FY08E (earlier Key indicators (FY1)
5x FY08E). These multiples are the same as those used by us prior to the risk to ROE (%) 88.0
Net debt/equity (%) 10.3
long-term earnings emerging from threats from government intervention. Key Book value/share (INR) 188.66
risks are volatility in cement prices and rise in fuel prices. Our sensitivity analysis Price/book (x) 7.08
shows that a 1% rise/drop in realisation can result in an 8% rise/drop in FY08E Net interest cover (x) 11.6
earnings. A 5% rise in fuel costs can result in a ~2% reduction in FY08 E earnings. Operating profit margin (%) 27.1

Sales (INRm) 6,948.3 13,679.0 19,732.8 26,952.0 35,820.3
EBITDA (INRm) 2,198.8 6,117.0 8,951.3 12,845.4 13,635.9
Reported NPAT (INRm) 184.0 1,770.4 4,573.7 7,446.8 9,052.3
DB EPS FD(INR) 5.28 50.82 131.29 213.76 259.84
OLD DB EPS FD(INR) 5.28 112.36 151.27 167.24 0.00
% Change -0.0% -54.8% -13.2% 27.8% –
DB EPS growth (%) -35.9 862.1 158.4 62.8 21.6
PER (x) 89.6 21.6 10.2 6.2 5.1
EV/EBITDA (x) 9.1 6.5 5.3 3.5 3.2
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
1
2
year end close


#$% &'
())& ())* ())+ ()), ())- ()).% ())/% ()')%

DB EPS (INR) 1.11 5.57 8.23 5.28 50.82 131.29 213.76 259.84
India P/E (x) 43.3 17.7 26.6 89.6 21.6 10.2 6.2 5.1
DB EPS growth (%) ¯ 400.0 47.9 -35.9 862.1 158.4 62.8 21.6

EPS FD (INR) 1.11 5.57 8.23 5.28 50.82 131.29 213.76 259.84
P/E FD (x) 43.3 17.7 26.6 89.6 21.6 10.2 6.2 5.1

CFPS (INR) 30.09 11.84 50.72 80.33 151.30 263.02 317.27 0.00
Free CFPS (INR) 2.95 0.67 12.22 6.73 121.95 133.85 196.71 0.00
Reuters Code SHCM.BO P/CFPS (x) 1.6 8.3 4.3 5.9 7.3 5.1 4.2 NM
DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 12 July INR BV/Share (INR) 97.23 97.59 101.30 100.75 109.88 188.66 316.91 472.82
1,335.20 Price/BV (x) 0.5 1.4 3.3 8.9 8.4 7.1 4.2 2.8
Price Target INR Weighted average shares (m) 35 35 35 35 35 35 35 35
Average market cap (INRm) 1,681 3,432 7,620 16,492 38,303 46,465 46,465 46,465
1,750.00
Enterprise value (INRm) 5,242 6,842 10,461 20,028 39,817 47,145 45,271 43,613
Web Site EV/Sales (x) 1.1 1.4 1.7 2.9 2.9 2.4 1.7 1.2
http://www.shreecementltd.com EV/EBITDA 5.1 5.1 6.1 9.1 6.5 5.3 3.5 3.2
EV/EBIT 12.7 11.4 21.2 35.8 22.3 8.8 4.6 3.7

EV/Op. Capital (x) 0.7 1.0 1.6 2.7 6.9 6.1 4.4 3.1
Is one of the largest cement producers in Rajasthan, has
Largest Cement Plant In Northern India at Single location.
0 102
Sales revenue 4,843 4,943 6,022 6,948 13,679 19,733 26,952 35,820
Operating EBITDA 1,021 1,334 1,724 2,199 6,117 8,951 12,845 13,636
Depreciation 608 734 1,230 1,640 4,330 3,600 3,000 2,000
Amortization 0 0 0 0 0 0 0 0
Operating EBIT 412 600 495 559 1,787 5,351 9,845 11,636
Net interest income (expense) -349 -333 -205 -128 -104 -463 -680 -585
Associates/affiliates 0 0 0 0 0 0 0 0
Investment and other income/expense 31 14 21 -159 212 492 763 1,019
Exceptionals/extraordinaries 0 0 0 0 0 0 0 0

Income tax expense 56 87 24 87 124 807 2,482 3,017
Minorities/preference dividends 0 0 0 0 0 0 0 0

!
+91 22 6658 4811 manish.saxena@db.com Net income 39 194 287 184 1,770 4,574 7,447 9,052
""

34 102
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 1,049 413 1,767 2,798 5,271 9,163 11,053 0
Movement in Net Working Capital 0 0 0 0 0 0 0 0
Capex -946 -389 -1,341 -2,564 -1,022 -4,500 -4,200 0
Free cash flow 103 23 426 234 4,248 4,663 6,853 0
Other investing activities 4 1 8 0 0 0 0 0
Equity raised/(bought back) -150 0 0 0 0 0 0 0
Dividends paid -98 -118 -159 -37 -905 -1,829 -2,979 0
Net inc/(dec) in borrowings 433 -112 16 -209 1,209 0 0 0
Other financing cash flows 0 0 0 0 0 0 0 0
Total cash flows from financing 185 -230 -143 -245 303 -1,829 -2,979 0
Net cash flow 292 -206 291 -11 4,552 2,833 3,874 0
Movement in net debt/(cash) 141 94 -275 -198 -3,343 -2,833 -3,874 0

102
Cash and other liquid assets 345 76 368 191 4,196 7,029 10,904 14,561
Tangible fixed assets 6,587 6,242 6,353 7,277 3,970 4,870 6,070 8,070
Goodwill 0 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0 0
Associates/investments 9 8 0 0 0 0 0 0
Other assets 1,692 1,802 1,396 1,991 3,948 5,673 7,680 10,305
Total assets 8,632 8,128 8,118 9,459 12,113 17,571 24,653 32,935
Interest bearing debt 3,914 3,494 3,209 3,727 5,709 7,709 9,709 11,709
Other liabilities 1,330 1,233 1,379 2,222 2,576 3,290 3,903 4,754
Total liabilities 5,245 4,728 4,588 5,949 8,285 10,999 13,612 16,464
Shareholders' equity 3,388 3,400 3,529 3,510 3,828 6,572 11,040 16,472
Minorities 0 0 0 0 0 0 0 0
Total shareholders' equity 3,388 3,400 3,529 3,510 3,828 6,572 11,040 16,472
Net working capital 1,025 1,378 885 718 2,599 3,810 5,253 7,027
Net debt/(cash) 3,569 3,418 2,841 3,537 1,514 680 -1,194 -2,852
Capital 6,957 6,818 6,370 7,047 5,342 7,252 9,846 13,620

Sales growth (%) 45.2 2.1 21.8 15.4 96.9 44.3 36.6 32.9
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 21.1 27.0 28.6 31.6 44.7 45.4 47.7 38.1
23.1% 45.3% 47.4%
EBIT Margin (%) 8.5 12.1 8.2 8.0 13.1 27.1 36.5 32.5
52-week Range INR 806.55 - 1,524.90 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 46,465 m ROE (%) 1.1 5.7 8.3 5.2 48.3 88.0 84.6 65.8
USD 1,150 m Return on capital (%) 4.2 6.2 6.5 4.1 29.8 77.8 92.7 80.6
Operating return on capital (%) 4.2 6.0 5.1 5.6 19.1 55.2 75.9 66.4
Company Identifiers
Capex/sales (%) 19.5 7.9 22.3 36.9 7.5 22.8 15.6 0.0
Bloomberg SRCM IN
Capex/depreciation (x) 1.6 0.5 1.1 1.6 0.2 1.3 1.4 0.0
Cusip ¯ Net debt/equity (%) 105.4 100.5 80.5 100.8 39.5 10.3 -10.8 -17.3
SEDOL 6100357 Net interest cover (x) 1.2 1.8 2.4 4.4 17.2 11.6 14.5 19.9

Investment thesis
Outlook
We reiterate Buy on Shree Cement with a revised target price of Rs1,790/share (+31%
upside). Based on our assumptions, we forecast a net sales growth of 38% CAGR for FY07-
10E, driving net profit growth of 72% CAGR over the same period. Our earning estimates are
10% higher than consensus for FY08E and 61% higher than the consensus for FY09E.
We expect the Indian cement industry to operate at peak utilisation levels as new capacity
commissioning is likely to be delayed and demand likely to continue to grow at 9-10%
annually. The cement companies are expected to report higher average realisations due to
tight demand-supply scenario expected to persist till 1HFY10/CY09. Accordingly we have
revised our pan-India cement price forecast for FY07 to Rs235/50kg bag (7.7% higher than
our previous assumption) and FY08 forecast to Rs245/50kg bag (18.8% higher than our
earlier assumption).
Valuation
The Indian finance minister has stated that there is no price-freeze and the prices of cement
will be dictated purely by demand and supply forces. Following this, we believe the overhang
of pressure on price realizations by cement companies stands abated.
cement prices. However, as seen from the following trading bands the stock is trading
virtually at the bottom – an anomaly which we expect the market to correct.

3,000 3,500
2,500 3,000
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
-500
We have thus used an average PE multiple of 12x FY08E (earlier assumed 8x FY08E) and 7.5x
EV/EBITDA FY08E (earlier assumed 5x FY08E) to arrive at the target price of INR1,790/share.
It is important to note that these multiples are the same as we used prior to reducing our
multiples due to the risk to long-term earnings emerging from threats from government
intervention in pricing cement in India. Our target multiples are at the low-end of P/E and
EV/EBIDTA bands and at a discount to the region. Moreover, these multiples are at the
lowest range of the respective bands over the last 15 years.
We note that EV/t at our target price is USD209 on FY08E, which is reasonable considering
the position of the cycle.

Figure 59: 12-month forward EV/ton (x) and EBITDA/ton (x)
EV/Ton Ebitda/Ton
200 40
35
150
30
25
100
20
15
50
10
0 5
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Source: Company data, Bloomberg, Deutsche Bank
Risks
Shree Cement is a high-beta stock and any risk on the liquidity front would impact the stock
returns. In addition, our positive bias on the sector is based on the expectation of a deficit till
1HFY09/CY08. A slowdown in the demand growth and/or higher capacity commissioning
may lead to lower-than-expected realisations.
Figure 60 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. If
cement prices are higher by 1% then our earnings estimates for FY08 will be higher by 7.6%
and vice versa. Also, the EBIDTA will be higher by 4% for FY08E and vice versa. A 5% rise in
coal prices would reduce FY08 EPS estimates by 1.8% and EBITDA estimates by 1%.

Sensitivity analysis FY08e FY09e FY010e
Base case estimates – EPS (INR) 130.9 212.9 258.3
Chg with respect to base case estimates(%) 7.6 5.6 5.9
If coal prices are 5% higher than estimates 128.5 206.8 243.8
Base case estimates-EBITDA ( INR mn) 9,426 13,567 14,581

If cement prices are 1% higher than estimates 9,831 14,117 15,288
Chg with respect to base case estimates (%) 4 4 5
If cement prices are 1% lower than estimates 9,025 13,023 13,883
Chg with respect to base case estimates (%) (4) (4) (5)
If coal prices are 5% higher than estimates 9,329 13,285 13,908


Higher average realization undone by likely cost overruns in FY08
Based on our revised price forecasts, we expect average realization to be higher by 7.7% in
FY08 and 18.8% in FY09 over our earlier estimates. We have not factored in the full impact of
capacity expansions in next two years. Figure 61 underlines our main assumptions.

Particulars -----------------FY08e -------------- ------------------ FY09e -------------- FY10e
INR/tonne Old New Variance Old New Variance
Estimates Estimates Estimates Estimates
(%) (%)
Key Assumptions
Sales Volume (mn tonnes) 6.2 6.6 6 8.5 8.5 - 12.0
Average realisation (INR/tonne) 3,345 3,555 6 3,192 3,722 17 3,536
Cost (INR/tonne)
Raw Material 243 422.2 74 234 434.8 86 448.0
Freight 400 420 5 450 450 - 450
Power 334 261 (22) 410 232 (43)
Our revised estimates based on higher price estimates show earning estimates declining by
a 14% in FY08 and rising by 26% in FY09 (over the earlier estimates). Based on our
assumptions we forecast a net sales growth CAGR of 38% for FY07-10E, driving net profit
growth of 71% CAGR over the same period. This is considering the aggressive depreciation
policy the company has adopted.

Particulars ---------------- FY08e-------------- ------------------- FY09e ------------ FY10e
INR mn Old New Variance Old New Variance
Estimates Estimates (%) Estimates Estimates (%)
Net Sales 18,248 19,733 8 23,723 26,952 14 35,820
EBITDA 9,290 9,426 1 10,375 13,567 31 14,581
PAT 5,306 4,559 (14) 5,862 7,416 26 8,997
EPS (INR) 152.3 130.9 (14) 168.3 212.9 26 258.3
Ratios
EBITDA/tonne (INR) 33 32 (4) 27 35 31 27
EV/tonne (USD) 178 209 17 107 157 47 109
ROE (%) (#) 116.7 87.7 (2,893) 76.1 84.4 833 66
RoCE (%) (#) 71.1 58.8 (1,230) 55.1 65.7 1,059
Cash earnings represent Shree Cement’s true potential

Shree Cements follows an aggressive depreciation policy, wherein it charges depreciation on
its plant and machinery at the higher of the rates prescribed by the Companies Act and the
Income Tax Act. This consequently deflates reported earnings of the company to a
considerable extent since the income tax rates are ~6 times those prescribed by the
Companies Act.

The cash flow EPS of the company is 3.4x and 1.8x the reported EPS for FY07E and FY08E
respectively. We expect this trend to continue till FY12 on account of significant capacity
additions to be made by the company over the next 3-4 years.
Figure 63: Cash EPS versus reported EPS
(INR) Cash EPS Reported EPS
350
300
250
200
150
100
50
-
Source: Deutsche Bank,

GEMS: Asia India

11 July 2007
UltraTech Cement Limited Buy

Price at 12 Jul 2007 (INR) 899.30
Reuters: ULTC.BO Bloomberg: UTCEM IN Price target - 12mth (INR) 1,140.00
52-week range (INR) 1,163.85 - 620.95
Benefits from south Indian BSE 30
Key changes
14,911
presence
Rating Hold to Buy Ç
Price target 795.00 to 1,140.00 Ç 43.4%
Sales (FYE) 55,602 to 57,907 Ç 4.1%
Net profit (FYE) 10,599.5 to 12,171.4 Ç 14.8%
Upgrade to Buy with a TP of Rs.1,140
UltraTech Cemco is likely to benefit from its markets in South and West both of Price/price relative
which have seen superior realization growth. Cost-inflation risk is coming down as
domestic lignite-based captive power plant gets commissioned this year. Our 200 1500
new earnings estimate for FY09 is up 65% over our previous estimate and 103% 150
1000
above the consensus. Despite recent run-up, the stock is trading at lower end of 100
valuation range. We upgrade our recommendation to Buy. 50
500
Party re-starts, price-freeze called off 0 0

As highlighted in our sector note, we are now more sanguine on tight supply
6
05
06
06
06
07
07
/0
/0
scenario in the Indian cement sector lasting till CY09. Accordingly, in line with our
7/
1/
4/
7/
1/
4/
10
10
Rel. to BSE 30 (L.H. Scale)
sector price outlook, we have revised the cement price forecast by 7.7% for
FY08E and 18.8% for FY09E. UltraTech Cement Lim (R.H. Scale)
Performance (%) 1m 3m 12m

Large benefits to kick in from FY09 Absolute 12.9 24.7 20.5
Based on our new price and revised volume forecasts, we have revised our EPS BSE 30 5.5 13.7 36.4
estimate for FY08 to Rs98/share and sharply revised our FY09 EPS estimate to
Rs144/share (up 65%). Our FY08 and FY09 estimates are above the consensus by Stock data
38% and 103%, respectively. Market cap (INRm) 111,513
Market cap (USDm) 2,760
Raising target price to Rs1,140 Shares outstanding (m) 124.5
In line with the sectoral valuations, we have estimated our target price at Major shareholders –
Rs1,140/share (26% upside) assuming an average of the target PER multiple of Free float (%) 48
Avg daily value traded (USDm) 0.8
12x FY08E and EV/EBITDA multiple of 7.5x FY08E. These multiples are at the
lower end of valuation bands and also at a discount to regional peers. We believe Key indicators (FY1)
that this is reasonable as the RoE and EPS growth of UltraTech is in the highest ROE (%) 55.5
quartile in the region. Key risks are volatility in cement prices and rise in fuel Net debt/equity (%) 46.5
prices. Our sensitivity analysis shows that a 5% rise/drop in realizations can result Book value/share (INR) 210.48
Price/book (x) 4.27
in a 25% rise/drop in FY08E earnings. A 10% rise in fuel cost can result in 9% Net interest cover (x) 15.9
drop in FY08E earnings. Operating profit margin (%) 29.4

Sales (INRm) 33,839.5 49,687.0 57,907.0 70,488.2 78,896.4
EBITDA (INRm) 5,345.6 14,619.9 19,799.2 27,814.3 28,220.0
DB EPS FD(INR) 18.35 63.34 97.77 144.40 144.13
OLD DB EPS FD(INR) 18.46 62.83 85.15 87.56 0.00
% Change -0.6% 0.8% 14.8% 64.9% –
DB EPS growth (%) 752.7 245.2 54.4 47.7 -0.2
PER (x) 23.6 13.2 9.2 6.2 6.2
EV/EBITDA (x) 12.4 7.8 5.9 3.9 3.7
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
1
2
year end close


%&' ()
*++, *++- *++. *++/ *++0' *++1' *+)+'
#!
DB EPS (INR) 2.80 2.15 18.35 63.34 97.77 144.40 144.13
India P/E (x) ¯ 146.5 23.6 13.2 9.2 6.2 6.2
DB EPS growth (%) ¯ -23.2 752.7 245.2 54.4 47.7 -0.2

EPS FD (INR) 2.80 2.15 18.35 63.34 97.77 144.40 144.13
P/E FD (x) ¯ 146.5 23.6 13.2 9.2 6.2 6.2

CFPS (INR) 325.27 13.94 36.24 77.54 98.89 202.81 129.93
Free CFPS (INR) 267.78 11.90 29.15 16.44 78.74 155.26 73.70
Reuters Code ULTC.BO P/CFPS (x) ¯ 22.6 12.0 10.7 9.1 4.4 6.9
! DPS (INR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend yield (%) ¯ 0.0 0.0 0.0 0.0 0.0 0.0
Price as of 12 July INR 899.30 BV/Share (INR) 84.72 78.27 83.65 142.04 210.48 311.56 412.45
Price Target INR Price/BV (x) ¯ 4.5 8.2 5.4 4.3 2.9 2.2
1,140.00 Weighted average shares (m) 62 124 124 124 124 124 124
Average market cap (INRm) ¯ 39,227 53,981 103,738 111,513 111,513 111,513
Web Site Enterprise value (INRm) ¯ 51,429 66,383 113,984 117,608 107,673 103,882
http://www.ultratechcement.com/ EV/Sales (x) NM 1.9 2.0 2.3 2.0 1.5 1.3
EV/EBITDA NM 15.4 12.4 7.8 5.9 3.9 3.7
" ! "
EV/EBIT NM 59.5 21.8 9.2 6.9 4.4 4.2
Cement business of Larsen & Toubro Limited demerged
EV/Op. Capital (x) NM 2.1 2.9 4.1 3.6 3.1 2.4
and vested in company in 2004, Grasim Industries hold
51% sake in Ultratech.
2 # 324
Sales revenue 22,920 27,010 33,840 49,687 57,907 70,488 78,896
Depreciation 2,475 2,485 2,306 2,287 2,748 3,138 3,509
Operating EBIT 757 865 3,040 12,333 17,052 24,677 24,711
Net interest income (expense) -1,185 -1,093 -901 -868 -1,072 -1,961 -2,179
Investment and other income/expense 443 440 721 288 499 1,251 1,390

Income tax expense -158 -44 593 3,887 4,307 5,992 5,981

#$
+91 22 6658 4811 manish.saxena@db.com Minorities/preference dividends -1 -13 -16 -18 0 0 0
Net income 174 268 2,283 7,884 12,171 17,975 17,942

56 # 324
Cash flow from operations 20,232 1,734 4,509 9,653 12,311 25,247 16,174
Capex -3,576 -254 -881 -7,607 -2,508 -5,920 -7,000
Free cash flow 16,656 1,480 3,628 2,046 9,802 19,327 9,174
Other investing activities 0 0 -1,482 -3,111 -1,500 0 0
Equity raised/(bought back) 1,249 -5 1 0 0 0 0
Dividends paid -70 -107 -450 -2,355 -3,651 -5,393 -5,383
Net inc/(dec) in borrowings 3,091 -310 -481 1,975 0 0 0
Other financing cash flows 9,392 -768 -2,128 1,750 0 0 0
Total cash flows from financing 13,662 -1,190 -3,059 1,370 -3,651 -5,393 -5,383
Net cash flow 30,318 290 -912 306 4,651 13,935 3,792
Movement in net debt/(cash) -27,227 -600 431 1,669 -4,651 -13,935 -3,792
#
324
Cash and other liquid assets 448 602 684 1,001 5,599 19,534 23,326
Goodwill 0 0 0 0 0 0 0
Associates/investments 0 0 1,482 4,592 6,092 6,092 6,092
Other assets 5,366 6,605 7,077 8,693 15,132 16,428 22,710
Total assets 36,580 35,741 36,352 46,716 59,013 77,026 90,592
Minorities 0 41 48 53 0 0 0
Net working capital 1,222 2,085 1,889 1,305 5,464 4,879 9,656
Net debt/(cash) 15,214 14,778 13,836 14,785 12,187 2,252 -1,539
Capital 25,753 24,556 24,297 32,520 38,389 41,037 49,805
!
Sales growth (%) NM 17.8 25.3 46.8 16.5 21.7 11.9
12.9% 20.0% 20.4%
EBIT Margin (%) 3.3 3.2 9.0 24.8 29.4 35.0 31.3
52-week Range INR 620.95 - 1,163.85 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Company Identifiers
Capex/sales (%) 15.6 0.9 2.6 15.3 4.3 8.4 8.9
Bloomberg UTCEM IN
Cusip ¯ Net debt/equity (%) 144.4 151.1 132.3 83.4 46.5 5.8 -3.0
SEDOL B01GZF6 Net interest cover (x) 0.6 0.8 3.4 14.2 15.9 12.6 11.3

Investment thesis
Outlook
We rate Ultra tech Cement as a buy due to the following. (1) We expect the company to
report earnings CAGR of 51% over the period FY07-09e (2) Our estimates for FY08e are (+38
and for FY09e are (+103% ) higher than consensus and we expect the consensus earnings
upgrade to drive the stock performance (3)Benefits flowing from superior bargaining power
driven by our forecast of tight utilisation levels over FY07-10e.(4) Our revised target price of
Rs 1140per share gives a potential ( +26% upside).
Note our new estimates are based on revision our all India cement price forecast we have
revised our all India cement price forecast for FY08 to Rs235/bag (7.7% higher than our
previous assumption) and FY09 forecast to Rs249/bag (18.8% higher than our earlier
assumption). Ultra tech Cemco is also likely to benefit from the 92 MW power plant coming
up for commissioning
Valuation
We have thus used an average PE multiple of 12x core earnings FY08E (earlier assumed 10x
FY08E) and 7.5xEV/EBITDA FY08E (earlier assumed 7xFY08E ) to arrive at the target price of
INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The
forward valuation multiples are similar to those used by us prior to the risk to long-term
earnings emerging from threats from government intervention in pricing cement in India. The
concerns stand reduced due to the following: (1) Indian cement companies were successful
in demonstrating that they can pass on government levies to end-users. (2) Indian finance
minister has stated that there is no price-freeze and the prices of cement will be dictated
purely by demand and supply forces. Based on our sectoral assessment, we believe we are
in the mid-cycle of an upward trend for cement prices. However, as seen from the trading
bands below the stock is trading virtually at the bottom – an anomaly which we expect the
market to correct.
Figure 64: 12-month forward rolling P/E band Figure 65: 12-month forward rolling EV/EBIDTA band

1,600 2,000
1,400
1,600
1,200
1,000 1,200
800
600 800
400
400
200
0 0
Mar-04
Mar-05
Mar-06
Mar-07
Mar-04
Mar-05
Mar-06
Mar-07

Risks
UltraTech Cement is a high-beta stock and any risk on the liquidity front would impact the
stock returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual
lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lower-
than-expected price realization reduces our estimates by ~5.0% for FY08 and 3.3% for FY09,
and vice versa.
International coal prices have risen up sharply We have assumed a 13% CAGR in coal cost
for the next three years. Any increase greater than 5% would have an impact on the
company’s earnings. Based on our sensitivity analysis, we estimate that a 10% increase in
fuel cost over our estimates would depress the earnings by ~9.3% FY08E and ~5.0% FY09E.
Figure 66 shows the sensitivity of earnings and EBITDA to cement prices and fuel costs. If
cement prices are higher by 5%, then our earnings estimates will be higher by 25% for FY08
and vice versa. Also, the EBITDA will be higher by 15% for FY08E and vice versa. A 10% rise
in coal prices would reduce EPS estimates for FY08 by 9.3% and EBITDA estimates for FY08
by 5.6%.

FY08e FY09e FY10e
Base Case estimate (INR/share) 98 144 144
If cement prices are 5% higher than estimates 122 168 172
If cement prices are 5% lower than estimates 73 120 117
If fuel prices are 10% higher than estimates 89 137 135


Higher average realization undone by cost overrun in FY08E
Based on our revised price forecasts, we expect average realization per 50kg bag to be
higher by 7.7% for FY08E and by 18.8% for FY09E over our earlier estimates. We have not
taken the full impact of capacity expansions in the next two years. The following table
underlines the changes in main assumptions.

---------------------FY08E-------------- ------------------FY09-------------
INR/tonne Old New Chg (%) Old New Chg (%)
Key assumptions
Sales volume (m tonnes) 18 18.4 2 22 20.5 (9)
Average realisation (INR/tonne) 3,269 3,815 17 3,037 4,066 34
Cost (INR/tonne)**
Raw Material 164 269 65 141 267 89
Freight 804 927 15 836 900 8
Power and fuel 710 828 17 622 692 11
Our revised estimates based on higher price estimates show earning estimates rising by a
marginal 4% for FY08e and 13% in FY09e over earlier estimates. Based on our assumptions
we forecast a net sales growth of 19% CAGR for FY07-09E, driving net profit growth of 51%
CAGR for FY07-09E.

------------------------FY08E--------------- ---------------------------FY09E--------------
INR mn Old New Chg (%) Old New Chg (%)
Net sales 55,602 57,907 4 62,195 70,488 13
EBITDA 19,495 20,298 4 19,145 29,065 52
PAT 10,599 12,171 15 10,900 17,975 65
EPS (INR) 85.1 97.8 15 87.6 144.4 65
Ratios
EBITDA/tonne (INR) 1,079 1,279 19 853 1,533 80
EV/tonne (USD) 153 175 15 105 136 30
ROE (%) (#) 54.2 55.4 123 40.2 55.3 1,509
RoCE (%) (#) 41.3 40.4 (89) 34 45.9 1,174

Appendix A
Capacity ordered
In the following table, we give the details of 73m tonnes of the capacity that has been
ordered by various companies in the sector.
Figure 69: Capacity Ordered

Particulars ( mn tonne) Region Cement Capacity(mn t) Commissioning Date Groups
By March-08
Gujarat Ambuja North 0.88 Dec-07
Binani Cements North 2.57 Jun-07 Others
Shree Cements-V North 1.34 Jun-07 Shree
JP Associates - Rewa- MP Central 2.01 Mar-08 Jaiprakash
Madras Cements- Jayanthipuram South 1.70 Dec-07 MadrasCements
Sub-total 8.50
BY March-09
Ambuja Eastern East 3.2 Mar-09
JP Associates North 4.55 Jun-08 Jaiprakash
Rain commodities South 1.6 May-08 Others
JP Associates - UP Central 3.35 May-08 Jaiprakash
Murli Industries West 2.77 Sep-08 Others
Lafarge-Sonadih North 2.68 Sep-08 Lafarge
Grasim-Kothputali-Rajasthan North 4.00 Sep-08 AdityaBirla
Grasim-Aditya-Rajasthan North 4.00 Sep-08 AdityaBirla
Shree Cements-VI North 1.34 Dec-08 Shree
India Cement-Sankaridurg South 1.1 Jun-08 India cement
JK Cement South 2.07 Sep-08 Others
Madras Cements -Alathiyur South 1.74 Mar-09 Madras Cements
UltraTech Cemco South 4.00 Sep-08 AdityaBirla
Zuari Cements South 1.98 Nov-08 Italicementi
Kesoram- Vasvadatta (Line IV) South 1.63 Mar-09 Other-Birla
Sub-total 40.00
By March-10
OCL East 2.01 May-09 Others
ACC Wadi South 3 May-09 ACC
Chettinad South 1.82 Jun-09 Others
Sagar cement South 1.72 Jun-09 Others
Penna Cement South 1.55 Dec-09 Others
Ambuja Cements North 3.9 Jun-09 Holcim
Dalmia Cement South 5.2 Jun-09 Others
Sanghi Cement South 1.7 Jun-09 Others
Sanghi Cement West 4.29 Jun-09
Sub-total 25.22
Total in India over the next 36 months 73.72


Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see
the most recently published company report or visit our global disclosure look-up page on our website at
http://gm.db.com.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject
issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any
compensation for providing a specific recommendation or view in this report. Manish Saxena
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-

holder return (TSR = percentage change in share price 500 58%
from current price to projected target price plus pro-
400
jected dividend yield ) , we recommend that investors
buy the stock. 300 31%
Sell: Based on a current 12-month view of total share- 200
holder return, we recommend that investors sell the 10% 10%
100 14% 4%
stock
Hold: We take a neutral view on the stock 12-months 0
out and, based on this time horizon, do not Buy Hold Sell
recommend either a Buy or Sell.
Notes:
Companies Covered Cos. w/ Banking Relationship
1. Newly issued research recommendations and target
prices always supersede previously published Asia-Pacific Universe
research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (including dividends)
between -10% and 10% over a 12-month period
Sell: Expected total return (including dividends) of -
10% or worse over a 12-month period

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GEMS: Asia India

Resources Construction Materials

Investment Policy Committee has

We’re in the midst of a EPS estimates are 30-100% above

supercycle – staying bullish

Industry – Sector earnings to grow at a

Thematic – Demand-supply mismatch

Thought leading – Entering a sustainable

Top large-cap picks: ACC and Ambuja;

Deutsche Bank Securities Inc.

We’re in the midst of a ACC (ACC.BO),INR1,072.40

supercycle – staying bullish Shree Cements (SHCM.BO),INR1,335.20

Fundamental, Industry, Thematic, Thought Leading

Fundamental – Analyzing the economic attractiveness of the sector

Thematic – Demand-supply mismatch may well extend much beyond 2010

Thought leading – Entering a sustainable earnings era

Deutsche Bank Securities Inc.

Look beyond the obvious ................................................................. 3

Demand growth in top gear ............................................................. 8

Deficit to continue till 1HFY10........................................................ 13

Cement prices on a roll again......................................................... 15

Asymmetric margin improvement ................................................. 18

Valuations are attractive................................................................. 20

Page 2 Deutsche Bank Securities Inc.

Look beyond the obvious

The three quantifiable constraints which overlap are:

Equipment orders placed for 68% of announced capacity

Deutsche Bank Securities Inc. Page 3

Regulatory approvals for 21% of announced capacity pending

Surprisingly, a few Figure 2: Regulatory clearances

Source: Ministry of Forest, environment, CMA, Deutsche Bank

Financial closure seems difficult for 27% of announced capacity

Figure 3: Funding constraints

Source: Prowess, CMA, Deutsche Bank

Page 4 Deutsche Bank Securities Inc.

Project delays add a different twist to likely capacity additions

Incremental cement capacity

Deutsche Bank Securities Inc. Page 5

 Rise in blending ratio: This is subject to stabilization of chemical composition of clinker

Supplies to India from other regions are unlikely

Regional demand –supply scenario is tight as well

Figure 6: Regional demand-supply scenario (in m tonnes)

Page 6 Deutsche Bank Securities Inc.

Deutsche Bank Securities Inc. Page 7

Demand growth in top gear

Indian cement demand skewed towards housing

Figure 9: Housing is the major driver…

Source: Deutsche Bank, NCAER

Page 8 Deutsche Bank Securities Inc.

Figure 10: …but not property prices

Cement demand growth - RHS Housing Prices (% Change YoY)

Source: Deutsche Bank, Builders Association, CMA

Infrastructure to give demand a big boost

Deutsche Bank Securities Inc. Page 9

Infrastructure spending to propel the growth in medium term

Figure 13: Infrastructure demand growth buoys up cement demand

Investment (%) FY97-02 FY03-07 FY07-12e FY97-02 FY03-07 FY07-12e

Pre-election spends can spice up demand growth

Page 10 Deutsche Bank Securities Inc.

Figure 14: ´Election effect´ to boost cement demand

Average growth in last 3 years Election year growth

Pan-India cement demand to grow at 10% CAGR over FY07-10

(1) Stronger-than-expected order book of Indian construction and engineering companies

(2) No slowdown seen in construction of houses at important consumption centers

Rise in blending ratio: This is subject to stabilization of chemical composition of clinker