Cement & Construction

Initiating Coverage | 18th Nov, 2011

ACC HOLD
Company Bloomberg Reuters Div Yield (%) 52 Week High 52 Week Low Eq. Cap. (`mn) FV (`) M. Cap (` mn) Avg.10d NSE Vol.

CMP TP
ACC ACC IN ACC.BO 2.7 1146.5 917.0 1877.4 10 210481.3 249886

1144 1218
Ambuja ACEM IN ABUJ.BO 1.7 166.5 112.0 3065.3 2 225526.1 1850679

Ambuja HOLD
UltraTech UTCEM IN ULTC.BO 0.5 1188.0 890.0 2740.5 10 309695.4 135916.8

CMP TP

146 160

UltraTech HOLD

CMP TP

1143 1211

Market Data*

Key Financials
ACC Revenue (` mn) EBITDA (` mn) PAT (` mn) Growth (%) EPS (`) PE (x) PBV (x) EV/EBITDA (x) ROE (%) Ambuja Revenue (` mn) EBITDA (` mn) PAT (` mn) Growth (%) EPS (`) PE (x) PBV (x) EV/EBITDA (x) ROE (%) UltraTech Revenue (` mn) EBITDA (` mn) PAT (` mn) Growth (%) EPS (`) PE (x) PBV (x) EV/EBITDA (x) ROE (%) CY10 77173 15540 11201 -4.0 59.7 18.0 2.9 10.3 17.9 CY10 73764 18236 12636 4.0 8.3 18.0 3.0 11.3 17.9 FY11 132099 25424 14024 87.0 87.8 22.1 2.9 12.4 18.4 CY11E 93175 18054 11391 21.0 60.6 16.0 2.7 11.6 17.0 CY11E 80553 19665 12237 9.0 8.6 19.0 2.2 10.5 15.8 FY12E 177214 37189 20094 34.0 51.2 16.0 2.4 8.2 17.4 CY12E 102029 19406 12213 10.0 65.1 15.0 2.5 9.0 16.9 CY12E 94815 23581 15146 18.0 9.9 15.2 2.4 9.2 17.1 FY13E 197467 43559 23048 11.0 73.3 14.0 2.1 7.6 17.0

The lumpy picture.. The Indian cement industry, which has been in an uptrend since 09, is caught up in growing concerns of impending overcapacity by FY12, which is believed to be overdone. We believe that FY12-13 would continue to witness oversupply, while FY12 could witness demandsupply parity, based on our analysis of incremental supply and expected fragile demand. While the industry would continue to face cost pressures as well as Government intervention. However, we rule out aggressive price hikes by cement players and thus prefer stocks with strong volume growth and/or cost savings. Volume sacrifice will lead to stable pricing We expect companies to sacrifice volumes and operate capacities at lower utilization rates to control pricing in the markets. We believe cement realizations for the companies will be slightly higher in FY12, even if the retail prices come down by 34%, due to benefit of excise duty cuts not passed on to the consumers. For FY13, we are estimating a 5% Y-o-Y increase in realizations, only to start from H2FY13, as capacity addition may slow down. Excess Supply concerns persist We are estimating addition of 48mn tonnes of capacity by FY13. However we do not see pricing disruptions due to this supply due to 1) slow progress in plant stabilization, 2) delay in market establishment and 3) pricing discipline exhibited by the players. Moreover we believe that the industry may resort to measures like increased OPC production (to cater to infrastructure demand and to keep clinker utilization levels optimal) and reduced blending ratios to contain the additional supply. Cost pressures to be passed on The cement industry is likely to face severe cost pressures from rising cost of coal, pet coke, fly ash and freight. However, these would be passed on in a scenario of supply tightness, although we rule out aggressive price hikes due to fear of Government intervention. Cement Demand growth to be robust at 10% p.a. We believe that the strong growth in dispatches shown by the industry in the last 6 months as a result of government expenditure and rural, semi urban housing demand is likely to continue for the next couple of years. The government in the recent budget 201011 has announced massive infrastructure spending which coupled with target of ~US$540bn infrastructure investments during XIth plan will lead to healthy demand for cement. Reform to stall further, current valuation priced worst scenario. Key Risks: Key risks to our call are 1) faster of capacity addition leading to short term supply glut in the market, 2) aggressive pricing and 3) increase in operating costs like coal, freight and power.

Price Trend
140
130 120 ACC Ambuja UltraTech

110
100 90 80 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Research Analyst:
Aditya Vikram Jha aditya.jha@rkglobal.in

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TABLE OF CONTENTS Industry Page

Industry at a glance .. 3 Demand driver.. 3 Industry Characteristics 4 Structural improvement 5 Pricing analysis 6 Cost analysis . 7 Profitability analysis 9 Capex Analysis .. 9 Cement Industry & Valuation 10

Companies

UltraTech Cement 13 ACC 18 Ambuja Cement. 22

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Industry at a glance

Over the past several years, Indian cement 12 industry has grown in tandem with Indias 10 economic growth, which helps the country to become the second largest producer and 8 consume of cement in the world. The demand 6 for cement is correlated with countrys GDP growth, since infrastructure and housing 4 construction is the key growth driver for both 2 GDP and cement industry. The average growth in demand for cement industry was around was 0 8.25%, while average GDP growth was 7.4% FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 -2 during the period FY01-FY11. Cement Cement consumption growth GDP growth consumption in India reached ~210MT at the Source: CMA, Planing Commission, R K Global Research end of March 2011, with domestic market value of the industry reached more than `800 billion. Cement companies have increased their production and capacity over the year to keep pace with the increasing demand in the country. Its installed capacity increased from ~115 MTPA in FY01 to ~327 MTPA in FY11, while its production increased from ~94 MTPA in FY01 to ~241 MTPA in FY11.

Comparison of India GDP and cement consumption growth

Demand drivers

Growth %

Demand driver : Segment break up

Indias cement industry has demonstrated healthy growth in the past Industrial decade, primarily driven by increased investments in the residential 5% real estate and infrastructure. During FY06-FY11, the residential real estate sector alone contributes ~62% of the total domestic Commercial Residential cement demand in the country, given the intense shortage of housing real estate real estate in the country, this segment has been the primary driver for the 12% 55% cement industry, though its share is expected to come down ~55% in InfraFY12-FY14 from ~62% during FY06-FY11. Over the years, increasing development real estate requirement in urban India has been the primary 28% contributor to the cement demand, however going forward demand Source: R K Global Research could be driven by semi-urban and rural housing needs. The total shortage in housing during 2010 was around 46.5 million units, which may slightly decline to 41.4 million units by the end of 2014. The decrease is due to the governments thrust on improving rural housing by providing houses to homeless under various development schemes and by enabling sum development programs in urban areas under JNNURM. However, housing shortage in urban areas Housing shortage in India 38 will continue to rise owing to migration towards 34 30.1 urban areas and increasing trend of nuclear families. 33 26.7 26 Housing shortage in urban areas is likely to touch a 28 21.7 20.5 walloping 21.7 million units by the end of 2014. On 23 19.7 19.3 18.4 the other hand rural areas will witnessed a reduction 15.1 18 in housing shortage due to migration and conversion 13 of kutcha houses into pucca houses. Election has also 8 gained importance in cement consumption as 3 development activity increases during election -2 2001 2005 2008 2010 2014 seasons. Over the next 12 months, many of the key Urban Rural Source: CRISIL, R K Global Research states like Uttar Pradesh, Gujarat, Goa, Manipur, Punjab and Uttrakhand, will be going for elections and the cement demand are expected in this regions. While in 2014 there is National election. Increasing investment activity in infrastructure sector have resulted in a consequent growth in the demand for cement, Economic growth during the past few years has increased the need of quality infrastructure facilities in the country. The government has increased its total investment in the sector from $24 billion (5% of countrys GDP) in
Million Units

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FY02 to $83.5 billion (7.2% of Countrys GDP) in FY10. The total investment target for infrastructure sector during 11th five year plan is $514 billion (9% of countrys Government investment in infrastructure 8.2 GDP) i.e. 2.3 times more than investment during 140 8.5 8 10th five year plan. The bulk of the investment 8.0 120 132 planned during the 11th five year plan is likely to 7.2 120 7.5 be observed by the power, road and highway, 100 7.0 6.5 97 railway and port segment. In the draft bill of 12th 80 6.5 6 6 five year plan, the total planned investment in 81 5.8 6.0 5.6 infrastructure has increased from 8% of GDP in 60 5.4 67 5.2 5.5 FY12E to 10.3% of GDP in FY17. The total 5 55 40 47 5.0 investment in infrastructure is planned to be ~$1 24 26 32 39 trillion during twelfth plan period. As a result, the 20 4.5 share of infrastructure sector in cement FY'02 FY'04 FY'06 FY'08 FY'10 FY12E Infra investment % of GDP consumption is expected to increase from 20% Source: Planning Commission, R K Global Research during FY06-FY10 to 28% during FY10-FY14. In the infrastructure segment, road has been the biggest contributor to the cement demand and are likely to maintain their position in the Twelfth Five Year Plan well. In the near term the cement industry is expected to go through tough phase stained by increase in capacity Incremental demend, effective capacity addition and operating rate additions, sluggish demand resulting in 60 100 95 93 92 90 fall in capacity utilization and 89 88 86 85 50 82 80 79 profitability. From FY12- FY14, the 75 70 40 industry is expected to add ~65MT of 60 capacity, which is unlikely to be 30 50 40 absorbed during the same period. The 20 30 capacity utilization is expected to be 20 10 remaining ~74% only to go up from 10 H2FY13. Cement price and margin for 0 0 cement producers are expected to follow FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13E FY'14E Incremental demand Addition to effective capacity Operating rate capacity utilization trend. Most Source: CMA, R K Global Research expansion plans of large cement producers are either completed or are on the verge of completion. This resulting in marginal fall in market share of top 3 cements producers. While this happens to be temporary phenomenon and the future sky should appear to be clear. However the south region will remain most affected due to capacity addition and capacity utilization is expected to drop from ~72% in FY11 to ~ 68.5% in FY12, after which it will increase marginally.
Investment ( Billion USD) Million tinnes Investment (% of GDP)

Industry Characteristics
Cement industry can be characterized according to a) Cyclicality b) Seasonality c) Regional dynamics. Cyclicality: Indian cement industry has demonstrated an overall growth over the last few decades, since significant capacities added during up cycle continued to be underutilized due to reduced growth in cement dispatches. FY11 saw moderation in prices and resultant fall in margins due to commission of the new capacities in the country. As of March 2011, the industry had effective surplus capacity of ~50MT, which is likely to increase to ~80MT by the end of FY12. The industry is expected to witness this cycle, even in future, the down cycle in the industry in the anticipated future, are likely to be primarily driven by the capacity overhang with slowing down in demand due to delay decision making procedure on infrastructure by the government.
Cyclicity of India's cement industry
Up cycle factors

Down Cycle factors

1. Sluggish economic growth 2. Decline in consumption 3. Excess Capacity 4. Decline in operating rate 5. Decline in margins and price

1. Strong economic growth 2. Increase in consumption 3. Increase in operating rate 4. Increase in margins and price 5. Ecterance of new player and increase in capacity by existing players

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Seasonality: The seasonal nature of the industry affects demand and supply scenario, demand does not remain uniform throughout the year and witness periodic fluctuations. The demand decline during monsoons (July September quarter) and is highest during January-March quarter. Demand break -up by region Regional dynamics: The bulky nature of cement and its key ingredient, limestone, East 17% and the freight cost associated with these commodities over long distance, the industry has formed regional characteristics. South A cement plant is generally located near limestone mine with 29% only exception being of split grinding units, the cement produced in a particular region predominantly get consumed West in the same region. The presence of limestone deposit plays an 19% important role in concentration of the industry in a particular region, and are only concentrated in some regions of India like: North Rajasthan, Gujarat, Chattisgarh, Maharashtra, Madhya Pradesh, central 20% Andhra Pradesh and Karnataka, most of the cement plant are 15% Source: R K Global Research located in and around these states and cater to demand originated from within these states and from neighboring regions, resulting the industry has classified into five region- north, south, east west and central, while demand and supply also vary regionally.

Structural improvement
The cement industry has witnessed several structural improvements over the year like a) Increasing concentration level, b) Improvement in efficiency, c)Entry of global players in Indian market and d) Increasing use of captive thermal power plants. Increasing concentration level: The primary structural improvement in Indian cement industry has been the increase in construction, resulting change in market share of large players. The share of top 3 players in total capacity has increased from 39% in FY05 to 47% in FY11, with their capacity increasing from 53 million tonnes to 109 million tonnes during the same period. This concentration has not only inculcated an enhanced supply discipline within the industry, but has also made it difficult for cement producers to only compete on price any more. It is also seen that cement makers are also focusing on branding and product differentiating and generate higher realization compared to unbranded cement. For example ACC, Ambuja and UltraTech Cements retail selling prices are 3-4% higher than that of unbranded cement. Improvement in efficiency: The industry has also witnessed enhancement in efficiencies across the board over the years. Most cement producers are now equipped with energy-efficient kilns and waste-heat recover plants. Apart from cost savings, these measures have also reduced the cost differential between different players. Entry of global player in Indian market: The shape on Indian cement industry change with the entrance of global player in 2005, although Lafarge was the first entrant in the year 1998, the focus of other player gained momentum with entry of Holcim. As on date, most global major have either entered the Indian cement industry or are closely evaluating the feasibility of investing in the country. Global players in India Player Lafarge Italcementi Holcim Heidelberg Cimpor CHR Vicat
Source: Merger Market, Company, CMA, RK Global Research

Year of Entry 1998 2000 2005 2006 2007 2009 2010

Capacity add-up till FY'10 (MTPA) 6.6 3.4 46 3.1 1.1 3.2 2.5

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Captive power plants: The cement industry has witnessed a boost in captive power generation to improve operating margins and ensure regular supply of electricity. At an all India level 65% of the cement produced in FY11 was through captive power as compared to 45.3% in FY01 Blending ratio: Cement vs Clinker production Improved blending ratio: 1.4 Ordinary Portland Cement (OPC) has been the 1.34 most common type of cement in India, though 1.3 1.32 1.31 the industry players has introduced different 1.3 1.31 variety of blended cement, such as fly ash (by 1.30 1.32 1.3 product of power plants) and slag (waste 1.3 1.27 material from steel plants) due to cost 1.25 effectiveness of the blended cement, by blending 1.3 fly ash or slag with Ordinary Portland cement 1.2 1.23 (OPC), cement manufacturers can lower power, 1.2 1.21 fuel, and raw material costs, thereby improving 1.2 their operating margins. examples: Pozzolona FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12 FY'13 FY'14 Portland Cement (PPC), Slag cement and other source: R K Global research type of blended cement having similar strength with lower production cost, therefore, the industry has witnessed a rise in blending ratios over a period of time, as well as in the share of blended cement in overall cement production to 73% in FY11 from 57% in FY05.

Pricing and Cost Analysis Pricing Analysis:

Being cyclical nature, the demand and supply 270 scenario changes time to time, resulting in 250 large fluctuation in cement price and 230 utilization rate. The price tends to increase during the period of high demand and higher 210 capacity utilization, while witness a 190 downward movement if the industry is in low 170 capacity utilization. However the cement 150 prices have seen overall CAGR growth of 130 ~6%. Cement price witnessed a turnaround in FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 H1FY'12 2005 with increase in demand due to increase Kolkata Delhi Mumbai Chennai All India in investment in road development and Source: CMA accelerating growth in housing construction and increase in demand from the Middle East. Moreover, during this period, there was no significant capacity addition, which leads to decline in demandsupply gap and higher utilization All India cement price and utilization trend rate. However, since FY10, the cement industry is Decline in price growth 100 suffering from sluggish demand growth, over 300 Increase in Price due to due to economic robust demand from real capacity and rise in input cost, resulting in the 95 slowdown and capacity estate industry prices to decline across regions, the decline which 250 90 addition started in the southern region widen the price 85 differential, between southern and other region, 200 80 leading to cement flows from southern region to 75 others parts of India, which in turn resulted a fall 150 70 in cement price across India. Companies in the 65 southern region were affected the most as cement 100 60 prices in the region has witnessed a sharp decline, 55 However there was a price recovery in Oct 2011 50 50 with across region by around ~`22 per 50kg bag FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E due to increase in cement prices by large players. All India average annual price Capacity Utilization
Cement price (` per 50 kg bag)
Source: CMA, E&Y, R K Global research

Cement Price 290

Cement Price (` per 50 kg bag)

Cement production /clinker production

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Cost Analysis:
The operating cost of Indian cement companies have grown at a CAGR of ~5.2% from FY04. Over the years, the share of energy cost has declined, while that of freight cost has seen a rise in total operating cost. The average cost of cement companies increased at a CAGR of mere 6% from FY04, largely due to commission of captive power plant, use of energy efficient kilns by cement companies, as well as increase in share of blended cement in overall production. The share of raw material cost has also increased due to rise in input cost as well as 25% increase in royalty on limestone. Raw Material: Raw material costs account for ~25% of the key operating cost of cement manufacturing. Limestone accounts for 40% of the total raw material cost, with other materials such as gypsum, fly ash, slag, bauxite, red oxide and other consumable contributing the remaining cost. In recent years, there has been a rise in the cost of these consumable, which has resulted in raw material costs, almost doubling over the last five year. Power: The cement industry is one of the top five Power demand-supply position in India 11.1 900000 energy-intensive under EC Act, 2011. 10.4 11 800000 Power cost account for ~20% of the 9.9 10.6 10 operating cost. ~95kwh of power is 700000 10.1 8.8 9.8 required to produce one tone of cement. 600000 9 Therefore, availability of stable and 7.8 500000 continues power supply is very important 8 7.3 8.3 400000 for cement industry. However the 7.5 7 300000 demand and supply scenario of power is 7.1 6 very bleak in the country. The demand for 200000 power is growing at a CAGR of 6.3% from 100000 5 FY05 to FY11, the supply increased at a FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E CAGR of only 5.9% during the same Demand Supply Shortage % period. As a result, India continues to be Sourav: Central Electricity Authority deficit in power supply with the power shortage in the country increasing from around 7.3% in FY05 to 10.4% in FY11. However, cement industry has witnessed an increased thrust in captive power generation to improve operating margin and ensure regular supply of electricity. At an all India level, ~66% of the cement production in FY11 was through captive power. Cement roduction by use of captive power 66.5 Currently, ~3230 MW of cement power 180 70 capacities have been installed by cement 69.4 65 160 56.5 64 players. Due to cost efficient, a larger 60 140 portion of capacity installed are coal 55 48.2 47.8 120 based, followed by diesel based 50 45.3 capacities and wind based. Captive 41.9 100 45 49.4 48.6 power plant also act as cost savings for 40 80 41.3 cement companies as their average cost 35 39.2 60 of generating captive power is ~50% 30 lower than that of the power source 40 25 from the third parties. By FY14, captive 20 20 power is expected to contribute ~80% FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E Cement production by use of captive power (MT) of the cement industrys power Cement production by use of captive power to total production (%) Source: CMA, Crisil, R K Global Research requirements. Over the next 2 years around ~500 MW of coal based captive power capacity is expected to add up. This is ~25.6% growth over existing coal based power capacity. The cost of generating power from coal based power plant is ~`2.6 per kwh, which is 35% less than the selling price of SEBs. With rise in the number of captive thermal power plant, the power cost of cement companies are likely to decline over the next four to five years. Further, Indias cement industry generates 18MW of electricity by processing heat generated from producing cement, as per CMA estimation, the industry has the potential to generate 500-600 MW of electricity by tapping the heat. Increased use of captive power today not only reduces the cost of manufacturing cement, but also provides revenue generating opportunities. The ECA Act 2007 allows
Million Units (MU) Cement Production (MT) Cement Production(%) Shortage %

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companies to sell power from their captive units without seeking prior licenses. Open access has enabled captive power producer across industries, including cement, to channel power to any destination, in the mean while increasing power deficit gap has lead to scale up power tariffs from merchant companies. Cement manufacturers with excess captive power are exporting power to other industries. Coal: The cement industry is third largest consumer of coal in India after power and steel. Coal cost account for ~25-305 of key operating costs. Coal is primarily required for the production of clinker with the consumption of ~700 kcl per kg of clinker. Although India has abundant coal reserve of ~276.8 billion tones, only 40% are confirmed, while the quality of the coal is a serious concern, as Indian coal has high ash content and low calorific value. Due to low calorific value, Indias import good quality coal from Australia, Indonesia, Russia and South Africa. Indias total coal import is expected to increase from 59 million tonnes in FY09 to 152 million tonnes in FY14. However, the coal-sourcing arrangement of cement companies has evolved over period of time. While their fuel supply agreements with government collieries have been their traditional source, Indian cement companies are now increasingly looking for mine- acquisition opportunities in domestic as well as overseas territories.
Coal procurement optins

Fuel Supply Agreement (FSA)

Imports Suitable for plant located ports Prone to fluctuation in international coal price

Open market purchases Suitable for procuring interim shortfall and urgent requirements. Subject to prevalent market prices.

Alternative fuel Lignite and pet coke

Acquisitins of coal mines Suitable for large cement plants Efficiency subject to expertise in coal mining

Suitability

Suitable for plant located near coal qurries Supply dependent on demand from other key sectors including power and steel

Limitations

Suitable for procuring shortfall

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Profitability Analysis:
As we know cement industry is highly cyclical and therefore the profitability of cement companies is highly dependent on business cycle. The Industry has seen a turnaround from FY05, while its EBITDA per tonne touched the highest level of ~`1300 during FY08. However, with economic slowdown, excess capacity and rise in input cost, leads to the fall in average EBITDA per tonne to ~`900 during FY11. However increase in price and decreasing production by the industry players may help the cement industry to scale up EBITDA per tonne slightly too ~`956 during FY12.

EBITDA (Per tonne)

1400 1200

1300 1175 1100 900 956

EBITDA (`/ tonne

1000 800 540 375 365 410

1020 490 490

600 400
200 0

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E
Source: E&Y, CMIE, R K Global Research

Capex Analysis:
Capex expenditure requiring setting up greenfield projects has increased substantially from 2005 to 2008 due to surge in the price of all the constituents elements, primarily land and steel. The cost of a greenfield cement plant per tonne went up from $90 in 2005 to $110 during FY10, a similar rise of about 40% also occurred in brown field project. Still price rose at a CAGR of ~12% from FY03 to FY11, resulting in the price rise of kiln and other machinery. Similar is the case with copper price, while land and civic construction cost increased by ~50-100% (depending on the location of the project. Although steel price rose during FY11, they are still 20% less than the one prevailing during FY09. This resulted in reduced Steel price replacement cost, which was estimated at 1200 1,032 ~USD 100 per tonne for 2009. Current replacement costs are estimated to be 1000 around USD 110-120 per tonne. Over the 766 800 medium to long term, steel price are 600 833 582 expected to rise by 17-18%. Another 723 600 important component i.e. land, is also 621 582 311 expected to increase by 20-21% per 400 annum. Consequently, the replacement cost 373 200 of the cement plant is expected to increase in line with steel and land costs. 0
Source: Index Mandi, R K Global Research

Avg steel price (USD/Mt)

FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E

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Cement Industry and Valuations:

The cement industry in India has undergone a major shift over the last few years, Increase in industrial investment, infrastructure and revival of real estate sector in last 3-4 years resulting in demand for cement to grow at a CAGR of 10.6% over the last 5 years. The Indian cement Industry attracts investors primarily due to: 1. Low per capita consumption of cement: Indias per capita production of 115 kilograms per year lags the world average of 250 kilograms & Chinas production of more than 450 kilograms per person. Also, the per capita consumption in India is estimated to be 150 kilograms per annum which is less than one-third Chinas per capita consumption. Clearly, there remains room for growth in the industry in India. Given the sustained growth in the housing sector, the Governments emphasis on infrastructure (at both the national and the state level) and increased global demand, the outlook for cement industry is exceedingly bright. 2. Direct correlation national GDP: Cement enjoys a positive correlation with economic growth, because it plays a critical role in construction and infrastructure creation, the backbone of an economy. The cement industry which offers high visibility of revenue and earnings in phase of high growth typically loses its shine during the time of economic slowdown. Cement stocks in India normally outperform the boarder market indexes during the high growth period of FY04-06; they underperform during FY07-09, just to recover again from FY10 onwards, however the short EV/tonne vis-a-vis Average Replacement cost of top 6 companies term scenario looks scary, the 180 broader is expected to remain under 160 pressure on account of growing 140 concern for world major economy, 120 despite stable domestic economy, 100 slowdown in demand of cement and 80 expected widening in demand-supply 60 scenario due to excess capacity 40 addition, for short duration, cement 20 stocks may be seen under pressure. 0 Valuation: ACC Ambuja UltraTech India Madras Shree Valuation in the cement sector is Cement Cement Cement Cement Cement closely related to its business cycle. EV/tonne($) Average Replacement Cost ($/tonne) While replacement cost (EV/tonne) is considered more relevant in boom periods, valuation during recessionary periods is influenced by operating cash flow generating capacity of an individual cement company. We analyzed such factors which largely influence valuation of a sector. By identifying historical trends we try to identify which companies are better equipped to survive the slowdown and why they fetch premium valuations over other companies, in term of p/e multiples. P/E valuation is also influenced by the leverage and coverage ratio of the companies. Acc and Ambuja trades at a premium vis-a vis peers, due to better leverage and interest coverage ratios. Name of Company Average ACC Ambuja UltraTech India Cement Madras Cement Shree Cement Capacity (MTPA) 24 21 52 15.5 11.3 13.5 Mcap (`Million) 212490.2 224356.6 303752.2 21103.2 25308.0 70456.6 EV/tonne ($) 115.4 142.6 170.2 128.0 63.6 90.3 98.0 P/E (x) 17.8 19.1 18.9 15.1 8.5 8.0 37.4 P/B (x) 2.3 3.0 2.7 2.6 0.6 1.3 3.4 EV/EBITDA (x) 9.8 10.8 10.0 12.2 9.6 8.0 8.5 52 wks P/E High Low 20.7 21.1 40.1 66.8 20.4 97.3 9.5 11.6 10.0 8.4 6.6 9.8

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10

ACC

Ambuja Cement

35 30 25 20 15 10

30 25 20 15 10 5

36 34 32 30 28 26 24 22 20

25 20 15 10 5

2006

2007

2008

2009

2010

2011

2006
India Cement

2007

2008

2009

2010

2011

EBIDTM % (LHS) UltraTech Cement

TTP p/e x (RHS)

EBIDTM % (LHS)

TTP p/e x (RHS)

35 30 25 20 15 10 2006 2007 2008 2009 2010 2011

EBIDTM % (LHS) Madras Cement TTP p/e x (RHS)

35 30 25 20 15 10 5

35 30 25 20 15 10 2006 2007 2008 2009 2010 2011

EBIDTM % (LHS) Shree cement TTP p/e x (RHS)

76 66 56 46 36 26 16 6

35 30 25 20 15 10 2006
Leverage ratio 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

20 18 16 14 12 10 8 6 4 2007 2008 2009 2010 2011

EBIDTM % (LHS) TTP p/e x (RHS)

45 40 35 30 25 20 2006
Coverage ratio

84 64 44 24 4 2007 2008 2009 2010 2011

EBIDTM % (LHS) TTP p/e x (RHS)

1.64 1.01 0.69 0.39 0.08

ACC

40 35 30 25 20 15 10 5 0 26.74

35.13

7.45

0.01
Ambuja Cement UltraTech Cement India Cement Madras Cement Shree Cement

1.63
ACC Ambuja Cement UltraTech Cement India Cement

3.12

1.63
Shree Cement

Madras Cement

Source: Company, ACE Equity

Debt/Equity (FY'11/CY'10)

Source: Comapny, ACE Equity

Interest Coverage ratio

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11

We have valued cement stocks using relative valuation method based on EV/EBIDTA multiples. We believe EV/EBIDTA is a superior way of valuing cement stocks compared to other measures like P/E or EV/ton. EV/EBIDTA captures the earnings capacity or the efficiency of the plants and also takes care of the capital structure of the company. As against this, P/E or EV/ton may not be completely reliable as companies have had negative earnings in the past distorting the P/E ratios and huge dispersion in premium or discount on EV/ton to replacement cost for different companies. Replacement cost can be difficult to ascertain because of difference in cost of green field and brown field expansion. Also EV/ton fails to look at the age of the plants thereby valuing the old and new plants or green field or brown field capacities at the same valuation. Moreover, recently many companies have started putting up captive power capacities which entails huge investments and leads to lower costs which does not get reflected in EV/ton valuation method. To arrive at our target multiples for individual stocks we have taken average EV/EBIDTA multiples since January 2000 which includes two cement cycles. What we observe is that the behavior of multiples during different stages of cement cycle is different for different companies. For example, EV/EBIDTA of ACC was higher than Ambuja during FY01 down cycle due to very low operating profits of ACC (lower denominator). The EV/EBIDTA of ACC reverted to mean during current cycle when its profitability improved to be at par with peers. On the contrary, Ambujas EV/EBIDTA average is lower as the companys operating profits have always been on the higher side as the company has shown higher profits even in down cycles by maintaining higher utilization rates.
EV/EBITDA to OPM ratio
2.50

EV/EBITDA to OPM ratio

in the past higher EV/EBITDA of ACC was due to lower OPM as reflacted in this chart. However with similar profitabality of both these companies they are trading at a similar valuations now

2.00
1.50 1.00 0.50

0.00 2000 2001 2002 2003

Source: R K Global Research

2004 ACC

2005

2006 2007 Ambuja

2008

2009

2010

2011

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UltraTech Cement | Cement & Constructions

Market Data Bloomberg Code Reuters Code SENSEX NIFTY Dividend Yield (%) 52 Week High/ Low(`) Equity Capital(` mn) Face Value (`) Market Cap (` mn) Avg. 10 day Vol. NSE Time Period (Months) Key Market Ratios TTM EPS (`) TTM Book Value (`) TTM PE (x) TTM P/BV (x) TTM EV/EBIDTA (x) EV/TTM Sales (x) Mcap/TTM Sales (x) Share-Holding Pattern (%)
Promoters FII's DII's Public Others

UTCEM IN ULTC.BO 16123 4832 0.5 1207/883 2740.4 10 313494.9 135916.8 12

Higher capacity utilization at existing cement units and 4.4mn tonnes of additional cement capacity commissioned in 1HFY11 are likely to help UTCL deliver ~10% volume growth in FY12. Waste gas utilization and setting up of logistic infrastructure and captive power plants. Acquisition of stake in Dubai based Star Cement Co. LLC is likely to enhance UTCLs global reach, adding 3mn tonnes of grinding capacity. Net profit is likely to report a CAGR of 22.6% during FY12- FY13.
Profitability and size of the company has improved and so should valuations Ultratech inherited comparatively inefficient plants from L&T. Throughout the last45 years, up gradation and modernization initiatives by the company, has led to improved profitability of the plants. We expect UltraTechs profitability to be at par with other industry majors like ACC and Ambuja which should lead to reduction in Ultratechs valuation discount to these two companies. New capacity to support CAGR of 10.5%. Higher capacity utilization at existing cement units and 4.4mn tonnes of additional cement capacity commissioned in 1HFY11 are likely to help UTCL deliver 11% volume growth in FY12. Brownfield expansion is likely to boost volumes beyond FY13f. The panIndia presence is likely to reduce the impact of regional price volatility on profitability Product and process changes likely to preserve profitability Utilization of waste gases and setting up lowcost captive thermal power plants are likely to reduce the dependence on highcost purchased power. Setting up of logistic infrastructure, bulk cement terminals and material evacuation facilities are likely to help reduce freight cost from `653 per tonne in FY12 to `620 per tonne in FY13. Volumes for the readymix concrete business are likely to grow at a CAGR of 15% for the next three years.

51.2 389.0 22.1 2.9 12.4 2.6 2.4

8.1% 7.8% 7.8%

12.9%

63.3%

Price v/s Sensex 110 105 100 95 90 85 80 75 70 Nov-10 Ultratech sensex

Acquisition to de-risk business and enhance geographical reach Acquisition of 80% stake in Star Cement Co. LLC, Dubai, is likely to increase cement grinding capacity by 3mn tonnes. The acquisition is likely to enhance global reach as Star Cement has cement plants in the UAE, Bahrain and Bangladesh and a bulk cement terminal at Sudan. We foresee the acquisition of the cement unit to be 3% EPS accretive. Volume growth, cost reduction to boost net profit We forecast revenues to report a CAGR of 12.3% during FY11FY13 driven by strong volume growth. Cement |Cement & Constructionsby ACC Cement prices are likely to decline 3.4% in FY12 due to weak demand in 1HFY12. As the pace of industry capacity addition slows, cement prices are likely to revive by 1% in FY12f. EBITDA/tonne is likely to increase from `935 in FY11 to `1,052 in FY12. Net profit is likely to grow at a CAGR of 22.6% during FY11fFY13.

Mar-11

Jul-11

Nov-11

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New capacity to support CAGR of 10.5% in volumes till Mar12 Higher capacity utilization at existing cement units and 4.4mn tonnes of additional cement capacity commissioned in 1HFY11 are likely to help UTCL deliver 11% volume growth in FY12. Brownfield expansion at the Karnataka and Chhattisgarh units are likely to boost volumes beyond FY13 and help maintain market share. The panIndia presence is likely to reduce the impact of regional price volatility on profitability. The price increase of `50 per bag in south India and `20 per bag in north and west India since Aug11. Cement dispatches to grow by 11% in FY12 Higher capacity utilization at the 4.4mn tonne additional cement capacity commissioned in 1HFY11 and at existing cement units is likely to help UTCL deliver volume growth in FY12 and FY13 Capacity utilization at the recentlycommissioned Kotputli (3.1mn tonnes) and Aligarh (1.3mn tonnes) units stood at 47.8% and 12.8%, respectively, in Sept11. UTCL operated its other cement plants at a capacity utilization of 76.8% during 1HFY12. We forecast overall capacity utilization to remain muted from 79.5% in FY12 to 90.6% in FY12. Cement dispatches are likely to increase by 6.9% yoy in FY11f to 39.8mn tonnes, includes 1QFY11 volumes of Samruddhi Cement (GRASIMs cement division), and by 11% in FY12f to 44.2mn tonnes. Expansion at Karnataka, Chhattisgarh to yield benefits Regional Capacity Distribution beyond FY12 UTCL plans to incur capital expenditure of INR56bn to expand cement capacity by 9.2mn tonnes beyond FY12f. Central UTCL plans to set up these cement plants along with clinker 11% Norhtern units in Karnataka (4.4mn tonnes) and Chhattisgarh (4.8mn 23% tonnes). These cement plants will be supported by setting up of bulk packaging terminals across various states. Work western on brown field cement plants is likely to be commissioned 26% Eastern by end 4QFY11f. The expansions are likely to help maintain 14% UTCLs allIndia market share in the long run as cement demand would continue to grow. UTCL has strong presence Southern in the southern, western and northern regions with 25.9%, 26% 26.3% and 23%, respectively, of its capacity in these Source: Cpmany, R K Global Researvh markets. This is likely to reduce the impact of regional price volatility on profitability. As cement is a regional product, its price depends on the demandsupply dynamics in that particular region. Cement prices in the South have increased by `22 per bag since mid Sep, whereas in the West and North the average price increase has been in the range of `1520 per bag. Acquisition to derisk business and enhance geographical reach Acquisition of 80% stake in Star Cement Co. LLC, Dubai, is likely to increase cement grinding capacity by 3mn tonnes. Based on the enterprise value of USD420mn, the deal is valued at an EV/tonne of USD140. The acquisition has enhanced global reach as Star Cement has cement plants in the United Arab Emirates, Bahrain and Bangladesh and a bulk cement terminal at Sudan. Star Cement has market share of 10% in Dubai and 20% in Bahrain; it plans to enhance its cement capacity to 8mn tonnes by 2015. We foresee the acquisition of the cement unit to be 3% EPS accretive. Acquisition to help foray into Africa and north east India The acquisition is likely to help derisk UTCLs business model from domestic commodity price movements and is likely to help enhance its presence in the African, Bangladesh and north east Indian markets. Star Cement plans to enhance its cement capacity to 8mn tonnes by 2015. Currently, the company has market share of 10% in Dubai and 20% in Bahrain. UTCL exports majority of its clinker and cement volumes to these regions. During FY10, UCTL exported 1.92mn tonnes of clinker and 0.5mn tonnes of cement.

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Middle East market to remain in surplus over the near term We foresee the acquisition of the cement unit to be 3% EPS accretive. The United Arab Emirates market is currently in surplus with average exfactory cement prices at `2700 per tonne. A slowdown in the real estate market in Dubai since early 2009 has impacted cement consumption. Star Cement Co. LLC currently generates an EBITDA/tonne of `400 with 85% capacity utilization. The increasing geographical presence is likely to help UTCL choose the best market for its cement products, depending upon the EBITDA per tonne and logistic costs. Volume growth, cost reduction to boost net profit till FY13 We forecast UTCLs revenue to grow at a CAGR of 12.3% during FY11FY13. Cement prices are likely to decline by 3.4% in FY13 due to weak demand in 1HFY13. As the pace of industry capacity addition slows, cement prices are likely to revive by 1% in FY12. The RMC division and other auxiliary businesses are likely to contribute `25.6bn to revenues in FY12. Reduced dependence on highcost power from the grid and setting up of logistic infrastructure is likely to reduce input cost. EBITDA/tonne is likely to increase from `935 in FY12 to `1052 in FY13. Net profit estimates for FY12 are likely to be `26.8bn, translating into an EPS of `97.6. Sales volume for UTCL, including sales Sales volume and realizations volume of Samruddhi Cement for FY11, is 50 7000 likely to grow at a CAGR of 10.5% during 45 6000 FY11FY13. We estimate sales volume for 40 FY11f to increase by 6.7% to 39.8mn tonnes 5000 35 due to weak infrastructure and construction 30 4000 demand in 1HFY12. Sales volume in FY12 and 25 3000 FY13 is likely to grow by 11% and 10%, 20 respectively, as demand revives. Cement 15 2000 prices is likely to remain stable in FY12. As 10 1000 the pace of industry capacity addition slows, 5 0 0 cement prices are likely to revive by 1% in FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E H2FY13 and 2.5% in FY13f. Improved Realization (RHS) demand in the RMC division and other Source: Company, R K GlobalSales Volume Research auxiliary businesses is likely to contribute `25.6bn to revenues in FY12. EBITDA per tonne for UTCL is likely to increase from `935 in FY11 to `1052 in FY12. Correspondingly EBITDA margins are likely to increase from 25.7% to 27.8%. Commissioning of lowcost captive power plants has reduced the dependence on highcost purchased power from 64% in FY08 to 22% in FY10. This is likely to decline to 5% by FY13f, once UTCL sets up thermal power plants of 25MW of and waste heat recovery systems of 38MW. Also, setting up logistic infrastructure and material evacuation facilities is likely to help reduce freight cost from `653 per tonne in FY12 to `630 per tonne in FY13. EBITDA/tonne and EBITDA margin
1300 1200 1100 1000 In ` 900 800 33% 31% 29% 27% 25% 23%

700
600 500 FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E FY'14E
EBITDAM (RHS)

21%
19% 17%

EBITDA/tonne
Source: Company, ACE Equity, R K Global Research

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Stable valuation We have valued UltraTech at a target multiple of 8x EV/EBIDTA which is lower than that of ACC and Ambuja to reflect the historical discount. If we value UltraTech at the same multiples, then our target price will go up by another 7%. On an EV per tonne, UltraTech is trading at $128 slight higher than industry average of $115. Even on a P/E basis, it is trading comparatively lower valuations to its peers despite the fact that it does not have the lowest earnings risk in the industry. At CMP of `1143, stock is trading at EV/EBIDTA of 10.1x and EV per tonne of $128. We initiate our coverage on the company with Hold rating and target price of ~`1211.

21.5 19.5 17.5 15.5 13.5 11.5 9.5 7.5 5.5

EV/EBITDA(x)

3.5
1.5 April-07 April-08 April-09 April-10 April-11

43.5 38.5 33.5 28.5 23.5 18.5 13.5 8.5 3.5 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09

P/E

Jul-09

Dec-09 May-10 Oct-10 Mar-11 Aug-11

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Financial Summery
Income Statement (`Mn)
Descriptions Revenue Expenditure EBITDA (ExOI) Interest PBDT Depreciation PBT(OI) Other Income PBT PAT FY'10 70497 50827 19711 1175 18536 3881 14655 1227 15882 10932 FY'11 132099 106781 25424 2771 22653 7657 14996 2867 17863 14042 FY'12 177214 140073 37189 2778 34411 9214 25197 3674 28871 20094 FY'13 197467 153960 43559 4600 38959 9517 29442 3674 33116 23048 Gross Block Less: Acc. Dep. CWIP Net Fixed Asset Cash At Bank FY'12 73.3 106.9 6.0 456.2 19% 18% 12% 8% 26% 17.4 24.0 18.0 1.2 34% 46% 57% 43% 43% 11642 8.2 2.2 2.4 16 FY'13 84.1 119.2 6.0 534.1 Investments Total CA Total CL Net Current Asset Total Asset Share Capital Total Reserves Shareholder's Funds Total Debt Total Liabilities Descriptions

Balance Sheet (` Mn)

FY'10 1245 44822 46067 16045 FY'11 2740 103872 106660 41446 FY'12 2740 122035 124824 44304 186428 196657 74634 27192 149215 4826 37303 44495 44576 (81) 186428 FY'13 2740 143172 145961 61304 224566 237933 84151 43402 197184 1103 37303 44102 49015 (4913) 224565 SOURCES OF FUNDS

70419 165407 APPLICATION OF FUNDS 80781 31365 2594 52011 837 16696 14724 12991 1713 70419 179423 65420 11053 125056 1448 37303 37586 34539 3047 165406

Financial Ratios
Description Adj.EPS CEPS DPS Book value PBIDTM EBIDTM Pre-Tax Margin PATM CPM ROE ROIC ROCE Sales/FA Revenue Growth EBIDTA Growth EBIT Growth PAT Growth EPS Growth EV/Tonne EV/EBIDTA Mcap/Sales P/BV P/E 11268 7.6 2.0 3.1 13.2 FY'10 87.8 119.1 6.0 370.2 28% 28% 23% 16% 35% 26.6 32.7 25.2 1.4 FY'11 51.2 79.4 6.0 389.4 19% 19% 14% 11% 27% 18.4 21.4 17.5 1.1 87% 29% 12% 28% -42% Valuation ratios(x) 13747 12.4 2.4 2.9 22.1 11642 7.6 2.2 2.1 14 Per Share (`)

Margin Ratios (%) 26% 25% 19% 13% 33% 17.0 25.7 18.4 1.0 11% 17% 22% 15% 15% Dividends Paid CAPEX Investments PAT Depreciation Changes In WC Changes in Diff.tax Descriptions

Cash Flow Statement (` Mn)

FY'10 10932 3881 -893 1078 14998 (2741) (6358) (8517) FY'11 14042 7657 (692) 0 21007 (107101) (20608) (16489) FY'12 20094 9214 6494 0 35802 (33372) 0 3674 FY'13 23048 9517 1110 0 33675 (57487) 5000 8674 CASH FLOW FROM OPERATIONS

Performance Ratios (%)

Net Cash From Operations

CASH FLOW FROM INVESTMENTS

Efficiency Ratios (%)

Cash In Investment Activities

CASH FLOW FROM FINANCING (728) (5371) 0 (7410) (208) 1045 837 (1911) 25401 0 (4309) -55 837 1448 (1911) (4089) 0 (1831) 3378 1448 4862 (1911) (5000) 0 10489 -3722 4862 1103 Incresase/decrease in debt Others Cash In Financing Activity Increase/ Decrease in Cash Cash At The Beginning Cash At The End

DuPoint Analysis
Description PAT/PBT PBT/EBIT EBIT/Sales Sales/TA TA/NW FY'10 0.7 1.0 0.2 1.0 1.5 FY'11 0.8 1.0 0.1 0.8 1.6 FY'12 0.7 1.0 0.2 1.0 1.5 FY'13 0.7 1.0 0.2 0.9 1.5

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ACC Cement | Cement and Construction

Market Data Bloomberg Code Reuters Code SENSEX NIFTY Dividend Yield (%) 52 Week High/ Low(`) Equity Capital(` mn) Face Value (`) Market Cap (` mn) Avg. 10 day Vol. NSE Time Period (Months) Key Market Ratios TTM EPS (`) TTM Book Value (`) TTM PE (x) TTM P/BV (x) TTM EV/EBIDTA (x) EV/TTM Sales (x) Mcap/TTM Sales (x) Share-Holding Pattern (%)
Promoters FII's DII's Public Others

ACC IN ACC.BO 16123 4832 2.7 1237/917 1877.4 10 214977.8 249886 12

ACC Q3CY11 earnings were lower than estimates primarily due to higher than expected other expenditure, which was up 21% Yo-Y. Expected expansion at Jamul (Chhattisgarh) has not been announced, and is now unlikely in the current year. Driven by capacity additions at Wadi (Karnataka) and Chanda (Maharashtra), dispatches grew 18% Y-o-Y. Strong prices in South, helped realizations improve 11% Y-o-Y.
Volume under pressure Volume growth to remain muted: Volume growth of the company deteriorated in CY11 on YTD basis to 5% mainly due to respite in demand from infrastructure projects and slowdown in housing demand due to inflationary pressure and rising interest costs. Consequently, we are expecting mere 4.2% Y-o-Y volume growth for the company in CY11E. Balanced geographical presence: ACC has well diversified presence across all regions in India with maximum exposure to Northern markets. This insulates the company from any weakness in a particular region. Further ACC has initiated cost cutting program which is likely to yield higher margins for the company going forward. Most of the companys plants are currently running at full capacity (except for Jamul plant) leading to greater utilization and lower operating costs.

59.2 377.7 19.3 3.0 10.5 2.3 2.4

0.8% 19.5%

16.1% 48.2%

Reducing operating costs: The Company embarked on cost control initiatives 23 quarters back to shed its inefficient plants tag and improve profitability. Increased use of captive power, optimum energy consumption and controlled freight costs has helped the company reduce operating costs by 8% Y-o-Y in CY10. We are conservatively estimating 1% decline in operating costs per ton for CY11. Strong balance sheet: The Companys balance sheet is very healthy at 0.1x debt to equity ratio. We expect that the company can complete its capex program of `300bn using internal accruals and without resorting to high amount of debt.

15.5%

Price v/s Sensex

122 117
112 107 102 97 92 87 82 77 Nov-10

Sensex

ACC

Feb-11

May-11

Aug-11

Nov-11

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Balanced geographical presence

ACC is the only company in India with cement plants present in all regions. This balanced geographical spread insulates the company from demand supply imbalances in one region. Because of this wide presence, the companys dispatches are also spread well across the country with highest exposure to the Northern region 41% of total dispatches. We believe that lower capacity additions in East and strong demand in North is likely to keep prices stable with an upward bias in these regions. ACC with almost 59% exposure to these two regions is likely to benefit from the same. Operating costs have reduced The company embarked on cost control initiatives 23 quarters back to shed its inefficient plants tag and improve profitability. These measures seem to have worked well for the company as the companys operating costs have gone down substantially over the last two quarters. Increased use of captive power, optimum energy consumption, has helped the company reduce operating costs by 4% Y-o-Y in 2QCY11. We are conservatively estimating 1% decline in operating costs per ton for CY11. Lower impact of fuel costs versus peers ~90% of ACCs coal requirements are sourced domestically. Imported coal is primarily used at its 1mnte plant in Tamil Nadu. However, Coal India (CIL) has raised coal prices by an average of 10-15% since April 2011. Further, of the total domestic coal consumed, ~20-25% has to be sourced from open markets (due to shortage of domestic coal), where prices are ~25-30% higher than CIL rates. This exposes the company to significant variations in the coal cost depending on the share of coal purchased from open markets. However, we believe that ACCs fuel costs are going to be more benign than most of its peers who use imported coal or pet coke. Savings in power costs unlikely ~70% of ACCs power requirements are met captively. This share has raised post commissioning of a 25MW captive power plant (CPP) at Lakheri, Rajasthan along with capacity augmentation in CY07. Another 30MW CPP in Orissa and the Bargarh expansion is expected by end CY08 following which, we expect share of captive power to be ~82%. ACC would continue to purchase power from the grid for its Himachal Pradesh plant as it is inexpensive hydro Cement Production & Capacity Utilization 25 100 power. We believe CPP additions are too small to have 95 substantial impact on power cost savings.
20 15
MT

90 85 80 75

Healthy balance sheet ACCs debt equity ratio stands at comfortable 0.1x as on CY10. The net debt to equity ratio is still comfortable making it a negative financial debt company. The company has adopted prudent policies to conserve cash and as a result has received AAA rating for both its debenture program and working capital facilities from Crisil.

10
5 0 CY'06 CY'07 CY'08 Production CY'09 CY'10 CY'11E Utilization

70
65 60 55 50

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Expensive valuations
At CMP of `1144, stock is trading at EV/EBIDTA of 10.1x and EV/tonne of $142. We initiate our coverage on the company with Hold rating and target price of ~`1218. We have valued the company at EV/tonne of $142 very close to its group company Ambujas valuation) for its CY12E year end capacity. We believe that any downside in the stock below `987 will be an entry level for the investors given ACC being one of the cost efficient players, completion of its capex plan and pan India presence adds advantage.

13.00

EV/EBITDA(x)

12.00
11.00 10.00 9.00 8.00

7.00
6.00 5.00 4.00 3.00
April-07 April-08 April-09 April-10 April-11

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Financial Summery
Income Statement (`Mn)
Descriptions Revenue Expenditure EBITDA (ExOI) Interest PBDT Depreciation PBT(OI) Other Income PBT PAT CY'09 80272 55469 24803 843 23960 3421 20539 2404 22943 16067 CY'10 77173 61633 15540 568 14972 3927 11045 3570 14615 11201 CY'11 93175 75121 18054 568 17486 4652 12834 3203 16037 11391 CY'12 102029 82623 19406 558 18848 5073 13775 3420 17195 12213 Gross Block Less: Acc. Dep. CWIP Net Fixed Asset Cash At Bank CY'11 60.6 85.4 20.0 369.3 20% 24% 19% 15% 30% 17.00 32.80 16.30 1.4 21% 16% 15% 2% 2% 7586 11.6 2.4 2.7 16 CY'12 65.1 92.3 20.0 398.7 Investments Total CA Total CL Net Current Asset Total Asset Share Capital Total Reserves Shareholder's Funds Total Debt Total Liabilities Descriptions

Balance Sheet (` Mn)

CY'09 SOURCES OF FUNDS 1879 58283 60162 5669 1880 62815 64965 5238 1879 67520 69399 5092 78107 95770 34597 5628 66801 15293 17027 31743 37464 (5721) 78107 1879 73056 74935 5046 83596 96770 39670 9628 66728 19504 17027 37306 37464 (158) 83596 CY'10 CY'11 CY'12

69324 73548 APPLICATION OF FUNDS 68263 26680 21562 63145 7464 14756 22945 31522 (8578) 69324 80770 29945 15628 66452 10800 17027 27533 37464 (9931) 73548

Financial Ratios
Description Adj.EPS CEPS DPS Book value PBIDTM EBIDTM Pre-Tax Margin PATM CPM ROE ROIC ROCE Sales/FA Revenue Growth EBIDTA Growth EBIT Growth PAT Growth EPS Growth EV/Tonne EV/EBIDTA Mcap/Sales P/BV P/E CY'09 CY'10 Per Share (Rs) 85.6 59.7 103.7 26.3 320.1 24% 27% 23% 17% 32% 29.40 34.90 27.80 1.3 12% 7% 6% 33% 33% 7573 6.7 2.0 3.1 10.2 76.1 30.4 344.2 31% 33% 29% 20% 38% 17.90 36.80 15.90 1.2 -4% -37% -46% -30% -30% 9259 10.3 2.6 2.9 18.0

Margin Ratios (%) 19% 21% 15% 10% 27% 16.90 37.80 16.30 1.5 10% 7% 7% 7% 7% 7586 9.0 2.2 2.5 15 Description PAT/PBT PBT/EBIT EBIT/Sales Sales/TA TA/NW Dividends Paid CAPEX Investments PAT Depreciation Changes In WC Changes in Diff.tax Descriptions

Cash Flow Statement (` Mn)

CY'09 16067 3421 6138 135 25761 (15840) (7966) (23806) (5051) 849 (131) (4333) (2379) 9842 7464 CY'10 11201 3927 4690 123 19940 (7234) (2270) (9505) (6677) (431) 9 (7099) 3337 7464 10800 CY'11 11391 6452 282 0 16325 (5000) 0 (5000) (6677) (146) 0 (6832) 4493 10800 15293 CY'12 12213 5073 (1352) 0 15935 (5000) 0 (5000) (6677) (47) 0 (6724) 4211 15293 19504 CASH FLOW FROM OPERATIONS

Performance Ratios (%)

Net Cash From Operations

CASH FLOW FROM INVESTMENTS

Efficiency Ratios (%)

Cash In Investment Activities

CASH FLOW FROM FINANCING Incresase/decrease in debt Others Cash In Financing Activity Increase/ Decrease in Cash Cash At The Beginning Cash At The End

Valuation ratios(x)

DuPoint Analysis
CY'09 0.7 1.1 0.3 1.2 1.2 CY'10 0.8 1.3 0.2 1.0 1.1 CY'11 0.7 1.2 0.1 1.2 1.1 CY'12 0.7 1.2 0.1 1.2 1.1

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Ambuja Cement | Cement & Constructions

Market Data Bloomberg Code Reuters Code SENSEX NIFTY Dividend Yield (%) 52 Week High/ Low(`) Equity Capital(` mn) Face Value (`) Market Cap (` mn) Avg. 10 day Vol. NSE Time Period (Months) Key Market Ratios TTM EPS (`) TTM Book Value (`) TTM PE (x) TTM P/BV (x) TTM EV/EBIDTA (x) EV/TTM Sales (x) Mcap/TTM Sales (x) Share-Holding Pattern (%)
Promoters FII's DII's Public Others

ACEM IN ABUJ.BO 16123 4832 1.7 165/111 3066.0 2 227499.2 1850679 12

Ambuja Cement Ltd (ACL) has increased its grinding capacity by 22% in the past 1 year, however, same has not translated into volume growth for the company due to slowdown in demand. Despite capacity addition, we are expecting the company to record just 6% CAGR in its volume over CY09-12E due to overall slowdown in cement demand. Also, we are expecting the companys profitability to remain stagnant due to not fully passing on the increase in costs to the end users on account of oversupply in the industry. Hence, in the near term, we are not expecting any upside in the stock price of the company. We are initiating our coverage on the stock with a Hold view and target price of `128. However, we feel that any further downside in the stock will trigger an opportunity for the investors to enter the stock. Volume pressure Volume growth to remain muted: Volume growth of the company deteriorated in CY11 on YTD basis to 4% mainly due to lull demand from infrastructure projects and slowdown in housing demand due to inflationary pressure and rising interest costs. Consequently, we are expecting mere 4.7% Y-o-Y volume growth for the company in CY11E. Higher exposure towards North and West regions risk to earnings: ACL has almost 75% of its exposure towards North and West regions in which we are expecting over supply in coming years. We appreciate that ACL does not have any exposure towards Southern region which currently is in worst situation, but, major exposure towards Northern and Western regions in which over capacity is likely to observe, is expected to limit the capacity utilization of the company. Steep rise in input costs: Despite lower clinker purchase cost due to commission of clinkerization units, we are expecting total cost of the company to go up significantly in coming years due to higher coal cost and freight cost. We are expecting total cost/tonne of the company to move up by 9% Y-o-Y in CY11E to `2991 mainly due to 30% hike in coal cost by Coal India and increase in fuel prices. Muted volume growth in CY11 Ambuja Cement reported 6.4% Y-o-Y growth in its volumes to 20MT in CY10 as compared to 18.8MT in CY09. However, growth of the company remained deteriorated in CY11 on YTD basis to 4% mainly due to lull demand from infrastructure projects and slowdown in housing demand due to inflationary pressure and rising interest costs.

7.7 53.9 19.2 2.7 10.0 2.6 2.8

0.1%

11.1%

14.6%

50.4% 23.7%

Price v/s Sensex

Sensex 120 115 110 105 100 95 90 85 80 75 70 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Ambuja

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Higher exposure towards North and West regions risk to earnings Ambuja Cement has almost 75% of its exposure towards North and West regions in which we are expecting over supply in coming years. We appreciate that ACL does not have any exposure towards Southern region which currently is in worst situation, but, major exposure towards Northern and Western regions in which over capacity is likely to observe, is expected to limit the capacity utilization of the company. Lower clinker purchase cost In CY10, the company has purchased only 0.36MT of clinker as compared to 1.7MT in CY09 due to commissioning of two new clinkerization units at Bhatapara and Rauri in Q1CY10. As a result of these new clinker plants, the companys clinker purchase cost has gone down significantly in CY10 to `1,237mn from `5,707mn in CY09. Going ahead, we are expecting no major cost of clinker purchased due to substituting own produced clinker for purchased clinker to a large extent. Despite lower clinker purchase cost, we are expecting total cost of the company to go up significantly in coming years due to higher coal and freight cost. We are expecting total cost/tonne of the company to move up by 9% YoY in CY11E to `2,991 mainly due to 30% hike in coal cost by Coal India and increase in fuel prices. Cost structure per tonne `/tonne Raw material Power & fuel cost Freight cost Total Growth% CY08 319 754 623 2546 15% CY09 503 757 717 2772 9% CY10 288 836 793 2742 -1% CY11E 303 939 872 2991 9% CY12E 318 1003 916 3126 5%

Completion of major capex cycle.. Ambuja Cement has just commissioned 2MTPA grinding capacity at Bhatapara and Maratha (1MTPA each) in JuneJuly11, taking total cement grinding capacity to 27MTPA. The company is also planning to increase its clinker capacity by setting up 2.2MTPA clinkerization unit in Rajasthan. The company is in right direction to maintain its objective of maintaining its market share of around 10%. Improving efficiency of logistic operations Currently, the company is having 7 ships with 20,500DWT capacity to transport the cement from Ambujanagar to Panvel and Surat. These ships are just sufficient to meet the present requirement. To cater the growing market needs of South Gujarat and Mumbai, the company had ordered three more ships with total capacity of 11800 DWT. Out of these three ships, one ship was delivered in CY10 for western coastal transportation and the remaining two ships are expected to be brought into the system in the 2HCY11. The said ships are expected to improve the efficiency of logistic operations of the company and is expected to save cost , however, we have not considered the same in our valuation as it is very difficult to calculate savings in freight cost on account of the logistic improvement Net sales to grow at a CAGR of 9.7% over CY09-12E Ambuja Cements Net sales grew at a CAGR of 8.7% over CY0710 mainly driven by 30 25 robust volume growth. Volume of the 22 22 25 20 18.5 company recorded strong growth of 20% 19 18 17 20 during the same period while realization 15 increased by 6.5%. Going ahead, due to 10 capacity addition, we are expecting the 5 company to report volume growth of 19% during CY0912E. Realization of the 0 company during same period is likely to CY07 CY08 CY09 CY10 increase by 3% driven largely by cost push Capacity Volume increases. We are expecting the companys source: Comapny, R K Global Research Net sales to grow at a CAGR of 9.7% over CY0912E.
MT

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27 22

21

4200 4100 4000 3900 3800 3700 3600 3500 3400

CY11E CY12E Realization (RHS)

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No major upside in the stock

At CMP of `146, stock is trading at EV/EBIDTA of 10.1x and EV/tonne of $169. We initiate our coverage on the company with Hold rating and target price of ~`161. We have valued the company at EV/tonne of $169 (much above its group company ACCs valuation) for its CY12E year end capacity. We believe that any downside in the stock below `135 will be an entry level for the investors given Ambuja cement being one of the cost efficient players, completion of its capex plan and location advantage.
12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 April-07 April-08 April-09 EV/EBITDA(x) April-10 April-11

25 20 15 10 5

0
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 P/E

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Financial Summery
Income Statement (`Mn)
Descriptions Revenue Expenditure EBITDA (ExOI) Interest PBDT Depreciation PBT(OI) Other Income PBT PAT CY'09 70799 51706 18669 224 21003 2970 18033 2558 18033 12184 CY'10 73764 55237 18236 487 20225 3872 16619 2476 16619 12636 CY'11 80553 60888 19665 61 19604 4712 14892 2588 17481 12237 CY'12 94815 71234 23581 57 23524 5022 18502 3135 21638 15146 Gross Block Less: Acc. Dep. CWIP Net Fixed Asset Cash At Bank CY'11 8.6 11.1 2.5 52.9 25% 27% 22% 17% 33% 15.80 30.10 21.70 1.2 9% 8% 4% -3% 4% 8368 10.5 2.6 2.2 19 CY'12 9.9 13.2 3.0 59.7 Investments Total CA Total CL Net Current Asset Total Asset Share Capital Total Reserves Shareholder's Funds Total Debt Total Liabilities Descriptions

Balance Sheet (` Mn)

CY'09 SOURCES OF FUNDS 3047 61659 64709 1657 3060 70228 73301 650 3060 77831 80890 565 86764 94788 36223 6037 64602 25999 6260 37502 21605 15897 86746 3060 88330 91389 565 97263 99788 41224 6037 64581 36899 6260 53862 27444 26418 97263 CY'10 CY'11 CY'12

66366 73951 APPLICATION OF FUNDS 62241 27841 27144 61545 8807 7270 19793 17411 2384 71226 87788 31511 9307 65585 17482 6260 31353 23942 7412 79260

Financial Ratios
Description Adj.EPS CEPS DPS Book value PBIDTM EBIDTM Pre-Tax Margin PATM CPM ROE ROIC ROCE Sales/FA Revenue Growth EBIDTA Growth EBIT Growth PAT Growth EPS Growth EV/Tonne EV/EBIDTA Mcap/Sales P/BV P/E CY'09 8.0 9.9 2.5 42.5 28% 31% 27% 23% 36% 17.50 35.20 21.60 1.2 10% 8% 4% 6% 2% 8309 11.0 2.3 2.4 18.0 CY'10 8.3 10.8 2.6 47.9 27% 30% 25% 17% 34% 17.90 38.70 22.40 1.1 4% -2% -9% 4% 4% 9210 11.3 2.7 3.0 18.0 Per Share (Rs)

Margin Ratios (%) 21% 23% 17% 11% 30% 17.10 33.80 23.20 1.5 18% 20% 24% 24% 15% 8368 9.2 2.5 2.4 15 Description PAT/PBT PBT/EBIT EBIT/Sales Sales/TA TA/NW Dividends Paid CAPEX Investments PAT Depreciation Changes In WC Changes in Diff.tax Descriptions

Cash Flow Statement (` Mn)

CY'09 12184 2970 6562 1051 22767 (13115) (3946) (17061) (4277) (1230) 90 (5417) 288 8518 8807 CY'10 12636 3872 3647 450 20647 (7912) 1011 -6901 (4625) (1007) 561 (5071) 8675 8807 17482 CY'11 12237 4712 31 0 16980 (3730) 0 (3730) (4647) (85) 0 (4733) 8517 17482 25999 CY'12 15146 5022 380 0 20548 (5000) 0 (5000) (4647) 0 0 (4647) 10900 25999 36899 CASH FLOW FROM OPERATIONS

Performance Ratios (%)

Net Cash From Operations

CASH FLOW FROM INVESTMENTS

Efficiency Ratios (%)

Cash In Investment Activities

CASH FLOW FROM FINANCING Incresase/decrease in debt Others Cash In Financing Activity Increase/ Decrease in Cash Cash At The Beginning Cash At The End

Valuation ratios(x)

DuPoint Analysis
CY'09 0.68 1.15 0.22 0.99 1.10 CY'10 0.76 1.16 0.19 0.93 1.08 CY'11 0.70 1.17 0.19 0.93 1.07 CY'12 0.70 1.17 0.20 0.97 1.06

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