Cement Sector Anand Rathi

India I Equities
Cement Sector Report
4 June 2010
India Cement Sector

The unfolding demand story; Buy Ambuja, Shree, Birla Corp
Overweight Nifty/Sensex: 5110/17022
Macro Section Sujan Hajra

+9122 6626 6720 sujanhajra@rathi.com
Jaspreet Singh Arora

+9122 6626 6727 jaspreet@rathi.com
Manish Valecha
+9122 6626 6552 manishvalecha@rathi.com
Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek 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. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities
4 June 2010
India Cement Sector The unfolding demand story; Buy Ambuja, Shree, Birla Corp
Segmental use of cement

(million tons) FY08 FY09 FY10 FY11e FY12e FY13e
Residential buildings New buildings Rural Urban Repair & maintenance Rural Urban Non-residential buildings Shops and offices-mixed use with residential Traditional shops and offices Modern shops and offices School, College, etc. Hotel, Lodge, Guest House, etc. Hospital, Dispensary, etc. Factory, Workshop, Workshed, etc. Place of worship Other non-residential use Other construction Electricity Roads and bridges Telecommunications Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Repair & maintenance other than residential Non-construction demand Total domestic demand Foreign trade Exports Imports Total final demand
Source: CSO, NSSO, CoI, ITC, Industry and Anand Rathi Research.
48.5 32.4 19.1 13.3 16.1 8.6 7.6 56.5 0.7 10.4 4.6 3.7 5.2 5.3 21.4 1.9 3.3 36.2 8.0 5.8 1.7 4.0 5.9 5.4 2.9 1.2 1.1 0.2 5.4 17.9 164.4 3.4 3.8 0.4 167.8
50.7 33.6 19.9 13.7 17.2 9.2 8.0 61.3 0.8 11.4 4.8 4.3 5.6 6.1 22.1 2.3 3.9 40.7 9.4 5.8 2.0 4.6 7.3 6.0 3.3 1.2 1.1 0.2 6.1 19.4 178.2 1.8 2.9 1.1 180.0
54.6 35.7 21.1 14.5 18.9 10.1 8.8 68.2 0.9 12.3 5.2 4.9 6.9 6.9 24.4 2.5 4.0 47.3 10.8 6.1 2.4 5.4 9.3 7.0 3.7 1.3 1.1 0.3 7.1 21.6 198.8 3.1 3.5 0.4 201.9
60.7 40.1 23.7 16.5 20.6 11.0 9.7 74.2 1.0 13.2 5.5 5.3 7.2 7.7 27.0 2.6 4.8 53.8 11.2 6.2 3.0 6.3 12.0 8.0 4.2 1.4 1.2 0.3 8.1 24.0 220.8 3.2 3.5 0.3 224.0
64.2 41.9 24.6 17.3 22.2 11.7 10.5 82.1 1.0 14.6 6.6 5.9 7.8 8.0 30.0 2.9 5.3 65.1 13.5 7.0 4.1 7.1 14.7 10.0 5.2 1.7 1.4 0.3 9.2 26.9 247.5 3.2 3.5 0.3 250.7
69.6 45.0 26.2 18.8 24.6 12.9 11.7 90.6 1.2 16.4 7.8 5.8 8.9 9.5 32.7 3.0 5.2 78.3 17.2 8.2 5.5 9.2 16.2 12.3 5.9 2.1 1.5 0.3 10.6 30.4 279.5 3.2 3.5 0.3 282.7
Anand Rathi Research
India I Equities
Cement Sector Report
4 June 2010
India Cement Sector

Structural improvement. Strong growth and better than expected capacity utilization relative to the current consensus view are likely to improve market perception on the cement sector over the next 6-9 months. Our top picks are Ambuja, Shree and Birla Corp. Cement & Macro Story: Concrete Base. In India, discretionary spending is rising, consumers leverage is increasing and consumption getting broad-based. High investment rates are also sustaining and the share of infra in the overall capex going up. These are boosting construction activities and thereby cement demand. Cement demand: Recasting underway. With the aid of rich array of official data, which so far remained largely unexplored, we provide a detailed cement demand model. We estimate cement demand CAGR of 12% in FY11-13 far ahead of consensus 8-9%. Infra and non-residential construction would drive cement demand. Surviving the perceived glut. While utilization levels in the cement industry are likely to worsen in FY11, we argue that the turnaround would be faster and sharper than the consensus expectation. Companies from East, Central and West are likely to benefit the most. M&A picking up. We expect the continued M&A activity and higher consolidation levels to protect downside. Top picks. We prefer Ambuja (for strong growth, attractive valuation), Shree Cement (cost leadership, venture into power) and Birla Corp (in high-growth regions, attractive valuation).
India Cement Sector Valuation matrix
Key Data ACC Ambuja UltraTech Shree India Birla Corp Orient Grasim
Overweight Nifty/Sensex: 5110/17022

Manish Valecha
Macro Section Sujan Hajra

+9122 6626 6720 sujanhajra@rathi.com
Sensex vs Cement universe

Buy 951 Buy 2,015 2,730 35.5 1.6 5.2 2.0 10.7 5.0 124 28.4 44.4 Buy 108 142 31.1 0.7 8.9 0.8 9.7 6.0 81 9.4 10.8 Buy 367 490 33.6 0.6 5.0 1.0 0.9 4.0 69 20.3 23.1 Buy 57 85 49.3 0.2 4.5 1.0 23.9 4.5 57 23.4 26.6 Buy 1,778 2,375 33.6 3.6 5.0 1.0 5.5 22.0 25.6
Source: Bloomberg
150 140 130 120 110 100 90 Jun-09 Aug-09 Sep-09 May-09 Jan-10 Oct-09 Mar-10 May-10 Nov-09 Dec-09 Jul-09 Feb-10 Apr-10 Sensex Cement Sector
Rating Price (Rs) Target Price (Rs) Difference (%) Market Cap (US$bn) PER- FY12 (x) P/BV- FY12 (x) EPS CAGR FY10-12 (%) Tgt EV/EBITDA (x) FY12 Tgt EV/ton (USD) FY12 RoCE- FY10 (%) RoE- FY10 (%)
Buy 826 1,125 36.2 3.4 10.5 1.9 (4.0) 7.5 135 31.9 29.4
Buy 110 148 34.8 3.7 10.3 2.0 15.7 7.5 159 23.3 20.1
1,255 32.0 2.6 11.1 1.9 (4.4) 7.5 138 23.4 26.6
Source: Company, Anand Rathi Research
PE: Grasim (Consol); Shree (Normalised)
Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek 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. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities
4 June 2010
India Cement Sector

Investment Argument & Valuation ................................................................ 3 Cement & Macro Story: Concrete Base........................................................ 9 Cement demand: Recasting underway....................................................... 15 Surviving the perceived glut........................................................................ 35 Cost increases to be passed on.................................................................. 47 M&A to protect downside............................................................................ 49 Company Section ....................................................................................... 51 ACC ............................................................................................... 52 Ambuja .......................................................................................... 59 UltraTech ....................................................................................... 67 Shree Cement................................................................................ 75 India Cement ................................................................................. 83 Birla Corp....................................................................................... 91 Orient............................................................................................. 98 Grasim ......................................................................................... 107 Annexures................................................................................................. 114
4 June 2010
Investment Argument & Valuation

A key beneficiary of the changing patterns in domestic consumption and investment will be the cement industry. Our unique macro model indicates strong cement demand 12% CAGR over FY11-13 compared with consensus 8-9%. Our analysis also shows that slower effective capacity addition/ optimization than generally anticipated would mitigate the fear of sharp deterioration of capacity utilization and unit realizations. We thus expect market perception of the sector to improve over the next 6-9 months. Our top picks in the sector are Ambuja, Shree and Birla Corp. Structural tailwind for the cement industry Strong and resilient domestic absorption both private consumption and investment is the very essence of Indias growth story. Indias private consumption is undergoing structural changes discretionary spend is increasing, consumers asset-backed leverage is rising and inclusive growth is making consumption demand more broad-based. On the investment side, high investment rates are sustaining and the share of infra in the overall capex going up. We feel the cement sector would be a key beneficiary of this transformation as these changes are boosting demand for construction and also making construction more cement-intensive. This is already apparent. Despite the global financial crisis cement demand grew by 8.4% in FY09 and 11.6% in FY10. We expect the process to gather momentum during FY11-13. The key drivers: Rising discretionary spend, greater consumer leverage and percolation of fruits of growth across income categories would increase housing demand. Discretionary consumption in India is rising fast, especially those relating to areas such as education, healthcare, hospitality, travel and entertainment. These require more educational institutes, hospitals, dispensaries, hotels, restaurants and theaters. Rising retail spending requires more shops. Strong consumer demand also calls for more factories and office space. The rising share of infrastructure in the overall capex implies more construction work for facilities such as power plants, irrigation, water supply, sanitation, roads, bridges, ports and airports. Concrete growth, beyond myths on cement demand There is a clear void of authentic cement demand estimates in India. Our detailed macro approach tries to bridge this gap with the aid of rich publicly available official statistics, which so far remained largely unexplored. We estimate 12% CAGR of cement demand during FY11-13, far ahead of back-of-the-envelop consensus estimate of 8-9% growth. Our top-down and bottom-up analyses of cement demand punctures many myths about Indias cement demand: We expect strong growth in infrastructure investment during FY11-13 and this in turn would lead to strong growth in cement demand from infrastructure activities. Our cement demand estimates show that the
Anand Rathi Research 3
4 June 2010
share of infrastructure in total domestic demand for cement has increased from 18% in FY05 to 24% in FY10 and likely to increase to 28% by FY13. Irrigation and power are two large users of cement. Within the infrastructure sector, irrigation, power and urban infrastructure are expected to be the main sources of growth during FY11-13. The conventional perception of the housing, in particular, urban housing being the main source of cement demand is invalidated by the available data. During FY08-10, on average, housing, non-residential buildings and infrastructure accounted for 29%, 34% and 23%, respectively, of overall domestic cement demand. Our estimates suggest that their shares would become 26%, 33% and 26%, respectively, during FY11-13. Indirect use by construction and repairs account for the rest of cement use. Shops and offices, another perceived big sources of cement demand, account for only 9% of the overall cement demand. The same amount of cement demand in fact comes from building used for education, healthcare and hospitality. The supply overhang more fear than substance During the course of the current year, at the state/regional levels, capacity utilization levels would fall often significantly but would improve considerably in the next two years. The Central, East and West zones would continue to remain excess demand zones while excess capacity concerns in the North and South is likely to continue even beyond FY11. Fall in capacity utilization concerns in the cement industry is likely to linger but turnaround could be far ahead of the current consensus expectations. We expect the actual capacity utilization levels in FY11 to be better than what is being anticipated now based on estimates of planned capacity additions. Yet, such concerns are unlikely to disappear quickly. Our view of much stronger cement demand and slower pace of effective capacity addition/ optimization of installed capacity suggest that market perception on the sector is likely to improve over next 6-9 months. Pricing power to be regained The additional installed capacity of 62m tons coming up during FY11-13, together with the current demand-supply gap, is expected to be absorbed by additional demand of around 83m tons. Thus, in line with the expected trend in utilization rates (bottom out in FY11 followed by pick-up in FY12 and FY13), we believe that prices would start looking up only from 4QFY11 (volatile till then) and strengthen thereafter. Also we see the trend of correction/firmness in prices varying across regions due to local demand-supply conditions. Overall, the regions of Central, East and West would be our preferred spots based on estimated trends on demandsupply and likely price outcomes. Our new capacity estimates (62m tons) over the next three years vs the past three years addition (100m tons) are based on information received from equipment suppliers, companies and industry consultants. We do not see too much risk to our estimate of capacity additions during FY10-13 given the three to four years of commissioning time required for a greenfield project. Our channel checks suggest that 85% of the fresh enquiries with the equipment suppliers are for greenfield projects.
4 June 2010
Cost increases to be passed on Sourcing of quality coal (for cement or captive power plant) at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures could be handled through hike in cement prices. With most cement companies running on captive power units vs state grids earlier, the risk of high power tariff and erratic supply has gone down. The open-market sale of power would also help cross-subsidise the cost of generating captive power. In addition, if the quantum of power sold is reasonably large, it throws up a new and diversified revenue stream. We believe that freight-price hikes (road or railways) could be passed on to consumers at least in phases. Freight increases are also likely on account of increase in lead distances on selling outside core markets. This, however, is unlikely to impact naked realizations (net less freight) as the higher realizations would offset the increase in freight charges. Consolidation/M&A to protect downside The top five groups currently contribute 55% to capacity vs 40% in FY00. In view of the greater degree of consolidation/M&A in the last decade, we expect no major price decline during FY11 despite a dip in utilization rates. Also with the balance sheets of most of the companies being in a much better shape (leverage of 0-1.5x) than in the past, we do not expect distress sales depressing the overall realizations. We expect prices to move up starting FY12 backed by strong demand. M&A deals struck in the past two years have been priced at around US$170-220 per ton. We expect the recent pick-up in M&A activities to continue thereby protecting current valuations for the following reasons: Large cash-rich Indian companies aim at a larger market share through inorganic growth and are hence ready to pay a premium over replacement cost in order to acquire quality assets. The upswing in cement cycle affords better valuations to smaller players to exit than in past. Heightening interest from foreign cement manufacturers to expand/ enter the fast-growing Indian cement market. With the current replacement cost hovering around US$100-110 per ton and a lead time of 3-4 years for setting up a greenfield project, the number of companies (domestic and international) on the lookout for acquisition opportunities is increasing. Valuations
Strong case for long term out-performance
In the past ten years, on a one-year forward PE, the cement sector (ACC and Ambuja) has traded at an average 21% discount to the Nifty. Being a cyclical sector, variation at the extremes is huge from a 60% discount to a 60% premium. At present, the discount is around 25%. During FY09-10, cement companies on an average traded at greater discount to the Nifty (40%), reflecting the not-so-great outlook. We believe that strong demand growth would be the key in the sectors re rating. We expect capacity utilization to bottom out in FY11 and improve gradually over next two years leading to valuation expansion. With price outlook improving (starting 4Q11), we are likely to see the sector discount
4 June 2010
to the Nifty narrowing (in FY12), as in the peak years of FY02, FY05 and FY08 (see Fig 1).
Fig 1 One-year-forward PE: the Nifty vs the Indian cement sector
(%)
180 160 140 120
100 95 90 85
100 80 60 40 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-10 80 75 70
Nifty
Cement
Cement Avg
Capacity Utilization (RHS)
Source: Bloomberg, Anand Rathi Research Note: The cement sector relates to ACC and Ambuja
Valuation methodology ten-year average EV/EBITDA
We have valued cement stocks on a one-year-forward EV/EBITDA, an appropriate valuation method for commodity industry. We assign a multiple in line with the average of the past ten years (see Fig 2). We test the target price with the implied EV per ton to compare the valuations with that of the average of last ten years (see Fig 3).
Fig 2 Indian cement sector One-year-forward EV/EBITDA trend
(x) 14 12 10 8 6 4 2 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09
Cement Sector
Average
Source: Bloomberg, Anand Rathi Research Note: Cement sector relates to ACC & Ambuja
We value ACC and Ambuja (large-cap pure cement plays) each at 7.5x CY11e EV/EBITDA. The implied EVs/ton are at a premium of around 30% to the average multiples for these companies for last ten years. This is justified keeping in mind the current/estimated low net leverage, low working capital and better or similar return ratios vs the average of last ten years. The other companies have been valued at an appropriate discount to ACC/Ambuja, bearing in mind their size, regional mix and their own valuation history. We believe the healthy balance sheets and greater consolidation would drive sector re-rating at the beginning of the next upturn (4Q11) (see Fig 4).
4 June 2010
Fig 3 One-year-forward EV per ton vs replacement cost

(Rs/ Ton) 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000
May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10
ACC
Source: Bloomberg, Anand Rathi Research
Ambuja
Replacement cost
Strong Balance Sheets and Cash flows
The last three years have seen strong demand growth. With few capacity additions cement prices rose, propping up balance sheets of companies. Coming after a four-year gap (FY01-FY05), this turned out to be a major relief. Enthused by the robust FY06-09 profits, most cement companies announced mega-capacity expansions. They have already added around 70m tons during FY08-10 and plan to add another 62m tons in FY10-13. Thus a major portion of their total capex has already been undertaken, leading to generation of free cash-flows in the next few years (unless other mega-expansion plans are announced) (see Fig 4).
Fig 4 Net D/E All companies at comfortable levels
(x) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 (0.5) ACC FY00 Ambuja FY02 FY04 Grasim FY06 UltraTech FY08 India Cement FY10 Shree FY12e
Risks Weak volume growth. A significant dampening of demand (our estimate: a 12% CAGR over FY11-13) would limit upside in utilization rates in FY12 and beyond. Sustained subdued pricing environment. Quicker ramp-up of fresh capacities beyond our assumptions, together with weak demand may hold down cement prices for longer than estimated, slashing earnings. Steep hike in coal prices. Coal prices rising appreciably from levels now would cut into earnings, incongruent with our estimates. Also, a strong rupee depreciation would buoy up coal prices.
4 June 2010
Fig 5 India cement sector Valuation matrix

Key Data ACC Ambuja Ultratech India Shree* Birla Corp Orient Grasim #
PER (x) FY10 FY11e FY12e EV / EBITDA (x) FY10 FY11e FY12e EV / ton (US$) FY10 FY11e FY12e
9.7 10.9 10.5 5.7 6.2 5.2 121 104 94
13.8 11.8 10.3 8.2 6.8 5.2 155 123 111
10.8 11.9 11.1 5.9 6.2 5.5 112 108 102
10.7 15.0 8.9 6.4 8.4 5.8 84 80 78
6.7 6.6 5.2 4.8 5.0 3.4 128 103 83
5.1 5.8 5.0 2.9 3.3 2.7 73 58 46
6.9 5.5 4.5 4.9 3.6 3.1 46 43 42
5.4 5.5 5.0
Source: Anand Rathi Research #Consolidated PE, * Based on normalized EPS
Top Buys
Ambuja. We rate Ambuja a Buy with a target price of Rs148 based on a target EV/EBITDA of 7.5x on CY11e, the average for past ten years. We like the stock due to the resurgence of its cost leadership status, expansion in high-growth regions and de-leveraged balance sheet. Shree Cement. We rate Shree a Buy with a sum-of-parts target of Rs2,730: Rs2,150 for cement at 5x FY12e EV/EBITDA and Rs580 for power at 1x P/BV. It implies a normalized PE of 7x and an EV/ton of $125. We like the stock due to industry leading efficiency in cement production, power venture diversification and growth plans. Birla Corp. We rate Birla Corp a Buy with a target price of Rs490 based on a target EV/EBITDA of 4x on FY12e, the average for past ten years. We are positive on the stock given its low cost structure, deleveraged balance sheet, capacity expansion and presence in highgrowth regions.
Fig 6 Anand Rathi Research vs consensus (Rsm)
PAT ACC Ambuja Ultratech India Shree Birla Corp Orient Grasim
FY11e ARG Consensus Diff. (%) FY12e ARG Consensus Diff. (%)
14,222 13,800 3.1 14,812 12,710 16.5
14,259 12,115 17.7 16,300 12,703 28.3
9,971 8,926 11.7 10,669 9,560 11.6
2,216 2,825 (21.6) 3,741 3,209 16.6
8,005 7,302 9.6 9,599 8,544 12.4
4,836 4,840 (0.1) 5,676 5,288 7.3
2,005 1,718 16.7 2,446 1,818 34.6
23,930 20,443 17.1 26,755 23,430 14.2
Note: Grasim figures Consolidated Source: Bloomberg, Anand Rathi Research
4 June 2010
Cement & Macro Story: Concrete Base

Indias private consumption is undergoing structural changes discretionary spend is increasing, consumers asset-backed leverage is rising and inclusive growth is making consumption demand more broad-based. On the investment side, high investment rates are sustaining and the share of infra in the overall capex going up. All these changes are boosting demand for construction and also making construction more cement-intensive. We expect sustained high growth in cement demand in India in the coming years. This is a major positive for domestic cement manufacturers as scope of cement imports remains marginal, globally as well as in India. Indias consumption, investment on the move. Strong and resilient domestic absorption both private consumption and investment is the very essence of Indias growth story. Patterns of domestic consumption and investment in India are currently undergoing major structural changes with significant implications at the sectoral level. This section explains why we feel that Indias cement industry would be a key beneficiary of this process. Changing facets of private consumption Changing facets of Indias consumption story. Three key trends of the current consumption story in India are (a) rising share of discretionary consumption in the overall private consumption as well as GDP; (b) rising financial leverage of the Indian consumer backed by rising private wealth and (c) widening of consumption base with percolation of the benefits of higher growth even to the lower income groups. Rising discretionary spend. Despite generally accelerating growth in private consumption over the decades, the growth trailed the overall GDP growth. As a result, contribution of private consumption to GDP growth and its share in overall GDP is falling (see Fig 7). Sharp decline in the nondiscretionary consumption led this process. On the contrary, the share of discretionary consumption in GDP is rising fast (see Fig 8).
Fig 7 Share of private consumption falling
15 (Pvt. consumption, growth, %) 12 9 6 3 0 1950s 1960s 1970s 1980s 1990s 2000s 90 80 70 60 50 40 (Cont. of pvt. cons. to GDP, %)
Contribution of private consumption to GDP growth

Source: Government of India and Anand Rathi Research.
Growth in private consumption
Rising asset backed household leverage. Coterminous with the falling share of the overall private consumption in GDP, there has been marked increase in savings rate savings to GDP ratio in India. This has been contributed mainly by rise in household savings both in physical and
4 June 2010
financial assets (see Fig 9 and 10). While Indian households remain net savers, i.e. rise in household assets far exceeds increase in household liabilities, increased savings and thereby greater wealth have allowed them to increase gross financial leverage (see Fig 10).
Fig 8 Discretionary consumption of the rise
90 (Non-discretionary cons. to GDP, %) 80 70 60 50 40 30 1950s 1960s 1970s 1980s 1990s 2000s 24 (Discretionary cons. to GDP, %) 21 18 15 12 9 6
Non-discretionary consumption
Discretionary consumption
Fig 9 Strong growth in domestic savings

12 10 8 6 4 1950s 1960s 1970s 1980s 1990s 2000s 25 20 15 10 5 (Overall and household savings, % of GDP) (Change in financial liabilities to personal disposable income, %) (Household physical savings, % of GDP) 14 30
Overall savings rate Rate of household savings in physical assets Household savings rate
Fig 10 Household leverage on the rise

26 (Change in financial assets to personal disposable income, %) 24 22 20 18 16 14 12 10 8 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 10 9 8 7 6 5 4 3 2 1
Change in financial assets to personal disposable income Change in financial liabilities to personal disposable income
Source: Government of India, RBI and Anand Rathi Research.
Inclusive growth driving consumption. A key factor behind robust domestic consumption and, in particular, sharp jump in discretionary consumption has been strong improvement in per capita income in the
4 June 2010
country (see Fig 11). While there is no official data in India depicting the growth in income within different income strata, indirect evidences suggest that the benefits of rising overall income are percolating across income groups. For example, growth rates in wages in the organized and unorganised sector have largely moved in tandem. In fact, during the last decade, wage rates in the unorganised sector have grown faster than the organized sector (see Fig 12). Inclusive income growth in India is making private consumption broad-based.
Fig 11 Rapid rise in per capita income
4,500 4,000 (Per capita income, US$, PPP) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY82 FY85 FY88 FY91 FY94 FY97 FY00 FY03 FY06 FY09 FY12 2,250 2,000 (Per capita income, US$) 1,750 1,500 1,250 1,000 750 500 250 0
Per capita income - PPP
Per capita income -USD
Source: Government of India, World Bank and Anand Rathi Research.
Fig 12 Well dispersed income growth

16 (Wage rate, annual average growth, %) 14 12 10 8 6 4 2 0 1980s Wage growth - organised sector
1990s
2000s
Wage growth - unorganised sector
Transformation of the investment cycle Manufacturing capex driven growth during FY04-08. Despite the fact that the share of investment in GDP India remains much lower than that of private consumption, the countrys tryst with high growth, especially the 9% growth during FY04-08, has been driven by strong capex cycle. Between FY04 and FY08, on an average, over 50% of the growth in Indias GDP was contributed by investment and consequently the investment to GDP ratio jumped from 23% in FY02 to 37% in FY08 (see Fig 13). During the same period, manufacturing investment was the single largest driver of the overall investment accounting for more than 50% of the incremental investment. In contrast, infrastructure contributed just over 20% of the incremental investment in this period (see Fig 14). India moving towards infra-driven capex cycle. The prominence of manufacturing capex is, however, on the wane and that of infrastructure
4 June 2010
capex is on the rise (see Fig 15). After recording over 50% real growth in FY05, manufacturing capex has decelerated till FY08 and suffered 22% decline in FY09. In contrast, after hitting a low in FY05, infra capex has gathered momentum. While Indias overall investment recorded a decline in FY09, infra capex growth remained positive, albeit low. We expect infra capex to play an increasingly prominent role in Indias investment and overall growth story in the current decade.
Fig 13 Investment main driver of high growth
38 36 (Investment rate, % of GDP) 34 32 30 28 26 24 22 20 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 60 (Cont. of inves. to GDP growth, %) 54 48 42 36 30 24 18 12 6
Contribution of investment to GDP growth

Investment rate
Fig 14 Manufacturing drove capex in FY03-08

125 (Contribution to overall investment, %) 100 75 50 25 0 -25 -50 -75 -100 -125 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Manufacturing
Infrastructure
Fig 15 Infra investments catching up

50 (Real growth in investment, %, 3YMA) 40 30 20 10 0 -10 -20 FY80 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08
Infrastructure
Manufacturing
12
4 June 2010
All-round signs of strong acceleration in infra capex. Rising prominence of infrastructure capex is evident from various spheres. Policy makers in India are promoting the sector with various inducements. Both private and public sector units have rolled out aggressive expansion plans in most spheres of infrastructure including power, roads, ports and communication. Various schemes have been launched to improve urban and rural infrastructure. Since late 2006, growth in bank credit to infrastructure has generally been much stronger than the same to the industry (see Fig 16). The share of infrastructure in the outstanding bank credit has jumped from 7.7% in Dec06 to 12.7% in Feb10.
Fig 16 Bank lending to infra growing fast
70 (Credit growth, annualised, %) 60 50 40 30 20 10 0 -10 Dec-06 Dec-07 Jun-07 Sep-07 Jun-08 Dec-08 Sep-08 Mar-07 Dec-09 Jun-09 Sep-09 Mar-08 Mar-09
Non-Food
Industry
Infrastructure
Changing absorption pattern: Cement a key beneficiary

Boost in construction activities. The ongoing structural changes in private consumption and investment in India is likely to result in strong growth in construction activities across all verticals housing, nonresidential buildings and infrastructure-related construction. Housing. Rising discretionary spend, greater consumer leverage and percolation of fruits of growth across income categories would increase housing demand. Non-residential buildings. Discretionary consumption in India is rising fast, especially those relating to areas such as education, healthcare, hospitality, travel and entertainment. These require more educational institutes, hospitals, dispensaries, hotels, restaurants and theaters. Rising retail spending requires more shops. Strong consumer demand also calls for more factories and office space. Infrastructure. The rising share of infrastructure in the overall capex implies more construction work for facilities such as power plants, irrigation, water supply, sanitation, roads, bridges, ports and airports. Cement intensity of construction going up. Within the housing space, the share of katcha and semi-katcha housing are falling and that of pucca houses are increasing. Similar changes in the structure type are happening for shops, especially in rural areas. From almost zero-base a decade back, Grade A offices, modern retail space and multiplexes are now emerging even beyond the limits of metropolitans and tier I cities. Greater share of infrastructure in the overall capex also means greater cement usage as infra capex is nearly 5 times more cement intensive than manufacturing capex.
13
4 June 2010
Strong cement demand outlook. Construction activities account for almost all cement demand both directly and indirectly through demand for construction materials manufactured through the use of cement. Therefore, both robust growth in construction activities and rising cementintensity of construction bode well for sustained and high cement demand growth in India. Cement: a near perfect domestic story. For most products, a considerable part of robust domestic demand can get leaked to rest-ofthe-world through rising imports. This is especially pertinent if the rising domestic demand starts pushing up the domestic prices. Mainly because of high transportation cost, import, however, is generally not a large scale viable option to meet cement demand and this result in wide variation in cement prices across the world (see Fig 17). These considerations suggest that Indian cement companies should be one of most prominent beneficiaries of the changing patterns of Indias growth story in the next 23 years.
Fig 17 Limited international trade in cement
Net exports (% of domestic production) 2002 2005 2008 Import price (US$ per ton) 2002 2005 2008
Brazil China Egypt France Germany India Indonesia Iran Italy Japan Korea Mexico Pakistan Russia Saudi Arabia Spain Thailand Turkey US Vietnam
0 0 3 -10 6 4 16 4 -4 10 4 5 0 5 11 -14 51 32 -26 -8
3 2 0 -9 16 5 10 4 -6 13 5 9 11 6 2 -18 41 23 -33 -8
1 2 -15 -17 22 1 8 0 -2 16 8 5 24 -14 1 -12 45 26 0 0
50 23 30 58 60 32 59 .. 49 43 37 167 .. 60 72 41 478 50 49 39
55 29 .. 86 81 163 78 70 60 51 41 140 151 82 56 50 224 44 58 51
63 40 .. 100 136 87 42 43 88 54 44 136 176 109 104 72 464 67 78 ..
Source: International Trade Centre and Anand Rathi Research.
14
4 June 2010
Cement demand: Recasting underway

There is a clear void of authentic cement demand estimates in India. Our detailed macro approach tries to bridge this gap with the aid of rich publicly available official statistics, which so far eluded cement analysts. We estimate 12% growth in cement demand during FY11-13, far ahead of back-of-the-envelope consensus estimate of 8-9%. Not housing but infrastructure and non-residential building constructions would be the main drivers. Groping in the dark Modeling cement supply. Cement supply estimates in India are largely based on information on company-specific current capacity and future capacity expansion plans. The high level of concentration of cement production in India whereby nearly 70% of the supply comes from the top 20 manufacturers allows reasonably good approximation of the current and the future capacity. Yet getting the appropriate current production and future expansion data on small and non-listed cement companies is a challenge. Execution delays in installation of new capacities and delays in optimum usage of newly installed capacities often result in overestimation of cement capacity in the near term future. This problem becomes particularly acute in the periods of strong expansion of cement capacities as is happening in the last few years. The problem is likely to persist in the foreseeable future as well. Notwithstanding our skepticism about such cement supply estimates, we have far greater reservations on the existing cement demand estimates both top-down as well as bottom-up. Top-down GDP based estimate. Current top-down cement demand forecasts assume a stable relationship between cement demand and GDP growth and apply multiples on real GDP growth ranging from 1-1.5 to derive growth in cement demand. Actual data, however, does not suggest the existence of any stable and strong relationship between cement demand and GDP growth (see Fig 18). Just look at the correlation coefficient between the two over 1982-2009: just 0.2. The relationship somewhat gets stronger when it is measured from the mid-90s (FY93-09), probably reflecting the dismantling of the license-permit raj in the cement industry and thereby greater interplay of market forces. The relationship gets even better when measured with quarterly data from 2000 to now. Yet, the correlation coefficient continues to remain below 0.4.
Fig 18 Cement demand and GDP: weak link
20.0 17.5 15.0 (GDP real growth, %) 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 18 16 14 12 10 8 6 4 2 0 -2 (Cement production growth, %)
GDP
Cement
Source: Government of India and Anand Rathi Research
15
4 June 2010
Predictive power undermined. Irrespective of the values of correlation coefficient, statistical significance or goodness of fit in the relationship between two variables, the predictive power of a model depends on the stability of the relation between these variables. In the context of top-down cement demand estimate using GDP growth outlook, the question is whether the past relationship between cement demand and GDP growth has been stable. The unambiguous answer is, it has not been so. This is reflected in the large variation of cement usage intensity per unit of GDP. Cement usage intensity dropped between FY96 and FY06 and rose sharply thereafter (see Fig 19).
Fig 19 Changing cement usage intensity
(Value of cement production to GDP, %) 1.7 1.6 1.5 1.4 1.3 1.2 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Cement intensity of GDP
Bottom-up sum-of-parts demand estimate. Bottom-up cement demand estimates are derived using (a) segmental cement usage intensity, (b) current size of these segments and (c) likely growth in those segments. The problem with the existing bottom-up cement estimates is that none of these use authentic data on the size of segments of the real estate or the infrastructure sectors in terms of yearly value of output, investment or any other measure of activity. Similarly, segmental shares in all-India cement demand are largely anecdotal. In view of this, we feel that the current bottom-up estimates of cement demand often end up deriving results that are actually the assumptions they started with. Demystifying Cement demand: A top-down view Strong cement demand growth. We estimate Indias cement demand is poised for compounded annual growth rate (CAGR) of 12% over FY1113 compared with consensus 8-9%. Given that demand from construction direct and indirect accounts for nearly the whole of cement demand, we first analyze and estimate construction growth. Data sources Finding relevant official data sources. In our bid to avoid the pitfalls of the top-down GDP-based and bottom-up anecdotal segmental demandbased forecasting methods, we scoured a mind-numbing stack of official data to find those relevant in building our unique macro forecasting model. To our knowledge, no one else has done this. The key source of our top-down cement demand estimate is Indias National Account Statistics 2010 by the Central Statistical Organisation (CSO), which estimates construction activity as part of overall national income. We also draw on liberally from a large array of other official data sources. These include inter alia the input-out transaction table (IOTT) of the CSO,
4 June 2010
housing condition surveys and consumer expenditure surveys by the National Sample Survey Organisation (NSSO), census of residential and non-residential structures by the Census of India, infrastructure investment data estimated by the Planning Commission and State-level GDP and construction activity estimates by the CSO. Methodology and assumptions Encompass of construction activities. Construction includes myriad activities, from building roads, rail-beds, residences, shops and offices, bridges to water reservoirs, power plants, hydro-electric projects. Indias national income data captures all such activities within value of output and investment in construction activities. According to the latest IOTT published by the CSO, direct cement consumption by the construction sector accounts for 89.13% of overall cement consumption in India. The rest of cement also goes mainly into construction activities, although indirectly through the use of cement-based construction materials. Cement usage intensity. We start of by estimating the rupee value of pucca (brick, concrete) construction from the national income data and derive its direct cement consumption in tons for the period FY05-10. We see that this coefficient has largely remained stable over FY05-10 the difference between the minimum and the maximum being 5%, likely arising from changes in construction technology and slight variations in structure types. Segmental cement usage intensity. To arrive at segmental cement usage intensity, we use National Account Statistics Sources and Methods, 2007 data that show the proportion of cement and other major construction materials used in different types of pucca construction. We then estimate annual segmental cement usage intensities for the period FY05-10, which show the intensity remained stable even at the segmental levels. The only exception was other construction (mainly infrastructure), which showed rising usage intensity, most probably because of technology changes and the fact that many infra projects were in relatively early stages of commissioning, which requires high cement usage as compared to the later part of project implementation. Sectoral growth assumptions. The national income data on construction activities at the granular level coupled with cement demand intensities provide us the break-up of the past cement demand from these segments. In addition, we need segmental growth for the construction sector for deriving cement demand estimates during FY11-13. While growth of almost all segments of construction slumped during FY09-10, we anticipate a smart recovery during FY11-13. Yet, with the exception of residential buildings, we assume the growth in all verticals of construction to be slower than the peak rates achieved during FY06-08 (see Fig 20).
Fig 20 Assumptions on real growth rate
(%) FY06 FY07 FY08 FY09 FY10e FY11e FY12e FY13e
Residential buildings Non-residential buildings Other construction Total new construction Repair and maintenance Total construction Construction value added (GDP)
3.3 16.8 17.5 15.0 6.7 13.3 12.4
4.4 11.0 16.9 11.9 10.8 11.7 10.6
3.2 14.6 7.8 11.0 12.6 11.3 10.0
2.2 6.9 8.5 6.8 6.3 6.7 5.9
2.5 7.4 9.8 7.6 8.0 7.6 6.5
4.6 11.2 12.8 11.0 10.5 10.9 8.5
5.7 10.2 14.8 11.2 11.0 11.2 10.5
5.8 9.1 16.0 11.1 12.0 11.3 13.0
17
4 June 2010
Conservative assumptions. Our construction sector growth assumptions are broadly in line with growth rates achieved during the pre-global financial crisis years (FY06-08). At the overall level, we assume construction sector real GDP growth of 10.7% over FY11-13, which is lower than the 11% recorded over FY06-08. We, in fact, expect much stronger growth in construction sector both at the overall and segmental levels during FY11-13 than what we have used for our calculations. Given this, our cement demand estimates (see Fig 21) are at the lower end of rates at which we expect the cement sector to grow in the medium term.
Fig 21 Domestic cement demand estimate
FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e
(million tons) 1 2 3 5 Residential buildings Non-residential buildings Other construction Sum (1)-(3) (4)+(5) (6)+(7) Repair and maintenance 31 46 27 103 18 121 15 136 22.7 33.6 19.7 76.1 13.1 89.1 10.9 100.0 0.4 13.6 22.8 11.4 3.7 32 50 32 114 19 133 16 150 21.2 33.4 21.5 76.2 13.0 89.1 10.9 100.0 2.9 9.4 20.1 10.2 9.2 32 56 36 125 22 147 18 164 19.7 34.3 22.0 76.0 13.1 89.1 10.9 100.0 1.8 13.0 12.1 9.6 11.1 34 61 41 136 23 159 19 178 (Share in total, %) Residential buildings Non-residential buildings Other construction Total new construction Repair and maintenance Total construction Non-construction Total demand Residential buildings Non-residential buildings Other construction Total new construction Repair and maintenance 18.9 34.4 22.8 76.1 13.0 89.1 10.9 100.0 (growth, %) 3.7 8.5 12.6 8.5 7.9 6.1 11.2 16.3 11.5 11.9 12.5 8.8 13.6 11.2 10.5 4.5 10.8 21.0 12.6 9.3 7.3 10.3 20.4 13.1 12.0 17.9 34.3 23.8 76.0 13.1 89.1 10.9 100.0 18.2 33.6 24.4 76.1 13.0 89.1 10.9 100.0 16.9 33.2 26.3 76.4 12.7 89.1 10.9 100.0 16.1 32.4 28.0 76.5 12.6 89.1 10.9 100.0 36 68 47 151 26 177 22 199 40 74 54 168 29 197 24 221 42 82 65 189 31 221 27 247 45 91 78 214 35 249 30 280
4 Total new construction 6 Total construction 7 Non-construction 8 Total demand
Total demand 10.2 10.1 9.8 8.4 11.6 11.1 12.1 12.9 Note: Cement demand by the construction sector includes only direct demand. Indirect cement demand by construction through demand for building/related material manufactured using cement is clubbed with non-construction demand.
Bottom-up cement demand: Myths and realities Validation and granular inferences. For our bottom-up approach, we analyze and estimate demand from the segments: residential, nonresidential and others-mainly infrastructure facilities. These estimates use data, which are largely different from those used for top-down estimates. There are two key purposes for the bottom-up estimates. First, these estimates enable us to compare and thereby cross-validate the top-down inferences. Second, we derive cement demand at more granular levels with the bottom-up estimates, which allows us to question many of the conventional views about the sources of cement demand in India. This, in turn, brings to the fore the reasons for consensus pessimism and our optimism on future cement demand in India.
18
4 June 2010
Demand from residential buildings Housing accounts for far less cement demand than consensus view. Available statistics that show each segments share of overall cement demand are largely anecdotal and vary widely. The consensus view is that housing, i.e., residential buildings, account for 40-60% of overall domestic cement demand. We beg to differ. Our top-down analysis (conducted above) shows that in FY13 new residential buildings would account for just 16.1% of overall cement demand, down from 17.9% in FY10 and 22.7% in FY06. Even if we include repair and maintenance of residential structures (discussed separately subsequently) along with new construction, the share of housing in overall domestic cement demand declined from 35.7% in FY05 to 27.5% in FY10 and expected to decline to 24.9% by FY13. Two important points need flagging here. First, our estimate of share of housing, taking both new construction and repair and maintenance is well below even the lower end of consensus estimate of 40-60%. Second, as a source of cement demand, the role of the housing sector is declining sharply. To substantiate our top-down estimates, we also did a bottom up analysis, which showed broadly similar results. Our housing, consensus housing. Prior to moving into the bottom up analysis of cement demand from the housing sector, we have to point out that there are clear differences between our definition of housing and that of consensus. There are two major differences:
1.
Consensus definition of housing implicitly includes all kinds of housing construction activity new house construction, extension/alteration /improvement/repair/maintenance of existing homes. We separately estimate cement demand from (a) new construction and major repair and (b) maintenance and repair activities. In this section we only discuss new housing construction. Repair and maintenance has been discussed separately in a subsequent section. Many residential buildings in India are mixed use residential as well as commercial and/or industrial. Our data sources CSO and NSSO have very granular statistics and segregate residential and nonresidential buildings with one exception: residential buildings owned by public sector units are included within non-residential buildings.
2.
Sharp jump in number of housing units. To understand cement demand from the housing sector, we first look at housing growth. India had 156m residential buildings in 93, which jumped to 207m in 02 and further to 222m in 08. Off those, pucca houses more increased dramatically, from 67m in 93 to 98m in 02 and 135m in 08. On the other hand, katcha houses have been declining since 1993, while the number of semi-pucca structures grew fast during 93-02 and declined even faster during 02-08 (see Fig 22 and 23). Rise in housing units misleading indicator of cement demand. We say so because of several reasons. Partitioning a house. Partitions can increase the number of houses as joint families disintegrate into nuclear families. Nevertheless, this increase in housing units does not add to residential plinth/floor area, which is the real driver of cement demand. Structure type. The share of katcha houses in overall housing stock declined from 26% in 93 to 14% in 08. Yet, katcha houses share remains large, particularly in rural areas. More importantly, the share
4 June 2010
of semi-pucca houses jumped from 31% in 93 to 36% in 02 before drastically dropping to 25% in 08. Katcha construction by definition does not use cement and the intensity of cement use by per unit of semi-pucca construction is, on an average, just around 35% of that of a pucca construction. Therefore, any cement demand estimate based on the growth in overall number of houses without taking into account the composition of housing stock in terms of structure type is likely to lead to erroneous estimates of cement demand from the housing sector.
Fig 22 Structural change in housing stock
250 (Residential buildings, No., million) 200 150 100 50 0 Total Total Rural Rural Urban Urban Rural Urban 2008 Katcha
-11.1
1993 Pucca
2002 Semi-pucca
Source: NSSO and Anand Rathi Research.
Fig 23 Pucca houses growing strongly

(No. of residential buildings, CARG, %) 8 6 4 2 0 -2 -4 -6 -8 Total Rural Urban Rural Urban Total
1993-2002 Pucca Semi-pucca Katcha
2002-2008 Total
Construction area. Rather than the number of houses, our bottom up estimate of cement demand from residential buildings is based on the plinth area of pucca and semi-pucca houses. While the details of the bottom up estimates have been discussed below, it is sufficient to state here that over time, there has generally been a marked decline in the size of dwelling units. Given this, a housing unit-based cement demand estimate is likely to overstate cement demand from residential buildings. Conversion between structure classes less cement intensive. The absolute decline in the number of katcha houses and the jump in pucca and semi-pucca houses during 1993-2002 and the absolute decline in both katcha and semi-pucca houses and sharp jump in pucca houses during 2002-08 suggest part of the katcha houses are being converted into semi-pucca/pucca houses and part of semiAnand Rathi Research 20
Total
4 June 2010
pucca houses are getting converted into pucca houses. While in terms of number, these would be counted in new construction within that category, the intensity of cement use for converting a semi-pucca house into a pucca house would be lower than building a totally new pucca house. Estimate of residential space addition. We utilize NSSO information on frequency distribution of Indias existing houses by plinth area and average area for new construction. These data are available in terms of rural and urban residential buildings and each category is further classified by construction type pucca and semi-pucca. Our estimates show that in 2002 India had 7.8bn square meter (sqm) of pucca and 4.7bn sqm of semipucca residential structures. The outstanding pucca residential area jumped to 8.9bn sqm in 2008 while the area in semi-pucca category remained virtually unchanged (see Fig 24). New constructions during 1998-2002, on an average, resulted in addition of 77.7m sqm of pucca and 15.9m sqm of semi-pucca residential building space per year. During 2003-2008, new construction added 180.1m sqm of pucca and 8.2m sqm of semi-pucca residential structures per year (see Fig 25).
Fig 24 14 bn sq. meter of housing space
(Residential building stock, million sq m) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Total Rural Urban Rural Urban Total
Total
2002 Pucca Semi-pucca Total
2008
Note: Data exclude katcha structures.

Fig 25 New addition of 180mn sqm a year

(Resi. new constrution per year, million sq m) 200 180 160 140 120 100 80 60 40 20 0 Rural Total Urban Rural Urban 2008 Pucca Semi-pucca Total
2002
Note: Data exclude katcha structures.

Our top down and bottom up housing cement demand estimates validate each other. Using data of new housing construction (in square meters) and cement intensity of construction, we got our bottom up cement demand estimates from new residential construction, which works
4 June 2010
Strong housing growth

While housing would continue to lag other segments of construction, growth in the sector during FY11-13 is poised to surpass the recent highs. Housing growth acceleration likely. Our assumptions for new housing construction growth during FY11-13 factors in the strong acceleration witnessed over FY09-10 and the average during the last decade (see Fig 26). We have been conservative in our view on housing growth and think actual growth could be higher. Nevertheless, housing construction growth is likely to continue to lag overall construction growth (see Fig 27). Our optimism about strong housing sector growth springs from several factors. Cyclical factors suggest housing revival. Housing construction is cyclical. Typically, two to three years of low/negative growth results in strong expansion over the next few years as pent up demand is executed in subsequent years. For example, the lull during FY82-84 was followed by strong growth over the next three years FY85-87. A slowdown in FY88-91 was followed by robust growth over the next eight years FY92-99. Compared with this, the sector has been much more volatile over the past decade. From FY00 to FY06, growth and decline alternated every other year. Given that housing construction was subdued during FY09-10, we expect pent-up demand to lead to a boost in housing construction during FY11-13.
Fig 26: Expect housing demand to rise
(Value of housing construction, growth, %) 10 8 (Real growth, %) -8.7 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12e 6 4 2 0 -2 -4
reduction in income tax rates. Such improvements are likely to boost housing demand in coming years. Policy thrust on housing. In recent years, the government has initiated many policies to improve housing, especially for the poor. The Indira Awaas Yojana was started in FY86 to provide financial assistance to rural households living below the poverty line (BPL) to construct/upgrade their houses. In the FY11 budget, the unit cost of houses was extended and Central government allocation was increased. Another scheme, the Rajiv Awas Yojana, was initiated in the FY11 budget, with focus on rehabilitating/providing property rights to urban slum dwellers. The current budget also extended by a year the scheme introduced last year that provided a 1% interest subvention on housing loans up to Rs1m where the house cost does not exceed Rs2m. All these measures are likely to foster growth in the housing sector. Should we be concerned about interest rates/land values? Many are of the view that rising land values could erode affordability and thereby limit housing demand. Another worry is rising interest rates, which would impact mortgage rates and dampen housing demand.
Fig 27: Housing to trail total construction growth
24 20 16 12 8 4 0 -4 -8 -12 FY12e FY82 FY85 FY88 FY91 FY94 FY97 FY00 FY03 FY06 FY09
Residential buildings
Decadal CAGR
Total construction
Residential buildings
Source: CSO and Anand Rathi Research.
Improvement in rural and lower income groups disposable income. In the past few years, disposable incomes of rural and low- and middleincome groups in urban areas have improved. Rural income growth was helped by higher agricultural commodity prices, loan waivers, and introduction of the National Rural Employment Guarantee Scheme (NREGA). Urban low- and middle-income groups income growth was supported by salary hikes for nearly 20m government employees and the
Relatively low impact of rising urban land values on housing construction. As rural areas account for 86% of overall pucca and semi-pucca housing construction, the strong appreciation of urban land values since 2004, especially in Tier I and II cities, has a relatively small impact on new housing demand and thereby new housing construction. Anecdotal evidence suggests that rural land values in some areas, too, have appreciated since 2004. This could have been driven by realty
22
4 June 2010
companies aggressive attempts to build-up land bank around major cities and to build special economic zones/industrial parks. Such moves, however, are on the wane if not reversing. Though high land prices are likely to remain an overhang on housing demand in various urban areas, this may not be a major factor in rural areas. Moreover, rising policy focus on promoting affordable housing in urban areas and slum rehabilitation programs are likely to substantially boost mass housing projects. Therefore, while we expect growth in residential construction to continue to lag overall construction growth, we do expect residential demand to gather momentum during FY11-13. Banks and NBFCs. Past data suggest that organized financial institutions banks as well as non-banking financial institutions (NBFCs) played only a modest role in funding new homes. In most cases, home owners used own funds. Borrowing from money lenders, friends and relatives also played a large role. Funding from other sources including cooperatives, organized financial and non-financial institutions (both government and private), taken together, rose perceptibly during 1993-2002. Yet, the total contribution from such sources in overall home finance remained relatively modest, especially in rural areas (see Fig 28). The situation changed significantly in the last decade. Outstanding mortgage funding by banks and NBFCs jumped by over eight times between FY02 and FY10 (see Fig 29), while yearly value of residential construction (excluding land value) doubled. In this sense, the sensitivity of new home demand to home loan conditions (including housing interest rates) has risen over the past decade.
Fig 28: Predominance of own funds
(Funding of housing cost, %) 80 70 60 50 40 30 20 10 0
Fig 29: Strong growth in organised home loans

90 80 70 60 50 40 30 20 10 0 5,400 4,800 4,200 3,600 3,000 2,400 1,800 1,200 600 0 (credit growth and bank share, %) (Housing credit, Rs billion)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Housing credit Share of banks in housing credit
Growth in housing credit
Note: Housing credit data relates to home loans by commercial banks and housing finance companies.
Source: RBI, NHB and Anand Rathi Research.
Falling share of organized funding. After hitting a high 90% in FY06, the ratio of yearly net housing loan disbursal by banks and NBFCs to cost of housing construction cost (excluding land value) has dropped over the years to 40% in FY09 and FY10. Strong competition in mortgage finance market. There is strong competition between banks and NBFCs in the residential mortgage market. While banks share of residential mortgages jumped from 52% in FY01 to 67% in FY08, since then it has declined to 62% in FY10 (see Fig 29). Given the intense competition for market share reflected in promotional activities such as low teaser rates we believe mortgage interest rates are unlikely to rise too much even in an overall rising interest rate scenario. Attractiveness of mortgage funding for banks. The priority sector status extended to home loans up to Rs2m provides additional incentive to banks to expand their mortgage portfolio, either directly through extending home loans or indirectly by buying such loan portfolios from other banks or NBFCs. Governments funding support including interest subsidy. In the case of Indira Awaas Yojana, the government directly funds eligible rural houses and the amounts both the overall allocation and assistance to individual housing units have been increased substantially. The current budget has extended by a year the scheme introduced last year that provided a 1% interest subvention on housing loans up to Rs1m where the house cost does not exceed Rs2m.
Semipucca
Semipucca
Semipucca
Pucca
Pucca
Pucca
Rural 1993 Own
Urban
Rural 2002 Moneylenders
Pucca
Urban
Friends and relatives
Others
Note: Others include cooperatives, organised financial and non-financial institutions.

Rising interest rates unlikely to dampen housing demand. Notwithstanding the rising influence of home loans from banks and NBFCs in shaping new housing demand, the following factors suggest that a rising interest rate scenario is unlikely to seriously dampen residential housing demand.
Semipucca
FY10
23
4 June 2010
out to be 24m tons during 2002 and 32m tons for 2008 broadly the same as our top down estimates. Therefore, our independent top down and bottom up estimates of cement demand from new residential buildings are similar. We expect strong growth in cement demand from the housing sector during FY11-13. In fact, this is the only segment of construction activity where we expect the growth during FY11-13 to surpass the highs reached in the previous cycle (for details see Box). Implications of housing cement demand estimates. There are a few interesting implications of our estimates of cement demand from residential buildings: Relatively minor role of housing in overall cement demand. Our estimates dispel the popular perception of a large share of housing in overall cement demand. While the growth of the housing sector would definitely have a bearing on overall cement demand, the influence is much lower than what the consensus suggests. Greater role of rural housing. New construction in rural areas accounted for 73% of the new pucca and 87% of the new semi-pucca construction during 2002 and this jumped to 86% and 96%, respectively, by 2008 (see Fig 25). Therefore, within cement demand from residential buildings, growth in rural housing construction seems to play a much bigger role than growth in new urban housing construction. This holds true even if one incorporates the fact that intensity of cement use in rural residential construction is somewhat lower than the same in urban areas. Adjusting for lower cement usage intensity in rural housing construction, rural housing accounts for 60% of the overall cement demand from the new housing. Demand from non-residential buildings Limited granular data on non-residential buildings. One of the key findings of our top down cement demand estimate is the very high share (over 30%) of non-residential buildings in overall cement consumption in India (see Fig 21). This is clearly not in line with conventional perception about sources of cement demand. While we could cross-validate our top down cement demand of the housing sector with rigorous official bottom up data, non-availability of such detailed official data constrains us from doing a similar exercise for non-residential buildings. We, therefore, supplement limited official data with industry estimates to get a bottom-up view on cement demand from non-residential buildings. Census reports non-residential buildings. The main source of detailed data on non-residential buildings in India is the decennial census. The census in India covers every building in the country irrespective of its occupancy/usage status purely residential, residential cum nonresidential, purely non-residential or vacant. The census provides purposewise classification of census houses (see Fig 30). Higher proportion of katcha structures for non-residential buildings. While a precise estimate of structure type for non-residential structures (by pucca, semi-pucca and katcha categories) is not possible, our indirect measures suggest that nearly 28% of these structures were katcha in 2001. This is higher than the corresponding proportion of katcha residential structures (16%). The higher proportion of katcha structures within nonresidential buildings seem to be on account of the large number of cattlesheds and go-downs in rural areas. In 2001, out of all structures in India, 20% were non-residential buildings. The share of non-residential buildings
24
4 June 2010
in overall pucca and semi-pucca constructions were 18% and 17%, respectively.
Fig 30 Purpose-wise distribution of census houses in India
1981 Total Rural Urban Total 1991 Rural Urban Total 2001 Rural Urban
Number of census houses Vacant census houses Occupied census houses of which Residence Residence-cum-other use Non-residential with mixed use Pure non-residential Shop, Office Places on entertainment School, College, etc. Hotel, Lodge, Guest House, etc. Hospital, Dispensary, etc. Factory, Workshop, Workshed, etc. Place of worship Other non-residential use Residence Residence-cum-other use Non-residential with mixed use Pure non-residential Shop, Office Places on entertainment School, College, etc. Hotel, Lodge, Guest House, etc. Hospital, Dispensary, etc. Factory, Workshop, Workshed, etc. Place of worship Other non-residential use Vacant Total
153,652 8,185 145,467 109,086 4,511 36,381 31,870 5,094 200 213 2,341 1,555 22,468 71.0 2.9 23.7 20.7 3.3 0.1 0.1 1.5 1.0 14.6 5.3 100.0
117,170 5,847 111,323 82,804 3,234 28,519 25,285 2,168 152 129 1,148 1,336 20,352 70.7 2.8 24.3 21.6 1.9 0.1 0.1 1.0 1.1 17.4 5.0 100.0
(Number of units,'000) 36,483 199,379 145,133 54,246 2,339 12,717 8,084 4,633 34,144 186,663 137,049 49,613 26,282 143,194 104,598 38,596 1,277 7,296 5,501 1,796 7,862 43,469 32,452 11,017 6,585 36,173 26,951 9,222 2,926 7,683 3,251 4,432 47 299 218 81 84 330 189 141 1,193 3,533 1,596 1,937 219 1,822 1,524 298 2,116 22,506 20,174 2,333 (Share on overall number of units,%) 72.0 71.8 72.1 71.2 3.5 3.7 3.8 3.3 21.6 21.8 22.4 20.3 18.1 18.1 18.6 17.0 8.0 3.9 2.2 8.2 0.1 0.2 0.2 0.2 0.2 0.2 0.1 0.3 3.3 1.8 1.1 3.6 0.6 0.9 1.1 0.6 5.8 11.3 13.9 4.3 6.4 6.4 5.6 8.5 100.0 100.0 100.0 100.0
249,096 15,811 233,285 179,276 7,887 54,009 46,123 13,390 1,502 522 604 2,211 2,399 25,495 72.0 3.2 21.7 18.5 5.4 0.6 0.2 0.2 0.9 1.0 10.2 6.3 100.0
177,538 9,359 168,178 129,053 6,047 39,126 33,079 5,567 1,229 267 340 987 1,983 22,707 72.7 3.4 22.0 18.6 3.1 0.7 0.2 0.2 0.6 1.1 12.8 5.3 100.0
71,558 6,452 65,106 50,223 1,840 14,883 13,044 7,824 273 255 264 1,224 416 2,788 70.2 2.6 20.8 18.2 10.9 0.4 0.4 0.4 1.7 0.6 3.9 9.0 100.0
Note: Categorization of non-residential buildings into different groups across different Census is not uniform. Source: Census of India, Government of India and Anand Rathi Research.
New construction/size of construction key drivers. Our analysis of residential buildings brought out the fact that only half of the increase in the number of houses over the past two decades happened due to new construction. The other half of the increase in the number of residential buildings took place because of factors such as partition of existing housing structures. On top of it, the plinth areas of new houses across categories (pucca and semi-pucca) and location (rural and urban) are by and large half of comparable existing houses. The combined impact of these two factors explains the reason why conventional domestic cement demand estimates suggest a very high share of residential construction in overall cement demand. The situation, however, is considerably different for non-residential buildings. Key differences between residential and non-residential buildings. Our estimates of new construction and cement use by non-residential building in 2008 are represented in Fig 31 and Fig 32, respectively. These estimates, based on official data, suggest that there are three key differences between residential and non-residential buildings in India:
1.
High share of new construction. The proportion of new construction in the overall increase in number of structures during the past two decades has been much higher for non-residential compared
25
4 June 2010
to residential buildings.
Fig 31 Non-residential area added of 300 mn sqm in 2008
(New construction, mn sq m) 80 70 60 50 40 30 20 10 0 Modern shops and offices Hotel, Lodge, Guest House, etc. Shops and offices-mixed use with residential Factory, Workshop, Workshed, etc. Hospital, Dispensary, etc. Other non-residential use Other non-residential use Traditional shops and offices School, College, etc. Place of worship Place of worship
Rural
Source: Census of India, industry and Anand Rathi Research.
Urban
Fig 32 55mt non-residential cement demand

16 14 12 10 8 6 4 2 0 Hotel, Lodge, Guest House, etc. Modern shops and offices Shops and offices-mixed use with residential Traditional shops and offices Hospital, Dispensary, etc. School, College, etc. Factory, Workshop, Workshed, etc. (Cement use, mn tonnes)
Rural
Source: Census of India, industry and Anand Rathi Research.
Urban
2.
Larger plinth area. Our estimates suggest that on an average, the size of new non-residential buildings in 2008 was 230 sqm in rural and 215 sqm in urban areas. The average area of construction for most types of non-residential buildings apart from traditional shops is much larger than the average size of residential buildings. For example, a medium to large manufacturing unit requires 120,000-800,000 sqm of covered area compared to 40-50 sqm for residential buildings. Despite a relatively small number of new large and medium factory additions each year, because of their large size such structures account for nearly one-third of overall cement use by non-residential buildings. In contrast, modern offices and retail space, the most visible part of nonresidential construction, accounted for only 8% of cement demand by non-residential building in 2008. High usage of cement. Per square meter cost of construction of various types of non-residential structures are often much higher than residential structures leading to lower share of cement in overall construction expenditure. This, however, does not mean that the usage of cement per square meter of non-residential buildings is much lower than residential buildings. Usage of cement per square meter of construction for non-residential structures such as shops, offices, schools, colleges, hotels, lodges, guest houses, hospitals, dispensaries and places of worship are either similar or higher than residential
26
3.
4 June 2010
structures. Overall, the average cement usage by residential construction at 180kg/sqm of plinth area is only marginally higher than that for non-residential buildings.
Growth momentum of non-residential buildings likely to continue
Expect double digit growth for non-residential buildings. Growth of non-residential building construction has been more volatile than overall construction. More often than not, growth of non-residential building construction, however, surpassed that of overall construction (see Fig 33). In the past three decades, the average growth of non-residential buildings has accelerated. In particular, during the six year period FY03-08, apart from in FY05, non-residential buildings maintained double digit real growth rates each year. The CAGR in this period has been 12.8%. The growth decelerated in FY09 and FY10 to 6.9% and 7.4%, respectively. We expect such construction to grow at a CAGR of 10.2% during FY11-13 (see Fig 34).
Fig 33 Volatile non-residential growth
25 20 15 (Real growth, %) 10 5 0 -5 -10 -15 FY10e FY10e FY12e FY12e FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY06 FY08 FY08
Total construction
Non-residential buildings
Fig 34 Expect buoyant non-residential growth

(Value of non-residential const., growth, %) 25 20 15 10 5 0 -5 -10 -15 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04
Non-residential buildings
Decadal CAGR
Reasons for growth revival. The major reasons why we expect 10% growth in non-residential construction during FY11-13 are (a) likely acceleration of construction of factories, (b) resumption of commercial projects stalled during FY09-10, (c) broad-basing of commercial construction beyond tier-I cities and (d) strong growth in education sector related construction.
27
4 June 2010
Spurt in new industrial plant construction. Strong contraction in manufacturing capex during FY09-10 depressed construction of new industrial plants, the single largest user of cement within the nonresidential category. While across-the-board revival of industrial capex is yet to materialize, business confidence is on the upswing. The tight demand-supply situation in many sectors also indicates a likely jump in industrial capex. Moreover, project delays in the last two years have also increased the projects currently under implementation. Past execution delays to boost commercial real estate executions. The global slow down and oversupply of commercial space in various micro markets of the major cities led to almost across-the-board collapse in occupancy rates, rentals and capital values. These in turn led to serious project delays in commercial real estate in most cities during 2H08 and 1H09. The situation has changed since then and many of the stalled projects have started activity and new project announcements have also started. Percolation of commercial construction beyond tier I cities. The supply overhang in various micro markets of tier I cities is likely to contain new construction in such areas, especially for modern retail space. Similarly, land acquisition constraints and policy changes have led to scaling down of office space development at the special economic zones. Yet, such commercial real estate development during FY04-08 was mostly limited to tier I and a few tier II cities. The process currently is getting more broad-based. High land value and rental in larger cities and increased purchasing power in tier II, III and smaller cities is pushing a lot of commercial development towards such centers and we expect the process to continue. On the demand side, life style consideration and increased income levels in the smaller cities would sustain demand for commercial real estate development both traditional and modern. Construction demand from education, healthcare and hospitality. Indias education sector is facing several tailwinds. First, the policy resolve towards education for all has led to the enactment of the Right of Children to Free and Compulsory Education Act, 2009. There has been substantial increase in government outlays towards education. Second, there has been a major increase in demand for tertiary and professional education in India. Third, there has also been a sharp increase in demand for institutes offering foreign educational courses in India. All these factors are likely to keep construction demand from the educational sector strong. As such, a large part of the rising discretionary spending by consumers is being channelised towards education, healthcare and hospitality. As a result, construction activities linked to these sectors, which account for over 25% of the overall non-residential buildings is likely to remain strong. Demand from infrastructure sector Infrastructure to be a major driver of cement demand. We expect strong growth in infrastructure investment during FY11-13. This is one of the key reasons for us to expect a major increase in cement demand during this period. Our top down cement demand estimates show that the share of infrastructure (other construction) in total domestic demand for cement has increased from 18% in FY05 to 24% in FY10 and likely to increase to 28% by FY13 (see Fig 21). Our bottom up estimate of cement demand from the infrastructure sector is in line with the top-down estimate (see Fig 35).
28
4 June 2010
Fig 35 Infrastructure sector and cement demand

FY08 FY09 FY10 FY11e FY12e FY13e
(Investment, Rs billion, FY05 prices) Electricity Roads and bridges Telecommunications Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Total Electricity Roads and bridges Telecommunications Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Total 712 450 296 359 294 168 150 63 33 24 2,549 8.0 5.8 1.7 4.0 5.9 5.4 2.9 1.2 1.1 0.2 36.2 882 476 360 430 384 198 179 67 36 26 3,038 9.4 5.8 2.0 4.6 7.3 6.0 3.3 1.2 1.1 0.2 40.7 1,043 515 458 519 505 237 210 71 39 29 3,627 10.8 6.1 2.4 5.4 9.3 7.0 3.7 1.3 1.1 0.3 47.3 1,104 539 582 619 666 276 242 80 42 31 4,181 11.2 6.2 3.0 6.3 12.0 8.0 4.2 1.4 1.2 0.3 53.8 1,242 562 742 653 759 323 277 93 45 32 4,729 13.5 7.0 4.1 7.1 14.7 10.0 5.2 1.7 1.4 0.3 65.1 1,524 634 946 819 805 381 305 107 47 32 5,601 17.2 8.2 5.5 9.2 16.2 12.3 5.9 2.1 1.5 0.3 78.3
(Cement demand, million tons)
Source: Planning Commission, CSO, industry and Anand Rathi Research.
Several drivers of cement demand from infrastructure activities. Our optimism of strong cement demand from the infrastructure sector is based on three key factors (a) rising share of infra capex in the overall investment, (b) improvements in funding arrangements for infrastructure and (c) policy liberalisation relating to infrastructure aimed at creating enabling conditions for greater participation of the private sector including foreign investment. Strong growth in infra capex already underway. A wide range of indicators including contribution of infrastructure in overall capex (see Fig 14), real growth capex in infrastructure (see Fig 15) and bank lending to infrastructure sector (see Fig 16) show that a large increase in infrastructure capex in India is already underway. Better funding. The need for drastic improvement in Indias infrastructure facilities was never disputed. The real issue has been to induce adequate investment into such activities. While infra funding continues to remain a challenge, considerable progress is being made in this respect. Bank funding of infra projects is rising fast (see Fig 16). Recently, there has been considerable liberalisation of norms governing foreign debt and equity funding of infra projects. The budget FY11 has provided special avenues for the issuance of tax-exempt infrastructure fund. Efforts are underway for channeling large amounts of long-term savings (such as insurance and pension funds) into infrastructure projects. These efforts are likely to boost infra capex in the future. Regulatory liberalization. The role of private including foreign capital in infrastructure projects has been enhanced substantially. Considerable regulatory reforms including establishment of independent segment specific infrastructure regulators are underway to provide long-term
4 June 2010
visibility in infrastructure development and maintenance. Risk sharing through public-private partnership is also being promoted. Acceleration in infra construction to continue. In the 80s, infra construction remained highly volatile. Since then there has been an upward trend in infra construction growth (see Fig 36). The decadal CAGR of infra construction show continuous improvements in the last three decades with a strong jump in the last decade. We expect an equally impressive jump in the current decade as well (see Fig 37).
Fig 36 Infra construction accelerating
21 18 15 (Real growth, %) 12 9 6 3 0 -3 -6 -9 FY10e FY10e FY12e FY12e FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY06 FY08 FY08
Total construction
Other construction
Fig 37 Strong infra construction CARG

18 (Value of other construction, growth, %) 15 12 9 6 3 0 -3 -6 -9 FY82 FY84 FY86 FY88 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04
Other construction
Decadal CAGR
Demand from repair and maintenance The missing link. Cement demand from repair and maintenance is often ignored. Both top down and bottom up estimates generally miss out on cement demand emanating from repair and maintenance of existing structures. This happens because cement demand is generally derived from capex data while repair and maintenance is part of current/revenue expenditure. Our estimates suggest that nearly 13% of overall domestic demand for cement comes from repair and maintenance. Housing accounts for large part of repair and maintenance. Historically, a large part of repair and maintenance relate to residential buildings. This is because major repairs and alterations are included in new construction. Most of repair and maintenance relating to non-residential buildings and infrastructure are major and therefore, qualify for new construction. NSSO survey data allows us to separately estimate repair and
4 June 2010
maintenance for residential buildings in terms of area, number and cost. These estimates suggest that in FY06 repair and maintenance of residential buildings accounted over three-fourths of the overall cement consumption on account of repair and maintenance. This ratio, however, declined to 73% by FY10 and we expect the same to decline to 70% by FY13. Falling share of housing in repair and maintenance. Cement demand for the repair and maintenance of residential buildings grew by a CAGR of only 6.5% during FY06-10. We expect these activities to gather further momentum and maintain CAGR of 9% during FY11-13. Yet, our estimates suggest the share of repair and maintenance of residential buildings in overall repair and maintenance would continue to fall. This seems to reflect two factors. First, the emphasis on maintaining infrastructure facilities and non-residential structures has increased in recent years. Second, improvement in quality of construction of infrastructure and non-residential construction over time is requiring less of alteration and major repair and maintenance. As a result, the proportion of relatively minor repair and maintenance is increasing for infrastructure facilities and non-residential structures. Non-construction demand Indirect cement demand by construction activities. Cement demand from various segments of construction activities discussed earlier relate to direct demand for cement by such activities. Beyond this, construction activities also indirectly use cement through the usage of construction materials such as asbestos sheets, hume pipes, ready-made concrete bricks and slabs, ceramic tiles, etc. Almost the whole of non-construction use of cement, therefore, comes from the construction sector, albeit indirectly. In addition, according to the latest IOTT of CSO, a relatively minor proportion of cement usage in India takes place for non-construction activities in industries such as paints, varnishes and lacquers, petroleum products, iron and steel foundries and non-ferrous basic metals. External demand Little global trade. Cement is a rare example of a sparsely traded undifferentiated manufactured product with a large domestic market (see Fig 17). Cement exports by India (see Fig 38) accounts for only around 0.2% of Indias overall exports. Interestingly, however, Indias share in world cement trade is often better than Indias position in the overall global exports (see Fig 39). In volume terms, Indias cement exports in the last decade varied in the range of 3-7m tons or 2-6% of the overall domestic production. Indias cement exports are largely concentrated towards neighbouring south Asian and middle-east countries (see Fig 40). India undertakes very small quantum of cement imports as well mainly from south Asian neighbouring countries (see Fig 41). Low volume cement exports to continue. As evident from these data, exports are not a major source of cement demand for India. High transportation cost and lack of facilities to handle bulk volume of cement at most Indian ports are major reasons for exports not being a large scale option for most cement manufacturers in India. Moreover, export realization for cement is often less attractive than domestic realization. In view of these we expect Indias cement exports to remain flat at the FY09 level during FY10-13.
31
4 June 2010
Fig 38 Little cement export from India

300 (Cement exports, US$ million) 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008
Cement clinker
Portland cement, white
Portland cement
Fig 39 Indias share in world trade remain high

7 (India's global export share, %) 6 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008
Cement clinker
Portland cement, white
Portland cement
Fig 40 Indias country-wise cement export

000 tons 2001 2002 2003 2004 2005 2006 2007 2008
United Arab Emirates Sri Lanka Nepal Kuwait Qatar Iraq Bangladesh Yemen Spain Others World
392 1,028 146 149 125 388 142 352 544 3,267
775 1,009 336 307 94 283 386 331 1,085 4,605
2,010 1,084 778 617 280 491 287 461 937 6,945
1,356 778 777 924 385 2 646 147 76 728 5,819
861 676 924 876 711 552 813 116 38 1,295 6,863
530 526 826 502 252 1,369 162 620 0 492 5,280
283 145 653 37 1,076 831 6 433 0 312 3,776
379 63 684 142 479 424 9 319 1 426 2,927
32
4 June 2010
Fig 41 Indias country-wise cement import

000 tons 2001 2002 2003 2004 2005 2006 2007 2008
Pakistan Bangladesh Indonesia China Japan Saudi Arabia United Arab Emirates Thailand Morocco Others World
28 0 30 1 1 60
2 0 0 2 1 5
15 0 0 2 5 22
0 0 5 4 10
6 2 0 4 0 7 19
18 38 38 0 4 6 105
93 38 83 61 37 2 0 18 41 374
943 108 10 7 0 6 25 8 1,108
International comparison of domestic cement consumption
Distant second. Our conviction about strong cement demand growth in India in the medium-term also finds support from international comparison of domestic cement consumption. Despite being worlds second largest producer and consumer of cement (see Fig 42), per capita cement consumption in India is one of the lowest among the large economies of the world (see Fig 43). At 156kg per capita, cement consumption in India is also less than half the global average. Prevalence of high proportion of houses with no/low cement usage, limited ruralurban migration, low levels of infrastructure development and as such low levels of per capita income are factors, which seem to have contributed to low per capita cement consumption in India. The situation, however, is already on the mend.
Fig 42 Second largest cement producer
1,385 200 (Cement consumption, million tones)
480
175 150 125 100 75 50 25 0 Thailand France Turkey Saudi Arabia Germany Indonesia Vietnam Egypt Pakistan Spain Italy Iran Mexico Korea Japan Brazil Russia US India Others China
Source: USGS, ITC, World Bank and Anand Rathi Research.
Rising per capita cement usage. Indias per capita cement demand jumped from less than 30kg in the early 80s to 50kg in the early 90s and further to 90kg by 2000. It has nearly doubled during 2001-09. If India just repeats this performance in the next nine years, it would mean 10% CARG of cement consumption growth during this period. With major improvements in per capita income, reasonably inclusive growth and rising infrastructure development, we expect cement consumption in India to do far better. In this sense, too, our top down as well as bottom up estimate of 12% CAGR of cement consumption during FY11-13 looks likely.
33
4 June 2010
Fig 43 Indias share in world trade remain high

1,400 (Per capita cement use, KG) 1,200 1,000 800 600 400 200 0 Indonesia India Pakistan Brazil US Thailand Germany France Japan Russia Mexico Vietnam Turkey Egypt Iran Italy Korea China Spain Saudi Arabia Per capita cement use World average
The simile between per capita cement consumption in India and China. We identified strong growth in investment, especially infrastructure capex, and sustained high investment to GDP ratio as the major catalyst for cement demand in India. It is interesting to note that in the respect of both investment rate and per capita cement consumption, India seems to be following Chinas path albeit with a 20 year lag (see Fig 44). China maintained 17% CAGR of cement consumption during 197585 and a CAGR of 12% during the whole of 1975-2009. During 2003-09, the trajectory of per capita cement consumption in India was almost identical with the same in China during 1983-89. The period 2003-09 is also the first instance when with the sharp jump in the domestic investment rate India has considerably narrowed down the gap with investment rate in China. In 2009, investment rate in India remained slightly ahead of the Chinese investment rate in 1989. If Indias cement consumption continues to follow Chinas with a 20 year lag, then we are at the threshold of an over 20% growth.
Fig 44 India seems to be following Chinese trajectory with a 20 year lag
1,200 (per capita cement cons., kg) 1,000 800 600 400 200 0 1975 / 1995 1978 / 1998 1981 / 2001 1984 / 2004 1987 / 2007 1990 / 2010 1993 / 2013 1996 / 2016 1999 / 2019 2002 / 2022 2005 / 2025 2008 / 2028 50 (Investment to GDP, %) 45 40 35 30 25 20
PC cement consumption - China Investment rate - China

PC cement consumption - India Investment rate - India
34
4 June 2010
Surviving the perceived glut

Our cement demand estimates debunks a few myths including the primacy of urban housing and modern commercial construction in the overall cement demand. While capacity utilization levels in the cement industry are likely to worsen in FY11, the turnaround could be faster and sharper than the current consensus expectation. Cement companies from East, Central and West seems to be better poised to benefit from the emerging demand-supply scenario. Cement demand: Myths and realities. Our top-down and bottom-up analyses of cement demand punctures many myths about Indias cement demand (see Fig 45). The main observations:
Fig 45 Segmental use of cement
(million tons) FY08 FY09 FY10 FY11e FY12e FY13e
Residential buildings New buildings Rural Urban Repair & maintenance Rural Urban Non-residential buildings Shops and offices-mixed use with residential Traditional shops and offices Modern shops and offices School, College, etc. Hotel, Lodge, Guest House, etc. Hospital, Dispensary, etc. Factory, Workshop, Workshed, etc. Place of worship Other non-residential use Other construction Electricity Roads and bridges Telecommunications Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Repair & maintenance other than residential Non-construction demand Total domestic demand Foreign trade Exports Imports Total final demand
Source: CSO, NSSO, CoI, ITC, Industry and Anand Rathi Research.
48.5 32.4 19.1 13.3 16.1 8.6 7.6 56.5 0.7 10.4 4.6 3.7 5.2 5.3 21.4 1.9 3.3 36.2 8.0 5.8 1.7 4.0 5.9 5.4 2.9 1.2 1.1 0.2 5.4 17.9 164.4 3.4 3.8 0.4 167.8
50.7 33.6 19.9 13.7 17.2 9.2 8.0 61.3 0.8 11.4 4.8 4.3 5.6 6.1 22.1 2.3 3.9 40.7 9.4 5.8 2.0 4.6 7.3 6.0 3.3 1.2 1.1 0.2 6.1 19.4 178.2 1.8 2.9 1.1 180.0
54.6 35.7 21.1 14.5 18.9 10.1 8.8 68.2 0.9 12.3 5.2 4.9 6.9 6.9 24.4 2.5 4.0 47.3 10.8 6.1 2.4 5.4 9.3 7.0 3.7 1.3 1.1 0.3 7.1 21.6 198.8 3.1 3.5 0.4 201.9
60.7 40.1 23.7 16.5 20.6 11.0 9.7 74.2 1.0 13.2 5.5 5.3 7.2 7.7 27.0 2.6 4.8 53.8 11.2 6.2 3.0 6.3 12.0 8.0 4.2 1.4 1.2 0.3 8.1 24.0 220.8 3.2 3.5 0.3 224.0
64.2 41.9 24.6 17.3 22.2 11.7 10.5 82.1 1.0 14.6 6.6 5.9 7.8 8.0 30.0 2.9 5.3 65.1 13.5 7.0 4.1 7.1 14.7 10.0 5.2 1.7 1.4 0.3 9.2 26.9 247.5 3.2 3.5 0.3 250.7
69.6 45.0 26.2 18.8 24.6 12.9 11.7 90.6 1.2 16.4 7.8 5.8 8.9 9.5 32.7 3.0 5.2 78.3 17.2 8.2 5.5 9.2 16.2 12.3 5.9 2.1 1.5 0.3 10.6 30.4 279.5 3.2 3.5 0.3 282.7
Housing cement demand not as predominant as assumed. During FY08-10, on average, housing, non-residential buildings and infrastructure accounted for 29%, 34% and 23%, respectively, of
4 June 2010
overall domestic cement demand. Our estimates suggest that their shares would become 26%, 33% and 26%, respectively, during FY1113. That is, housings share would drop 3 percentage points (pp), while the share of infrastructure would rise by 3pp and non-residential constructions would fall by 1pp. At the same time, the share of nonconstruction demand would remain unchanged at 11% while that of repair and maintenance of structures other than houses would increase by 1pp to 4%. Rural cement demand for housing far higher than urban demand. Cement demand from rural housing accounts for 60% of cement demand from the overall housing sector. This is despite the fact that on an average per sqm cement use by urban houses are higher than those of rural houses. Shops and offices only 28% of non-residential building. All formats of shops and offices shops and offices-mixed use with residential, traditional shops and offices and modern shops and offices together account for only 9% of the overall cement demand and 28% of the cement demand from non-residential structures. Interestingly, building used for education, healthcare and hospitality account for almost identical cement demand. Fastest growth of cement demand from infrastructure sector. Irrigation and power are two large users of cement. Within the infrastructure sector, irrigation, power and urban infrastructure (water and sanitation) are expected to be the source fastest growth in cement demand during FY11-13. The sub-national scenario Fragmentation of cement market. The high cost of transporting cement not only limits its cross-border movement, but also within India given its continental size. Generally, cement mobility is limited to 500km from the cement factory. Given this, demand-supply and pricing have distinct regional characteristics. Regional cement supply-demand. Our year-end installed cement capacity estimates are based on scheduled plans of capacity addition by cement companies. We estimate the effective capacity for a year based on our assessment of the trajectory of feasible utilization of new capacities (see Fig 46). To capture market fragmentation in the cement industry and the implications thereof, we apportioned our all-India cement demand estimates at the state and regional levels. Once again, we utilized macro data mainly state GDP, state-wise construction activity and past data on state-wise cement consumption to derive state-level cement demand estimates. We also derive the state/region-wise capacity utilization by comparing the state/region-wise demand and effective capacities (see Fig 47). To get a clear perspective on demand relative to capacity at the state and regional levels, we derived the increment new installed capacity, new effective capacity and additional demand (see Fig 48). Back-loaded capacities. Installed capacity refers to end-year capacity, while demand pertains to the whole year. Monthly state-wise cement capacity addition data since FY98 show that on an average as much as 40% of the capacity addition takes place during the last four months of a financial year (Dec-Mar) and over 20% of the capacity addition takes place during April alone. Industry sources suggest that such high capacity addition during April reflects late reporting of capacity addition (which took place during the closing months of the previous financial year).
4 June 2010
Therefore, nearly 60% of the capacity addition seems to happen during the end of a financial year.
Fig 46 Sub-national installed and effective cement capacity
FY09 FY10 FY11e FY12e FY13e FY09 FY10 FY11e FY12e FY13e
Effective cement capacity, mn tn Central Zone Madhya Pradesh Uttar Pradesh East Zone Arunachal Pradesh Assam Bihar Chhattisgarh Jharkhand Manipur Meghalaya Mizoram Nagaland Orissa Tripura West Bengal North Zone Chandigarh Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttarakhand Southern Zone Andaman & Nicobar Andhra Pradesh Goa Karnataka Kerala Puducherry Tamil Nadu Western Zone Gujarat Maharashtra Total 25.76 18.27 7.50 26.74 0.19 0.95 11.12 4.68 1.25 3.79 4.76 39.54 0.48 1.77 5.89 0.19 4.37 26.13 0.70 58.81 26.99 12.59 0.59 18.65 29.68 17.56 12.12 180.53 29.06 19.37 9.69 29.97 0.19 0.95 11.86 4.81 1.48 5.33 5.36 48.88 0.48 2.35 7.32 0.19 4.51 32.73 1.31 71.04 30.71 15.62 0.59 24.13 32.07 18.99 13.08 211.01 34.05 21.73 12.32 33.72 0.19 0.95 13.41 4.89 1.48 7.05 5.76 56.78 0.48 2.35 9.22 0.19 4.51 38.24 1.79 85.97 36.98 19.17 0.59 29.24 35.66 20.54 15.12 246.17 38.06 24.15 13.91 36.55 0.19 0.95 15.05 4.89 1.48 7.99 6.01 61.06 0.48 2.35 10.40 0.19 4.51 41.04 2.09 99.20 44.98 21.69 0.59 31.95 39.62 22.38 17.24 274.49 40.73 26.04 14.68 38.11 0.19 0.95 15.85 4.89 2.05 7.99 6.19 61.77 0.48 2.35 10.40 0.19 4.51 41.75 2.09 109.12 52.02 23.24 0.59 33.27 43.04 24.80 18.24 292.76
Installed cement capacity (year end), mn tn 28.16 19.89 8.27 29.90 0.20 1.00 12.01 5.14 1.55 4.66 5.33 48.34 0.50 2.47 6.20 0.20 4.75 33.22 1.00 73.03 32.62 15.37 0.62 24.43 32.38 19.28 13.10 211.81 36.53 21.89 14.64 36.12 0.20 1.00 13.49 5.14 1.55 8.41 6.33 63.24 0.50 2.47 10.95 0.20 4.75 42.17 2.20 90.39 36.12 20.62 0.62 33.04 37.18 21.98 15.20 263.47 41.33 26.69 14.64 39.32 0.20 1.00 16.69 5.14 1.55 8.41 6.33 64.64 0.50 2.47 10.95 0.20 4.75 43.57 2.20 105.19 47.92 23.62 0.62 33.04 42.28 23.08 19.20 292.77 41.33 26.69 14.64 39.32 0.20 1.00 16.69 5.14 1.55 8.41 6.33 64.64 0.50 2.47 10.95 0.20 4.75 43.57 2.20 115.09 55.94 23.62 0.62 34.92 44.68 25.48 19.20 305.07 46.21 29.00 17.22 41.85 0.20 1.00 16.69 5.14 3.48 8.41 6.93 65.84 0.50 2.47 10.95 0.20 4.75 44.77 2.20 122.61 58.91 26.29 0.62 36.79 48.64 29.44 19.20 325.15
Source: CSO, Industry and Anand Rathi Research.
Reasons for back loading plant commissioning. First, a plant already commissioned but undergoing trial runs would result in expenditure, especially interest expenditure on the borrowed fund used for the capex but would not lead to commensurate revenues. By delaying announcement of plant commissioning a company can capitalize interest expenses in the balance sheet and thereby largely avoid the impact on the profit and loss account for that year. Second, in order to take the depreciation benefit, however, the company needs to fix the date of plant commissioning before the fiscal year end. These two factors taken together seem to result in bunching of capacity addition close to the end of a financial year.
37
4 June 2010
Installed and effective capacity. New capacity addition does not become fully operational on the first day of the commissioning of a plant. Industry sources suggest that 12-18 months are required to make new capacity fully operational. More time is generally required for Greenfield as compared to Brownfield plants. Major part of the capacity addition in the recent years and bulk of the capacity additions during FY11-13 are under Greenfield projects. Given this and the fact that 60% of capacity addition takes place in the last four months of a financial year, we need to distinguish between year end capacity and effective production capacity in a year. As indicated before, we estimated future installed capacities using the scheduled plans of capacity addition by individual cement companies.
Fig 47 Sub-national cement demand and effective capacity utilization
FY09 FY10 FY11e FY12e FY13e FY09 FY10 FY11e FY12e FY13e
Demand as % of effective capacity Central Zone Madhya Pradesh Uttar Pradesh East Zone Arunachal Pradesh Assam Bihar Chhattisgarh Jharkhand Manipur Meghalaya Mizoram Nagaland Orissa Tripura West Bengal North Zone Chandigarh Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttarakhand Southern Zone Andaman & Nicobar Andhra Pradesh Goa Karnataka Kerala Puducherry Tamil Nadu Western Zone Gujarat Maharashtra Total 102.1 46.0 238.8 105.7 .. 873.1 538.3 37.5 66.6 .. 53.7 .. .. 144.6 .. 161.1 89.0 .. 1,005.5 409.6 32.8 568.7 143.1 42.1 347.4 92.5 .. 66.7 .. 91.7 1,343.5 .. 85.3 114.7 69.0 181.0 98.7 108.4 48.7 227.5 113.6 .. 796.6 755.7 37.2 80.5 .. 49.3 .. .. 120.1 .. 178.0 78.6 .. 1,097.8 332.1 38.2 591.5 157.3 34.5 201.2 79.9 .. 58.8 .. 78.2 1,390.7 .. 72.0 118.8 74.3 183.5 94.2 105.1 46.2 209.1 113.3 .. 856.6 890.1 37.0 89.5 .. 52.5 .. .. 102.6 .. 179.0 75.9 .. 1,200.9 358.2 34.6 691.4 173.8 34.1 172.1 70.6 .. 50.2 .. 71.3 1,489.9 .. 63.6 120.7 81.2 174.3 89.7 105.5 47.0 207.1 119.1 .. 1,002.3 1,026.3 40.6 106.7 .. 56.9 .. .. 101.3 .. 185.0 78.9 .. 1,121.1 397.0 34.7 813.1 196.0 37.8 160.5 68.6 .. 45.7 .. 74.5 1,589.6 .. 64.6 120.2 84.6 166.4 90.2 111.5 48.9 222.5 128.7 .. 1,158.5 1,157.5 45.6 121.0 .. 44.0 .. .. 115.4 .. 194.8 88.1 .. 1,244.9 442.1 38.2 895.4 220.7 42.8 177.1 71.2 .. 48.6 .. 77.5 1,687.9 .. 68.9 123.1 87.0 172.0 95.5 26.3 8.4 17.9 28.3 0.0 1.7 5.1 4.2 3.1 0.0 0.7 0.1 0.1 5.5 0.1 7.7 35.2 0.4 4.8 7.3 1.9 1.1 6.3 11.0 2.4 54.4 0.1 18.0 0.5 11.5 7.9 0.4 15.9 34.1 12.1 21.9 178.2
Cement demand, million tons 31.5 9.4 22.1 34.0 0.0 1.5 7.2 4.4 3.9 0.1 0.7 0.1 0.1 6.4 0.1 9.5 38.4 0.5 5.2 7.8 2.8 1.1 7.1 11.3 2.6 56.7 0.1 18.0 0.4 12.2 8.2 0.4 17.4 38.1 14.1 24.0 198.8 35.8 10.0 25.8 38.2 0.0 1.6 8.5 5.0 4.4 0.1 0.8 0.1 0.1 7.2 0.2 10.3 43.1 0.5 5.7 8.4 3.2 1.3 7.8 13.0 3.1 60.7 0.1 18.6 0.5 13.7 8.8 0.4 18.6 43.0 16.7 26.4 220.8 40.2 11.3 28.8 43.5 0.0 1.9 9.7 6.1 5.2 0.1 0.8 0.1 0.1 8.1 0.2 11.1 48.2 0.7 5.3 9.3 3.6 1.5 8.8 15.5 3.4 68.0 0.1 20.5 0.6 16.2 9.4 0.5 20.6 47.6 18.9 28.7 247.5 45.4 12.7 32.7 49.1 0.0 2.2 11.0 7.2 5.9 0.1 0.9 0.1 0.1 9.2 0.2 12.1 54.4 0.9 5.9 10.4 4.0 1.7 10.0 17.9 3.7 77.7 0.1 25.3 0.8 18.0 9.9 0.6 22.9 53.0 21.6 31.4 279.5
38
4 June 2010
Fig 48 Incremental installed capacity, effective capacity and additional demand

FY10 FY11e FY12e FY13e FY10 FY11e FY12e FY13e FY10 FY11e FY12e FY13e
Addition to installed capacity mn tn Central Zone Madhya Pradesh Uttar Pradesh East Zone Arunachal Pradesh Assam Bihar Chhattisgarh Jharkhand Manipur Meghalaya Mizoram Nagaland Orissa Tripura West Bengal North Zone Chandigarh Delhi Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan Uttarakhand Southern Zone Andaman & Nicobar Andhra Pradesh Goa Karnataka Kerala Puducherry Tamil Nadu Western Zone Gujarat Maharashtra Total 8.4 2.0 6.4 6.2 0.0 0.0 0.0 1.5 0.0 0.0 0.0 0.0 0.0 3.8 0.0 1.0 14.9 0.0 0.0 0.0 4.8 0.0 0.0 9.0 1.2 17.4 0.0 3.5 0.0 5.3 0.0 0.0 8.6 4.8 2.7 2.1 51.7 4.8 4.8 0.0 3.2 0.0 0.0 0.0 3.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0.0 14.8 0.0 11.8 0.0 3.0 0.0 0.0 0.0 5.1 1.1 4.0 29.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.9 0.0 8.0 0.0 0.0 0.0 0.0 1.9 2.4 2.4 0.0 12.3 4.9 2.3 2.6 2.5 0.0 0.0 0.0 0.0 0.0 0.0 1.9 0.0 0.0 0.0 0.0 0.6 1.2 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.0 7.5 0.0 3.0 0.0 2.7 0.0 0.0 1.9 4.0 4.0 0.0 20.1
Addition to effective capacity mn tn 3.3 1.1 2.2 3.2 0.0 0.0 0.0 0.7 0.1 0.0 0.2 0.0 0.0 1.5 0.0 0.6 9.3 0.0 0.0 0.6 1.4 0.0 0.1 6.6 0.6 12.2 0.0 3.7 0.0 3.0 0.0 0.0 5.5 2.4 1.4 1.0 30.5 5.0 2.4 2.6 3.8 0.0 0.0 0.0 1.6 0.1 0.0 0.0 0.0 0.0 1.7 0.0 0.4 7.9 0.0 0.0 0.0 1.9 0.0 0.0 5.5 0.5 14.9 0.0 6.3 0.0 3.6 0.0 0.0 5.1 3.6 1.5 2.0 35.2 4.0 2.4 1.6 2.8 0.0 0.0 0.0 1.6 0.0 0.0 0.0 0.0 0.0 0.9 0.0 0.3 4.3 0.0 0.0 0.0 1.2 0.0 0.0 2.8 0.3 13.2 0.0 8.0 0.0 2.5 0.0 0.0 2.7 4.0 1.8 2.1 28.3 2.7 1.9 0.8 1.6 0.0 0.0 0.0 0.8 0.0 0.0 0.6 0.0 0.0 0.0 0.0 0.2 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.7 0.0 9.9 0.0 7.0 0.0 1.6 0.0 0.0 1.3 3.4 2.4 1.0 18.3
Addition to cement demand mn tn 5.2 1.0 4.2 5.8 0.0 -0.1 2.1 0.2 0.7 0.0 0.1 0.0 0.0 0.9 0.0 1.9 3.2 0.0 0.4 0.5 0.9 0.0 0.8 0.3 0.2 2.3 0.0 0.0 -0.1 0.7 0.3 0.0 1.5 4.0 2.0 2.1 20.6 4.3 0.6 3.7 4.1 0.0 0.1 1.3 0.6 0.5 0.0 0.0 0.0 0.0 0.8 0.0 0.8 4.7 0.1 0.5 0.6 0.4 0.2 0.7 1.7 0.4 3.9 0.0 0.5 0.1 1.4 0.6 0.1 1.2 4.9 2.6 2.4 22.0 4.4 1.3 3.1 5.3 0.0 0.3 1.3 1.2 0.8 0.0 0.1 0.0 0.0 0.9 0.0 0.8 5.1 0.1 -0.4 0.9 0.4 0.2 1.0 2.5 0.3 7.3 0.0 2.0 0.1 2.5 0.6 0.1 2.1 4.6 2.3 2.3 26.7 5.2 1.4 3.9 5.5 0.0 0.3 1.2 1.1 0.7 0.0 0.1 0.0 0.0 1.1 0.0 0.9 6.2 0.2 0.6 1.1 0.4 0.2 1.1 2.4 0.3 9.7 0.0 4.7 0.1 1.8 0.6 0.1 2.3 5.4 2.7 2.7 32.0
Estimation of effective capacity. Technically, running a cement plant at 100% utilization of the installed capacity is seldom possible. On an average, plants need to shutdown for 15-20 days for planned regular maintenance and repair. In addition, seasonality of demand often leads to lower utilization during certain months of the year. Moreover, there are often mismatches between new clinker and grinding capacity. The latter often gets commissioned prior to the former. Reflecting inter alia such gaps between installed and effective capacity utilization, the average production to installed capacity ratio of the Indian cement sector has been 76.5% during the past 30 years (FY81-FY10) and in none of these years production to installed capacity ratio crossed 93%. In view of these, we assume effective capacity of existing plants to be 95% of the installed capacities. For new capacity addition, the effective capacity is 30% during the year of commissioning, 70% in the next year and 95% in the third year.
4 June 2010
Exports add to capacity utilization. The capacity utilization discussed in our estimates relate to only domestic demand as bifurcating export demand at the state-wise/regional level is difficult. Therefore, if exports are factored in, capacity utilization levels would go up, albeit marginally. Concentration of cement production. Cement capacities generally come up in the proximity of limestone. That is why there is a high concentration of cement production in five states Madhya Pradesh, Chhattisgarh, Rajasthan, Andhra Pradesh and Gujarat. These five states account for less than 30% of all-India cement demand, but 55% of cement installed capacity. Considerable inter-state/inter-region movements. Given the concentration of cement plants in a few states, capacity utilization at the state/regional levels needs to be interpreted with caution as there is considerable movement of cement across regional and state boundaries. For example, the large deficit state of Uttar Pradesh gets a sizable part of cement supply from Madhya Pradesh, Rajasthan and Haryana. Bihar gets cement supplies from Jharkhand. On the other hand, Andhra Pradesh, a state with large over-supply of cement (relative to cement demand in that state) caters to demand from Maharashtra, Karnataka and Orissa. Similarly, apart from Uttar Pradesh, Rajasthan also supplies to all the northern states. Regional trends our observations. Our regional cement demandsupply estimates suggest the following important points: Fall in utilization in FY11. During the course of the current year, for almost all states/regions, capacity utilization levels would fall often significantly but would improve in the next two years, especially in FY13. The Central, East and West zones would continue to remain excess demand zones and the North and South excess supply zones through out FY11-13. Capacity concerns could be deceptive. A key reason behind the consensus concern about capacity utilization in the cement sector and thereby realizations during the current year and beyond springs from 52 million tons installed capacity addition in FY10 and another 29 million tons scheduled addition in FY11. Our estimates, however, show that the effective capacity addition would be spread over FY1012. The gap between effective capacity and demand at the all-India level would increase only marginally between FY10 and FY11. Incremental demand would largely catch-up with incremental effective supply in FY12 and incremental demand would exceed incremental supply by a large margin in FY13. Capacity concerns to linger but turnaround could be quick. Our analysis shows that effective capacity utilization levels in FY11 would be better than what is being anticipated now based on estimates of new installed capacity in FY10 and planned capacity additions in FY11 and beyond. Yet, such concerns are unlikely to disappear quickly. In fact, our estimates also show dips in capacity utilization in FY11 and this is likely to further heighten concerns on over capacity and fall in realizations during FY11. Yet, we feel that lower than expected dip in effective utilization and stronger than expected demand is likely to lead to major turn around on the outlook for the cement sector. Improvement in market perception. Our view of much stronger cement demand and sequenced effective capacity addition suggest that the market perception on the sector is likely to improve over next 6-9 months.
40
4 June 2010
Pricing power to be regained

The additional 62m tons (dont see risk beyond what has been ordered) coming up in the next three years, together with the present surplus, is expected to be absorbed by greater demand (of around 83m tons over FY10-13). Thus, in line with the expected trend in utilization rates (pick-up in FY12 and FY13), we believe that prices would start looking up from 4Q11 (volatile till then) and strengthen thereafter. Overall, the Central, East and West would be our preferred spots. 62m tons capacity to be added in the next three years We expect 62m tons to be added to capacity over the next three years, taking the total effective capacity to 325m tons by end-FY13. This addition is much less than the capacity commissioned in the past three years (~100m tons). The addition during FY11/12/13 is expected to be 29/13/20m tons. Our capacity addition estimates are based on orders received by key equipment suppliers such as KHD Humboldt, FL Smith, Polysius. This has been cross validated from information received through companies and industry consultants. To obtain a realistic picture, we have factored in a delay of 3-12 months in our forecast of commissioning schedules of new units, based on channel checks and past record. Our supply estimates include upto 18m ton from companies that may not become members of the CMA, leading to differences in capacity addition data as reported by CMA and ours.
Fig 49 Regional distribution of additions (FY10-13 m tons) Fig 50 Pace of expansion to slow down
Central, 10 North, 3
(m tons) 350 300 250 200
(%) 25 20 15 10 5 0 FY09e FY10e FY11e FY12e FY13e
West, 11 South, 32
150 100 50 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
East, 6
Capacity
Source: CMA, Anand Rathi Research, Company
Capacity Growth (RHS)
Source: CMA, Anand Rathi Research, Company
Fig 51 Utilization to hit bottom in FY11 and take off for the next up-cycle
(m tons) 325 275 225 175 125 75 FY11e FY12e FY13e FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 (%) 100 95 90 85 80 75
Effective Capacity
Source: CMA, Anand Rathi Research
Total Demand
Cap Utilization (RHS)
41
4 June 2010
We believe that a 12% CAGR in demand over FY10-13 along with slower capacity addition would result in better utilization rates than originally envisaged (or consensus figures). We expect utilization rates to bottom out in FY11 at 81% and improve gradually to 90% by FY13.
Fig 52 All-India demand-supply equation
m ton FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e
Opening Capacity New Projects Closing Capacity Idle Capacity Effective Capacity Cap Utilization (%) Production Consumption- Domestic Consumption growth (%) Exports Total Demand Surplus / (Deficit)
96.3 5.2 101.5 3.5 98.0 80.3 76.7 73.9 8.4 4.4 78.3 NA
101.5 6.1 107.6 4.6 103.0 81.3 81.7 79.8 8.0 3.5 83.3 NA
107.6 2.5 110.1 5.7 104.4 90.9 94.2 92.1 15.4 3.1 95.2 NA
110.1 11.4 121.5 6.1 115.4 85.2 93.6 90.3 (1.9) 5.2 95.4 NA
121.5 13.4 134.9 6.5 128.3 83.6 101.9 98.9 9.5 5.1 104.0 4.2
134.9 5.2 140.0 7.4 132.6 85.4 111.5 107.4 8.7 6.9 114.3 4.0
140.0 6.4 146.5 7.4 139.0 86.5 117.5 113.9 6.0 9.0 122.9 3.3
146.5 7.8 154.3 7.4 146.9 89.2 127.6 123.1 8.1 10.2 133.2 3.5
154.3 5.9 160.2 7.4 152.8 94.6 141.8 135.6 10.1 9.2 144.8 (1.4)
160.2 8.1 168.3 7.4 160.9 98.7 154.7 149.0 9.9 8.5 157.5 (9.4)
168.3 29.5 197.8 7.4 190.4 95.8 168.3 164.0 10.1 6.0 170.0 (16.0)
197.8 21.4 219.2 7.4 211.8 90.2 181.4 177.7 8.4 6.1 183.8 (16.3)
219.2 48.7 267.9 4.4 263.4 84.3 200.4 197.6 11.2 5.1 202.6 (9.5)
267.9 29.3 297.2 4.4 292.7 80.6 224.2 221.5 12.1 5.1 226.6 0.5
297.2 12.3 309.5 4.4 305.0 84.0 251.2 248.1 12.0 5.1 253.2 9.2
309.5 20.1 329.5 4.4 325.1 89.9 283.3 279.6 12.7 5.1 284.7 10.1
Source : CMA, Anand Rathi Research Note: (1)Capacity Utilization is calculated based on average capacity for the year (2) Surplus/(Deficit) is calculated based on new capacity utilization assumptions of 30%/70%/90% for Year1/2/3
Not much scope for de-bottlenecking/ brownfield expansion The last round of expansion as well as the ongoing, has largely (two-thirds) been accomplished through de-bottlenecking and the brownfield route. With little scope left for expansion through such routes, the next round of organic expansion in the industry would have to come through the greenfield route. This would take three to four years to commission. Thus, we do not see too much risk in capacity additions during FY10-13 beyond what is ordered for. Based on our channel checks, of fresh enquiries of 100m tons by all cement companies, more than 85% is for greenfield projects. These would therefore take a minimum three years to commissioning. Fresh projects, for which orders would be placed in the next six months, at the earliest would see the light of the day by 4QFY13. Key issues for greenfield projects would be availability of cement-grade limestone and coal and environmental clearances. Blending ratio decline to cap surplus volumes Availability of fly ash at a low cost (only freight) helped boost PPC (Portland Pozzolano cement) production in the past ten years. Its superior properties have helped in higher usage. The shift also benefited companies as PPC offered them higher margins than OPC (ordinary Portland cement).
Fig 53 Product mix
100% 80% 60% 1.33 40% 20% 0% FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 1.31 1.29 1.27 1.25 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Fig 54 Blending ratio

(x) 1.39 1.37 1.35
O.P.C
P.P.C.
P.B.F.S
Others
Source: CMA
42
4 June 2010
Increase in production of PPC resulted in the blending ratio (the amount of cement produced to clinker ground) increasing from 1.11x in FY99 to 1.33x in FY10 (FY09 was 1.36x). However, ahead, this is unlikely to rise, as companies use it as a means to maintain optimum utilization levels (especially in times of surpluses). With the addition of new clinker units, and consequent surpluses, it would be more economic for cement companies to produce OPC. The trend, therefore, of generating additional volumes by resorting to more blending would cease as companies would have to make a choice between higher volumes or higher realizations. Cement prices to move up from FY12 Despite a drop in utilization rates in FY10 to 84% (from 90% the year before), all-India average prices have risen around 2% yoy. We estimate capacity utilization levels to bottom out in FY11 at 81% (from 84% the year prior) and prices to be firm. The additional 62m tons coming up in the next three years, together with the present surplus, is expected to be absorbed by greater demand (of around 83m tons over FY10-13). Thus, in line with the expected trend in utilization rates (pick-up in FY12 and FY13), we believe that prices would start looking up from 4Q11 and strengthen thereafter. Nevertheless, we see the trend of correction/firmness in prices varying region-wise for most of FY11, depending on local demand-supply equilibriums. Also, there is a strong likelihood of prices being volatile over the next six to twelve months due to factors such as seasonality (monsoons), bunching up of capacities in a particular quarter or a sudden pick-up in demand due to events such as state elections.
Fig 55 Capacity utilization vs price change
(%) 100 95 90 85 80 75 70 65 60 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09e FY10e FY11e FY12e FY13e (%) 30 25 20 15 10 5 0 -5 -10
Capacity Utilization
% Change in Prices (RHS)
Of all the regions, the South is expected to record the lowest utilization rates during FY10-12, followed by the North. The Central and East region is expected to be the least affected, with rates continuing above 100%.
43
4 June 2010
Fig 56 Sensitivity of utilization to demand growth

(Capacity Utilization) 100% Demand CAGR at 15% Demand CAGR at 12% Base Case Demand CAGR at 9%
95%
90%
85%
80%
75% FY11e FY12e FY13e FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Region-wise equation Across the five cement markets of India (the North, South, East, West and Central regions), a fair amount of movement takes place. The high proportion of freight costs (in the final selling price) does not permit the distance typically traversed to exceed 600km consistently. Inter-region price differences, however, push companies to market output to as far as 1,000km, (for short periods of time) as the higher freight cost is more than offset by higher realizations.
Fig 57 Price movements across regions
(Rs/bag) 300 280 260 240 220 200 180 160 140 120 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e
North
South
East
West
Central
Cement movements across regions have chiefly been within the two clusters: the North-Central-East and the South-West. Price movements in different regions within a cluster are therefore strongly co-related and would exhibit similar movements. Nevertheless, given the free movement, selling across clusters would continue till parity emerges.
44
4 June 2010
Fig 58 Inter-region movement: FY09

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% North North East East South South West West Central Central
South to be surplus; West to the rescue? In the next three years the South would see the maximum capacity additions. With 32m tons, the region would bring in 50% of all-India capacity additions. The surplus capacity built up in FY10 together with slackening demand led to a 10% yoy price correction in the region. Andhra Pradesh was the most affected as most of the new capacity in South was put up in the state. The surplus led to prices dropping Rs50-70 across the region within six to eight months. However, they have since rebounded (by Rs20-25), backed by revived demand and power shortages in AP and TN. Ahead, we expect utilization rates and prices in the South to be suppressed (<70%) through FY10-12, with a pick up in FY13. Excess in the region could be absorbed by the West, given the strong inter-regional movement between the two and relatively high utilization rates in the West. Over FY1013, we expect prices to rise by 7-9% cumulatively both in the South and West. North to see rising utilization rates; Central, East steady The Central region and Eastern belt are expected to continue operating at over 100% and 95% utilization rates, with robust demand and little capacity additions in the region. Over FY10-13, we expect prices to rise 9% and 14% cumulatively in the Central and Eastern regions, respectively. With little capacity additions, the Northern belt is expected to see utilisation rates moving up, post FY12. Through FY10-13, we expect prices to rise 7% in the region. Overall, the Central, East and West would be our preferred spots based on estimated trends on demand-supply equilibrium and likely price outcomes.
45
4 June 2010
Fig 59 Highest capacities addition in the South

(m tons) Capacity Utilization
140
105% 105% 88% 88% 89% 92% 103% 98%
120%
109% 100% 90% 82% 81% 76% 68% 69% 72% 89% 88% 96%
120 100 80 60 40 20
100% 80% 60% 40% 20% 0%
FY10 FY11e FY12e FY13e
FY10 FY11e FY12e FY13e West
North
South
East
Fig 60 Demand-supply vs price hikes (FY07-10)

(m ton)
Fig 61 Demand-supply vs estimated price hikes (FY10-13)

46 95
(m ton) 81 52
45 40 35 30 25 20 15 10 5 0 North South East Demand

17%
10%
23%
9%
22%
16%
50 45 40 35 30 25 20 15 10 5 0
7%
7%
14%
FY10 FY11e FY12e FY13e Central

9% 9%
9%
West Supply
Central
All India
North
South
East Demand
West Supply
Central
All India
Source: Anand Rathi Research
46
4 June 2010
Cost increases to be passed on

Sourcing of quality coal (for cement and power plants) at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures (including freight hikes) could be handled through a hike in cement prices. Availability of captive power, besides lowering costs, has also lowered dependence on grids. Also surplus power being sold in the open market has opened up a diversified revenue stream. Coal costs to remain high Most of the coal consumed by Indian cement companies comes through government-assigned linkages, at long-term supply agreements with Coal India, Ltd. CIL produces nearly 85% of coal in India (though the cement sector, not falling under priority status, gets a mere 3% of the coal produced). From FY07 to FY09, coal linkages to the industry have increased from 15.5m tons to 18.4m. However, receipts of coal have not risen in line with allocations. This is due to the fact that the industry was able to obtain better coal (with a higher calorific value) from international markets at lower prices. International coal prices fell 35% in FY10 and now show signs of an upturn. We expect prices to be up around 15-20% on an average in FY11. However, the appreciating rupee (against the US dollar, our house call) next year is expected to lessen the impact to around 10-15%. Also, the unutilized amount of linkage coal available would come in handy. With Coal India raising prices by around 10% in Dec 09, another hike in the short term is not likely. Sourcing of quality coal at reasonable prices has been and would continue to be a challenge for the industry. Nevertheless, we believe that any cost pressures could be handled through a hike in cement prices.
Fig 62 Coal prices - Australia Newcastle port prices
(US$ / Ton) 200 180 160 140 120 100 80 60 40 20
Fig 63 Coal linkages and actual supply

(m tons) 20 18 16 14 12 10 8 6 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Coal Prices
0 Dec-02 Dec-06 Feb-00 Sep-00 Feb-04 Aug-04 Jan-08 Aug-08 Apr-01 Oct-01 Mar-05 Oct-05 Mar-09 May-02 May-06 Oct-09 Jul-03 Jul-07 May-10
Reciepts
Linkages
Source: Bloomberg
Source: CMA
Captive power to reduce grid dependence and cost In the last five years most cement companies have shifted from obtaining through state grids more than 80% of the power required (high charges and erratic supply in certain states). They now enjoy similar amounts of power generated by their own plants. This lowers their power costs as well as avoids production disruptions. The percentage of captive power is likely to be
4 June 2010
maintained or increased. This leaves the companies grappling only with the issue of sourcing quality coal (or pet coke) consistently and at reasonable prices. This should not be a horrendous task, given that, all this while (processes and relationships in place), they have been sourcing coal for cement production as well.
Surplus power to add to their kitty
Many cement companies now have surplus power to sell in the open market or intend to do so in future. Accordingly, they plan to expand power capacity to more than their eventual requirement. The open-market sale of power would help cross-subsidise the cost of generating captive power. Alternatively, if the quantum of power sold is reasonably large, it throws up a new and diversified revenue stream. Freight costs to be passed on through cement price hikes With a 63% share in freight, roads have been the preferred mode of transport over the years chiefly due to their last-mile connectivity. In FY10, the railways have lost a two-percentage-point market share to roads, mainly due to wagon shortage and freight-rate hikes during the year. Diesel prices rose 6.5% in Mar 10. Further hikes appear unlikely, as international crude prices have softened in the last two months. However, any increase in diesel prices in the long term would up road freight costs. And a freight hike, if implemented by the railways, would also raise rail-freight costs. We believe that freight-price hikes (road or railways) could, in time, be passed on to consumers. (This might be possible immediately if the demand-supply situation at that time favors manufacturers, as has been seen in the past.) With the continuing disparity in prices in different regions in India and commissioning of fresh capacities, freight increases are also likely (due to lead distances increasing on selling outside core markets). This, however, is unlikely to impact naked realizations (net less freight) as the higher realizations would offset the increase in freight charges.
Fig 64 Freight mix
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
350 300 FY04 FY05 FY06 FY07 FY08 FY09 Freight Cost Avg.Diesel prices (RHS) FY10 500 450 400
Fig 65 Avg. Freight cost vs Diesel prices

(Rs/ton) Rs/lit.
650 600 550
38 36 34 32 30 28 26 24 22 20
Rail
Road
Sea
Source: CMIE, Anand Rathi Research
48
4 June 2010
M&A to protect downside

Higher degree of consolidation and improved balance sheets are expected to prevent a major crash in prices. We expect the recent pickup in momentum in M&As (priced at around US$170-220) to continue thereby protecting current valuations. With current replacement cost hovering around US$100-110 and a lead time of three-four years to set up a greenfield project, more and more companies (domestic and international) are on the lookout for acquisition opportunities. Greater consolidation level to prevent price crash The fallout of big ticket M&A activity has been that the Indian cement sector is far more consolidated than before. The top five groups contributed 40% to capacity in FY2000, which in FY10 is around 55%. We expect the greater degree of consolidation to prevent a major crash in prices in FY11 despite a dip in utilization rates. Except in AP, the industry has not seen major pressure on prices in the past one year, indicating a greater degree of understanding and cohesiveness among industry participants. With the balance sheets of most in the industry in a much better shape (leverage of nil to 1.5x) than in the past (leverage of 1.5x to 5x in FY03 when prices fell 7%), companies including tier-two ones are expected not to behave irrationally on the pricing front. We expect prices to move up, starting FY12 (and much more in FY13) backed by strong demand.
Fig 66 Consolidation climbs from 41% to 55%
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 41% 55% 59% 45%
Consolidation increases from 41% to 55%
FY00 Top 5 Groups
FY10 Others
M&A activity to gain momentum The equity market turmoil in FY09 had led to valuation gaps widening as sellers expectations had not gone down in line with the crash in stock prices. This led to no major deals being struck during FY09. We are now seeing some pick-up in M&As based on a spate of deals recently struck. French cement major Vicat bought a majority stake in Bharati Cement (a South-based private cement company) in Apr 10 to expand its footprint in India at valuations of over US$170 a ton. In May 10 KKR (a leading private equity investment firm) bought a 20% stake in Dalmias cement business at a valuation of US$100 a ton. Equivalently, as Indian companies are expanding operations outside India, UltraTech has acquired a stake in a UAE-based cement company at valuations of ~US$125 a ton.
49
4 June 2010
We believe momentum in M&A would be maintained for the following reasons. Large cash-rich Indian companies aim at a larger market share through inorganic growth and are hence ready to pay a premium over the replacement cost in order to acquire quality assets. The upswing in the cement cycle offers better valuations to smaller players to exit than in the past Heightening interest from foreign cement manufacturers to expand/ enter the fast-growing Indian cement market.
Fig 67 Recent deals
Acquired Company Acquirer EV / Ton (US$) Year
Dalmia * Bharthi My Home Cements Shree Digvijay Cements Ambuja Cements Mysore Cements ACC
Source: Anand Rathi Research * PE investment
KKR Vicat CRH Cimpor Holcim Heidelberg Holcim
100 170 215 162 200 117 100
2010 2010 2008 2007 2006 2006 2005
Replacement cost and lead time to keep valuations high Replacement costs of a cement plant, measured by the capex required to set up a greenfield unit, have been increasing over the past five years due to a surge in prices of all constituent elements, primarily land and machinery. The cost of a greenfield cement plant per ton has gone up from US$75 in 2004 to US$125 in 2008. Since then, with the reduction in land cost and steel, copper prices have led to replacement cost slipping to more reasonable levels of US$110 per ton. However, the lead time to set up a greenfield composite plant is today a minimum of three years.
Mid-caps basket, selective outperformance
Most midcap companies are now available at EV/ton valuations of less than replacement cost. As we enter the next upturn in the cement sector, some of these should be re-rated based on size, leverage, operational efficiency, return ratios and growth strategy.
Fig 68 Valuations mid-caps (FY10)
Company Current Capacity (m tons) Price (Rs/share) PE (x) EV/EBITDA (x) EV/ton ($) Debt/equity (x)
Binani Cement Birla Corp. JK Lakshmi JK Cement OCL India Sanghi Industries Dalmia Heidelberg Cement Chettinad Cement Orient Cement Mangalam Cement Kesoram Cement Madras Cement
6.3 5.8 5.6 7.9 4.0 3.3 7.8 3.1 8.2 5.0 2.0 7.3 11.5
79.6 367.0 63.0 182.7 125.8 23.1 217.5 50.9 479.4 57.0 155.0 323.3 103.0
5.5 5.1 3.2 7.2 5.5 9.4 12.8 8.6 15.5 6.9 3.5 6.2 6.9
4.2 2.9 1.5 5.5 3.7 5.8 7.1 3.2 4.7 4.9 1.6 6.1 5.1
86 73 26 63 54 185 56 47 64 46 33 48 85
1.4 (0.4) 0.7 1.0 0.7 3.1 1.6 1.0 0.7 1.7 1.5
Source: Companies, Anand Rathi Research.
50
4 June 2010
Company Section
51
Cement
India I Equities
Change in Estimates Target
Update
Reco
4 June 2010
ACC
Improving efficiency, upgrading to Buy
Upgrade. We raise CY10e/CY11e earnings 13%/19%, given new volume, realization and cost assumptions, and target price to Rs1,125 (from Rs730). We upgrade to Buy, from Sell, given cost rationalization, all-India presence and de-leveraged balance sheet. Expansion to drive volume growth. ACCs ongoing expansion would raise cement capacity to 30.5m tons (from 24m tons now) by 3QCY10, leading to a 9% volume CAGR over CY09-11. Insulation against regional fluctuations. ACC is present in almost all regions, though the West contributes the least. On its Maharashtra plant being commissioned, we expect this imbalance to be redressed, insulating it from regional fluctuations. Cost rationalization boosts profitability. In the past two years, cost rationalization measures have shown results. It has cut coal consumption per ton of cement by 15% and kept fixed costs constant despite a 9% rise in volumes. This, together with more coal linkages (65%), would keep it competitive. De-leveraged balance sheet. With no major capex in the pipeline, we expect ACC to remain FCF positive until CY11. We estimate net cash of Rs27bn by CY11 (per share: Rs145). Valuations. At our target price of Rs1,125, the stock would trade at 7.5x CY11e EV/EBITDA, in line with its ten-year average. The target price implies an EV/ton of US$135 and a PE of 14.3x.
Key financials
Year end 31 Dec CY07 CY08 CY09 CY10e CY11e
Rating: Buy Target Price: Rs1,125 Share Price: Rs826

Manish Valecha
Key data
52-week high/low Sensex/Nifty 3-m average volume Market cap Shares outstanding Free float Promoters Foreign Institutions Domestic Institutions Public
ACC IN/ ACC.BO Rs1017 / Rs570 17022 / 5110 US$10.8m Rs155bn/US$3.4bn 187.7m 53.8% 46.2% 13.0% 19.8% 21.0%
Relative price performance

69,907 12,255 65.2 14.4 10.8 7.5 142 39.4 34.1 2.4 (30.9) 72,829 11,639 62.0 (5.0) 12.8 8.4 143 26.7 26.1 2.4 (24.0) 80,272 16,067 85.5 38.0 9.7 5.7 121 29.4 31.9 2.8 (27.5) 84,641 14,222 75.7 (11.5) 10.9 6.2 104 21.9 23.7 2.4 (25.0) 94,479 14,812 78.8 4.1 10.5 5.2 94
May-09 Nov-09 Dec-09 Jun-09 Jul-09 950 850 Sensex 750 650 Apr-10 May-10 Aug-09 Sep-09 Oct-09 Feb-10 Mar-10 Jan-10 1,050 ACC
Sales (Rsm) Net profit (Rsm) EPS (Rs) Growth (%) PE (x) EV/EBITDA (x) EV/Ton (US$) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
19.7 22.6 2.4 (37.8)
Source: Bloomberg
Anand Rathi Financial Services Limited 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. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities
4 June 2010
ACC Improving efficiency, upgrading to Buy
Quick Glance Financials and Valuations

Fig 1 Income statement (Rsm)
Fig 4 PE Band
80,272 10.2 55,475 24,797 30.9 843 3,421 2,411 6,877 16,067 38.0 16,067 85.5 104.4 23.0 84,641 5.4 61,984 22,657 26.8 500 4,500 2,660 6,095 14,222 (11.5) 14,222 75.7 100.7 20.0 94,479 11.6 69,923 24,556 26.0 500 5,300 2,710 6,655 14,812 4.1 14,812 78.8 108.1 20.0
Rs 1,600 1,400 ACC 1,200 1,000 800 600 400 200 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 12x 800 600 400 200 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10
$200 ACC $150 4,000 3,000 2,000 $50 1,000 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 $100
Net sales Sales growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Reported PAT FDEPS (Rs/share) CEPS (Rs/share) DPS (Rs/share)
69,907 20.5 50,720 19,186 27.4 739 3,051 1,775 4,917 12,255 14.4 14,386 65.2 93.4 20.0
72,829 4.2 55,497 17,332 23.8 400 2,942 2,887 5,238 11,639 (5.0) 12,128 62.0 80.4 20.0
17x 14x 11x 8x
Fig 2 Balance sheet (Rsm)

Fig 5 EV/EBITDA Band

1,879 50,756 52,635 4,820 57,456 50,726 6,791 (9,903) 9,842 57,456 187.8 (24.0) (50) 1,879 61,775 63,655 5,669 69,324 63,145 14,756 (16,041) 7,464 69,324 187.9 (27.5) (73) 1,879 71,799 73,679 3,143 76,821 67,879 14,756 (11,695) 5,881 76,821 187.9 (25.0) (50) 1,879 82,413 84,293 3,000 87,293 63,579 14,756 (9,713) 18,670 87,293 187.9 (37.8) (38)
(Rs) 1,400 ACC 1,200 1,000
Share capital Reserves & surplus Shareholders fund Debt Minority interests Capital employed Fixed assets Investments Working capital Cash Capital deployed No. of shares (m) Net Debt/Equity (%) W C turn (days)
1,878 42,962 44,841 3,064 47,905 39,639 8,448 (7,617) 7,435 47,905 187.5 (30.9) (40)
10x 8x 6x
Fig 3 Cash flow statement (Rsm)

Fig 6 EV/Ton Band

16,067 3,421 134.6 19,623 (6,138) 25,761 15,840 9,920 5,051 (131) 849 7,966 (2,379) 9,842 7,464 14,222 4,500 200 18,922 4,346 14,576 9,234 5,342 4,398 0 (2,527) (1,582) 7,464 5,881 14,812 5,300 200 20,312 1,983 18,329 1,000 17,329 4,398 (143) 12,789 5,881 18,670
($ m) 7,000 6,000 5,000
PAT + Depreciation + Deferred Tax Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
12,255 3,051 107.3 15,413 (6,208) 21,621 8,731 12,890 4,388 99 (6,096) 3,413 (2,141) 1,233 6,202 7,435
11,639 2,942 43.4 14,624 (2,286) 16,910 14,028 2,882 4,391 15 1,756 (1,657) (489) 2,408 7,435 9,842
53
4 June 2010
Investment Argument and Valuation

We raise CY10 and 11 earnings estimates 13% and 19%, given new volume, realization and cost assumptions. We also raise the target price to Rs1,125 from Rs730, and upgrade to Buy. Cement expansion to drive volume growth ACCs volume CAGR over CY07-CY09 was just 4%, mainly because there was no capacity expansion in CY08 and delays in CY09s expansion. Expansion would lead to a 9% CAGR in volumes over CY09-11 In Dec 09, the company added two split grinding units (with combined capacity of 2.9m tons) in Karnataka. The corresponding clinker unit (new Wadi), though, is to be commissioned in Jul 10. The company is adding another 3m-ton composite plant at Chanda in Maharashtra, which would be commissioned by 3QCY10, taking capacity to 30.5m tons. We believe these expansion plans would lead to a 9% volume CAGR over CY09-11.
Fig 7 Expansion to lead to strong volume growth
(m tons) 31
29 27 25 23 21 19 17 CY10e CY11e CY06 CY07 CY08 CY09
Capacity
Despatches
A premium brand with all-India reach ACC is well-established in almost all regions, though the West contributes the least. We expect this imbalance to be redressed when its Maharashtra plant is commissioned, thereby insulating it from regional fluctuations. The high-growth regions of North, Central, East and West would contribute ~70% of its production.
Fig 8 Well-diversified regional mix (CY10e)
Central 15% North 20%
West 13%
East 20%
South 32%
54
4 June 2010
ACCs is one of Indias oldest cement companies and the only one that figures in the list of Consumer Super Brands of India. Given this lineage, it has noteworthy brand equity, commanding a premium in all markets. Cost rationalization boosts profitability Coal consumption reduced by 15%, to 103kg per ton of cement Under the guidance of Holcim, ACC has been working towards cost rationalization. In the past two years, this has yielded good results. In CY07, it used 121kg of coal to produce one ton of cement; it has reduced this to 103kg, a marked 15% lower coal consumption. Also, it has the highest linkage in the industry (65% of its requirement). It is also setting up a further captive 90 MW, which would raise its selfsufficiency to 86% (from 72% now). Although open market coal costs have risen 55% in the past two years, lower consumption and higher linkages have enabled ACC to hold in check its power and fuel costs.
Fig 9 Cost rationalization initiatives showing results
(Rs/ton)
2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0 CY08 CY09 CY10e CY11e Other Exp. CY07 Raw Material
Staff Cost
Power
Fuel
Freight
Fixed costs too (employee and other expenses) have been constant in the past two years despite a 9% increase in volumes. We believe that costpruning measures would continue, and partially offset the impact of the rise in fuel and raw material costs. De-leveraged balance sheet Net cash of Rs13bn (CY09) expected to shoot up to Rs27bn in CY11 During CY10, ACC will complete its expansion plans and is expected to have a positive free-cash-flow until CY11. In the next two years, it is estimated to generate cash profits of Rs39bn. Accordingly, its net cash of ~Rs13bn (CY09) is expected to rise to Rs27bn by CY11 (up per share from Rs70 to Rs145). This would take its net gearing from a negative 0.3x in CY09 to a negative 0.4x in CY11. The company is one of the best placed in the sector to fund future growth plans, without much of an impact on its balance sheet.
55
4 June 2010
Fig 10 Net-debt-to-equity vs FCF

(Rsm) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY05 CY05 CY06 CY08 CY09 CY10e CY11e
+2SD EV/EBITDA +1SD Mean -1SD -2SD May-09
(%) 80 60 40 20 0 -20 -40 CY07

May-05 May-06
Free Cash Flow

Net Debt to Equity (RHS)
Valuation At our target price of Rs1,125, the stock would trade at 7.5x CY11 EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14.3x and an EV per ton of US$135.
Fig 11 12-month-forward EV/EBITDA Mean and Standard Deviation
(x)
18 16 14 12 10 8 6 4 2 0 May-01 May-02 May-03 May-04 May-07 May-08 May-10
Change in estimates We slightly raise our sales estimates for CY10 and CY11 by 4% and 11%, respectively. We have increased our net profit estimate, by 13% and 19% in CY10 and CY11 to factor in higher volumes and realizations.
Fig 12 Change in estimates
CY10e Old New Change % Old CY11e New Change %
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) EBITDA per ton (Rs) NSR per ton (Rs) Volumes (m tons)
Source: Anand Rathi Research.
81,660 20,655 12,615 25.3 869 3,437
84,641 22,657 14,222 26.8 979 3,658
3.7 9.7 12.7 147 12.6 6.4
84,866 20,200 12,500 23.8 806 3,387
94,479 24,556 14,812 26.0 951 3,658
11.3 21.6 18.5 219 17.9 8.0
56
4 June 2010
Risks to valuation Industry capacity ramping up quicker and bunching up; steep rise in international coal prices; lower demand offtake over the next two years.
Fig 13 Income Statement (Rsm)
Net Sales Sales Growth (%) Less Expenditure Raw Material Staff Cost Power& Fuel Freight charges Other Expenditure EBITDA EBITDA Margin (%) Growth (%) - Interest - Depreciation + Other Income Profit Before Tax - Tax Tax rate (%) Adjusted PAT PAT Margin (%) Growth (%) Extraordinary Items Reported PAT FDEPS (Rs / Share) CEPS (Rs / Share) DPS (Rs / Share)
Source: Company, Anand Rathi Research.
69,907 20.5 7,608 3,533 12,436 9,442 17,701 19,186 27.4 18.2 739 3,051 1,775 17,172 4,917 28.6 12,255 17.5 14.4 (2,131) 14,386 65.2 93.4 20.0
72,829 4.2 7,988 4,163 15,990 10,016 17,341 17,332 23.8 (9.7) 400 2,942 2,887 16,877 5,238 31.0 11,639 16.0 (5.0) (489) 12,128 62.0 80.4 20.0
80,272 10.2 8,628 3,677 15,396 10,544 17,230 24,797 30.9 43.1 843 3,421 2,411 22,944 6,877 30.0 16,067 20.0 38.0 16,067 85.5 104.4 23.0
84,641 5.4 10,139 3,935 17,864 11,831 18,215 22,657 26.8 (8.6) 500 4,500 2,660 20,317 6,095 30.0 14,222 16.8 (11.5) 14,222 75.7 100.7 20.0
94,479 11.6 11,861 4,525 20,081 13,892 19,565 24,556 26.0 8.4 500 5,300 2,710 21,466 6,655 31.0 14,812 15.7 4.1 14,812 78.8 108.1 20.0
Fig 14 Balance Sheet

Sources of Funds Share Capital Reserves and Surplus Deferred Tax Liability Net Worth Debt Capital Employed Application of Funds Gross Block Less: Depreciation Net Block Capital WIP Investments Sundry Debtors Inventories Loans & Advances Current Assets Current Liablities Provisions Current Liabilities Working Capital Cash Net Current Assets Capital Deployed W C Turnover (days) BV (Rs / Share)
1,878 39,648 3,315 44,841 3,064 47,905 54,641 21,494 33,147 6,492 8,448 2,893 7,309 4,394 14,596 15,550 6,663 22,213 (7,617) 7,435 (183) 47,905 (40) 221
1,879 47,399 3,358 52,635 4,820 57,456 58,357 23,660 34,697 16,029 6,791 3,102 7,933 6,475 17,510 17,774 9,639 27,413 (9,903) 9,842 (61) 57,456 (50) 262
1,879 58,283 3,493 63,655 5,669 69,324 68,263 26,680 41,583 21,562 14,756 2,037 7,790 5,654 15,481 20,603 10,919 31,522 (16,041) 7,464 (8,578) 69,324 (73) 320
1,879 68,107 3,693 73,679 3,143 76,821 98,223 31,180 67,043 836 14,756 3,478 9,276 7,154 19,908 20,603 11,000 31,603 (11,695) 5,881 (5,814) 76,821 (50) 372
1,879 78,521 3,893 84,293 3,000 87,293 99,559 36,480 63,079 500 14,756 3,883 10,354 8,654 22,891 20,603 12,000 32,603 (9,713) 18,670 8,958 87,293 (38) 428
57
4 June 2010
Fig 15 Cash Flow Statement (Rsm)

PAT + Depreciation + Deffered Tax Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
12,255 3,051 107.3 15,413 (6,208) 21,621 8,731 12,890 4,388 99 (6,096) 3,413 (2,141) 1,233 6,202 7,435
11,639 2,942 43.4 14,624 (2,286) 16,910 14,028 2,882 4,391 15 1,756 (1,657) (489) 2,408 7,435 9,842
16,067 3,421 134.6 19,623 (6,138) 25,761 15,840 9,920 5,051 (131) 849 7,966 (2,379) 9,842 7,464
14,222 4,500 200 18,922 4,346 14,576 9,234 5,342 4,398 0 (2,527) (1,582) 7,464 5,881
14,812 5,300 200 20,312 1,983 18,329 1,000 17,329 4,398 (143) 12,789 5,881 18,670
Fig 16 Ratio Analysis @ Rs826

Sales Growth (%) PAT Growth (%) Operating Margin (%) PE (x) P/C (x) Dividend Yield (%) P/B (x) EV/Sales (x) EV/EBITDA (x) Net Debt / Equity (%) Working Capital Turnover (days) Dividend Payout (%) RoE (%) RoCE (%)
20.5 14.4 27.4 10.8 8.8 2.4 3.7 2.0 7.5 (30.9) (40) 26.1 39.4 34.1
4.2 (5.0) 23.8 12.8 10.3 2.4 3.1 2.0 8.4 (24.0) (50) 30.9 26.7 26.1
10.2 38.0 30.9 9.7 7.9 2.8 2.6 1.8 5.7 (27.5) (73) 26.9 29.4 31.9
5.4 (11.5) 26.8 10.9 8.2 2.4 2.2 1.7 6.2 (25.0) (50) 26.4 21.9 23.7
11.6 4.1 26.0 10.5 7.6 2.4 1.9 1.4 5.2 (37.8) (38) 25.4 19.7 22.6
58
Cement
India I Equities
Update
Reco
4 June 2010
Ambuja Cements
Cost leader, expansion in growth areas; upgrading to Buy
Upgrade. We raise CY10/11 earnings estimates 26%/39%, given new volume, realization and cost assumptions; and target price to Rs148, from Rs87. We upgrade to Buy from Sell, given the resurgence of its cost leadership status, expansion in high-growth regions and de-leveraged balance sheet. Cement expansion to drive volume growth. Ambuja would complete its expansion in CY10. In 1Q, cement capacity rose to 25m tons (from 22m), and is expected to be 27m tons by 3Q. We expect this to lead to a 10% volume CAGR over CY09-11. Established in North, Central, East. Around 60% of its sales arise from the high-growth North, Central and East regions; the rest from the West. Its recent foray into the southern region with a bulk terminal in Kerala makes it an all-India player. Cost leadership reinforced. In 1QCY10, it commissioned its 4.6m-ton clinker plant, taking capacity to 16.7m tons. We expect this to save ~Rs200/ton, reinforcing Ambujas cost leadership status, putting behind cost issues with clinker. De-leveraged balance sheet. With no major capex in the pipeline, we expect Ambuja to remain FCF positive until CY11. We estimate net cash to rise to Rs33bn by CY11 (per share: Rs22). Valuation. At our target price of Rs148, the stock would trade at 7.5x CY11 EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14x CY11 and an EV/ton of US$160.
Key financials
Rating: Buy Target Price: Rs148 Share Price: Rs110

Manish Valecha
Key data
ACEM IN / ABUJ.BO Rs114 / Rs60 17022 / 5110 US$10m Rs168bn/US$3.7bn 1523.7m 53.6% 46.4% 27.3% 16.5% 9.80%

56,314 13,039 8.6 0.9 12.8 7.4 182 32.0 35.8 3.2 (28.3) 62,203 10,939 7.2 (16.1) 15.3 9.1 160 21.2 25.3 2.0 (15.8) 70,769 12,184 8.0 11.4 13.8 8.2 155 20.1 23.3 2.2 (22.3) 76,612 14,259 9.4 17.0 11.8 6.8 123 20.6 24.0 2.7 (24.0) 84,882 16,300 10.7 14.3 10.3 5.2 111 20.5 24.3 2.5 (39.1)
Source: Bloomberg
130 125 120 115 110 105 100 95 90 85 80 May-09 Jun-09 Jul-09
Sales (Rsm) Net profit (Rsm) EPS (Rs) Growth (%) PE (x) EV/EBITDA (x) EV/Ton (US$) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Sensex
Ambuja Apr-10 May-10 Aug-09 Sep-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Oct-09
4 June 2010
Ambuja Cements Cost leader, expansion in growth areas; upgrading to Buy

Fig 4 PE Band
70,769 13.8 52,100 18,669 26.4 224 2,970 2,558 5,849 12,184 11.4 12,706 8.0 11.0 2.4 76,612 8.3 54,531 22,081 28.8 250 3,900 2,825 6,497 14,259 17.0 14,460 9.4 12.7 3.0 84,882 10.8 59,186 25,696 30.3 250 4,700 3,225 7,671 16,300 14.3 16,300 10.7 14.4 2.8
(Rs) 180 160 140 120 14x 100 80 60 40 May-05 May-06 May-07 May-08 May-09 May-10
12x Ambuja 10x 8x 6x Nov-09
56,314 16.0 35,862 20,451 36.3 591 2,363 1,935 6,393 13,039 0.9 17,691 8.6 13.2 3.5
62,203 10.5 44,779 17,424 28.0 321 2,598 2,109 5,676 10,939 (16.1) 14,023 7.2 10.9 2.2
Ambuja 17x
11x 8x
Nov-05
Nov-06
Nov-07
Nov-08


3,045 57,445 60,490 2,887 63,377 51,400 3,324 135 8,518 63,377 1522.6 (15.8) 1 3,047 66,494 69,542 1,657 71,199 61,545 7,270 (6,423) 8,807 71,199 1523.7 (22.3) (33) 3,047 76,622 79,670 500 80,170 63,454 6,066 (1,469) 12,118 80,170 1523.7 (24.0) (7) 3,047 88,942 91,990 400 92,390 59,754 6,066 (1,042) 27,612 92,390 1523.7 (39.1) (4)
Rs bn 250 230 210 190 170
3,045 47,286 50,330 3,304 53,635 36,567 12,889 (2,247) 6,426 53,635 1522.4 (28.3) (15)
150 130 110 90 70 50 May-05 May-06 May-07 May-08 May-09 Nov-05 Nov-06 Nov-07 Nov-08

Fig 6 EV/Ton Band

12,184 2,970 1,015 16,168 (6,558) 22,726 13,115 9,611 4,277 115 (1,230) 3,946 (16) 288 8,518 8,807 14,259 3,900 1,000 19,159 4,954 14,205 5,809 8,396 5,348 (1,157) (1,204) (217) 3,312 8,807 12,118 16,300 4,700 1,001 22,001 427 21,575 1,000 20,575 4,991 (1) (100) (11) 15,494 12,118 27,612
$m 6,000 Ambuja 5,000 4,000 3,000 2,000 $50 1,000 0 May-05 May-06 May-07 May-08 May-09 May-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 $150 $200
13,039 2,363 (55) 15,348 (3,215) 18,563 7,689 10,874 6,232 244 (5,350) 1,558 (4,667) 2,645 3,781 6,426
10,939 2,598 60 13,597 2,382 11,215 17,431 (6,216) 3,919 (23) (418) (9,566) (3,103) 2,093 6,426 8,518
Nov-09
$100
60
4 June 2010

We raise Ambujas CY10/11 earnings estimates 26%/39%, given new volume, realization and cost assumptions; and the target price to Rs148, from Rs87. Given its cost leadership, de-leveraged balance sheet and expansion into high-growth regions, we upgrade the stock from a Sell to a Buy. Cement expansion to drive volume growth Ambuja is expected to post a 10% CAGR in volumes over CY09-11 Ambujas volume CAGR over CY07-CY09 was just 6% due to cement capacity constraints. Also, a mismatch in clinker and cement capacity resulted in sourcing clinker at a higher cost, leading to lower profitability during CY07-CY09. In 1QCY10, the company added two grinding units of 1.5m tons each in Himachal Pradesh and Uttar Pradesh, taking cement capacity to 25m tons. It is also adding another 1m tons each at Maharashtra and Chhattisgarh by 3QCY10, taking cement capacity to 27m tons. We believe this expansion would lead to 10% volume CAGR over CY09-11, given its established presence in the high-growth markets of the North, Central and East.
Fig 7 Expansion to lead to strong volume growth
(m ton) 29.0
27.0 25.0 23.0 21.0 19.0 17.0 15.0 CY07 CY08 CY09 CY10e CY11e
Capacity
Sales
Post-expansion, Ambuja would have 60% exposure to the high-growth markets of the North, Central and East
Presence in high-growth North, Central, East; foray into the South During FY10 dispatches to the North, East and Central markets grew 13%, 13% and 15%, respectively, while to the West and the South they grew ~7% each. Ambuja would complete the last leg of its expansion in 3QCY10, after which it would have about 60% exposure to these three high-growth markets, the balance coming from the West. Also, prices in the markets of the North, East and Central have been stronger than in other regions. This makes for a strong regional portfolio for Ambuja. In CY09, Ambuja commissioned a Rs660m bulk terminal in Kerala. This would enable it to directly move products from its Gujarat plant to southern markets, making it an all-India player.
61
4 June 2010
Fig 8 Geographical breakup Capacity (CY10e)

West 41%
East 20%
Cost leadership status reinforced Post the full ramp-up of clinker capacity, we expect cost savings of Rs200 a ton In the past three years, Ambuja had to resort to third parties sourcing for clinker as it had been plagued with clinker shortages. Besides restricting cement sales, this came at higher prices and pushed up raw material costs per ton. In 1QCY10 Ambuja commissioned clinker capacity of 4.6m tons (at Himachal Pradesh and Chhattisgarh), taking capacity to 16.7m tons and potential cement production to 24m tons (current cement capacity at 25m tons). This has already lowered the raw material cost in 1QCY10, by ~Rs100/ton qoq. With the full ramp-up in clinker capacity, we expect cost savings of ~Rs200/ton, which would reinforce Ambujas position as the lowest-cost producer in the industry.
Fig 9 Raw material costs vs EBITDA margin
(Rs/ton)
700 600 500 400 300 200 100 Q2CY08 Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 CY10e CY11e
(%) 32
30 28 26 24 22 20
Raw Material Cost
EBITDA Margin (RHS)
De-leveraged balance sheet In CY10, Ambuja is expected to complete all its expansion and to generate positive free cash till CY11. Accordingly, we expect its net cash of Rs14bn (in CY09) to rise to Rs33bn by CY11 (per share up from Rs10 to Rs22). This would take its net gearing from a negative 0.28x in CY09 to a negative 0.39x two years later. Ambuja is one of the best-placed companies in the sector to fund future growth plans without much impact on its balance sheet.
62
4 June 2010
Fig 10 Net-Debt-to-Equity vs FCF

(Rs m) 25,000 (%) 40
20,000 15,000 10,000 5,000 0 -5,000 -10,000 FY05 CY06 CY07 CY08 CY09 CY10e CY11e
30 20 10 0 -10 -20 -30 -40
Free Cash Flow

Valuation At our target price of Rs148, it would trade at 7.5x CY11e EV/EBITDA, in line with its ten-year average. The target price implies a PE of 14x and an EV per ton of US$160.
(x) 11
10 9 8 7 6 5 4 3 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 EV/EBITDA
+2SD +1SD Mean -1SD -2SD May-10

CY11e Change % Old New Change %
Change in estimates We raise our net profit estimates of Ambuja for FY11/12, by 26% and 39%, respectively, in order to factor in more volumes and better realizations.
Fig 12 Key changes
CY10e Old New
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) EBITDA margin (%) EBITDA per ton (Rs) NSR per ton (Rs) Volumes (m ton)
70,123 17,909 11,359 25.5 918 3,593 19.5
76,612 22,081 14,259 28.8 1,078 3,739 20.5
9.3 23.3 25.5 328 17.4 4.1 5.0
75,782 18,996 11,746 25.1 901 3,593 21.1
84,882 25,696 16,300 30.3 1,132 3,739 22.7
12.0 35.3 38.8 521 25.7 4.1 7.6
63
4 June 2010
Risks to valuation Industry capacity ramping up quicker and bunching; steep rise in international coal prices; lower demand offtake in the next two years.
56,314 16.0 3,979 2,086 10,198 10,895 8,704 20,451 36.3 15.7 591 2,363 1,935 19,433 6,393 31.4 13,039 23.2 0.9 (4,652) 17,691 8.6 13.2 3.5
62,203 10.5 5,193 2,661 13,257 12,499 11,170 17,424 28.0 (14.8) 321 2,598 2,109 16,615 5,676 28.8 10,939 17.6 (16.1) (3,083) 14,023 7.2 10.9 2.2
70,769 13.8 10,139 2,728 14,228 13,474 11,531 18,669 26.4 7.1 224 2,970 2,558 18,033 5,849 31.5 12,184 17.2 11.4 (523) 12,706 8.0 11.0 2.4
76,612 8.3 6,495 3,138 16,482 15,683 12,734 22,081 28.8 18.3 250 3,900 2,825 20,756 6,497 31.0 14,259 18.6 17.0 (201) 14,460 9.4 12.7 3.0
84,882 10.8 5,892 3,451 18,524 17,669 13,650 25,696 30.3 16.4 250 4,700 3,225 23,971 7,671 32.0 16,300 19.2 14.3 16,300 10.7 14.4 2.8
64
4 June 2010
Fig 14 Balance Sheet (Rsm)

Sources of Funds Share Capital Reserves and Surplus Deferred Tax Liability Net Worth Debt Capital Employed Application of Funds Gross Block Less: Depreciation Net Block Capital WIP Investments Sundry Debtors Inventories Loans & Advances Current Assets Current Liablities Provisions Current Liabilities Working Capital Cash Net Current Assets Capital Deployed W C Turnover (days) BV (Rs / Share)
3,045 43,502 3,784 50,330 3,304 53,635 52,311 22,712 29,599 6,968 12,889 1,457 5,816 2,175 9,448 6,759 4,936 11,695 (2,247) 6,426 4,179 53,635 (15) 31
3,045 53,637 3,808 60,490 2,887 63,377 57,069 25,142 31,928 19,472 3,324 2,246 9,398 3,233 14,876 10,036 4,706 14,741 135 8,518 8,653 63,377 1 37
3,047 61,636 4,858 69,542 1,657 71,199 62,241 27,841 34,400 27,144 7,270 1,522 6,832 2,632 10,987 10,669 6,740 17,409 (6,423) 8,807 2,384 71,199 (33) 42
3,047 70,764 5,858 79,670 500 80,170 94,195 31,741 62,454 1,000 6,066 3,148 9,445 4,132 16,726 10,495 7,700 18,195 (1,469) 12,118 10,649 80,170 (7) 48
3,047 82,084 6,858 91,990 400 92,390 95,195 36,441 58,754 1,000 6,066 3,488 10,465 5,632 19,585 11,628 9,000 20,628 (1,042) 27,612 26,570 92,390 (4) 56

13,039 2,363 (55) 15,348 (3,215) 18,563 7,689 10,874 6,232 244 (5,350) 1,558 (4,667) 2,645 3,781 6,426
10,939 2,598 60 13,597 2,382 11,215 17,431 (6,216) 3,919 (23) (418) (9,566) (3,103) 2,093 6,426 8,518
12,184 2,970 1,015 16,168 (6,558) 22,726 13,115 9,611 4,277 115 (1,230) 3,946 (16) 288 8,518 8,807
14,259 3,900 1,000 19,159 4,954 14,205 5,809 8,396 5,348 (1,157) (1,204) (217) 3,312 8,807 12,118
16,300 4,700 1,001 22,001 427 21,575 1,000 20,575 4,991 (1) (100) (11) 15,494 12,118 27,612
65
4 June 2010
Fig 16 Ratio Analysis @ Rs110

16.0 0.9 36.3 12.8 8.4 3.2 3.6 2.7 7.4 (28.3) (15) 40.8 32.0 35.8
10.5 (16.1) 28.0 15.3 10.1 2.0 3.0 2.5 9.1 (15.8) 1 30.6 21.2 25.3
13.8 11.4 26.4 13.8 10.0 2.2 2.6 2.2 8.2 (22.3) (33) 30.0 20.1 23.3
8.3 17.0 28.8 11.8 8.7 2.7 2.3 2.0 6.8 (24.0) (7) 32.1 20.6 24.0
10.8 14.3 30.3 10.3 7.6 2.5 2.0 1.6 5.2 (39.1) (4) 26.2 20.5 24.3
66
Cement
India I Equities
Update
Reco
4 June 2010
UltraTech
Restructuring-led growth and re-rating, upgrading to Buy
Upgrade. We raise FY11e/12e earnings 2%/14%, given new volume and realization assumptions and cost savings. We raise the target price to Rs1,255 from Rs890 and upgrade from Sell to Buy. Strong brand equity. UltraTech has a strong brand equity and is categorized as a Grade A brand in most regions. Focus on greater efficiency through cost control. We expect UltraTechs cost control measures (raising captive power, blending ratio, reducing fuel usage) to strengthen its cost competitiveness. Restructuring: platform for accelerated future growth. The consolidation of the cement business of the Aditya Birla Group (merger of Grasims cement business with Ultratech) would create Indias largest cement company with a 49m-ton capacity and an all-India presence. This would enable the company to capitalize on organic and inorganic growth opportunities. Strong balance sheet to support future growth. We expect UltraTech to be FCF positive till FY12, with net cash of Rs12.5bn by FY12 (per share of Rs100). Valuations. At our target price of Rs1,255, the stock would trade at 7.5x FY12e EV/EBITDA, on par with the target multiples of other large cement companies. The target price implies a PE of 14.5x and an EV per ton of US$140 (standalone). On a merged basis, it implies a PE of 12x and EV per ton of US$145.
Key financials
Year end 31 Mar FY08 FY09 FY10 FY11e FY12e
Rating: Buy Target Price: Rs1,255 Share Price: Rs951

Manish Valecha
Key data
UTCEM IN / ULTC.BO Rs1059/Rs343 17022 / 5110 US$5.0m Rs118bn/US$2.6bn 125.3m 45.2% 54.8% 5.5% 16.5% 23.2%

55,088 10,076 80.9 28.8 11.7 7.7 162 45.2 33.5 0.5 54.5 63,831 9,770 78.5 (3.0) 12.1 7.5 130 31.0 24.1 0.5 27.8 70,497 10,932 87.8 11.9 10.8 5.9 112 26.6 23.4 0.6 (3.2) 74,912 9,971 80.1 (8.8) 11.9 6.2 108 19.8 18.4 0.9 (11.6) 80,255 10,669 85.7 7.0 11.1 5.5 102 18.0 17.2 1.1 (19.5)
Source: Bloomberg
1,200 1,100 1,000 900 800 700 600 May-09 Apr-10 May-10 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Sensex Ultratech
Sales (Rsm) Net profit (Rsm) EPS (Rs) Growth (%) PE (x) EV/EBITDA (x) EV/Ton (US $) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
4 June 2010
UltraTech Cements Restructuring-let growth and re-rating; upgrading to Buy

Fig 4 PE Band
70,497 10.4 50,786 19,711 28.0 1,175 3,881 1,227 4,949 10,932 11.9 10,932 87.8 127.7 6.0 74,912 6.3 56,788 18,124 24.2 1,100 4,300 1,520 4,273 9,971 (8.8) 9,971 80.1 123.5 9.0 80,255 7.1 60,984 19,272 24.0 1,000 4,700 1,670 4,572 10,669 7.0 10,669 85.7 132.3 10.0
(Rs) 1,200 1,000 800 600 400 200 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 10x UltraTech 8x 6x 4x $200 $150 $100 2,000 $50 1,500 1,000 500 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 May-10
55,088 12.2 37,830 17,258 31.3 823 2,372 1,007 4,994 10,076 28.8 10,076 80.9 98.7 5.0
63,831 15.9 46,790 17,041 26.7 1,255 3,230 1,058 3,844 9,770 (3.0) 9,770 78.5 114.8 5.0
UltraTech 12x 10x 8x 6x


1,262 41,989 43,250 21,416 64,667 53,130 10,348 144 1,045 64,667 124.5 27.8 (2) 1,262 53,125 54,387 16,047 70,433 52,022 16,693 895 823 70,433 124.5 (3.2) 3 1,262 62,885 64,147 15,647 79,793 54,972 16,693 2,811 5,317 79,793 124.5 (11.6) 9 1,262 73,197 74,459 15,247 89,706 57,184 16,693 4,810 11,018 89,706 124.5 (19.5) 17
(Rs bn) 200 180 160 140 120 100 80 60 40 20 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09
1,253 31,141 32,393 17,405 49,798 47,836 1,709 (754) 1,007 49,798 124.5 54.5 1

Fig 6 EV/Ton Band

10,932 3,881 1078 15,891 751 15,140 2,773 12,367 874 (5,370) 6,345 (222) 1,045 823 9,971 4,300 1100 15,371 1,916 13,455 7,250 6,205 1,311 (400) 4,494 823 5,317 10,669 4,700 1100 16,469 1,999 14,470 6,912 7,558 1,457 (400) 5,701 5,317 11,018
10,076 2,372 -179.1 12,269 (1,908) 14,177 18,066 (3,889) 728 (16) 1,619 (3,126) 111 896 1,007
9,770 3,230 1287.3 14,288 898 13,390 8,524 4,866 728 528 4,011 8,639 38 1,007 1,045
(US$m) 4,000 3,500 3,000 2,500 UltraTech
68
4 June 2010

We raise our FY11/12 earnings estimates for Ultratech 2%/14%, given new volume and realization assumptions and the gains from cost savings. We also raise the target price to Rs1,255 (from Rs890) and upgrade from a Sell to a Buy. Strong brand equity UltraTech enjoys strong brand equity and is categorized as a Grade A brand in most regions. Both Grasim and UltraTech cement are sold under a single brand UltraTech. On acquiring L&Ts cement business, the brand name UltraTech was created and promoted as an all-India brand, with the other brand Birla Plus being slowly phased out. UltraTech is now well established in the South, West and East. However, the merger with Grasims cement business would give it an all-India footprint. Its recent expansion into Karnataka is expected to lead to a 12% CAGR in cement sales over FY10-12.
Fig 7 Geographical Break up Pre Merger Fig 8 Geographical Break up Post Merger
Central 10%
South 35% West 47%
North 15%
West 31% South 29%
East 18%
Source: Company Source: Company
East 15%
Focus on greater efficiency through cost control The 86-MW addition would take UltraTechs power self-sufficiency from 40% now to 80% UltraTechs efforts towards cost control are expected to strengthen its cost competitiveness. Besides modernizing and upgrading its plants, it is working towards greater availability of captive power, adding 86 MW to its present 210 MW. This includes a 75 MW thermal plant and 11 MW through waste-heat recovery. These power plants would be commissioned by end-FY11 and take its power sufficiency to 80% (from 40% now). Apart from power capex, UltraTech is also investing in logistics and material evacuation measures to keep operating costs under control. It is also working on altering the product mix by increasing the blending ratio (at present 1.29x, vs industry average of 1.34x). this would give it higher profitability.
69
4 June 2010
Fig 9 Reducing power and fuel costs per ton

(Rs/ton) 1,200 1,100 1,000 900 800 700 600 500 400 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Business restructuring: platform for accelerated future growth The consolidation of the Aditya Birla Groups cement business would create the largest cement company in India, of 49m-ton capacity The consolidation of the cement business of the Aditya Birla Group (through the merger of Grasims cement business with UltraTech) would create the largest cement company in India with a 49m-ton capacity (20% market share) and with an all-India presence. This would enable the company to capitalize on organic and inorganic growth opportunities. The amalgamated entity is estimated to have a net profit of Rs25.8bn and Rs28bn in FY11 and FY12, respectively, on net sales of Rs169bn and Rs183bn. Also, its market cap is expected to more than double to $5.8bn from levels now, dwarfing the market caps of ACC and Ambuja ($3.5bn).
Fig 10 UltraTech to have an all-India presence (post cement assets restructuring)
Source: Company
Strong balance sheet to support future growth UltraTech has completed its major expansion plan and is expected to continue to generate a positive free cash-flow till FY12. Its net cash of ~Rs1.5bn (FY10) is expected to shoot up to Rs12.5bn by FY12 (per share of Rs100). This would take its net gearing from a negative 0.03x in FY10 to a negative 0.2x in FY12. This would, without increasing leverage by a great extent, support future growth plans, which include adding 12m tons
70
4 June 2010
in five years. Post-merger, the company aims to add 25m tons in the next five years in order to retain its market share. This is likely to cost it over Rs125bn. Funding should not be a daunting task, given the estimated annual cash generation of around Rs30bn (post merger).
(Rsm) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 FY06 FY07 FY08 FY09 FY10 FY11e FY12e
+2SD 10 +1SD 8 Mean 6 -1SD 4 2 0 May-05 May-06 May-07 May-08 May-09 May-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 -2SD
(%) 140 120 100 80 60 40 20 0 -20 -40
Free Cash Flow
Valuation At our target price of Rs1,255, the stock would trade at 7.5x FY12 EV/EBITDA, on par with the target multiples of other large cement companies. The target price implies a PE of 14.5x and an EV per ton of US$140 (pre-merger).
Fig 12 12-month-forward EV/EBITDA Mean and standard deviation
(x) 12
Source: Bloomberg, Anand Rathi Research.
Our target price of Rs1,255 implies a 32% return from the present Rs951. At the current price of Rs951, the stock trades at a PE of 11.1x, an EV/EBITDA of 5.5x and an EV/ton of US$102 on FY12 estimates.
Valuation: Merger with Grasims cement business
Based on the merger of Grasims cement assets with UltraTech, at the target price of Rs1,255, the stock would trade at $145 EV per ton is pre-merger (FY12e), at par with other large-cap cement companies. It would trade at a PE of 11.8x and an EV/EBITDA of 6.7x.
71
4 June 2010
Fig 13 Key financials Amalgamated Entity

Rs m FY11e FY12e
Net Sales EBITDA PAT Equity EPS

Valuation
169,062 42,536 24,949 2,740 91.1
183,468 46,953 27,974 2,740 102.1
PE (x) EV/EBITDA (x) EV/ ton (US$)

10.4 5.9 115
9.3 5.1 109
Change in estimates We raise our sales estimates for FY11 and FY12, by 3% and 10%, respectively. We have increased our net profit estimates, by 2% and 14% for FY11 and FY12, to factor in higher volumes and realization.
FY11 Old New Change % Old FY12 New Change %
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) EBITDA margin (%) EBITDA per ton (Rs) NSR per ton (Rs) Volumes (m tons)
72,723 18,672 9,777 25.7 873 3,400 21.4
74,912 18,124 9,971 24.2 840 3,472 21.6
3.0 (2.9) 2.0 (148) (3.8) 2.1 0.9
73,085 17,547 9,324 24.0 816 3,400 21.5
80,255 19,272 10,669 24.0 852 3,547 22.6
9.8 9.8 14.4 0 4.4 4.3 5.2
Risks to our target price Industry capacity ramping up quicker and bunching of capacities Steep rise in international prices of coal Lower demand offtake in the next two years
72
4 June 2010

55,088 12.2 5,101 1,676 12,533 9,693 8,827 17,258 31.3 21.7 823 2,372 1,007 15,070 4,994 33.1 10,076 18.3 28.8 10,076 80.9 98.7 5.0
63,831 15.9 5,962 2,177 17,270 10,583 10,798 17,041 26.7 (1.3) 1,255 3,230 1,058 13,615 3,844 28.2 9,770 15.3 (3.0) 9,770 78.5 114.8 5.0
70,497 10.4 9,629 2,506 14,309 12,288 12,054 19,711 28.0 15.7 1,175 3,881 1,227 15,882 4,949 31.2 10,932 15.5 11.9 10,932 87.8 127.7 6.0
74,912 6.3 10,601 2,556 17,033 14,122 12,476 18,124 24.2 (8.1) 1,100 4,300 1,520 14,244 4,273 30.0 9,971 13.3 (8.8) 9,971 80.1 123.5 9.0
80,255 7.1 11,127 2,607 17,854 16,099 13,296 19,272 24.0 6.3 1,000 4,700 1,670 15,242 4,572 30.0 10,669 13.3 7.0 10,669 85.7 132.3 10.0

Sources of Funds
Share Capital Reserves and Surplus Deferred Tax Liability Net Worth Debt
Capital Employed Application of Funds
1,253 25,717 5,424 32,393 17,405

49,798
1,262 34,759 7,229 43,250 21,416

64,667
1,262 44,818 8,307 54,387 16,047

70,433
1,262 53,478 9,407 64,147 15,647

79,793
1,262 62,690 10,507 74,459 15,247

89,706
Gross Block Less: Depreciation Net Block Capital WIP Investments Sundry Debtors Inventories Loans & Advances Current Assets Current Liabilities Provisions Current Liabilities Working Capital Cash Net Current Assets
Capital Deployed
49,726 24,721 25,005 22,832 1,709 2,166 6,098 3,768 12,032 11,530 1,256 12,786 (754) 1,007 253
49,798
74,010 27,653 46,357 6,773 10,348 1,862 6,920 3,790 12,571 11,209 1,218 12,427 144 1,045 1,189
64,667
82,773 31,534 51,239 783 16,693 2,158 8,217 3,511 13,886 11,381 1,610 12,991 895 823 1,718
70,433
89,681 35,834 53,847 1,125 16,693 3,079 9,236 4,511 16,825 12,314 1,700 14,014 2,811 5,317 8,128
79,793
95,593 40,534 55,059 2,125 16,693 3,298 10,994 5,511 19,803 13,193 1,800 14,993 4,810 11,018 15,828
89,706
W C Turnover (days) BV (Rs / Share)

1 215
(2) 285
3 365
9 434
17 507
73
4 June 2010

Year end 31 Dec FY08 FY09 FY10 FY11e FY12e
10,076 2,372 -179.1 12,269 (1,908) 14,177 18,066 (3,889) 728 (16) 1,619 (3,126) 111 896 1,007
9,770 3,230 1287.3 14,288 898 13,390 8,524 4,866 728 528 4,011 8,639 38 1,007 1,045
10,932 3,881 1078 15,891 751 15,140 2,773 12,367 874 (5,370) 6,345 (222) 1,045 823
9,971 4,300 1100 15,371 1,916 13,455 7,250 6,205 1,311 (400) 4,494 823 5,317
10,669 4,700 1100 16,469 1,999 14,470 6,912 7,558 1,457 (400) 5,701 5,317 11,018
Fig 18 Ratio analysis @Rs951

12.2 28.8 31.3 11.7 9.6 0.5 4.4 2.4 7.7 54.5 1 6.2 45.2 33.5
15.9 (3.0) 26.7 12.1 8.3 0.5 3.3 2.0 7.5 27.8 (2) 6.4 31.0 24.1
10.4 11.9 28.0 10.8 7.5 0.6 2.6 1.7 5.9 (3.2) 3 6.8 26.6 23.4
6.3 (8.8) 24.2 11.9 7.7 0.9 2.2 1.5 6.2 (11.6) 9 11.2 19.8 18.4
7.1 7.0 24.0 11.1 7.2 1.1 1.9 1.3 5.5 (19.5) 17 11.7 18.0 17.2
74
Cement
India I Equities
Update
Reco
4 June 2010
Shree Cements
Low cost, power-venture diversification, upgrading to Buy
Upgrade. We lower FY11/12 earnings 7%/2%, given new cost, volume, realization, depreciation assumptions. We raise the target price to Rs2,730 from Rs1,700, and upgrade to Buy from Hold. Cement grinding/clinker units to drive profitability/sales. Shrees recently commissioned grinding units would enable it convert clinker sales to cement sales, yielding higher realizations and profitability. New clinker unit to be commissioned by Sep 10 would boost sales. We estimate a 9% cement CAGR (FY10-12). Low cost player. We expect Shrees status as lowest-cost cement producer to be maintained, given (1) availability of captive power, (2) higher sales of blended cement and (3) lowest power and coal consumption. These could result in industry-leading profits. Merchant power sales offer diversified earnings. Shrees foray into power has yielded high returns, given high tariffs and competitive cost of production. Its share of earnings is expected to rise to 28% in FY12 from 7% two years earlier. Strong balance sheet. Shree is estimated to be FCF positive, with net cash of Rs9bn (Rs257 a share:) as on Mar 12. Its strong balance sheet would enable it to grow organically or inorganically. Valuation. Our sum-of-parts value is Rs2,730: Rs2,150 for cement at 5x FY12e EV/EBITDA and Rs580 for power at 1x P/BV. It implies a normalized PE of 7x and an EV/ton of $125.
Key financials
Rating: Buy Target Price: Rs2,730 Share Price: Rs2,015

Manish Valecha
Key data
SRCM IN / SHCM.BO Rs2,542/Rs953 17022 / 5110 US$1.2m Rs69.6bn/US$1.55bn 34.8m 34.5% 65.5% 15.8% 8.8% 9.9%

21,091 2,993 86 (20.4) 23.5 12.7 8.5 178 48.3 22.5 43.7 27,106 6,089 175 103.5 11.5 10.6 7.5 175 63.0 32.0 14.8 36,321 7,828 225 28.6 9.0 6.7 4.8 128 44.4 28.4 12.8 41,702 8,005 230 2.3 8.8 6.6 5.0 103 36.4 22.0 9.9 51,490 9,599 276 19.9 7.3 5.2 3.4 83 32.0 21.9 (26.0)
Source: Bloomberg
2,500 2,300 2,100 1,900 1,700 1,500 1,300 1,100 900 May-09 Jun-09 Jul-09 Sep-09 Oct-09 Aug-09 Shree Cement
Sales (Rsm) Net profit (Rsm) EPS (Rs) Growth (%) PE (x) Normalised PE (x) # EV/EBITDA (x) EV/Ton (US$) RoE (%) RoCE (%) Net gearing (%)
Sensex
Nov-09 Dec-09
Source: Company, Anand Rathi Research #Depreciation taken at SLM value
Apr-10 May-10
Jan-10
Feb-10 Mar-10
4 June 2010
Shree Cements Low cost, power venture diversification, upgrading to Buy

Fig 4 PE Band
36,321 34.0 21,204 15,117 41.6 950 5,704 1,284 1,918 7,828 28.6 6,761 225 370 13 41,702 14.8 27,240 14,462 34.7 1,000 5,000 1,300 1,757 8,005 2.3 8,005 230 376 17 51,490 23.5 33,283 18,206 35.4 1,000 7,000 1,500 2,107 9,599 19.9 9,599 276 479 20
(Rs) 3,000 2,500 9x 2,000 1,500 5x 1,000 3x 500 0 May-05 May-06 May-07 May-08 May-09 May-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Shree 7x
21,091 54.2 12,467 8,624 40.9 533 4,788 768 1,079 2,993 (20.4) 2,604 86 208 8
27,106 28.5 17,571 9,535 35.2 772 2,054 829 1,449 6,089 103.5 5,780 175 227 10


348 11,648 11,996 14,962 26,958 11,057 8,448 2,729 4,723 26,958 34.8 14.8 28 348 17,859 18,207 21,060 39,267 18,566 15,922 1,991 2,789 39,267 34.8 12.8 24 348 25,271 25,619 21,060 46,679 23,896 16,500 4,262 2,021 46,679 34.8 9.9 27 348 34,155 34,503 21,060 55,563 20,906 28,000 4,635 2,023 55,563 34.8 (26.0) 32
(Rs bn) 90 80 70 60 50 Shree 4x 3x 2x 5x
348 6,195 6,543 13,307 19,850 7,779 5,910 1,487 4,675 19,850 34.8 43.7 25
40 30 20 10 0 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09
Nov-09

Fig 6 EV/Ton Band

7,828 5,704 (20) 13,512 (739) 14,250 13,213 1,038 530 (2,133) 6,098 7,474 (1,067) (1,934) 4,723 2,789 8,005 5,000 100 13,105 2,271 10,834 10,330 504 693 578 (767) 2,789 2,021 9,599 7,000 100 16,699 373 16,327 4,010 12,317 815 11,500 1 2,022 2,023
(US$m) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Nov-05 Nov-06 Nov-07 May-05 May-06 May-07 May-08 Nov-08 May-09 May-10 $50 $75 Shree $125 $100
PAT + Depreciation + Deferred tax Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
2,993 4,788 (147) 7,633 125 7,508 3,647 3,860 326 (587) 3,993 5,410 389 1,141 3,533 4,675
6,089 2,054 81 8,224 1,243 6,981 5,332 1,649 408 (0) 1,655 2,538 309 48 4,675 4,723
May-10
76
4 June 2010

Commissioning of the new grinding and clinker units in 2QFY11 would drive volume growth for Shree. We expect a 9% volume CAGR over FY10-12. This, coupled with the cement-cost advantage, a 28% contribution to EBITDA from power and a strong balance sheet, bodes well for Shree. Cement grinding/clinker units to drive profits/sales We expect a 9% CAGR in volumes over FY10-12 Shrees two recently commissioned grinding units of 1.2m tons and 1.8m tons (at Rajasthan and Uttrakhand) take its capacity to 12m tons. During FY10 it sold ~1m tons of clinker due to a mismatch in its clinker and cement capacities. Commissioning of these grinding units would enable it to convert clinker sales to cement sales, thereby yielding higher realizations and profitability. Shree is also setting up a new clinker unit of 1m ton and a cement grinding unit of 1.5m tons, which would take its clinker capacity to 9.4m tons and cement capacity to 13.5m tons by 2QFY11. The push in volume growth would come on the commissioning of these two units. We expect a 9% volume CAGR over FY10-12.
Fig 7 Capacity additions to drive volumes
(m ton) 14
13 12 11 10 9 8 7 6 FY08 FY09 FY10 FY11e FY12e
Cement Capacity
Clinker Capacity
Cement Sales
Long-term plans Shree plans to geographically diversify its capacities, for which it has already acquired land (90% of requirement) to set up a 5m-ton plant in Karnataka Shree plans to geographically diversify its capacities, for which it has already acquired land (90% of requirement) to set up a 5m-ton plant in Karnataka. It has also acquired limestone mines, with sufficient reserves to support a 5m-ton capacity for 50 years. It plans to place orders for equipment by 4QFY11. In the next five years it plans to more than double its capacity, from 12m tons now to 25m tons. Low cost player Shree Cements is the lowest-cost cement producer in India due to its competitive advantages of captive power, more sales of blended cement and plant efficiency, resulting in the lowest power and coal consumption. These, together with better realizations, lead to industry-leading profitability. Ahead, we expect this to be maintained.
77
4 June 2010
Fig 8 Cost-structure advantage

Heads Advantages
Product mix Power Fuel
Market mix
A greater share of blended sales (~80%), resulting in a cement-clinker conversion ratio of around 1.35x vs the industry range of 1.2x to 1.4x Shrees power consumption per ton of cement is around 76 units vs the industry range of 80 to 95 units. Also Shree meets its power requirement through captive power plants. Shree uses only PET coke to produce cement and power. Its plants support PET-coke as a fuel, making them very cost efficient (cost per k cal). This leads to a ~15% lower fuel cost than its peers, who use coal. Shree sells its entire output in the Northern and Central regions, which are better placed in terms of demand and supply. It is number one in Haryana, Rajasthan, HP and Delhi. Also, its lead distance to some of the important cities in the North is the lowest of its peers enabling it a greater market share
Fig 9 Lowest cost producer in the Industry (FY10)

(Rs/ton) 2900 2700 2500 2300
Fig 10 Lowest coal and power consumption (FY10)

700 650 600 550
Coal Cost (Rs/ton)
India Cem
UltraTech Shree Ambuja ACC Orient
500 450 400 350 300 250 200 200 225
2100 1900 1700 1500 India Cement Orient Paper Birla Corp. Shree Cement UltraTech Ambuja ACC
250
275 300 Power Cost (Rs/ton)
325
350
375
Merchant power sales to provide diversified earnings stream At present Shree has captive capacity of 216 MW including the recently commissioned 46 MW through waste-heat recovery, and a 50 MW thermal plant. However, it consumes less power than it generates; hence, it sells the surplus on a merchant basis to state government utilities and exchanges. Shrees foray into power beyond captive consumption (merchant sales) has yielded high returns, given the high tariffs and its competitive cost of production.
Fig 11 Increasing contribution from power segment
(Rsm) 6,000 5,000 4,000 3,000 2,000 1,000 0 FY11e FY12e FY09 FY10 (%) 30 25 20 15 10 5 0
Fig 12 Key assumptions - Power segment

FY09 FY10 FY11e FY12e
Unit Sold (m units) Realizations (Rs/unit) Merchant Sales (Rs m) Cost (Rs/unit) EBITDA (Rs/unit) EBITDA (Rs m) EBITDA Margins (%)
117 6.88 806 2.5 4.4 518 64.2
264 6.20 1,639 2.0 4.2 1,123 68.5
931 5.00 4,654 2.2 2.8 2,626 56.4
2,234 4.50 10,052 2.2 2.3 5,040 50.1
EBITDA - Power
% of Total EBITDA (RHS)
78
4 June 2010
The share of earnings from power is expected to quadruple from 7% in FY10 to 28% two years later
It is expected to add another 350 MW of thermal power by Jun 11, taking its capacity to 566 MW. The saleable power based on 13.5m-ton cement output is around 420 MW. The company has not signed a PPA, leading to all the power being sold at merchant rates. During FY10, its average realizations were Rs6.2/unit, which resulted in an EBITDA of Rs4.2/unit. The share of earnings from power is expected to quadruple from 7% in FY10 to 28% two years later on the commissioning of the 350 MW (by Jun 11). In the next six years, the company plans to expand capacity to 1,200 MW. Note: Based on its track record of commissioning ahead of deadlines, the company is likely to commission 300 MW by Mar 11, which would push up depreciation by Rs4.5bn during FY11. Strong balance sheet During FY11, Shree would complete most of its ongoing capex and is expected to be FCF positive. With no major capex in the pipeline beyond FY11, it would add net cash of Rs7bn in the next two years. Accordingly, its net cash as on Mar 12 is expected to be Rs9bn (per share of Rs257). This would take its net gearing from 0.13x in FY10 to a negative 0.26x two years later. The strong balance sheet would enable it to grow aggressively, organically or inorganically, from its proposed 13.5m tons.
Fig 13 Free cash flow vs net debt to equity
(Rsm) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY06 FY07 FY08 FY09 FY10 FY11e FY12e (%) 140 120 100 80 60 40 20 0 -20 -40
Free Cash Flow
Valuation Our sum-of-parts value for Shree is Rs2,730: Rs2,150 for cement at 5x FY12 EV/EBITDA (a 33% discount to large caps) and Rs580 for the power business at 1x P/BV. The fair price implies a normalized PE (depreciation taken at SLM vs WDV) of 7x and an EV/ ton of US$125.
Fig 12 Sum-of-parts valuation
Segments (FY12e) Multiple (x) Value (Rsm) Per share (Rs)
- Cement - EV/EBITDA - Power - P/BV Target price

5.0 1.0
74,794 20,300 95,094
2,147 583 2,730
Our target price of Rs2,730 implies a 35% return from the ruling Rs2,015. At the going price, the stock trades at a normalized PE of 5.2x, an EV/EBITDA of 3.4x and an EV/ton of US$83 on FY12 estimates.
79
4 June 2010

(x) 12.0 10.0 8.0 6.0 4.0 -1SD 2.0 -2SD May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 +2SD
EV/EBITDA
+1SD Mean
Change in estimates We raise our sales estimates for FY11 and FY12 by 9% and 15%, respectively. After factoring higher costs, volumes and higher depreciation expense, we have lowered our net profit estimates, by 7% and 2%, respectively.
FY11e Old New Change % Old FY12e New Change %
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) Cash Profit (Rs m) EBITDA margin (%) EBITDA per ton (Rs) NSR per ton (Rs) Volumes (m tons)
Source: Anand Rathi Research.
38,209 15,292 8,635 14,635 40.0 1,134 3,206 10.57
41,702 14,462 8,005 13,105 34.7 1,054 3,300 11.2
9.1 -5.4 -7.3 -10.5 (534)bps -7.0 2.9 6.3
44,692 17,603 9,797 16,797 39.4 1,008 3,206 11.17
51,490 18,206 9,599 16,699 35.4 1,064 3,350 12.4
15.2 3.4 -2.0 -0.6 (403)bps 5.6 4.5 10.7
Risks to valuation Industry capacity ramping up quicker and bunching up of capacities Steep rise in prices of PETcoke Lower-than-expected prices of merchant power Lower demand offtake over the next two years
80
4 June 2010

Year end 31 March FY08 FY09 FY10e FY11e FY12e
Net Sales Sales Growth (%) Less Expenditure Raw Material Staff Cost Power& Fuel Freight charges Other Expenditure EBITDA EBITDA Margin (%) Growth (%) - Interest - Depreciation* + Other Income Profit Before Tax - Tax Tax rate (%) Adjusted PAT PAT Margin (%) Growth (%) Extraordinary Items Reported PAT FDEPS (Rs / Share) CEPS (Rs / Share) DPS (Rs / Share)
21,091 54 2,262 736 3,672 3,947 1,850 8,624 40.9 46.2 533 4,788 768 4,072 1,079 26.5 2,993 14.2 (20.4) 389 2,604 85.9 207.9 8.0
27,106 29 2,623 1,039 6,058 5,399 2,452 9,535 35.2 10.6 772 2,054 829 7,538 1,449 19.2 6,089 22.5 103.5 309 5,780 174.8 227.2 10.0
36,321 34 3,133 1,495 6,105 7,626 2,847 15,117 41.6 58.5 950 5,704 1,284 9,746 1,918 19.7 7,828 21.6 28.6 1,067 6,761 224.7 369.8 13.0
41,702 15 3,829 1,793 8,631 9,867 3,119 14,462 34.7 (4.3) 1,000 5,000 1,300 9,762 1,757 18.0 8,005 19.2 2.3 8,005 229.8 376.2 17.0
51,490 23 4,388 1,973 12,425 11,053 3,444 18,206 35.4 25.9 1,000 7,000 1,500 11,706 2,107 18.0 9,599 18.6 19.9 9,599 275.5 479.4 20.0
* Based on its track record of commissioning ahead of deadlines, the company is likely to commission 300 MW by Mar 11. This would push up depreciation by Rs4.5bn during FY11. Source: Company, Anand Rathi Research

Year end 31 March FY08 FY09 FY10e FY11e FY12e
Sources of Funds Share Capital Reserves and Surplus Deferred Tax Liability Net Worth Debt Capital Employed Application of Funds Gross Block Less: Depreciation Net Block Capital WIP Investments Sundry Debtors Inventories Loans & Advances Current Assets Current Liabilities Provisions Current Liabilities Working Capital Cash Net Current Assets Capital Deployed W C Turnover (days) BV (Rs / Share)
348 6,380 (185) 6,543 13,307 19,850 21,873 14,273 7,600 180 5,910 494 1,766 4,026 6,286 2,362 2,437 4,799 1,487 4,675 6,161 19,850 25 179
348 11,752 (104) 11,996 14,962 26,958 22,559 16,291 6,269 4,789 8,448 583 1,545 7,443 9,571 2,956 3,885 6,842 2,729 4,723 7,452 26,958 28 347
348 17,983 (124) 18,207 21,060 39,267 33,298 21,995 11,303 7,263 15,922 824 3,581 7,252 11,658 4,668 4,999 9,667 1,991 2,789 4,780 39,267 24 526
348 25,295 (24) 25,619 21,060 46,679 39,798 26,995 12,803 11,093 16,500 1,714 3,999 8,000 13,713 4,570 4,880 9,451 4,262 2,021 6,283 46,679 27 736
348 34,079 76 34,503 21,060 55,563 54,401 33,995 20,406 500 28,000 1,693 4,937 9,000 15,630 5,643 5,353 10,995 4,635 2,023 6,658 55,563 32 988
81
4 June 2010

Year end 31 March FY08 FY09 FY10 FY11e FY12e
PAT +Depreciation +Deferred tax Cash profit - Incr/(Decr) in WC Operating cash flow -Capex Free cash flow -Dividend + Equity raised + Debt raised -Investments -Misc. items Net cash flow +Opening cash Closing cash
2,993 4,788 (147) 7,633 125 7,508 3,647 3,860 326 (587) 3,993 5,410 389 1,141 3,533 4,675
6,089 2,054 81 8,224 1,243 6,981 5,332 1,649 408 (0) 1,655 2,538 309 48 4,675 4,723
7,828 5,704 (20) 13,512 (739) 14,250 13,213 1,038 530 (2,133) 6,098 7,474 (1,067) (1,934) 4,723 2,789
8,005 5,000 100 13,105 2,271 10,834 10,330 504 693 578 (767) 2,789 2,022
9,599 7,000 100 16,699 373 16,327 4,010 12,317 815 11,500 1 2,022 2,023
Fig 18 Ratio Analysis @ Rs2,015

Year end 31 March Sales Growth (%) PAT Growth (%) Operating Margin (%) PE (x) P/C (x) Dividend Yield (%) P/B (x) EV/Sales (x) EV/EBITDA (x) Net Debt / Equity (%) Working Capital Turnover (days) Dividend Payout (%) RoE (%) RoCE (%)
FY08 54.2 (20.4) 42.5 23.5 9.7 0.4 11.3 3.5 8.5 43.7 25 9.3 48.3 22.5
FY09 28.5 103.5 38.2 11.5 8.9 0.5 5.8 2.7 7.5 14.8 28 5.7 63.0 32.0
FY10e 34.0 28.6 45.3 9.0 5.4 0.6 3.8 2.0 4.8 12.8 24 5.8 44.4 28.4
FY11e 14.8 2.3 38.5 8.8 5.4 0.8 2.7 1.7 5.0 9.9 27 7.4 36.4 22.0
FY12e 23.5 19.9 38.8 7.3 4.2 1.0 2.0 1.2 3.4 (26.0) 32 7.3 32.0 21.9
82
India Cements
India I Equities
Update
Reco
4 June 2010
India Cements
Cement biz to improve, IPL adds value, upgrading to Buy
Upgrade. We upgrade the stock to a Buy from a Sell owing to lower funding, regional risk and IPL monetization opportunity. Regional concentration risk reducing. India Cements exposure to the South at 90% would fall to 80% by Dec10, on the commissioning of its 1.4m ton Rajasthan unit, reducing concentration risk. We estimate volume CAGR of 11%(FY10-12). Cost rationalizing initiatives. To rationalize costs, India Cements plans to set up a captive power plant and make an overseas coal acquisition besides improving overall efficiency. Well-funded for growth. India Cements recent Rs3bn QIP lowered leverage to 0.5x. This, together with cash generated, is expected to fund its capex and the Rs5bn FCCB redemption. IPL monetization. Its investment in an IPL franchise offers a value-unlocking opportunity the winning bids for the two new teams imply a value of Rs35-41 per share. Lowering estimates. We lower FY11/12 estimates 53%/30% to factor in lower realizations and cost pressures. Valuation. Our sum-of-parts value is Rs142 (earlier Rs104) Rs115 for cement at 6x FY12 EV/EBITDA and Rs27 for the IPL stake (a 30% discount to the recently awarded franchises). The implied valuation of the cement business is 9.5x PE and US$80 EV/ton.
Key financials

Manish Valecha
Key data
ICEM IN/ ICMN BO Rs180/Rs90 17022 / 5110 US$7.9m Rs33bn/US$0.69bn 282.5m 72.6% 27.4% 32.4% 16.8% 23.4%

30,578 6,756 24.0 22.0 4.5 4.1 102 49.6 36.2 1.9 48.8 34,279 5,116 18.1 (24.4) 6.0 4.7 92 15.6 14.2 1.9 51.4 37,713 3,108 10.1 (44.1) 10.7 6.4 84 10.8 9.4 1.9 50.3 40,046 2,216 7.2 (28.7) 15.0 8.4 80 6.0 5.6 1.9 55.7 45,973 3,741 12.2 68.8 8.9 5.8 78 9.6 8.8 2.3 48.9
210 190 170 150 130 110 90 May-09 Oct-09 Jun-09 Jul-09 Aug-09 Sep-09 India Cements May-10 Jan-10 Feb-10 Mar-10 Nov-09 Dec-09 Apr-10 Sensex
Sales (Rsm) Net profit (Rsm) EPS (Rs) Growth (%) PE (x) EV/EBITDA (x) EV /Ton ($) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
4 June 2010
India Cements - Cement biz to improve, IPL adds value, upgrading to Buy

Fig 4 PE Band
37,713 10.0 29,448 8,266 21.9 1,426 2,331 370 1,770 3,108 (44.1) 3,543 10.1 18.2 2.0 40,046 6.2 33,360 6,686 16.7 1,325 2,794 598 950 2,216 (28.7) 2,216 7.2 17.6 2.0 45,973 14.8 36,557 9,417 20.5 1,450 3,206 583 1,603 3,741 68.8 3,741 12.2 23.9 2.5
(Rs)
400 350 India Cement 300 250 200 150 100 50 0 May-05 May-06 May-07 May-08 May-09 May-10 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 14x 12x 10x 8x
30,578 35.6 19,648 10,929 35.7 1,099 1,279 275 2,071 6,756 22.0 6,375 24.0 35.0 2.0
34,279 12.1 24,317 9,962 29.1 1,122 2,033 470 2,161 5,116 (24.4) 4,322 18.1 26.4 2.0


2,824 35,910 38,735 19,880 58,615 47,123 3,854 6,786 852 58,615 282.4 51.4 115 3,072 41,667 44,739 23,050 67,789 51,592 2,390 11,194 2,613 67,789 307.2 50.3 121 3,072 43,614 46,686 23,450 70,136 55,648 1,590 12,183 715 70,136 307.2 55.7 135 3,072 45,735 48,807 21,946 70,753 55,492 1,590 12,931 741 70,753 307.2 48.9 121
Rs bn 100 India Cement 80 60 40 20 0 May-05 May-06 May-07 May-08 May-09 May-10
$200 India Cement $150 2,000 1,500 1,000 $50 500 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 $100
2,819 32,412 35,230 18,115 53,345 40,394 1,293 7,402 4,256 53,345 281.9 48.8 130
9x 7x 5x 3x
Nov-05
Nov-06
Nov-07
Nov-08

Fig 6 EV/Ton Band

3,108 2,331 137 5,576 4,044 1,531 7,164 (5,633) 719 2,957 3,170 (1,464) (521) 1,761 852 2,613 2,216 2,794 400 5,410 625 4,785 7,214 (2,429) 719 400 (800) (50) (1,898) 2,613 715 3,741 3,206 400 7,347 384 6,963 3,414 3,549 898 (1,504) 1,121 25 715 741
US$ m 3,500 3,000 2,500
6,756 1,279 1,827 9,862 673 9,189 8,483 706 660 5,410 (2,472) 742 287 1,955 2,302 4,256
5,116 2,033 299 7,448 (774) 8,223 8,920 (698) 661 (558) 1,765 2,561 692 (3,404) 4,256 852
Nov-09
84
4 June 2010

We upgrade the stock to a Buy from a Sell, owing to reducing funding and regional concentration risk and IPL monetization opportunity. Regional concentration risk decreasing On the commissioning of its Rajasthan unit, its exposure to the South would go down to 80% The leader in South India, India Cements serves AP, TN, Karnataka and Kerala. With its new grinding unit in Parli, it also caters to Maharashtra (12% of the total). It plans to further reduce its concentration risk (current exposure in the South at ~90%) by setting up a 1.4m-ton greenfield unit in Rajasthan. The plant is slated for commissioning by Dec2010; subsequently, its exposure in the South would slide to ~80%. We expect the utilization rates in the South to stabilize, leading to stable prices. Situations of intermittent demand-supply mismatch could arise, though these could even out in the course of the year.
Fig 7 - Market Mix
Maharashtra 12% Andhra Pradesh 21%
Tamil Nadu 38%
Karnataka 14%
Kerela 15%
Source: Company
AP exposure at ~20%; visibility in demand revival India Cements present exposure to the AP market is 20%, with the rest coming from Tamil Nadu, Karnataka, Kerala and Maharashtra. The demand collapse in AP from Jul to Dec 09 came on the back of statespecific events, all of which followed in rapid succession. The major ones were the demise of the chief minister (leading to temporary political instability), floods and the emergence of the Telangana issue. These, coupled with the massive capacity additions in the state (7m tons added in FY10, 30% of FY09 and 26% of all-India additions) led to severe overcapacity and the consequent sharp drop in prices. Demand in AP is now reviving, with consumption in 3QFY10 rising 14% qoq, against the normal 6-8%. In 4QFY10 demand rose 12% qoq, resulting in a pull-back in prices. Prices in AP have bounced back 28% from levels of Dec 09 after dropping 27% during 3QFY10. Similar is the trend in other regions in the South. With key one-off events leading to demand collapse, behind it, the demand-supply scenario in AP has stabilized and should continue ahead as well. We expect 12m tons to be added in FY11 (33% of Mar10 and 40% of all-India additions). Overall, South India is expected to see additions of 15m tons in FY11 (16% of FY10 and 50% of all-India additions) and 10m tons in FY12. If demand growth in South India turns out at 10% p.a. over FY10-12, it would
4 June 2010
require further production of 14m tons over a two year period. This may put a squeeze on prices during FY11; but prices are expected to improve during FY12. We expect volumes at the company to see a 11% CAGR over FY10-12. Cost-rationalizing initiatives In an attempt to rationalize its costs, India Cements is working towards reducing its power and fuel costs. Towards that objective, it plans to set up a captive 100 MW plant and is aggressively looking at coal acquisition overseas. The two captive plants (50 MW each) planned for its units in AP and Tamil Nadu, would lower its power costs. This would also cut dependence on state electricity boards, thereby ensuring constant supply during power cuts, an annual phenomenon in AP and Tamil Nadu during the first six months of the year. It is in an advanced stage of acquiring a coal mine in Indonesia, ensuring steady supply (captive source) resulting in cost savings At present, 60% of coal required is met through high-cost imports, making the company susceptible to the vagaries of international coal and freight prices. The company bought two ships in FY09 and is in an advanced stage of acquiring a coal mine in Indonesia, ensuring steady supply (captive source). It would also result in savings in costs. It estimates landed cost to be around US$70, contrasted with the current landed price of US$110. We have not factored in such savings, pending completion of the acquisition.
Fig 8 - Power and fuel costs expected to decline
(Rs/ton) 1,150 1,100 1,050 1,000 950 900 850 800 750 700 Dec-09 Jun-08 Dec-08 Sep-08 Jun-09 Sep-09 Mar-09 Mar-10
Well-funded for future growth Funding of Rs15bn required over FY11-12 - Rs5bn for FCCBs and Rs10bn for capex India Cements current round of expansions is well funded. Hence, it does not need to take on more debt or raise equity over the next two years. Its ongoing expansion plan involves capex of Rs10bn over FY11-12: the Rajasthan cement unit at Rs3bn, a 100-MW plant at Rs5bn, coal-mine acquisition and maintenance at Rs2bn. The company has (at end-Mar 10) already spent Rs3bn on its Rajasthan unit. Also, there is likely to be cash outflow on account of the FCCB redemption (conversion at Rs306/share), due May 11, totaling Rs5bn (including interest of Rs1.6bn). Thus it would have a total funding requirement of Rs15bn over FY11-12. We estimate an operating cash flow of Rs12.7bn over FY11-12. The balance would be bridged with the QIP proceeds at Rs120 a share in Mar 10 (Rs3bn). The QIP issue has enabled the company to maintain its leverage at 0.5x. This would protect its balance sheet from any potential shocks.
4 June 2010
Fig 9 - FCF vs D/E

(Rsm) 4,000 3,000 2,000 1,000 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 FY07 FY08 FY09 FY10 FY11e FY12e 0.20 0.60 0.40 0.80 1.20 1.00 (x) 1.40
Free Cash Flow

Net Debt-Equity (RHS)
IPL franchise: value-unlocking potential and promote cement brand India Cements acquired the franchise rights of an IPL team (Chennai Super Kings) in 2008 for US$91m. The right to operate the franchise provides a platform to build corporate and brand image, more so in the context of the company becoming an all-India player. The valuation of the recent deals involving the award of two new teams signifies the potential value unlocking in the venture. Two new franchises (Pune and Kochi) were recently awarded at an astronomical US$333-370m against the reserve price of US$225m. With this figure as the benchmark, the implied value of the India Cements venture amounts to Rs11-12.5bn or Rs35-41 a share, ~35% of its market cap. The company made an EBITDA of Rs190m during FY10 from this venture. This figure is expected to increase in FY11, given the addition of two new teams (18 matches vs 14 earlier). We have not taken into our estimate any earnings accruing from the IPL. Valuation Our sum-of-parts value is Rs142: Rs115 for cement at 6x FY12 EV/EBITDA (20%discount to large cap stocks) and Rs27 for its stake in IPL (a 30% discount to recently awarded franchises). The implied valuation of the cement business is 9.5x PE and US$80 EV/ton.
Fig 10 - 12-month-forward EV/EBITDA Mean and Standard Deviation
(x) 40 35 30 25 20 15 10 5 0 -5 -10 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 -1SD -2SD +2SD +1SD Mean
87
4 June 2010
Our target price of Rs142 (earlier Rs104) implies a 31% return. At the current price of Rs108, the stock trades at a PE of 8.9x, an EV/EBITDA of 5.8x and an EV/ton of US$78 on FY12 estimates. Excluding the fair value of the IPL, it trades at 6.7x PE, an EV/EBITDA of 4.9x and an EV/ton of US$66. Change in estimates We slightly lower our FY11/12 sales estimates, by 4% and 1%, respectively. We have lowered our net profit estimates, by 53% and 30%, respectively, to factor in higher costs and lower realization.
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) EBITDA margin (%) EBITDA per ton (Rs) NSR per ton (Rs) Volumes (m tons)
41,799 9,844 4,674 23.6 824 3,500 11.9
40,046 6,686 2,216 16.70 550 3,295 12.2
(4.2) (32.1) (52.6) (685) (33.3) (5.8) 1.8
46,340 11,035 5,368 23.8 797 3,348 13.8
45,973 9,417 3,741 20.48 701 3,420 13.4
(0.8) (14.7) (30.3) (333) (12.1) 2.1 (2.9)
Risks to our target price Industry capacity ramping up quicker and bunching of capacities Steep rise in prices of international coal Lower demand offtake in South in the next two years Non availability of continuous power from the AP and TN grids
88
4 June 2010

Source: Company, Anand rathi Research
30,578 36 2,826 1,877 6,907 4,600 3,437 10,929 35.7 48.8 1,099 1,279 275 8,827 2,071 24.5 6,756 22.1 22 380 6,375 24 35 2
34,279 12 3,565 1,983 8,916 4,860 4,993 9,962 29.1 (8.8) 1,122 2,033 470 7,277 2,161 33.3 5,116 14.9 (24) 794 4,322 18 26 2
37,713 10 4,799 2,500 9,999 6,431 5,720 8,266 21.9 (17.0) 1,426 2,331 370 4,878 1,770 33.3 3,108 8.2 (44) (436) 3,543 10 18 2
40,046 6 5,520 2,625 11,190 8,006 6,020 6,686 16.7 (19.1) 1,325 2,794 598 3,166 950 30.0 2,216 5.5 (29) 2,216 7 18 2
45,973 15 6,129 2,756 12,290 9,121 6,261 9,417 20.5 40.8 1,450 3,206 583 5,344 1,603 30.0 3,741 8.1 69 3,741 12 24 3

2,819 30,154 2,257 35,230 18,115 53,345 47,087 12,442 34,645 5,749 1,293 3,111 3,506 10,621 17,238 9,176 659 9,835 7,402 4,256 11,659 53,345 130 91
2,824 33,354 2,556 38,735 19,880 58,615 53,136 15,053 38,083 9,040 3,854 3,540 3,909 10,870 18,319 10,679 854 11,533 6,786 852 7,638 58,615 115 105
3,072 38,975 2,693 44,739 23,050 67,789 64,876 17,385 47,492 4,100 2,390 4,650 4,699 14,099 23,447 11,149 1,104 12,253 11,194 2,613 13,808 67,789 121 117
3,072 40,522 3,093 46,686 23,450 70,136 74,076 20,178 53,898 1,750 1,590 5,486 5,006 14,374 24,865 11,384 1,297 12,682 12,183 715 12,899 70,136 135 123
3,072 42,243 3,493 48,807 21,946 70,753 78,076 23,385 54,692 800 1,590 6,298 5,490 14,682 26,471 11,870 1,670 13,539 12,931 741 13,672 70,753 121 131
89
4 June 2010

PAT +Depreciation +Deferred Tax Cash profit - Incr/(Decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
6,756 1,279 1,827 9,862 673 9,189 8,483 706 660 5,410 (2,472) 742 287 1,955 2,302 4,256
5,116 2,033 299 7,448 (774) 8,223 8,920 (698) 661 (558) 1,765 2,561 692 (3,404) 4,256 852
3,108 2,331 137 5,576 4,044 1,531 7,164 (5,633) 719 2,957 3,170 (1,464) (521) 1,761 852 2,613
2,216 2,794 400 5,410 625 4,785 7,214 (2,429) 719 400 (800) (50) (1,898) 2,613 715
3,741 3,206 400 7,347 384 6,963 3,414 3,549 898 (1,504) 1,121 25 715 741
Fig 15 Ratio analysis @ Rs108

35.6 22.0 35.7 4.5 3.1 1.9 1.2 1.4 4.1 48.8 130 8.8 49.6 36.2
12.1 (24.4) 29.1 6.0 4.1 1.9 1.0 1.4 4.7 51.4 115 13.1 15.6 14.2
10.0 (44.1) 21.9 10.7 6.0 1.9 0.9 1.4 6.4 50.3 121 17.3 10.8 9.4
6.2 (28.7) 16.7 15.0 6.1 1.9 0.9 1.4 8.4 55.7 135 27.7 6.0 5.6
14.8 68.8 20.5 8.9 4.5 2.3 0.8 1.2 5.8 48.9 121 20.5 9.6 8.8
90
Cement
India I Equities
Initiating Coverage
4 June 2010
Birla Corp
Low-cost producer in high-growth areas; initiate at Buy
Buy. We initiate coverage on Birla Corp, with a Buy rating and a target price of Rs490. We are positive on the company, given its low cost structure, de-leveraged balance sheet, capacity expansion and presence in high-growth regions. Cement expansion to drive volume growth. Birla Corps ongoing expansion will add 1.7m tons (in MP and Rajasthan) to its 5.8m tons by 2QFY11. This would drive a volume CAGR of 11% over FY10-12 compared with 4% over FY08-10. Presence in high-growth regions. Birla Corps plants cater to the high-growth regions of the North, Central and East. All regions are well placed in terms of net realizations as well as demand-supply equilibrium. Lean cost structure offers high profitability. Birla Corp is one of Indias lowest-cost cement producers, mainly due to more sales of blended cement and lower cost of freight and power. This, along with better realizations, results in greater profitability. De-leveraged balance sheet. We expect Birla Corp to be FCF positive, with net cash of Rs8bn by FY12 (Rs102 a share). Valuation. At our target price of Rs490, the stock would trade at 4x FY12e EV/EBITDA, ~50% discount to our target multiple for large-cap cement companies, in line with its eight-year average. The target price implies a PE of 6.7x and an EV per ton of US$70.
Key financials

Manish Valecha
Key data
BCORP IN/BRLC.BO Rs422/Rs187 17022/5110 US$0.6m Rs28.3bn/US$628m 77m 37.1% 62.9% 7.4% 12.4% 17.3%

17,248 3,936 51.1 20.6 7.2 4.2 83 47.6 45.2 1.1 (39.4) 17,907 3,235 42.0 (17.8) 8.7 5.2 78 28.4 25.6 1.2 (46.5) 21,570 5,572 72.4 72.2 5.1 2.9 73 36.4 30.8 1.6 (43.9) 22,965 4,836 62.8 (13.2) 5.8 3.3 58 24.2 19.7 1.8 (33.7) 26,800 5,676 73.7 17.4 5.0 2.7 46 23.1 20.3 1.9 (28.9)
Source: Bloomberg
460 420 380 340 300 260 220 180 May-09 Oct-09 May-10 Jun-09 Jan-10 Aug-09 Sep-09 Feb-10 Mar-10 Jul-09 Nov-09 Dec-09 Apr-10 Sensex Birla Corp
4 June 2010
Birla Corp Low-cost producer in high-growth areas; initiate at Buy

Fig 4 PE Band
21,570 20.5 14,519 7,051 32.7 270 556 1,383 2,036 5,572 72.2 5,572 72.4 79.6 6.0 22,965 6.5 16,725 6,240 27.2 270 748 1,403 1,789 4,836 (13.2) 4,836 62.8 72.5 6.5 26,800 16.7 19,264 7,536 28.1 270 894 1,403 2,099 5,676 17.4 5,676 73.7 85.3 7.0
(Rs) 500 400 300 200 100 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10
4x 3x 2x 1x 5 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10
Net sales Sales growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Consolidated PAT FDEPS (Rs/share) CEPS (Rs/share) DPS (Rs/share)
17,248 10.1 11,481 5,767 33.4 217 414 376 1,576 3,936 20.6 3,936 51.1 56.5 4.0
17,907 3.8 13,647 4,259 23.8 221 434 760 1,130 3,235 (17.8) 3,235 42.0 47.6 4.5
Birla Corp.
6x 5x 4x 3x


770 12,879 13,649 2,765 16,414 7,489 5,523 205 3,197 16,414 77.0 (46.5) 7 770 17,911 18,681 7,090 25,771 9,867 12,958 996 1,950 25,771 77.0 (43.9) 10 770 22,261 23,031 7,090 30,121 14,549 12,958 1,051 1,563 30,121 77.0 (33.7) 16 770 27,406 28,176 7,090 35,266 18,540 12,958 1,806 1,962 35,266 77.0 (28.9) 19
Rs bn 30 25 20 15 Birla Corp.
770 9,947 10,717 2,723 13,439 6,275 6,340 511 314 13,439 77.0 (39.4) 10
10

Fig 6 Segmental Break up

5,572 556 6,128 791 5,337 2,935 2,403 541 4,326 7,435 0 (1,247) 3,197 1,950 4,836 748 100 5,685 55 5,630 5,430 199 586 0 (386) 1,950 1,563 5,676 894 100 6,669 755 5,914 4,885 1,029 631 (0) 399 1,563 1,962
PAT +Depreciation +Deffered Tax Cash profit - Incr/(Decr) in WC Operating cash flow -Capex Free cash flow -Dividend + Equity raised + Debt raised -Investments -Misc. items Net cash flow +Opening cash Closing cash
3,936 414 (80) 4,270 91 4,179 1,426 2,753 360 0 (104) 2,139 180 (30) 344 314
3,235 434 105 3,775 (306) 4,081 1,648 2,432 405 42 (817) 2 2,884 314 3,197
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Revenue Cement Jute Power FY10 FY09 PBIT Others FY10
92
4 June 2010

We initiate coverage on Birla Corp, with a Buy rating and a target price of Rs490. We are positive on the company, given its low-cost structure, de-leveraged balance sheet, capacity expansion and presence in high-growth regions. Cement expansion to drive volume growth We expect an 11% CAGR in volumes over FY10-12 Over FY08-10, Birla Corps volumes had a mere 4% CAGR. In 2QFY11, it plans to add two brownfield units, totalling 1.7m tons, at Rajasthan and MP. On their commissioning, we expect the company to post an 11% CAGR in volumes over FY10-12, given its presence in high-growth markets. The second leg of the brownfield expansion involves another 1.8m tons in Rajasthan and West Bengal by 4QFY12. These would drive volume growth from FY13.
Fig 7 Expansion to lead to strong cement volume growth
(m ton) 9.5
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 FY11e FY12e FY07 FY08 FY09 FY10 Cement Despatches
Capacity
Opening up diversified revenue streams
Power capacity would reach 140 MW, while requirement would be around 105 MW at 9.3m tons
Birla Corps growth plans over the next two years include completion of the ongoing cement 1.7m ton expansion, further brownfield expansion of 1.8m tons, a packing, mixing plant and coal washery and putting up 83 MW of power plants (60 MW thermal, 23 MW from waste heat). While the first would cost Rs3.5bn, the latter three would cost Rs11.5bn cumulatively. The companys power capacity would reach 140 MW on the expansion, whereas its requirement for 9.3m tons of cement would be around 105 MW. The balance would be sold in the open market, opening up another revenue stream. Presence in high-growth regions In FY10, the North, East and Central markets grew 13%, 13% and 15%, respectively, while the West and South grew ~7% each. Birla Corps plants cater to the high-growth regions of the North, Central and East. We expect these regions to see a 13% plus CAGR over FY10-12. All the three regions are relatively better placed in terms of demand-supply compared with the South, resulting in lower pricing pressure. At present, all the three regions generate 8-10% higher absolute prices than the South and West.
93
4 June 2010
Fig 8 Presence in high-growth regions (FY10)

East 28% North 35%
Central 37%
Lean cost structure offers high profitability Birla Corp is a low-cost cement producer, mainly because it sells a high percentage of blended cement and its freight and power costs are low. Around 80% of its cement production is Portland pozzolano cement and it has a lead distance of less than 400km, compared with the industry average range of 400-600km. On commissioning of the power plants (in FY12), the company would have surplus power, which it plans to sell Around 80% of its power requirement comes from its own plants. To be fully self-sufficient, it is adding a 23 MW waste-heat-recovery plant and two 30 MW thermal plants at its MP and Rajasthan cement units. These would take captive power capacity to around 140 MW. Once these are commissioned in FY12, the company would have surplus power, which it plans to sell. Based on the expanded cement capacity of 9.3m tons, the power required would be 105 MW, leaving a surplus of around 35 MW. The cost-control measures along with relatively better realizations (due to its better market mix) would result in good profitability.
Fig 10 Peer comparison: Freight cost
(Rs/ton) 800
Fig 9 Peer comparison: Power and fuel cost

(Rs/ton) 1,200
1,100 1,000 900 800 700 600 500 400 Sep-08 Sep-09 Dec-08 Dec-09 Mar-09 Mar-10 Jun-08 Jun-09 400 Sep-08 Sep-09 Dec-08 Dec-09 Mar-09 Mar-10 Birla Corp Jun-08 Jun-09 India Cement 500 600 700
ACC
Ambuja
UltraTech
India Cement
Shree
Birla Corp
ACC
Ambuja
UltraTech
Shree
Source: Anand Rathi Research, Companies
Source: Anand Rathi Research, Companies
Jute business: back on track
The jute business, which has been a drag for the last fifteen years, is finally showing signs of a turnaround. It reported a Rs90m and Rs99m PBIT in 4QFY10 and FY10, respectively. All this has been achieved due to various management initiatives such as modernization of machinery, reduction in wastage and use of jute caddies as fuel in the boilers. We expect the division to improve on its PBIT in FY11/12. However, its contribution to the total PBIT would be a negligible 2-3%.
94
4 June 2010
De-leveraged balance sheet Its greenfield project (Rs12bn), to be set up over three years, could be funded almost entirely through internal accruals We expect Birla Corp to be free-cash-flow positive until FY12, despite a Rs10bn capex over FY10-12. Accordingly, we estimate net cash of Rs8bn (FY10) by FY12 (per share: Rs102). Birla Corp is one of the best placed mid-cap companies in the sector, given its strong balance sheet, to fund future growth plans. Its greenfield project (Rs12bn), to be set up over three years, could be funded almost entirely through internal accruals. Plans for the project would be finalized by 4QFY11.
(Rsm) 3,000 (%) -20
2,500 2,000 1,500 1,000 500 0 FY11e FY12e FY07 FY08 FY09 FY10
-25 -30 -35 -40 -45 -50
Free Cash Flow

Valuation At our target price of Rs490, the stock would trade at 4x FY12 EV/EBITDA, a ~50% discount to our target multiple for large-cap cement companies and in line with its eight-year average multiple. The target price implies a PE of 6.7x and an EV per ton of US$70.
(x) 10.0
8.0 6.0 4.0 2.0 (2.0) Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 EV/EBITDA +2SD +1SD Mean -1SD -2SD
Our target price of Rs490 implies a 34% return from the present Rs367. At the going price of Rs367, the stock trades at a PE of 5x, an EV/EBITDA of 2.7x and an EV/ton of $46 FY12 estimates. Risks to valuation The court case between the Lodha and Birla families would affect growth plans; industry capacity ramping up quicker and bunching of capacities; steep rise in prices of coal; lower demand in the next two years.
4 June 2010

Year-end 31 Mar FY08 FY09 FY10 FY11e FY12e
Net Sales Sales Growth (%) Less Expenditure Raw Material Stores & Spares Staff Cost Power & Fuel Freight charges Other Expenditure EBITDA EBITDA Margin (%) Growth (%) - Interest - Depreciation + Other Income Profit Before Tax - Tax Tax rate (%) Adjusted PAT PAT Margin (%) Growth (%) Extraordinary Items Reported PAT FDEPS (Rs / Share) CEPS (Rs / Share) DPS (Rs / Share)
17,248 10 1,668 1,467 1,415 3,283 2,016 1,631 5,767 33.4 16.9 217 414 376 5,512 1,576 28.6 3,936 22.8 20.6 3,936 51.1 56.5 4.0
17,907 4 2,403 1,685 1,486 3,682 2,443 1,949 4,259 23.8 (26.1) 221 434 760 4,365 1,130 25.9 3,235 18.1 (17.8) 3,235 42.0 47.6 4.5
21,570 20 2,578 1,628 1,463 3,821 2,709 2,321 7,051 32.7 65.6 270 556 1,383 7,608 2,036 26.8 5,572 25.8 72.2 5,572 72.4 79.6 6.0
22,965 6 3,200 1,800 1,609 4,300 3,300 2,516 6,240 27.2 (11.5) 270 748 1,403 6,625 1,789 27.0 4,836 21.1 (13.2) 4,836 62.8 72.5 6.5
26,800 17 3,500 1,950 1,770 4,800 3,700 3,544 7,536 28.1 20.8 270 894 1,403 7,775 2,099 27.0 5,676 21.2 17.4 5,676 73.7 85.3 7.0

770 9,280 667 10,717 2,723 13,439 11,734 6,726 5,008 1,267 6,340 317 2,005 1,612 3,933 2,717 705 3,422 511 314 825 13,439 10 129
770 12,107 772 13,649 2,765 16,414 13,542 6,942 6,601 888 5,523 200 1,929 2,041 4,170 3,296 669 3,965 205 3,197 3,402 16,414 7 166
770 17,138 772 18,681 7,090 25,771 13,296 7,498 5,798 4,069 12,958 400 2,200 2,500 5,100 3,300 804 4,104 996 1,950 2,946 25,771 10 231
770 21,389 872 23,031 7,090 30,121 19,930 8,246 11,684 2,865 12,958 500 2,800 3,000 6,300 4,400 849 5,249 1,051 1,563 2,614 30,121 16 287
770 26,434 972 28,176 7,090 35,266 25,660 9,140 16,520 2,020 12,958 600 3,000 3,500 7,100 4,400 894 5,294 1,806 1,962 3,768 35,266 19 352
96
4 June 2010

3,936 414 (80) 4,270 91 4,179 1,426 2,753 360 0 (104) 2,139 180 (30) 344 314
3,235 434 105 3,775 (306) 4,081 1,648 2,432 405 42 (817) 2 2,884 314 3,197
5,572 556 6,128 791 5,337 2,935 2,403 541 4,326 7,435 0 (1,247) 3,197 1,950
4,836 748 100 5,685 55 5,630 5,430 199 586 0 (386) 1,950 1,563
5,676 894 100 6,669 755 5,914 4,885 1,029 631 (0) 399 1,563 1,962
Fig 16 Ratio Analysis @Rs367

10.1 20.6 33.4 7.2 6.5 1.1 2.8 1.4 4.2 (39.4) 10 7.8 47.6 45.2
3.8 (17.8) 23.8 8.7 7.7 1.2 2.2 1.2 5.2 (46.5) 7 10.7 28.4 25.6
20.5 72.2 32.7 5.1 4.6 1.6 1.6 0.9 2.9 (43.9) 10 8.3 36.4 30.8
6.5 (13.2) 27.2 5.8 5.1 1.8 1.3 0.9 3.3 (33.7) 16 10.4 24.2 19.7
16.7 17.4 28.1 5.0 4.3 1.9 1.0 0.8 2.7 (28.9) 19 9.5 23.1 20.3
97
Cement
India I Equities
Initiating Coverage
4 June 2010
Orient Paper and Industries

Low costs, paper recovery; initiate at Buy
Buy. We initiate coverage on Orient, with a Buy rating and a target price of Rs85. We are positive on the company, given its low cement production costs, expansion in cement and electricals, and recovery in the paper business. Expansion in cement and electricals to drive growth. Expansion in cement to 5m tons in 4QFY10 (from 3.4m tons) and in electricals (both in fans and CFLs) could fuel revenue. We estimate a 19% revenue CAGR over FY10-12. Low-cost structure advantage in cement. Orient is one of Indias lowest-cost cement producers owing to larger blended sales, captive power, high-quality limestone and low coal costs. Recovery in paper, growth in electricals lowers business risk. Having built a water reservoir, its paper business is set to recover in FY10-12. This, together with strong growth in electricals could increase non-cement earnings share to 26% in FY12. Focus on cement, electricals. Orient intends to focus on the high-growth, high-returns businesses of cement and electricals, where it is formidable. Of the planned capex of Rs18.4bn (FY1014), Rs16bn is for a greenfield cement project (in Karnataka). Valuations. Our sum-of-parts value is Rs85: Rs66 for cement at 4.5x FY12 EV/EBITDA (implied EV/ton: US$60) and Rs15/4 for the electricals/ paper business at 4x/3x EV/EBITDA.
Key financials

Manish Valecha
Key data
OPI IN / ORPP.BO Rs66/Rs31 16742/5020 US$0.8m Rs11bn/US$244m 192.83m 56.5% 43.5% 3.5% 31.9% 21.1%

12,962 2,170 11.9 37.2 4.8 3.5 49 72.0 53.0 2.0 30.9 15,032 2,488 12.9 8.1 4.4 3.9 66 44.7 38.1 2.6 67.6 16,198 1,593 8.3 (36.0) 6.9 4.9 46 22.6 19.6 2.6 56.3 19,546 2,005 10.4 25.9 5.5 3.6 43 23.7 21.6 3.1 37.8 22,752 2,446 12.7 22.0 4.5 3.1 42 23.8 23.3 3.5 36.8
Source: Bloomberg
70 65 60 55 50 45 40 May-09 Jun-09 Oct-09 Aug-09 Sep-09 Nov-09 Dec-09 Feb-10 Mar-10 Jan-10 Jul-09 Apr-10 May-10 Orient Sensex
4 June 2010
Orient Paper and Industries - Low costs, paper recovery; initiate at Buy

Fig 4 PE Band
16,198 7.8 13,101 3,097 19.1 345 573 163 748 1,593 (36.0) 1,593 8.3 14.3 1.5 19,546 20.7 15,530 4,016 20.5 400 765 188 1,033 2,005 25.9 2,005 10.4 16.4 1.8 22,752 16.4 17,918 4,834 21.2 500 815 188 1,260 2,446 22.0 2,446 12.7 19.0 2.0
(Rs) 80 70 60 5x 50 4x 40 30 20 10 0 Nov-05 Nov-06 Nov-07 Nov-08 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10
4x Orient 3x 2x 1x May-10
12,962 17.6 9,358 3,604 27.8 197 344 197 1,090 2,170 47.9 2,045 11.9 13.3 1.1
15,032 16.0 11,091 3,941 26.2 207 378 232 1,100 2,488 14.6 2,001 12.9 15.1 1.5
Orient 6x
3x


203 6,805 7,008 4,660 11,668 10,432 92 811 333 11,668 192.8 67.6 26 203 8,667 8,870 5,162 14,032 11,727 471 1,367 467 14,032 192.9 56.3 25 203 10,677 10,880 5,162 16,043 12,562 471 1,737 1,273 16,043 192.9 37.8 29 193 13,073 13,265 5,162 18,428 15,047 471 2,280 630 18,428 192.9 36.8 32
Rs bn 18 16 14 12 10
263 5,079 5,341 1,716 7,057 5,337 92 1,369 260 7,057 192.7 30.9 39
8 6 4 2 0 May-05 May-06 May-07 May-08 May-09 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09

Fig 6 Segmental Break up

1,593 573 600 2,766 556 2,210 1,868 342 338 (16) 503 379 (23) 134 333 467 2,005 765 400 3,170 370 2,801 1,600 1,201 395 (0) 806 467 1,273 2,446 815 400 3,661 544 3,118 3,300 (182) 451 (10) (643) 1,273 630
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Revenue Cement Paper Electrical FY10 FY09 PBIT FY10
2,170 344 78 2,591 (49) 2,640 2,167 473 314 1,600 (1,654) (42) 58 89 171 260
2,488 378 47 2,913 (558) 3,471 5,474 (2,002) 339 (14) 2,884 0 456 73 260 333
99
4 June 2010

Expansion of its cement capacity (from 3.4m tons to 5m in 4QFY10) and in its electricals business is likely to result in a 19% revenue CAGR over FY10-12. Orient is one of Indias lowest-cost cement producers, given its advantages of higher blended sales, captive power, high-quality limestone, low coal cost and lower lead distance. This, along with the smart recovery in the paper business, bodes well for it. Expansion in cement and electricals to drive growth Expansion of cement capacity (from 3.4m to 5m tons in 4QFY10) and in electricals is likely to result in a 19% revenue CAGR over FY1012 Orient has expanded capacity in both cement and electricals. Ahead, this is likely to drive revenue growth. Its cement capacity expansion of 1.6m tons was completed in early 4QFY10, taking its capacity to 5m tons. During MarApr 10, it sold at a normalized rate of 4.4m tons, implying an 88% utilisation rate. We estimate a 16% CAGR in cement sales (by volume) over FY10-12. Orients electricals business has seen a 24% CAGR over the last five years, driven primarily by volume growth. We expect it to maintain such growth over FY10-12, driven by higher volumes and robust growth in CFLs. Orient is the second-largest fan manufacturer in the country (an 18% market share) and the largest exporter, with a strong brand. It has expanded capacity from 2.7m units in FY06 to 5m units now. In order to monetize its brand and distribution network, it ventured into CFLs in FY09 and broke even by FY10 itself. It has moved to fifth position (a 5% market share) in the CFL category in two years. It aims to grow the business aggressively by marketing products manufactured in-house as well as outsourced. It plans to double its manufacturing capacity from the present 5m units. We expect the segment to contribute 25% of the electricals division revenue in FY12 (from 9% in FY09). Capacity expansion at competitive cost Orients cement expansion from 2.4m to 5m tons (clinker from 2m to 3.4m tons) was carried out at Rs4.9bn (US$42 per ton). At a conservative EBITDA per ton of around Rs800, that translates to a payback period of less than two-and-a-half years. We expect the companys ability to set up projects at a lower cost to be replicated in future (including greenfield), resulting in industry-leading return ratios. Low-cost structure advantage in cement Orient is one of the lowest-cost producers of cement in the industry (lowest in its region) due to its efficient plants and certain logistical advantages.
100
4 June 2010
Fig 7 Cost-structure advantage

Heads Advantages
Product mix Market mix
Power
Coal
Raw material
A greater share of blended sales (90%), resulting in a cement-clinker conversion ratio of over 1.4x vs the industry range of 1.2x to 1.4x Orients sales mix is distributed between the leading consuming states of India: Maharashtra (70%) and AP (30%). Its average lead distance is around 300km vs the industry range of 450 to 600km. This results in low freight costs Orients power consumption per ton of cement is around 77 units vs industry range of 80 to 95 units. Also, availability of captive power from 4QFY10 reduces costs to Rs2.2 per unit at its Devapur plant vs the grid price of Rs3.1. This gives it strategic advantage vs regional peers in power cuts in AP (no impact on production) Orient obtains 75% of the coal it requires through Singareni Collieries (<100km); the balance through the auction market. Its average cost of coal is around Rs2,800 a ton vs the industry range of Rs3,000 to Rs4,500 High-quality limestone is available at captive mines located next to the plant, implying low transportation costs. Fly ash is sourced from NTPCs Ramagundam plant and the Bhusawal thermal power station for Devapur (AP) and Jalgaon (Maharashtra). Cost of transporting (50km distance) this translates to Rs220 a ton vs the industry range of Rs300 to 500
Fig 8 Cost per ton comparison (FY10)

(Rs/ton) 2,900 2,700 2,500 2,300
Fig 9 Coal and power consumption per ton of cement (FY09)

700 650 600 550
Coal Cost (Rs/ton)
India Cem
UltraTech Shree Ambuja ACC Orient
500 450 400 350 300 250 200 200 225
2,100 1,900 1,700 1,500 India Cement Orient Paper Birla Corp. Shree Cement UltraTech Ambuja ACC
250
275 300 Power Cost (Rs/ton)
325
350
375
Source: Companies, Anand Rathi Research
Source: Companies, Anand Rathi Research
Recovery in paper, growth in electricals to lower business risk We expect Orients earningsconcentration risk to ease, with the share of non-cement earnings to rise to 26% in FY12 (from 7% two years earlier) Ahead, we expect Orients earnings-concentration risk to ease, with noncement earnings share to rise to 26% in FY12 (from 7% two years earlier). This would follow from the recovery in paper and strong growth in electricals. Orient is well-established in the writing/printing paper and tissue paper subsegments, with capacities of 75,000 and 25,000 tons, respectively. It is the market leader in tissue paper, with a 40% market share. It is backward integrated, with captive sources of raw material. In the past, the division has had an RoCE of over 20%. However, its performance in the past two years (losses in FY10 for the first time in four decades) has been affected by water shortages and technical glitches. Having undertaken refurbishment/modernisation together with brownfield expansion in tissue paper, the company is now building a reservoir at its Amlai plant at a cost of Rs250m. Starting 2QFY11, this would have capacity to store water for up to three months usage and avoid any production loss. From a loss of Rs431m in FY10, we estimate the unit to breakeven in FY11 (1QFY11 production loss) and return to normal profitability in FY12.
101
4 June 2010
Performance in electricals would be led equally by fans and CFLs. While profit growth in fans would be modest due to pressure from rising raw materials, the CFL business is expected to grow rapidly due to robust volume growth (50% over FY10-12). We expect the CFL business to deliver an EBITDA of Rs120m in FY12 (FY10 nil) of the total estimated EBITDA of Rs895m in the electricals division. This is expected to lead to an 18% EBIT CAGR over FY10-12 in electricals. This business has delivered a RoCE of around 30% in the last six years and this is expected to continue. Focus on cement, electricals. Strong balance sheet to support growth In cement, it plans to set up over FY10-14 a 4m-ton greenfield project in Karnataka at a cost of Rs16bn Orient wants to focus on the high-growth, high-returns businesses of cement and electricals, in which it is formidable in the regions where it operates. It is exploring both organic and inorganic opportunities in the two divisions. In cement, it plans to set up over FY10-14, a 4m-ton greenfield project in Karnataka at a cost of Rs16bn. This would be financed largely through internal accruals, given the strong cash generation expected over the next four years. Accordingly, its current leverage of 0.6x is expected to be marginally lower over the next two years. In paper, the company has no plans to expand capacity, given the lower RoCE (vs the other businesses). It plans to set up a 55 MW thermal plant in order to reduce costs and to sell surplus power in the open market (30 MW). In order to monetise its strong brand and distribution network, it plans to diversify its electricals products basket by venturing into associated products such as household appliances: toasters, press irons, heaters, mixers, etc.
Fig 10 Business Segments - RoCE
(%) 120 100 80 60 40 20 0 -20 FY11e FY12e FY07 FY08 FY09 FY10
Fig 11 FCF vs Net-Debt-to-Equity

(Rsm) 2,000 (%) 250
1,500 1,000 500 0 -500 -1,000 -1,500 -2,000 -2,500 FY07 FY08 FY09 FY10 FY11e FY12e 0 50 150 100 200
Cement
Paper
Electricals
Free Cash Flow
Monetizing idle assets Since 1999, labour problems have shut down Orients second paper plant in Brajrajnagar (Orissa). Thus, the plant has suffered huge operational losses. The company plans to utilize available land (850 acres) for a greenfield industrial project. The location (proximity to the Sterlite and Bhushan plants), its size and availability of basic township infrastructure (roads, water, power, houses) make it a valuable possession, given prevailing prices in that region. The probable industries that can be housed in the area are power and cement. The companys stake of 1.5m shares in Century Textiles is currently valued at Rs700m. Based on funds that may be required, it plans to divest this (nonstrategic) in course of time.
Its 1.5m shares in Century Textiles are valued at Rs700m. Based on funds that may be required, it plans to divest this (non-strategic) in course of time
102
4 June 2010
Valuation Our sum-of-parts value for Orient is Rs85: Rs66 for cement at 4.5x FY12 EV/EBITDA, in line with midcap cement companies, Rs15 for the electrical business at 4x FY12 EV/ EBITDA, a 50% discount to the industry and Rs4 for the paper business at 3x FY12 EV/EBITDA, a 33% discount to the industry. The overall implied EV/EBITDA of 4.2x is also in line with the average multiple for the last eight years. We have not assigned any value to the companys investment in Century Textiles (Rs4/share). The implied valuation of the cement business on our target price is US$60 EV/ton. Our target price of Rs85 implies a 49% return from the present Rs57. At the going market price of Rs57, the stock trades at a PE of 4.5x, an EV/EBITDA of 3.1x and an EV/ton of US$42 on FY12 estimates.
Fig 12 Sum-of-parts valuation
Segments (FY12e) EV/EBITDA EV Per share
- Cement - Paper & Board - Electric Fans TOTAL Debt Cash + Investments Target Price
4.5 3.0 4.0
15,952 1,084 3,532 20,569 5,162 1,108 16,515
83 6 18 107 27 5 85

(x) 10.0 8.0 +1SD 6.0 EV/EBITDA 4.0 -1SD 2.0 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 Nov-09 May-10 -2SD Mean +2SD
Risks to our target price Cement capacity ramping up quicker or bunching of capacities, leading to sustained pricing pressure Steep rise in international prices of coal Lower demand offtake in the next two years Depressed performance from the paper division due to equipmentrelated issues Lower demand from the electricals business or rise in cost of metal prices
4 June 2010
Fig 13 - Income Statement (Rsm)

Net Sales Sales Growth (%) Less Expenditure Raw Material Stores & Spares Staff Cost Power& Fuel Freight charges Other Expenditure EBITDA EBITDA Margin (%) Growth (%) - Interest - Depreciation + Other Income Profit Before Tax - Tax Tax rate (%) Adjusted PAT PAT Margin (%) Growth (%) Extraordinary Items Reported PAT FDEPS (Rs / Share) CEPS (Rs / Share) DPS (Rs / Share)
12,962 18 3,650 661 753 1,710 1,555 1,030 3,604 27.8 36.6 197 344 197 3,260 1,090 33.4 2,170 16.7 47.9 (125) 2,045 11.9 13.3 1.1
15,032 16 4,274 725 869 2,146 1,883 1,194 3,941 26.2 9.4 207 378 232 3,588 1,100 30.7 2,488 16.5 14.6 (487) 2,001 12.9 15.1 1.5
16,198 8 5,364 543 1,055 2,680 1,887 1,573 3,097 19.1 (21.4) 345 573 163 2,341 748 31.9 1,593 9.8 (36.0) 1,593 8.3 14.3 1.5
19,546 21 6,500 650 1,160 3,200 2,100 1,920 4,016 20.5 29.7 400 765 188 3,039 1,033 34.0 2,005 10.3 25.9 2,005 10.4 16.4 1.8
22,752 16 7,500 700 1,277 3,700 2,400 2,342 4,834 21.2 20.4 500 815 188 3,707 1,260 34.0 2,446 10.8 22.0 2,446 12.7 19.0 2.0
Fig 14 - Segment-wise Performance

Cement Revenue (Rs m) PBIT (Rs m) Margin (%) Sales (m ton) NSR (Rs per ton) EBITDA (Rs per ton) Paper Revenue (Rs m) PBIT (Rs m) Margin (%) Sales (ton) NSR (Rs per ton) Electric Revenue (Rs m) PBIT (Rs m) Margin (%) Fans sales (m units) Fans NSR (Rs per unit) CFL sales (m units) CFL NSR (Rs per unit)
7,332 3,120 42.6% 2.6 2,821 1,211 2,742 267 9.8% 75,628 36,257 2,855 219 7.7% 3.5 805 0.2 55
8,717 3,426 39.3% 2.9 3,021 1,174 2,900 36 1.2% 64,988 44,624 3,414 339 9.9% 3.7 846 4.7 61
8,948 2,539 28.4% 3.3 2,741 843 2,394 (431) -18.0% 59,055 40,535 4,808 617 12.8% 5.0 822 9.0 78
10,768 2,800 26.0% 4.1 2,618 801 2,554 (50) -2.0% 60,000 42,562 6,225 635 10.2% 6.0 850 15.0 75
11,897 3,150 26.5% 4.4 2,700 814 3,405 250 7.3% 80,000 42,562 7,450 857 11.5% 7.0 850 20.0 75
104
4 June 2010
Fig 15 - Balance Sheet (Rsm)

Sources of Funds Share Capital Reserves and Surplus Deferred Tax Liability Net Worth Debt Capital Employed Application of Funds Gross Block Less: Depreciation Net Block Capital WIP Investments Sundry Debtors Inventories Loans & Advances Current Assets Current Liabilities Provisions Current Liabilities Working Capital Cash Net Current Assets Capital Deployed W C Turnover (days) BV (Rs/Share)
263 4,624 455 5,341 1,716 7,057 7,684 4,344 3,340 1,997 92 1,358 990 812 3,161 1,383 409 1,792 1,369 260 1,629 7,057 39 24
203 6,303 502 7,008 4,660 11,668 8,503 4,658 3,845 6,587 92 1,407 1,097 1,028 3,532 1,993 728 2,721 811 333 1,144 11,668 26 33
203 7,564 1,103 8,870 5,162 14,032 16,435 5,208 11,227 500 471 1,844 1,503 1,173 4,520 2,346 807 3,153 1,367 467 1,834 14,032 25 40
203 9,175 1,503 10,880 5,162 16,043 17,535 5,973 11,562 1,000 471 2,200 1,600 1,200 5,000 2,400 863 3,263 1,737 1,273 3,010 16,043 29 48
193 11,170 1,903 13,265 5,162 18,428 17,935 6,788 11,147 3,900 471 2,500 1,800 1,300 5,600 2,400 920 3,320 2,280 630 2,910 18,428 32 59
Fig 16 Cash Flow Statement

Year end 31 Mar PAT +Depreciation +Deffered Tax Cash profit - Incr/(Decr) in WC Operating cash flow -Capex Free cash flow -Dividend + Equity raised + Debt raised -Investments -Misc. items Net cash flow +Opening cash Closing cash
FY08 2,170 344 78 2,591 (49) 2,640 2,167 473 314 1,600 (1,654) (42) 58 89 171 260
FY09 2,488 378 47 2,913 (558) 3,471 5,474 (2,002) 339 (14) 2,884 0 456 73 260 333
FY10 1,593 573 600 2,766 556 2,210 1,868 342 338 (16) 503 379 (23) 134 333 467
FY11e 2,005 765 400 3,170 370 2,801 1,600 1,201 395 (0) 806 467 1,273
FY12e 2,446 815 400 3,661 544 3,118 3,300 (182) 451 (10) (643) 1,273 630
105
4 June 2010
Fig 16 - Ratio Analysis @ Rs57

17.6 47.9 27.8 4.8 4.3 2.0 2.3 1.0 3.5 30.9 39 11.9 72.0 53.0
16.0 14.6 26.2 4.4 3.8 2.6 1.7 1.0 3.9 67.6 26 14.5 44.7 38.1
7.8 (36.0) 19.1 6.9 4.0 2.6 1.4 0.9 4.9 56.3 25 18.2 22.6 19.6
20.7 25.9 20.5 5.5 3.5 3.1 1.2 0.7 3.6 37.8 29 16.8 23.7 21.6
16.4 22.0 21.2 4.5 3.0 3.5 1.0 0.7 3.1 36.8 32 15.8 23.8 23.3
106
India I Equities
Change in Estimates
4 June 2010
Cement Update
Target Reco
Grasim
VSF doing well; retain Buy
Raising estimates. Post de-merger, Grasim would hold 60.3% of the merged cement entity (largest in India with 49m ton capacity). We raise FY11e/12e earnings 6%/4%, given new volume and realization assumptions for both the cement and VSF divisions. Post-restructuring, our new target price is Rs2,375. Cement expansion to drive revenue growth. In FY10, Grasim completed its 8m-ton expansion in Rajasthan. Backed by this, we expect it to post a 10% CAGR in cement sales over FY10-12. Strong comeback in VSF. Demand revival in developed markets and lower cotton supply have led to robust volume growth in the VSF division (29% in FY10). We do not expect any major squeeze on operating margins (currently at 35-36%). Grasim plans to add 80,000 tpa capacity in Gujarat at a capex of Rs10bn. Strong balance sheet to support future growth. We expect Grasim to remain FCF positive until FY12, with net cash of Rs34bn by FY12. This would support its future growth plans, which include adding 13m tons in cement over five years. Valuations. Our fair price is based on the new holding structure (post-restructuring). We value its holding in UltraTech (60.3% stake in merged entity) and other investments at a holding company discount of 30%, VSF/chemicals business at 6x/4x EV/ EBITDA. Our revised target price is Rs2,375.
Key financials #
Rating: Buy Target Price: Rs2,375 Share Price: Rs1,778

Manish Valecha
Key data
GRASIM IN/ GRAS.BO Rs2,938 / Rs872 17022 / 5110 US$13.6m Rs163 bn/US$3.6bn 91.7m 74.8% 25.2% 37.2% 20.6% 17.0%

102,151 30,467 20,019 218.3 284.6 32.6 6.2 31.1 24.8 1.7 22.8 26 108,287 24,940 16,480 179.7 238.5 (16.2) 7.5 18.7 15.9 1.7 21.4 23 124,627 37,926 24,042 262.2 327.9 37.5 5.4 25.6 22.0 1.7 0.7 25 136,416 37,885 23,930 261.0 320.9 (2.1) 5.5 18.6 19.1 2.2 (6.9) 31 147,327 43,226 26,755 291.8 356.0 10.9 5.0 17.9 19.4 2.2 (21.3) 36
Source: Bloomberg
2,950 2,700 2,450 2,200 1,950 1,700 May-09 Apr-10 May-10 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Sensex Grasim
Sales (Rsm) EBITDA (Rsm) Net profit (Rsm) EPS (Rs) Consolidated EPS Growth (%) PE- Consol (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%) W C turnover (days)
Source: Company, Anand Rathi Research # Based on old structure for comparison purposes
4 June 2010
Grasim VSF doing well; retain Buy

Fig 4 PE Band
124,627 15.1 86,701 37,926 30.4 2,075 5,643 4,253 10,420 24,042 45.9 30,069 262.2 327.9 30.0 136,416 9.5 98,531 37,885 27.8 2,000 6,542 4,842 10,256 23,930 (0.5) 29,427 261.0 320.9 40.0 147,327 8.0 104,101 43,226 29.3 2,000 7,846 4,842 11,467 26,755 11.8 32,638 291.8 356.0 40.0
Rs / Share 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jul-09
Nov-09
2.5x 2x 1.5x 1x May-10 Nov-09
Consol. EPS (Rs/share) DPS (Rs/share)


1,021 128,473 129,495 26,738 156,233 86,679 46,090 10,067 13,397 156,233 96.6 0.7 25 1,021 150,612 151,633 21,031 172,665 95,524 46,090 13,067 17,984 172,665 96.6 (6.9) 31 1,021 175,576 176,598 15,324 191,922 92,677 46,090 16,067 37,088 191,922 96.6 (21.3) 36
Rs bn 400 350 300
966 86,510 87,476 32,019 119,495 70,540 40,808 6,872 1,275 119,495 96.6 22.8 26
1,021 102,398 103,420 33,950 137,369 83,078 46,091 7,067 1,134 137,369 96.6 21.4 23
Grasim 6x 5x 4x 3x
250 200 150 100 50 0 May-05 May-06 May-07 May-08 May-09 Nov-05 Nov-06 Nov-07 Nov-08

Fig 6 P/BV Band

24,037 5,643 1891.3 31,571 3,000 28,571 9,244 19,327 3,218 5 (7,211) (1) (3,361) 12,263 1,134 13,397 23,930 6,542 2500 32,972 3,000 29,972 15,387 14,585 4,291 (5,707) 4,587 13,397 17,984 26,755 7,846 2500 37,102 3,000 34,102 5,000 29,102 4,291 (5,707) 19,104 17,984 37,088
Rs / Share 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 May-05 May-06 May-07 May-08 May-09 Nov-05 Nov-06 Nov-07 Nov-08 Grasim
20,019 3,533 243.8 23,795 (887) 24,683 28,101 (3,418) 3,164 (56) 2,503 (1,939) (2,307) 111 1,164 1,275
16,480 4,570 2575 23,624 194 23,430 17,108 6,322 3,164 53 1,931 5,283 (141) 1,275 1,134
Jan-10
Net sales Sales growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Tax PAT PAT growth (%) Consolidated PAT FDEPS (Rs/share)
102,151 17.7 71,684 30,467 29.8 1,070 3,533 3,778 9,623 20,019 33.6 26,091 218.3 284.6 30.0
108,287 6.0 83,347 24,940 23.0 1,397 4,570 3,505 5,999 16,480 (17.7) 21,867 179.7 238.5 30.0
Grasim 10x 8x 6x 4x
108
4 June 2010

Post de-merger, Grasim will hold 60.3% of the merged cement entity (with 49m tons, the largest in India). We raise FY11e/12e earnings 12%/21%, given new volume and realization assumptions for both the cement and VSF divisions. Our fair price for Grasim at Rs2,375 is based on the new holding structure (post-restructuring). Cement expansion to drive growth We expect a 10% cement volume CAGR over FY10-12 During FY10, Grasim commissioned two new units of 4m tons each, at Rajasthan, taking capacity to 25.7m tons. Based on normal ramp-up timeframe, we expect a 10% aggregate volume CAGR over FY10-12. Realizations for FY11 and FY12 are expected to be flat, leading to an 10% revenue CAGR over the period.
Fig 7 Expansion to lead to strong volume growth (grey cement)
(m ton) 28 26 24 22 20 18 16 14 12 FY11e FY12e FY07 FY08 FY09 FY10 Cement Despatches
Capacity
Favorable regional mix With the commissioning of new capacities in FY10, over 75% of Grasims capacity would be concentrated in the high-growth regions of the East, Central, North and West. Utilization rates and prices are expected to be better in these regions than in the South. This bodes well for Grasim, and is likely to lead to strong volume growth and stable realizations.
Fig 8 Cement regional mix (FY10)
Over 75% of Grasims capacity would be concentrated in the highgrowth regions of the East, Central, North and West
West 9%
East 13%
Source: Company
South 23%
109
4 June 2010
Strong comeback in VSF VSF realizations are now at an all-time high Rs114/kg, in contrast with an average Rs97 in FY09 and Rs106 in FY10 Revival in demand in developed markets and less cotton available have led to robust volume growth in the VSF division (29% in FY10). Strong demand has led to healthy realization growth. Realizations are now at an all-time high Rs114/kg, in contrast with an average Rs97 in FY09 and Rs106 in FY10. During early FY10, VSF inventories in the industry had risen sharply, leading to a price correction. With inventory cleared and demand increasing, we believe that the company would be able to pass on any cost increases, thus maintaining margins at highs of 35-36% over FY10-12.
Fig 9 VSF Volume and realization
(tons) 85,000 (Rs/kg) 130
80,000 75,000 70,000 65,000 60,000 55,000 50,000 Jun-08 Dec-08 Jun-09 Dec-09 Sep-08 Sep-09 Mar-08 Mar-09 Mar-10
125 120 115 110 105 100 95 90 85 80
Volume
Realization (RHS)
Seeing the strong growth in the segment, the company plans to add 80,000 tpa in Gujarat at a capex of Rs10bn. This would drive future growth. It has already acquired land and environmental clearances. Post-commissioning, in FY13, Grasims VSF capacity would rise to 413,975 tons. Strong balance sheet to support future growth We estimate net cash to rise to Rs34bn by FY12 (Rs375per share) During FY10, Grasim completed its expansions and is expected to continue to generate positive free-cash-flow till FY12. We estimate net cash to rise to Rs34bn by FY12 (Rs375per share). This would take its net gearing from positive 0.2x in FY09 to a negative 0.2x in FY12. Without increasing leverage to a great extent, this would support future growth plans, which include adding 13m tons of cement in the next five years.
Fig 10 Net debt-to-equity vs FCF
(Rsm) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -5,000 -10,000 FY11e FY12e FY06 FY07 FY08 FY09 FY10 (%) 30 20 10 0 -10 -20 -30
Free Cash Flow

110
4 June 2010
Change in estimates We raise FY11 and FY12 net sales estimates by, respectively, 7% and 9%, to factor in higher volumes and realizations from the cement business and greater VSF profitability. The resultant increase in EBITDA (by 8% and 16% for FY11 and FY12, respectively) is likely to raise net profit. Accordingly, we raise our FY11 and FY12 net profit estimates, by 6% and 14%, respectively.
Fig 11 Revised estimates
Net sales (Rs m) EBITDA (Rs m) PAT (Rs m) EBITDA margin (%) EBITDA per ton (Rs) * NSR per ton (Rs)* Volumes (m ton)* Consol PAT
127,531 35,083 22,576 27.5 1,032 4,030 22.1 27,967
136,416 37,885 23,930 27.8 1,053 4,216 22.3 29,427
7.0 8.0 6.0 26 2.1 4.6 1.2 5.2
135,682 37,292 23,572 27.5 1,032 4,066 23.4 28,713
147,327 43,226 26,755 29.3 1,134 4,230 24.4 32,638
8.6 15.9 13.5 186 9.9 4.0 4.4 13.7
Source: Anand Rathi Research, * Cement
Valuation We value Grasims holding in UltraTech (merged entity) and other investments at a holding company discount of 30% to the current market price, the VSF/chemicals business at 6x/4x EV/ EBITDA. Postrestructuring, our revised target price is Rs2,375.
Fig 12 Sum-of-parts valuations
FY12 Grasim stake in UltraTech Value of Other Investments VSF- 6x FY11 EV/EBITDA Chemicals- 4x FY11 EV/EBITDA EV Net Debt Equity Value
Source: Anand Rathi Research Holding co. Disc Stake (%) # Equity Shares (m) Value (Rs m) Value (Rs/share)
30.0% 30.0%
60.3%
274.0
110,069 18,433 81,698 6,253 216,452 (1,345) 217,797
1,200 201 891 68 2,361 (15) 2,375
Our target price of Rs2,375 implies a 34% return from the present Rs1,778. At the going market price of Rs1,778, the stock trades at a consolidated PE of 5.5x, and 5x FY11 and FY12 estimates respectively. Risks to valuation Capacity ramping up quicker and bunching up of capacities; Steep rise in prices of international coal; lower demand offtake of cement in the next two years; lower demand offtake of VSF in the next two years.
111
4 June 2010

Net Sales Sales Growth (%) Less Expenditure Raw Material Staff Cost Power& Fuel Freight charges Other Expenditure EBITDA EBITDA Margin (%) Growth (%) - Interest - Depreciation + Other Income Profit Before Tax - Tax Tax rate (%) Adjusted PAT PAT Margin (%) Growth (%) Extraordinary Items Reported PAT Consolidated PAT FDEPS (Rs / Share) Consolidated FDEPS (Rs/Share) CEPS (Rs / Share) DPS (Rs / Share)
102,151 17.7 27,954 5,501 14,765 10,479 12,985 30,467 29.8 26.5 1,070 3,533 3,778 29,642 9,623 32.5 20,019 19.6 33.6 (2,307) 22,326 26,091 218.3 285 284.6 30.0
108,287 6.0 31,175 6,004 19,296 12,232 14,640 24,940 23.0 (18.1) 1,397 4,570 3,505 22,478 5,999 26.7 16,480 15.2 (17.7) 16,480 21,867 179.7 238 238.5 30.0
124,627 15.1 27,502 6,796 19,972 14,649 17,787 37,922 30.4 52.1 2,075 5,643 4,253 34,457 10,420 30.2 24,037 19.3 45.9 (3,361) 27,398 30,069 262.2 328 327.9 30.0
136,416 9.5 34,700 7,200 18,000 15,000 23,631 37,885 27.8 (0.1) 2,000 6,542 4,842 34,185 10,256 30.0 23,930 17.5 (0.5) 23,930 29,427 261.0 321 320.9 40.0
147,327 8.0 34,700 7,200 18,000 15,000 29,201 43,226 29.3 14.1 2,000 7,846 4,842 38,222 11,467 30.0 26,755 18.2 11.8 26,755 32,638 291.8 356 356.0 40.0

966 80,441 6,069 87,476 32,019 119,495 75,925 35,649 40,277 30,263 40,808 7,120 9,784 11,412 28,316 16,042 5,402 21,444 6,872 1,275 8,147 119,495 26 887.5
1,021 93,754 8,644 103,420 33,950 137,369 110,617 39,725 70,891 12,186 46,091 5,599 13,782 10,463 29,845 16,869 5,909 22,778 7,067 1,134 8,200 137,369 23 1,033.3
1,021 117,938 10,535 129,495 26,738 156,233 126,921 45,368 81,553 5,127 46,090 6,099 15,282 11,463 32,845 16,869 5,909 22,778 10,067 13,397 23,464 156,233 25 1,297.1
1,021 137,577 13,035 151,633 21,031 172,665 146,079 51,910 94,169 1,355 46,090 6,599 17,282 11,963 35,845 16,869 5,909 22,778 13,067 17,984 31,051 172,665 31 1,511.3
1,021 160,041 15,535 176,598 15,324 191,922 149,934 59,757 90,177 2,500 46,090 7,099 19,282 12,463 38,845 16,869 5,909 22,778 16,067 37,088 53,155 191,922 36 1,756.4
112
4 June 2010

20,019 3,533 243.8 23,795 (887) 24,683 28,101 (3,418) 3,164 (56) 2,503 (1,939) (2,307) 111 1,164 1,275
16,480 4,570 2575 23,624 194 23,430 17,108 6,322 3,164 53 1,931 5,283 (141) 1,275 1,134
24,037 5,643 1891.3 31,571 3,000 28,571 9,244 19,327 3,218 5 (7,211) (1) (3,361) 12,263 1,134 13,397
23,930 6,542 2500 32,972 3,000 29,972 15,387 14,585 4,291 (5,707) 4,587 13,397 17,984
26,755 7,846 2500 37,102 3,000 34,102 5,000 29,102 4,291 (5,707) 19,104 17,984 37,088
Fig 16 Ratio analysis @Rs1778

Year end 31 Mar (Rs m) FY08 FY09 FY10 FY11e FY12e
Sales Growth (%) PAT Growth (%) Operating Margin (%) PE- Consol (x) Dividend Yield (%) Net Debt / Equity (%) Working Capital Turnover (days) Dividend Payout (%) RoE (%) RoCE (%)
17.7 33.6 29.8 6.2 1.7 22.8 26.1 12.3 31.1 24.8
6.0 (17.7) 23.0 7.5 1.7 21.4 23.5 16.7 18.7 15.9
15.1 45.9 30.4 5.4 1.7 0.7 25.1 10.0 25.6 22.0
9.5 (0.5) 27.8 5.5 2.2 (6.9) 30.9 15.3 18.6 19.1
8.0 11.8 29.3 5.0 2.2 (21.3) 36.1 13.7 17.9 19.4
113
4 June 2010
Annexures
114
4 June 2010
Annexture 1 Clinker and Cement grinding capacity data

Clinker Capacity
Additions mn ton Mar'09 FY10 FY11e FY12e FY13e Mar'13
North South East West Central All India Cement Grinding Capacity
33.1 60.9 15.5 25.4 22.5 157.4
12.7 13.3 3.0 2.0 1.5 32.5
1.0 11.5 3.4 3.3 3.4 22.7
7.6 2.0 9.6
0.7 5.3 1.5 3.3 3.6 14.5
47.6 98.6 23.4 36.0 31.0 236.6
North South East West Central All India
51.1 77.5 30.9 32.4 27.3 219.2
14.9 17.4 6.2 4.8 5.4 48.7
1.4 14.8 3.2 5.1 4.8 29.3
9.9 2.4 12.3
1.2 7.5 2.5 4.0 4.9 20.1
68.6 127.1 42.8 48.6 42.4 329.5
Cement Capacity based on regional blending ratio

North South East West Central All India Blending Ratio (x)
44.8 78.4 26.2 31.5 31.9 212.8
16.5 16.8 4.9 2.4 2.1 42.6
1.3 14.5 5.6 4.0 4.8 30.2
9.6 2.4 12.0
0.9 6.7 2.5 4.0 5.1 19.2
63.6 126.0 39.1 44.4 43.9 316.9
FY09
FY10
FY11e
FY12e
FY13e
North South East West Central All India

1.35 1.29 1.70 1.24 1.42 1.36
1.29 1.26 1.64 1.22 1.40 1.33
1.29 1.26 1.64 1.22 1.40 1.33
1.29 1.26 1.64 1.22 1.40 1.33
1.29 1.26 1.64 1.22 1.40 1.33
115
4 June 2010
Annexture 2 Companywise capacity addition data

Estimated Capacity Additions
m ton Mar'10 FY11e FY12e FY13e Mar'13
Grasim Ambuja ACC UltraTech JP Associates India Cements Shree Cements Madras Cem Dalmia Chettinad Lafarge Century Textiles JK Cement Kesoram Binani Birla Corp JK Lakshmi OCL Orient Paper Penna Cement Rain Commodities Zuari My home Inds. Heidelberg Cmt Mehta Group Sanghi Mangalam Prism Andhra Cements CMCL KCP Ltd JSW ABG Cement Others All India
25.7 25.0 24.3 23.1 18.6 14.1 12.0 11.5 9.0 8.2 8.0 7.8 7.5 7.3 6.3 5.8 5.6 5.3 5.0 4.5 4.0 3.4 3.2 3.1 2.7 2.6 2.0 2.0 1.4 1.1 0.7 7.3 267.9
2.0 6.0 2.2 1.4 1.5 1.8 1.6 2.0 1.5 3.0 1.8 6.1 30.8
6.4 1.9 1.5 2.5 12.3
2.6 1.9 1.8 2.3 1.9 3.0 4.0 2.7 20.1
25.7 27.0 30.3 23.1 29.8 15.5 13.5 13.3 9.0 10.1 8.0 7.8 7.5 7.3 6.3 9.4 5.6 5.3 5.0 6.1 4.0 5.4 4.7 5.4 2.7 2.6 2.0 5.0 3.2 3.0 2.2 3.0 4.0 18.5 331.0
116
4 June 2010
Annexture 3 Regional data (m ton)

NORTH FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11e FY12e FY13e
Closing Capacity Idle Capacity Effective Capacity Cap Utilization (%) Production Growth (%) Surplus/ (Deficit)
SOUTH
25.5 1.6 23.9 100.1 24.2 13.2 (2.7)

FY03
26.6 1.6 25.0 103.1 25.2 4.0 (2.6)

FY04
28.4 1.6 26.8 103.1 26.7 5.9 (3.9)

FY05
31.1 1.6 29.5 105.3 29.7 11.1 (5.1)

FY06
34.9 1.6 33.4 102.0 32.1 8.2 (4.9)

FY07
48.6 1.6 47.1 90.7 36.5 13.6 (3.1)

FY08
51.1 1.6 49.5 85.2 41.1 12.9 (0.8)

FY09
66.0 1.6 64.4 81.8 46.6 13.2 2.0

FY10
67.4 1.6 65.8 81.0 52.8 13.3 2.6

FY11e
67.4 1.6 65.8 89.6 59.0 11.7 0.0

FY12e
68.6 1.6 67.0 100.0 66.4 12.6 (6.8)

FY13e
EAST
45.5 1.5 44.0 76.2 33.4 11.9 4.7

FY03
46.4 1.5 44.9 81.4 36.1 8.1 3.7

FY04
48.6 1.5 47.1 84.8 39.0 7.9 1.9

FY05
51.0 1.5 49.4 93.0 44.9 15.1 (2.3)

FY06
54.0 1.5 52.4 96.8 49.3 9.9 (4.4)

FY07
61.4 1.5 59.9 96.6 54.2 10.0 (5.4)

FY08
77.5 1.5 76.0 88.0 59.7 10.2 (2.5)

FY09
94.8 1.5 93.3 75.6 64.0 7.1 6.4

FY10
109.6 1.5 108.1 68.6 69.0 7.9 15.9

FY11e
119.5 1.5 118.0 68.4 77.3 12.0 20.0

FY12e
127.1 1.5 125.5 72.4 88.2 14.0 18.3

FY13e
WEST
22.5 1.1 21.3 81.0 16.7 0.1 1.6

FY03
22.4 1.1 21.2 78.3 16.7 (0.2) 2.2

FY04
23.0 1.1 21.8 87.0 18.7 12.4 0.6

FY05
24.2 1.1 23.1 89.3 20.0 7.0 (0.2)

FY06
24.9 1.1 23.8 93.8 22.0 9.7 (1.3)

FY07
28.6 1.1 27.4 93.1 23.8 8.5 (1.5)

FY08
30.9 1.1 29.7 90.9 26.0 8.9 (1.3)

FY09
37.1 1.1 36.0 89.1 29.3 12.7 (1.1)

FY10
40.3 1.1 39.2 88.3 33.2 13.2 (1.1)

FY11e
40.3 1.1 39.2 96.4 37.8 13.9 (3.2)

FY12e
42.8 1.1 41.7 105.1 42.5 12.5 (6.5)

FY13e
CENTRAL
25.3 0.2 25.1 81.5 19.3 11.8 1.5

FY03
29.3 0.2 29.1 77.5 21.0 9.0 2.2

FY04
29.4 0.2 29.2 78.1 22.8 8.4 2.7

FY05
28.9 0.2 28.7 86.1 24.9 9.5 1.2

FY06
28.9 0.2 28.7 95.0 27.3 9.5 (1.3)

FY07
31.8 0.2 31.6 95.2 28.8 5.3 (2.0)

FY08
32.4 0.2 32.2 89.2 28.5 (1.0) (0.4)

FY09
37.2 0.2 37.0 88.4 30.6 7.4 (0.3)

FY10
42.3 0.2 42.1 88.2 34.9 14.0 (1.0)

FY11e
44.7 0.2 44.5 89.0 38.5 10.6 (1.0)

FY12e
48.6 0.2 48.4 92.1 42.8 11.0 (2.0)

FY13e
ALL INDIA
21.3 3.0 18.3 98.3 17.8 6.8 (1.9)

FY03
21.9 3.0 18.9 99.6 18.5 3.7 (1.9)

FY04
25.0 3.0 22.0 99.8 20.4 10.4 (2.6)

FY05
25.0 3.0 22.0 101.2 22.3 9.2 (3.1)

FY06
25.5 3.0 22.5 108.0 24.0 7.9 (4.1)

FY07
27.3 3.0 24.4 106.8 25.0 4.1 (4.3)

FY08
27.3 3.0 24.4 107.1 26.1 4.2 (4.5)

FY09
32.7 (0.0) 32.7 105.0 29.9 14.9 (6.4)

FY10
37.5 (0.0) 37.5 97.9 34.4 14.8 (7.3)

FY11e
37.5 (0.0) 37.5 102.7 38.5 12.1 (5.7)

FY12e
42.4 (0.0) 42.4 108.8 43.5 12.8 (8.2)

FY13e
140.0 7.4 132.6 85.4 111.5 9.4 3.3
146.5 7.4 139.0 86.5 117.5 5.4 3.5
154.3 7.4 146.9 89.2 127.6 8.6 (1.4)
160.2 7.4 152.8 94.6 141.8 11.2 (9.4)
168.3 7.4 160.9 98.7 154.7 9.1 (16.0)
197.8 7.4 190.4 95.8 168.3 8.8 (16.3)
219.2 7.4 211.8 90.2 181.4 7.8 (9.5)
267.9 4.4 263.4 84.3 200.4 10.5 0.5
297.2 4.4 292.7 80.6 224.2 11.9 9.2
309.5 4.4 305.0 84.0 251.2 12.0 10.1
329.5 4.4 325.1 89.9 283.3 12.8 (5.2)
Source: CMA, Anand Rathi Research Note: (1)Capacity Utilization is calculated based on average capacity for the year (2) Surplus/(Deficit) is calculated based on new capacity utilization assumptions of 30%/70%/90% for Year1/2/3
117
4 June 2010
Annexture 4 Plant wise capacity estimate over FY11-14

2010-11e India Cement Total North ACC Zuari Cement (Italcementi) Penna Cement Andhra Cement My Home NCL Inds. Bhavya Cement Jaya Jyoti Total South Ambuja JPA- SAIL Total East Deepak Cement ACC Ambuja Total West Birla Corp Prism Total Central Total All India 2011-12e Nil Total North Raghuram Cement II (Bharti ) KCP Chettinad - II JPA Total South Nil Total East JPA: GACL: Line II Total West Nil Total Central Total All India 2012-13e Birla Corp Total North Madras Cement- II Sagar-Vicat Cement JSW Total South CMCL Birla Corp Total East ABG Cement Total West Heidelberg JPA Line II (UP) Total Central Total All India Capacity (m ton) 1.4 1.4 3.0 2.0 1.6 1.8 1.5 1.5 1.5 2.0 14.8 1.0 2.2 3.2 1.1 3.0 1.0 5.1 1.8 3.0 4.8 29.3 Capacity (m ton) Nil Nil 2.50 1.52 1.88 4.00 9.90 Nil Nil 2.40 2.40 Nil Nil 12.3 Capacity (m ton) 1.20 1.20 1.87 2.67 2.97 7.51 1.93 0.60 2.53 3.96 3.96 2.31 2.57 4.88 20.1 Central Central MP UP West Gujarat East East South South South TN Karnataka Andhra Region North State Rajasthan Central West Gujarat East South South South South AP AP TN AP Region North State Central Central MP MP West West West Gujarat Maharashtra Maharashtra East East Chattisgarh Chattisgarh South South South South South South South South Karnataka AP AP AP AP AP AP AP Region North State Rajasthan
118
4 June 2010
2013-14e Lafarge JK Cement Total North Chettinad JPA Total South Emami Total East Century- Manikgarh Nirma Cement JPA GACL Line III Total West JPA- Sidhi II JPA- UP Line III Total Central Total All India
Capacity (m ton) 2.15 2.15 4.29 2.57 2.57 5.15 3.00 3.00 3.43 2.57 2.57 8.58 2.57 2.57 5.15 26.2
Region North North South South East West West West Central Central
State Rajasthan Rajasthan Karnataka Karnataka
Maharashtra Gujarat Gujarat MP UP
119
Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below. Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >20% >30% Hold 5-20% 10-30% Sell <5% <10%
Anand Rathi Research Ratings Distribution (as of 31 Mar 10) Buy Anand Rathi Research stock coverage (118) 61% % who are investment banking clients 8%
Hold 12% 0%
Sell 27% 0%
Other Disclosures This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission. Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Stock Exchange, Mumbai, and the National Stock Exchange of India. 2010 Anand Rathi Financial Services Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited. Additional information on recommended securities/instruments is available on request.

Cement Sector Anand Rathi

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cement Sector Anand Rathi

Uploaded by

Copyright:

Available Formats

India I Equities

Cement Sector Report

India Cement Sector

Overweight Nifty/Sensex: 5110/17022

Macro Section Sujan Hajra

Jaspreet Singh Arora

Segmental use of cement

Anand Rathi Research

Cement Sector Report

India Cement Sector

Overweight Nifty/Sensex: 5110/17022

Jaspreet Singh Arora

Macro Section Sujan Hajra

Sensex vs Cement universe

Source: Company, Anand Rathi Research

PE: Grasim (Consol); Shree (Normalised)

India Cement Sector

Anand Rathi Research

Investment Argument & Valuation

Anand Rathi Research

180 160 140 120

Capacity Utilization (RHS)

Valuation methodology ten-year average EV/EBITDA

Anand Rathi Research

Fig 3 One-year-forward EV per ton vs replacement cost

Strong Balance Sheets and Cash flows

Source: Company, Anand Rathi Research

Anand Rathi Research

Fig 5 India cement sector Valuation matrix

9.7 10.9 10.5 5.7 6.2 5.2 121 104 94

13.8 11.8 10.3 8.2 6.8 5.2 155 123 111

10.8 11.9 11.1 5.9 6.2 5.5 112 108 102

10.7 15.0 8.9 6.4 8.4 5.8 84 80 78

6.7 6.6 5.2 4.8 5.0 3.4 128 103 83

5.1 5.8 5.0 2.9 3.3 2.7 73 58 46

6.9 5.5 4.5 4.9 3.6 3.1 46 43 42

5.4 5.5 5.0

Source: Anand Rathi Research #Consolidated PE, * Based on normalized EPS

14,222 13,800 3.1 14,812 12,710 16.5

14,259 12,115 17.7 16,300 12,703 28.3

9,971 8,926 11.7 10,669 9,560 11.6

2,216 2,825 (21.6) 3,741 3,209 16.6

8,005 7,302 9.6 9,599 8,544 12.4

4,836 4,840 (0.1) 5,676 5,288 7.3

2,005 1,718 16.7 2,446 1,818 34.6

23,930 20,443 17.1 26,755 23,430 14.2

Note: Grasim figures Consolidated Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

Cement & Macro Story: Concrete Base

Contribution of private consumption to GDP growth

Growth in private consumption

Fig 9 Strong growth in domestic savings

Fig 10 Household leverage on the rise

Per capita income - PPP

Per capita income -USD

Source: Government of India, World Bank and Anand Rathi Research.

Fig 12 Well dispersed income growth

Wage growth - unorganised sector

Contribution of investment to GDP growth

Fig 14 Manufacturing drove capex in FY03-08

Fig 15 Infra investments catching up

Anand Rathi Research

Changing absorption pattern: Cement a key beneficiary