Cement Sector

Cement - Overweight
Strong foundation!
Analysts: Niraj Agarwalla Email: niraj.agarwalla@tatacapital.com Tel: +91 22 6745 9164 Viral Shah Email: viral.shah@tatacapital.com Tel: +91 22 6745 9179
ISIEmergingMarketsPDF in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF. from 122.170.99.169 at 2012-03-29 01:43:07 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
20 March 2012 Downloaded by in-mascot1
Institutional Research
Cement
Overweight
Strong foundation!
Analysts: Niraj Agarwalla Email: niraj.agarwalla@tatacapital.com Tel: +91 22 6745 9164 Viral Shah Email: viral.shah@tatacapital.com Tel: +91 22 6745 9179
Cement
Over the past few years, Indian cement industry has fared reasonably well, with a EBITDA CAGR of ~8% over FY08-12E despite low demand, oversupply and cost pressures. Compared to previous down-cycles, the industry is more cost efficient now due to modernisation of existing facilities, addition of captive power plants and split grinding units and improvement in logistic facilities. Moreover, the strategy to regulate production to match demand has resulted in higher profitability. While the operating environment has improved in terms of demand growth, challenges remain due to oversupply and entry of new players. We believe that (a) good financial health (b) investment for cost savings and (c) production discipline would lead to mid-cycle profitability in the medium term. Thus we value the large cement companies at an EV/ton of US$150-170, a marginal premium over the replacement cost. Our top picks in the sector are Ultratech and Grasim in the large cap space and India Cement in the mid-cap space. Sector Update Company Update
Investment rationale
Demand growth picks up; to continue in medium term: We expect demand to improve in CY12 on account of (a) increase in the pace of infrastructure construction and pick-up in housing activity as interest rates begin to soften from 1QFY13 (b) pent up demand due to low base of FY11 & FY12. Utilisation levels to bottom out in FY12: Post ~60mn tons of new capacity getting added in FY11-12, we expect capacity additions to slow down. We estimate ~40mn tons of new capacity would be added over FY13-14. Along with a pick-up in demand, this would lead to utilisation rates bottoming out in FY12 at ~73% and thereafter improve to ~80% in FY14. Cost pressures to moderate: Cost pressures have been intense due to rising coal prices combined with increasing transportation costs. While the industry has been able to pass on costs over the last four quarters, high crude prices remain a concern and could lead to higher P&F, freight and packing charges. Pricing to remain strong in near term: The recent pickup in demand growth would help sustain the cement pricing strength. However, over the medium term, given the relatively low utilisation rates, demand growth and production discipline would be key to sustain the current strength in cement prices. Valuation summary
Rating Mcap Rs bn 252 258 253 32 100 406 CMP Rs 1,340 169 2,759 103 2,892 1,480 TP Rs 1,480 180 3,484 119 3,135 1,703 Upside (%) 10.4 6.9 26.2 15.7 8.4 15.1 P/E FY13E 17.6 16.6 9.6 9.4 22.9 18.0 FY14E 12.9 13.5 7.6 7.7 12.4 13.1 EV/EBITDA FY13E 9.5 9.1 3.9 5.9 8.2 9.0 FY14E 7.0 7.2 3.0 5.2 5.9 6.9 EV/Ton (US$) FY14E 145 161 NA 79 155 135.0 EBITDA mgn (%) FY13E 21.0 25.6 23.3 21.1 23.0 22.2 FY14E 23.9 27.2 24.9 21.2 28.8 24.1 RoE (%) FY14E 21.5 19.1 15.9 9.1 28.0 19.2
ACC Ambuja Grasim India Cem Shree Cem Ultratech
BUY HOLD BUY BUY HOLD BUY
* Figures for ACC and Ambuja are for CY12 and CY13, # priced on 16th March 2012
ISIEmergingMarketsPDF 20 20 March 2012 March 2012
in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF.
Downloaded by in-mascot1 from 122.170.99.169 at 2012-03-29 01:43:07 EDT. ISI Emerging Markets. Unauthorized Distribution Prohibited.
Cement
Valuation: Invest with a long term horizon

The cement industrys outlook has improved over the past few months and we expect the trend to continue over the medium term. In the long term, we expect demand growth to pick up in line with the GDP growth. Also, capacity additions would slow down, thereby pushing up utilisation rates and resulting in better pricing environment. The investments made for (a) debottlenecking/modernisation of old facilities, (b) new logistics facilities and (c) setting up captive power plants (CPPs) would lead to cost savings and superior profitability, when compared to previous down-cycles. Bunching up of capacities in FY10-11 and a slowdown in demand in FY11 and 1HFY12 had led to the industry going through a volatile period. Also, the current high interest rate regime had a negative impact on cement demand, as it directly impacts housing and infrastructure sectors. This was compounded by cost pressures such as (a) increase in freight cost, (b) rising coal cost (both domestic and imported) and (c) increasing cost of gypsum, fly ash and slag. We believe that most of the cost pressures have been factored in. We expect interest rate cycle to reverse from 1QFY13, thereby improving cement demand environment. Thus, in the long term, demand would catch up with supply, thus improving utilisation rates and profitability. Cost control efforts to support earnings: We note that the large players are taking steps to control costs by installing low cost CPPs and investing in alternative fuel technologies, jetty, cargo ships etc, while expanding capacity in line with demand growth. We do not expect earnings to decline significantly, unlike in FY99-02 when ACC and India Cement slipped into the red. Healthy balance sheet is a positive in a down-cycle: Cement companies balance sheets remain robust despite large capex; most of the capex for companies under our coverage has been done through internal accruals. Also, their leverage after capex is ~0.3x in FY11/CY10. Mid-cycle valuations: Cost controls and pass-through of costs to consumers would lead to cement companies earning mid-cycle margins over the next few quarters. A comparison of the industrys earnings in the last down-cycle (FY9598/FY00-02) and the present one (FY10-13) indicates that current earnings are higher. In contrast to EBITDA margins of 15-18% in the last cycle, we expect the companies to report EBITDA margins of 20-23% now; however, the current valuations are only marginally higher than the previous down-cycle after considering the increase in replacement cost.
20 March 2012 ISIEmergingMarketsPDF in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF.
Cement
Relative valuation
Mcap
(Rs bn)
P/E
FY13E FY14E
P/BV
FY13E FY14E
EV/EBITDA
FY13E FY14E
EV/ton (US$)
FY13E FY14E
EBITDA mgn (%)

FY13E FY14E
PAT mgn (%)

FY13E FY14E
RoE (%)
FY14E
Sales growth (%)

FY14E/FY13E
PAT growth (%)

FY14E/FY13E
Average ACC * Ambuja * Grasim India Cem Shree Cem Ultratech
217 252 258 253 32 101 406
15.7 17.6 16.6 9.6 9.4 22.9 18.0
11.2 12.9 13.5 7.6 7.7 12.4 13.1
2.5 3.1 2.9 1.3 0.7 4.0 2.8
2.1 2.6 2.5 1.1 0.6 3.1 2.3
7.6 9.5 9.1 3.9 5.9 8.2 9.0
5.9 7.0 7.2 3.0 5.2 5.9 6.9
144.1 150.2 169.1 NA 79.5 159.3 162.5
135.0 144.6 161.0 NA 78.9 155.5 135.0
22.7 21.0 25.6 23.3 21.1 23.0 22.2
25.0 23.9 27.2 24.9 21.2 28.8 24.1
10.8 12.7 16.0 10.0 6.7 8.1 11.3
12.9 15.1 17.3 10.7 7.3 13.8 13.0
18.8 21.5 19.1 15.9 9.1 28.0 19.2
14.4 14.8 13.2 17.7 12.1 9.1 19.3
38.4 36.8 22.5 26.3 22.2 85.7 37.1
* Figures for ACC and Ambuja are for CY12 and CY13, # priced on 16th March 2012
Source: Tata Securities Research.
Thus we value the large cement companies at an EV/ton of US$150-170 and EV/EBITDA of 6-8x. Hence, we are optimistic, albeit with caution, on the cement sector and our top picks in the sector are Ultratech and Grasim in the large cap space and India Cement in the mid-cap space. Recommendation summary
Company ACC Ambuja Cement Grasim India Cements Shree Cement Ultratech
Source: Tata Securities Research.
Rating BUY HOLD BUY BUY HOLD BUY
CMP (Rs) 1,340 169 2,759 103 2,892 1,480
TP (Rs) 1,480 180 3,484 119 3,135 1,703
Upside (%) 10.4 6.9 26.2 15.7 8.4 15.1
Valuations not factoring in improvement in operating performance

350 300 250 200 150 100 50 0
Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
(US $)
(US $)
45 40 35 30 25 20 15 10 5 0
16 14 12 10 8 6 4 2 0
(x)
(%)
40 30 20 10 0
EV/ton - LHS
EBITDA/ton - RHS
Cumulative data for the five pure play cement companies under coverage Source: Bloomberg, Company data, Tata Securities Research.
Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
EV/EBITDA - LHS EBITDA margin - RHS
Cement
Table of contents
Cement Sector
Investment rationale.................................................................... Demand growth to recover gradually............................................. Surplus capacity to persist for a while......................................... Pricing to remain volatile............................................................... Cost pressures impact profitability................................................. Conclusion................................................................................... Annexure I Capacity additions................................................... Annexure II Region wise demand supply balance................... 5 5 9 14 15 18 19 20
Company Section
ACC.............................................................................................. Ambuja Cement............................................................................ Grasim......................................................................................... India Cements............................................................................. Shree Cement............................................................................. Ultratech Cement........................................................................ 21 28 35 43 50 57
Cement
Investment rationale
Demand growth to recover gradually
We expect demand to recover gradually over CY12. On the back of a good monsoon, going forward, we expect rural demand to be robust, aided by real estate demand from Tier II and III cities. We also expect a pick-up in real estate activity in the National Capital Territory (NCR) and Bangalore towards 2HCY12, which could drive cement demand. On the flip side, infrastructure demand has been low due to the current political environment. We believe a pick-up in the infrastructure sector would be gradual and evident only in 2HFY13. Recent pick-up in demand growth to sustain in medium term
14.0 12.0 10.0 8.0 6.0 4.0 2.0 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 3.3 4.0 0.6 2QFY12 3QFY12 Jan-12 Feb-12 12.2 11.2 9.3 8.6 6.7 5.5 6.5 10.2 11.2 11.1 (mn tons)
Source: CMA, Company data.
In the long term, demand posted a healthy CAGR of 8.3% in the past 15 years (FY97-11). Excluding a blip in FY01, cement demand witnessed a secular growth, increasing from ~65mn tons in FY96 to ~210mn tons in FY11. Domestic cement demand had been extremely robust in the five-year period (FY06-10), with a CAGR of 10%. However, a decline in exports over the past five years has slightly subdued the cement despatch CAGR to 9.4%. Cement demand follows GDP growth Cement demand is directly related to the growth of an economy. In the past 15 years, cement demand grew at an average of 1.2x GDP growth rate; cement demand posted a CAGR of 8.3% during FY97-11, while GDP grew by 7.1%. Going forward, we expect cement demand to gradually pick up, mainly from the organised real estate and infrastructure sectors.
Cem ment
Cem ment deman tracks GDP growth by avg. 1.2 nd G h 2x

3.0 3 2.5 2 2.0 2 1.5 1 1.0 1 0.5 0 0.0 0 -0 0.5 -1 1.0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 173 India (x)
Cement growth / GDP growth
Average
Sourc CMA,CSO, T ce: Tata Securities Research. R
We estimate tha GDP would grow in t at the range of 7-8% over the next tw to f wo thre years. On the back of this, we be ee f elieve cemen demand would grow b 8nt w by 10% over the medium term; per cap % pita cement consumptio in India still t on remains one of t lowest in the world. the n west per cap pita consum mption glob bally (2010 0) Low
1,800 (kgs/per rson) 1,340
1,350
900
840
730 7 475 440 310 210 0
450
0 Japan Iran Turkey China World Brazil USA
Sourc Industry dat ce: ta.
Hou using: Still the large consum est mer

Hou using sector c continues to be the large consumer of cement, with 60-65% of est , % the sales being consumed by residentia real estate While infrastructure is the b al e. s seco ond biggest consumer of cement wi ~20% sh o ith hare, comme ercial real es state and corporate ca apex make up for the balance. u
20 March 2012 0 ISIEmergingMarketsPDF in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF.
Cem ment
Seg gment-wise breakup of cement demand e o

100 1 (%) 75 20 10 15 20
50 70 25 65
0 2005 Industrial Sourc Industry dat ce: ta. Infrastr ructure 2010 Housing
In o view, du to the go our ue ood monsoon last year, demand fro rural hou n om using wou uld be stron ng. Also, co onsidering t the housing shortage in the country, g resid dential real estate would continue to be the la argest consu umer of cem ment. Acco ording to XIt Five Year Plan docume th P ents, there is a housing shortage of 4 s s 47mn units in the rura areas and ~25mn unit in urban a al ts areas. Hence going forw e, ward, orga anised real estate players are plannin aggressive development. s ng e
Infrastructur sector to keep cem re o ment demand strong g

The Governmen has laid out an expan nt nsive outlay for the XIIth Five Year Plan h (201 12-17) for in nfrastructure developmen with an in nt, nvestment ta arget of US$ $1trn acro oss different sectors; also, there would be s t a spill over fr rom XIth p plans infra astructure investment. Thus, we expect infrastructure segme to be the key ent e drive for cement demand over the me er edium term, and it would increase f from ~20 currently to 26-28% in the next fi years. 0% i ive Infr rastructure developme to get a boost in the XIIth pla e ent an
1,200 1,000 800 600 400 227 200 0 X th Plan XI th Plan XII th Plan h 514 (US$ bn n)
1,0 000
Sourc ce: Planning Co ommission
Cem ment
Duri ing FY12, infrastructur sectors demand wa low, co re as ompared to our expe ectations. This was due to lower order inflow consider e ws, ring the cur rrent polit tical situatio and due to increasing gestation period of projects--higher on, n shar of project are comin on a PPP basis. Going forward, we believe th a re ts ng g w hat pick k-up in infra astructure in nvestment w would be g gradual and expect cem ment dem mand to pick up at a modest rate in FY Y12.
Exp ports to be minimal e

Cem ment exports including clinker, hav declined in the past six years--f s, ve from 10.1 1mn tons (in ncluding clink of 6mn ton) in FY05 to ~4.2mn tons (inclu ker 5 n uding clink of ~2.6m ton) in FY11. The p ker mn F primary reaso for a de ons ecline in exp ports were (a) improv e ved realisations in the d domestic ma arket and (b an oversu b) upply situa ation in the M Middle East region. India companies used to ex an xport cement and t clink to the M ker Middle East as construct tion activities touched at a peak du a uring FY03 3-08. Dec clining cement exports s
12 2.0 10 0.0 8 8.0 6 6.0 4 4.0 2 2.0 0 0.0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 (mn tons s)
Cement Ex xport Sourc CMA ce:
Clink Export ker
Cement
Surplus capacity to persist for a while

The Indian cement industry has witnessed significant capacity addition from the beginning of FY08; new capacities of ~140mn tons were added over FY08-11. In comparison, cement demand grew by only ~55mn tons over the same period. This led to capacity utilisation declining from 96% in FY08 to less than 85% in FY10. The bunching of capacity additions towards 2HFY10 and a subsequent ramp-up in production in FY11 led to further pressure, with utilisation levels falling to ~77% in FY11. In the past 20 years, cement demand always showed a positive growth (except in FY01), with a CAGR of 8.2% from FY93-11. On the other hand, cement capacity addition tended to happen in a bunched up manner. Improved profitability in an up-cycle prompted players to set up new capacities; the bunching of capacities lead to a decline in utilisation levels, thereby exerting pressure on realisations and profitability. Cement industry: Capacity utilisation to improve gradually
(mn ton) Year end capacity Effective Capacity Production Capacity utilization (%) Domestic Demand Exports (net of imports) Total Demand FY05 154 152 128 FY06 160 158 142 FY07 166 166 155 FY08 189 176 168 FY09 218 205 181 FY10 264 241 201 FY11 292 273 211 FY12E 313 302 222 FY13E 333 317 240 FY14E 355 332 263
84.1
123 4 127
90.0
136 6 142
93.8
149 6 155
95.8
164 4 168
88.3
178 3 181
83.2
197 3 200
77.1
207 2 209
73.6
220 2 222
75.6
238 2 240
79.3
261 2 263
Growth (%)
Surplus / (Deficit) over demand
8.5
25
11.4
16
9.4
11
8.2
8
7.9
24
10.3
42
4.9
64
6.2
80
7.8
78
9.9
69
As % of Effective Capacity
Source: CMA, Tata Securities Research.
16
10
12
17
23
26
24
21
More than 85mn tons of capacity addition in FY10-11

Due to cement companies highly improved free cash generation and optimum levels of utilisation during FY07-10, the industry announced extremely aggressive capacity expansion plans. Capacity additions during FY08-11 of 138mn tons (CAGR of 17%) far outpaced the additions witnessed by industry in the past 15 years; this led to a sharp decline in capacity utilisations from 96% in FY08 to 77% in FY11. We expect a surplus capacity scenario to persist for some time as the industry ramps up new capacities of ~60mn tons added in FY11-12. Thus, the ramp-up of capacities added in 2HFY11 and FY12 would exert pressure on capacity utilisations over the next three to four quarters.
Cem ment
Cap pacity addit tion: FY08-1 beats pa 15-year additions 11 ast r

50 0.0 45 5.0 40 0.0 35 5.0 30 0.0 25 5.0 20 0.0 15 5.0 10 0.0 5.0 5 0.0 0 FY12E FY13E 22 FY14E 50 45 40 35 29 28 21 20 30 25 20 15 10 5 0 FY09 FY10 FY11
Capacity
(mn tons s)
46
29 23 15 1 9 9 6 9 3 5 7 8 6 5
28 21 20 22
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Sourc CMA, Indust data, Tata Securities Research. ce: try S
Duri ing FY12, major capaciti were add by Jaipra ies ded akash Assoc ciates (~9mn ton n acro various l oss locations), ABG group ( A (3.5mn ton in Gujarat), Madras Cem ment (2m ton in Ta mn amil Nadu) etc to hit th market in FY12. In FY13, we ex e he n F xpect capa acity addition from JSW group (3mn tons in AP) JK Lakshm (2.7mn ton in n n ), mi ns Chhattisgarh) am mong others.
Cap pacity addition grow to tape down... wth er

On t back of a difficult op the perating scen nario in the p past two years, some cem ment com mpanies have deferred/c e cancelled the expansion plans. Als we expe a eir so, ect dela of at least two to thre quarters t commissio and ramp up some of the ay t ee to on p f new capacities. Thus, going forward, w believe th pace of ca w g we he apacity addit tions wou slow dow with peak capacity ad uld wn, k dditions bein done over FY10-11. T ng r Thus, we estimate add ditions of 21 1mn tons, 20 0mn tons an 22mn ton in FY12, F nd ns FY13 and FY14 respec ctively (a CAG of 7%). GR Cap pacity addit tion: FY08-1 beats pa 15-year additions 11 ast r
350 0 300 0 250 0 200 0 150 0 100 0 50 0 0 FY12E
Addition
FY11
(m tons) mn (mn tons) 46
FY13E
FY14E F
10 0
Cem ment
...le ead to an i improveme in utili ent isation lev vels from FY13 F
Historically, the industry wid capacity utilisation ha been in the range of 78de as t f 84% depending on the position in th commodi cycle. In FY11, capacity %, g he ity n utilis sation declin to 76%, from a peak utilisation level of 90-9 ned k 95% in FY06 6-09. In o view, the situation would reverse from FY13 when the capacity add our e w e 3 c dition grow slows do wth own. Hen nce, we estim mate a capa acity addition CAGR of 6 n 6.5% over FY11-14, aga F ainst whic the cemen demand is assumed to post a CAG of 8%. Th would lea to ch nt s o GR his ad an improvement in capacity utilisation; w expect ca t we apacity utilisa ations to imp prove from 74% in FY1 to 76% and 80% in F m 12 FY13 and FY1 respective 14 ely. Utilisation to b bottom out in FY12
300 0 250 0 200 0 150 0 77.1 100 0 50 0 0 FY09 FY10 FY11 Pro oduction FY12E Y13E FY FY14 4E 60.0 73.6 75.6 70.0 88.3 83.2 79.8 80.0 90.0 (mn tons) (%) 100.0
Capacity Utilisation
Market conso olidation, the way fo t orward...

Cem ment industry in India has been highl fragmente with more than 80 pla y ly ed e ayers in operation. The fragmented market structure has a e d also led to a sharp volatili in s ity cem ment prices, mainly duri ing industry down-cycle The top five compa y es. anies cont trol only ~50 of the ce 0% ement marke Except fo Holcim pic et. or cking up maj jority stak kes in ACC and Ambuj Cements, and Grasi ja , im acquiring L&Ts cem g ment busi iness, there w were no maj consolida jor ations in the industry. Thu over the past us, six y years, marke share of th top six pla et he ayers was in the range of 53-57%. f Imp proving market share of top five players
(% %) ACC C Ambuja India Cem JP A Asso Shr Cem ree Ultr raTech Tot tal FY Y06 13.2 1 11.5 1 6.0 4.4 2.3 20.3 2 57.7 5 FY07 7 12.0 0 10.7 7 5.6 6 4.3 3 3.1 18.8 8 54.5 5 FY08 12.0 10.3 5.5 4.1 3.8 18.2 53.9 FY09 11.6 9.9 5.0 4.2 4.3 17.7 52.8 FY10 10.6 9.6 5.3 5.3 4.7 18.4 53.9 FY11 F 10.4 9.8 4.9 7.0 4.5 18.2 54.8 YTD Y FY Y12 10.9 9.7 4.8 8.0 4.8 17.7 55.9 5
Sourc CMA, Tata S ce: Securities Resea arch.
11 1
Cement
During the last four years, most of the small/marginal players expanded in a big way. Though a few players diversified into other regions, most of the smaller players consolidated in their present region of operations. This led to increased consolidation at the regional level, with the top five companies increasing their market share.
...high price expectations - big hurdle

In our view, a better market stability could be achieved only through industry consolidation; however, the obstacle has been the high exit price expectations of willing sellers. Our interactions with industry players suggest that even in the current down-cycle, sellers are expecting a price realisation in excess of US$150/ton. This is in comparison to the replacement cost of ~US$120/ton. Given the high growth expectation in the Indian market, most of the foreign cement companies were keen to acquire cement units in India. But barring Holcim, none of the global cement majors were able to garner a significant market share in the Indian market. Historical M&A deals in the Indian cement industry
Acquirer Jaiprakash Associates KKR Vicat CRH Plc Cemex Heidelberg ItalCementi Holcim Holcim Grasim industries Acquired Andhra Cement Dalmia Cement Bharathi Cement My Home Industries Shree Digvijay Mysore cement Zuari cement Ambuja Cement ACC L&T Cement 100 175 210 160 93 80 227 129 80 EV/ton (US$) Year 2011 2010 2010 2008 2007 2006 2005 2006 2005 2003
Source: Industry Reports, Tata Securities Research.
12
Cem ment
Reg gional fact tors play a big role

Regional dynam mics play an important role in the context of Indian cem n e f ment indu ustry. As limestone (key raw materia for cemen is availab only in a few al nt) ble clusters, most o the cement plants are located arou these lim of und mestone clus sters. Also moving cem o, ment beyond 400-500km becomes u d ms unviable due to the high cost e of transport and it cannot be stored fo a longer p d b or period. Ther are seven key re lime estone clust ters in the country--C Chandoria (R Rajasthan), Satna (Mad dhya Prad desh), Bilaspur (Chhatt tisgarh), Ch handrapur ( (Maharashtra a), Yerrangu untla (And dhra Pradesh Nalgonda (Andhra Pra h), a adesh) and G Gulbarga (Karnataka).
Sou India c uth continues to be the w weak link

Trad ditionally, So outh India alw ways constit tuted ~30% of the all-In ndia capacity due y to the high lime estone reser rves in Andh Pradesh and Karnata hra aka. Howeve in er, the past couple of years its share rose and is ~40 currently Over the past s e 0% y. thre years, Sou India wi ee uth itnessed cap pacity additio of ~50m tons, the ons mn ereby doubling the tota capacity of the region to ~116mn tons in FY12 In comparison, al o 2. all t the other reg gions cumulatively adde ~46mn to of new capacities in the ed ons n past three years which led to a huge ov t s, t versupply situ uation, mainl in South In ly ndia. Curr rently, most of the plants in South In s ndia are ope erating at cap pacity utilisat tions of 50-65%, agai inst an all-India average of ~74% in FY12. gion-wise segregation of capaciti FY12 ies Reg
North 21%
West 15%
Centra 2% al,
Eas st 13% %
South 39%
Goin forward, w believe South India w ng we S would contin to witness low utilisa nue ation leve on the ba of (a) ex els ack xcess capacit and (b) lo demand growth; dem ty ow mand grow in South India is exp wth pected to con ntinue on a w weak note un demand f ntil from AP r recovers. Th hus, we expe South In ect ndia to witne flat dema ess and in FY12 and grow of 6% in FY13 respec wth n ctively. In o other regions we expect demand in N s, North India t remain mu to uted and rec cover in F FY13, with a recovery in organised real estate. West and East India w n E would cont tinue to repo a good demand grow on the b ort d wth back of heigh htened econo omic activ vities in the states of Gujarat, Ma e aharashtra, Bihar, Jhark khand and W West Bengal.
13 3
Cem ment
Pri icing to remain volatile

Thus, cement p prices would continue to remain vola atile over the next year. The e curr rent oversup pply scenario and low demand growth has led to capacity utilis sations being at ~74-77 levels. H 7% Historically, w have see that capacity we en utilis sations below 78-80% have always led to a wea cement pricing marke In w ak et. the current mark most of the cement producers ar trying to match produc ket, re m ction with demand, thereby cou h untering a w weak pricing scenario. The produc g ction discipline mainta ained by the industry (m e mainly in South India) in ncreased cem ment price by 13% o es over the past twelve months. t Cem ment prices have recov s vered over the past fo quarters our s
30 00 27 75 25 50 22 25 20 00 17 75 Sep-09 Nov-09 Sep-10 Nov-10 Sep-11 Nov-11 Jan-09 Jan-10 Jan-11 May-10 May-11 Mar-09 May 09 May-09 Mar-10 Mar-11 Jan-12 325 10.2 12.8 15.3 17.9 20.4 Jul-09 Jul-10 J l 10 Jul-11 (Rs/bag)
Sourc Crisil Resear ce: rch, Tata Securi ities Research.
We expect FY13 to be bette in terms of demand gr 3 er f rowth due to the low bas of o se both FY11 & F h FY12 and a marginal im mprovement in rural an infrastruc nd cture dem mand. On the back of this we expect cement pric to remain stable over the e s, t ces n r next two quart t ters. In our view, the stability in cement prices wo r e t ould dep pend on a pick-up in demand g n growth and the sust d tenance of the production dis scipline, mainly in S m South India As the average capacity a. a utilis sation in Sou India sta uth ands at 60-6 65%, most o the new players/plants are of s oper rating at ~5 55% utilisat tion. At thes utilisation levels, the companies are se n e s gene erating single digit RoCE with margin profits. e nal RoC to remain low till ut CE tilisation ra improve ate es
225 Utilisation rate 40% 50% 60% 70% 80% 2.1 2.6 3.2 3.7 4.2 Cement price (Rs/bag) es 250 275 4.1 5.2 6.2 7.2 8.3 6.2 7.7 9.2 10.8 12.3 300 8.2 10.2 12.3 14.3 16.4
Sourc Tata Securit ce: ties Research.
Thus, in our vi iew, until demand picks up and le s eads to an improvemen in nt capa acity utilisation, the exis sting produc ction discipline would co ontinue. Cem ment price after reg es, gistering a sh harp decline in 2QFY12, have risen in most regi ions; Sout India cem th ment prices re emained stab over the past four to five quarters ble s.
14 4
Cem ment
Co press ost sures impact pro ofitabilit ty

On the cost fro ont, cement manufacture are bein impacted from the r ers ng rising inpu and logisti cost. Pow & fuel (P ut ics wer P&F) cost, which constitu utes ~22-25% of % the total cost o productio is causin the majo dent. Though P&F c of on, ng or costs incre eased over the years, the astronomical increa ase over pas three to four st quarters was due to coal prices (both domestic a h and imported). Rising c crude price have also led to an inc es crease in freight and pac cking costs. Cos st/ton has increased by 10.5% CA b AGR over F FY07-FY11
4,0 000 3,2 200 2,4 400 1,6 600 800 8 0 FY07 FY08 FY09 F FY10 FY11 FY Y12E FY13E FY14E 2,245 1,948 2, ,531 2,552 (Rs/ton n) 2,909 3,519 3,607
3,320 3
Sourc Companies d ce: data, Tata Secu urities Research. .
Coa cost beco al oming unma anageable Mos cement co st ompanies hav long term supply con ve m ntracts for co to meet their oal kiln and captive power requ uirements. Co oastal plants also have the advantag of s t ge impo orting coal p primarily from Indonesia and South A m Africa. Total coal reserve in es India are estima ated at 264bn tons and Coal India controls nearly 85% of the d f curr rent coal pro oduction in In ndia. Around 70% of the total coal consumed in the d e c n India is by the p power sector, while the ce , ement sector consumes ~5% of the total cons sumption. Ac ccording to Crisil, the ce ement indus stry would re equire a tota of al 142mn tons of c coal over FY1 12-15. al he ee Coa requirement over th next thre years
45 5 36 6 27 7 18 8 9 0 FY10 Sourc Crisil Resear ce: rch. FY11 FY12 FY13 FY14 FY15 25.6 27.9 (mn tons) 31 34.2 39.9
37
15 5
Cem ment
Rece ently, the pr roportion of linkage coal to cement industry has been decli ining due to Coal In ndias inabilit to increa ty ase productio This res on. sulted in higher prop portion of co procureme through (a) e-auction and (b) im oal ent mports; it also led o to h high coal cos inflation fo the indust st or try. In Mar11 Coal India hiked price by 1, a es 30% thus furthe increasing the coal cos inflation. %, er g st P&F cost on an uptrend F n
1,200 (Rs/ton) 1,000 800 600 400 200 0 ACC C Amb buja FY10 Ind Cem dia FY11 F Shree Cem FY12E Ultratech
In th past, indu he ustry importe ~5mn ton of coal, p ed ns primarily thro ough coast-based cem ment plants. In conjunction with the high crude prices and increased global dem mand for non n-coking coa imported coal prices were ruling above US$100al, 110/ /ton for the past three to four quarte o ers. Impo orted coal p prices
140 (US$/ton) 120 100 80 60 40 20 Nov-09 Nov-10 Nov-11 Jul-09 Mar-09 Jul-11 Jul 10 Jul-10 Mar-10 Mar-11 Mar-12
Balt dry freig index tic ght

5,0 000 4,5 500 4,0 000 3,5 500 3,0 000 2,5 500 2,0 000 1,5 500 1,0 000 500 5 0 Jun-09 Jun-10 Dec-09 Sep-10 Dec-10 Jun-11 Sep-11 Dec-11 Mar-10 Sep 09 Sep-09 Mar-09 Mar-11 Mar-12 (US$)
Source Bloomberg. e:
16 6
Cem ment
Pro ofitability t improve to e

Goin forward, we believe that the cem ng ment compa anies would report mid-c cycle oper rating margi ins. The rece improvement in dem ent mand outlook has led to the o play yers passing on the cost inflation. Ho owever, given the low utilisation scen n nario, we believe that significant price increase from here p es e-on would not happen. Until n oper rating rates improve, cem ment produc cers would not have the pricing powe to er earn the profitab n bility witness during FY sed Y07-09. EBI ITDA margin to improv with upt ve tick in dema and
1,400 1,200 1,000 800 600 400 200 0 ACC C Amb buja FY Y11 India Cem FY12E FY13E Sh hree Cem FY Y14E Ultratech (Rs/ton)
Cem ment companies return ratios hav been tre n ve ending dow wnwards due to e incre easing capita cost and declining pr al rofitability. W estimate that they w We would gene erate averag RoEs of 14-15% over FY12-13 and improving it to ~18% in ge 1 % FY14 4. RoE to impro as utilis Es ove sation incre eases over F FY13-14
40 0.0 (%)
30 0.0
20 0.0
36.7 26.6 24.1 14.3 15.5 16.5
10 0.0
19.5
0.0 0 FY08 FY09 FY10 Y11 FY FY12E E FY13E FY14E
17 7
Cement
Conclusion
In our view, cement demand would see a recovery with a cement despatch growth over the next few months. This will be aided by the (a) low base of FY11 & FY12 and (b) uptick in demand from rural and infrastructure segments. Demand from South India has shown signs of recovery primarily due to the low base impact of last two years. Andhra Pradesh (the biggest cement consuming state) has shown signs of an improvement with double digit demand growth in the last three months. However, given the low growth in early FY12, we estimate demand growth to be at a subdued level of 6.2% in FY12; this would lead to capacity utilisations declining to 73%. According to our house view, the rising interest rate cycle would reverse in FY13, leading to an improvement in execution cycle in infrastructure and real estate segments. Thus, we expect cement demand to improve in FY13 as execution improves in both infrastructure and organised real estate sectors. Hence, we assume a cement demand growth of 7.8% and 9.9% in FY13 and FY14 respectively. This would lead to an improvement in capacity utilisations to the level of 76% and 80%. On the other hand, the pace of new capacity additions would slow down. We estimate that ~40mn tons of new capacity would be added, indicating a CAGR of 6% over FY12-14. Thus, we assume the industry shall have an effective capacity of 317mn tons and 330mn tons in FY13 and FY14 respectively. In contrast to this, industry would see despatches of 240mn tons and 263mn tons in FY13 and FY14 respectively, indicating an oversupply of 20-24% of total capacity. We expect capacity utilisations to be at 76-80% during FY13-14.
Sensitivity analysis
According to the base case scenario, we have assumed domestic demand would grow at 7.9% and 10% in FY13 and FY14 respectively. We expect export volumes to remain flat at 2mn tons in FY12-14 and industry-wide capacity utilisations at 74%, 76% and 80% in FY12, FY13 and FY14 respectively. We have done a sensitivity analysis to assess the impact of demand growth on (a) capacity utilisation and (b) surplus scenario. If infrastructure activity picks up with an improvement in real estate segment, cement demands growth could increase to 10% p.a. If this happens, given the declining rate of capacity expansion, industry utilisation levels would increase from our estimate of 75.6% to 77.1% in FY13, an improvement of ~150bps. Demand growth key to reduce supply pressure
(as % of capacity) Demand growth 8% 10% 12% Utilization Surplus Utilization Surplus Utilization Surplus FY13 75.7 32.1 77.1 29.7 78.5 27.4 FY14 78.5 27.3 81.5 22.8 84.5 18.4
18
Cement
Annexure I - Capacity Additions

Demand growth key to reduce supply pressure
Capacity Additions mn tons Ultra cement ACC Ambuja JP Associate India Cement Shree Cement Madras Cement Dalmia Chettinad Century textile Jk Cement Kesoram Lafarge Penna Cement Binani Birla Corp Prism OCL JK Lakshmi Orient Paper Rain Commodities Zuari My home Inds. Heidelberg Mehta Group Sanghi Mangalam Andhra Cements CMCL KCP Ltd ABG Cement JSW Others Total Source: CMA, Tata Securities Research. Mar-11 48.8 30.6 27.0 21.5 15.0 13.4 12.7 9.0 8.4 7.8 7.5 7.3 6.6 6.5 6.3 5.8 5.6 5.3 5.1 5.0 4.0 3.4 3.2 3.1 2.7 2.6 2.0 1.4 1.1 0.7 12.7 291.9 FY12E 8.5 2.0 1.9 1.5 1.5 3.3 2.5 21.2 FY13E 2.5 2.2 1.8 2.7 2.9 1.9 3.0 2.7 19.6 FY14E 9.2 5.1 2.6 2.1 3.0 22.1 Mar-14 58.0 30.6 27.0 34.4 15.0 13.4 12.5 9.0 12.8 11.8 9.7 7.3 8.7 6.5 6.3 9.3 5.6 5.3 7.8 5.0 4.0 3.4 3.2 6.0 2.7 2.6 2.0 1.4 3.0 2.2 3.3 3.0 22.2 354.8
19
Cement
Annexure II Region wise demand supply balance

Demand growth key to reduce supply pressure
Northern Region Dynamics FY07 Effective Capacity Production Capacity Utilization Demand 33.3 32.1 103% 29.9 FY08 36.9 37.4 107% 33.5 FY09 48.5 41.2 96% 35.1 FY10 52.6 46.5 92% 38.6 FY11 58.5 50.1 90% 40.9 FY12E 63.5 55.0 90% 45.4 FY13E 64.8 60.2 94% 49.1 FY14E 65.0 66.0 102% 54.5
Growth (YoY)
Surplus / (Deficit)
10.3%
1.4
12.1%
1.6
4.7%
7.6
10.0%
11.9
6.0%
14.6
11.0%
15.6
8.0%
3.0
11.0%
-3.0
% of capacity
4.1%
FY07
4.3%
FY08 56.3 53.8 99% 48.7
17.8%
FY09 65.1 59.7 98% 53.8
23.6%
FY10 90.1 66.4 86% 58.6
26.3%
FY11 104.7 66.1 68% 58.8
25.5%
FY12E 116.6 64.4 58% 57.6
4.7%
FY13E 122.6 68.4 57% 61.6
-4.6%
Southern Region Dynamics Effective Capacity Production Capacity Utilization Demand 52.3 50.0 98% 44.0 128.4 75.4 60% 67.8
Growth (YoY)
Surplus / (Deficit)
15.5%
1.7
10.6%
0.2
10.5%
1.0
9.0%
13.6
0.3%
32.3
-2.0%
46.2
7.0%
50.0
10.0%
48.2
% of capacity
3.4%
FY07
0.4%
FY08 26.8 23.9 92% 25.3
1.6%
FY09 31.3 26.0 90% 28.2
17.5%
FY10 33.4 28.4 88% 33.0
33.2%
FY11 34.4 31.2 92% 36.6
41.8%
FY12E 38.0 32.8 90% 38.1
41.8%
FY13E 41.2 35.7 90% 41.9
38.4%
Eastern Region Dynamics Effective Capacity Production Capacity Utilization Demand 25.0 21.8 89% 23.9 42.2 40.0 96% 46.5
Growth (YoY)
Surplus / (Deficit)
5.8%
0.6
6.0%
0.6
11.4%
0.8
17.0%
-0.7
11.0%
-2.7
4.0%
-1.9
10.0%
2.9
11.0%
0.3
% of capacity
2.4%
FY07
2.1%
FY08 29.9 28.7 96% 32.7
2.9%
FY09 32.5 28.5 91% 34.5
-2.0%
FY10 35.3 30.9 91% 37.6
-8.1%
FY11 39.4 32.2 86% 40.2
-5.3%
FY12E 44.9 36.4 86% 45.8
7.4%
FY13E 46.4 39.7 87% 49.0
0.6%
Western Region Dynamics Effective Capacity Production Capacity Utilization Demand 29.6 27.3 92% 28.3 48.0 43.3 92% 53.4
Growth (YoY)
Surplus / (Deficit)
9.3%
1.3
15.6%
-3.0
5.3%
-3.3
9.0%
-3.7
7.0%
-2.8
14.0%
-3.7
7.0%
4.9
9.0%
2.4
% of capacity
4.4%
FY07
-10.0%
FY08 25.8 25.0 98% 23.8
-10.5%
FY09 28.2 26.0 96% 26.2
-10.8%
FY10 29.8 28.4 98% 29.1
-7.6%
FY11 36.2 31.0 94% 30.9
-8.7%
FY12E 39.2 33.7 89% 33.3
10.8%
FY13E 42.1 35.7 88% 36.0
5.1%
Central Region Dynamics Effective Capacity Production Capacity Utilization Demand 25.3 24.0 95% 22.4 46.6 38.9 88% 39.3
Growth (YoY)
Surplus / (Deficit)
8.7%
2.8
6.1%
1.8
10.4%
0.8
11.0%
-0.1
6.0%
2.1
8.0%
4.4
8.0%
3.9
9.0%
4.0
% of capacity
10.9%
FY07
6.9%
FY08 176 169 96.1% 168
2.8%
FY09 206 181 88.2% 181
-0.4%
FY10 241 201 83.2% 199
6.4%
FY11 273 211 77.1% 209
11.6%
FY12E 302 222 73.5% 222
9.7%
FY13E 317 240 75.6% 240
9.0%
All India Dynamics Effective Capacity Production Capacity Utilization Total Demand 166 155 93.8% 154 330 263 79.8% 263
Growth (YoY)
Surplus / (Deficit)
10.0%
7
8.6%
3
8.0%
10
10.2%
24
5.0%
48
6.2%
65
7.8%
70
9.9%
60
% of capacity
4.3%
1.7%
4.7%
9.9%
17.5%
21.6%
22.1%
18.2%
20
ACC
Buy
CMP: Rs 1,340
Target Price: Rs 1,480 Potential Upside: 10%
Key Statistics
M cap (INR bn/USD mn) : 251.6/5,012 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 346,940 : US$8.6mn : 188 : ACC.BO : ACC IN : 17,466 : 5,318 : 1,422/918
ACC
Capacity ramp-up leads to market share gains
ACC Ltd (ACC) would benefit from the strong volume growth due to a ramp-up in its Karnataka and Maharashtra expansions. We estimate the company would post a volume growth of 8.5% in CY12 and 8.2% in CY13, which would result in it maintaining its market share. ACC has recently announced plans to expand capacity by adding a new clinker capacity of 2.8 mn tons in Jamul, Chhattisgarh. Given its strong balance sheet with net cash of ~Rs24bn, it would be able to expand through internal accruals. We estimate it would post strong earnings CAGR of 34% over CY11-13. The stock currently trades at CY13 EV/ton and EV/EBITDA of US$145 and 7x respectively. We rate the stock as Buy with a target price of Rs1,480. Company Update
Key highlights
Strong volume growth in medium term: ACC would post strong volume growth in CY12 and CY13 on the back of a ramp-up in its Karnataka (3mn tons) and Maharashtra (3mn tons) expansions; this would result in utilisation rates of 84% and 90% in CY12 and CY13 respectively. Due to the strong volume growth, we expect the company to post revenue CAGR of 15% over CY11-13. Strong balance sheet to help tide over down-cycle: ACC is comfortable with a net cash of ~Rs24bn as on CY11 end. Compared to this, in the last downcycle, it had a net debt-to-equity ratio of ~1.3x. It has recently announced a clinker capacity addition of 2.8mn tons in Chhattisgarh along with split-grinding units. We believe the company would be able to comfortably fund this expansion through internal accruals. Merger with Ambuja Cement to take some time: We believe the merger of ACC and Ambuja Cement would take some time. According to our interaction with the management, Holcim is streamlining the integration issues and thus the merger would take at least four to six quarters to be complete. Valuation and recommendation: The stock trades at CY12 and CY13 EV/EBITDA of 9.5x and 7x respectively and at CY13 EV/ton of US$145. We value ACC at an average of CY13 EV/EBITDA of 8x and EV/ton of US$160 to arrive at a target price of Rs1,480, indicating an upside of 10% from the current levels. We rate the stock as Buy.
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 160 140 120 100 80 60 Aug-11 Mar-11 May-11 Mar-12 Oct-11 Jan-12 ACC
50.3 17.3 13.2 19.2
Sensex Analysts:
Niraj Agarwalla Email: niraj.agarwalla@tatacapital.com Tel: +91 22 6745 9164 Viral Shah Email: viral.shah@tatacapital.com Tel: +91 22 6745 9179
Financial summary
Year-end December CY2010 CY2011 CY2012E CY2013E Sales (Rs mn) 79,113 96,603 112,818 129,556 YoY EBITDA YoY (%) (3.4) 22.1 16.8 14.8 (Rs mn) 19,207 23,663 30,926 NP YoY (%) 7.5 30.3 36.8 EPS (Rs) 54.3 58.3 76.0 104.0 YoY (%) 7.5 30.3 36.8 PE EV/EBITDA EV/ton PBR (x) 23.0 17.6 12.9 (x) 13.0 11.8 9.5 7.0 (US$) 188.0 170.6 150.2 144.6 (x) 3.9 3.5 3.1 2.6 RoE (%) 15.6 16.2 18.1 21.5 RoCE DPS Div Yield (%) 14.3 15.2 16.9 20.0 (Rs) 30.4 27.9 22.5 22.5 (%) 2.3 2.1 1.7 1.7 (%) (Rs mn) 7.0 23.2 30.7 10,973 14,303 19,570
17,953 (32.1) 10,209 (36.5)
(36.5) 24.7
21 21
ACC A
Co ompany o overview w
ACC is the secon largest ce C nd ement compa in the co any ountry, after Ultratech, w a with capa acity of 30.6 6mn tons. With plants spread acro the coun W oss ntry, it is a well dive ersified playe As a part of the Holcim group and along with Ambuja Cem er. m d ment, the combined entity has a capacity of ~ c ~58mn tons and comma s ands the hig ghest mar rket share. T Though delay capacity additions led to ACC losi market s yed d ing share during FY08-FY1 over the past five quarters, it re 10, e egained the market shar in re line with its expa anded capac city. Company is also one of the leading players in the y e n orga anised RMC business; however, giv h ven the cur rrent low de emand and high tran nsportation c costs, this business ha not been profitable and thus ACC as n restrained its in nvestment in this busine n ess. The strong parenta age in Holcim a m, heal lthy balance sheet and diversified pre d esence keep ACC on a strong footin to ps ng tap the domestic growth story. c cent capacit additions help volume growth ty s Rec
35 3 (mn ton) ) 29 2 23 2 17 1 11 1 5 FY05 CY05 (9M) CY06 CY07 CY08 8 CY09 CY1 10 CY11 CY Y12E CY13E 22.6 22.4 19.9 .3 21. 20.0 18.8 26.2 21.7 1 27.1 24.0 21.4
30.6
30 0.6 26.0
30.6 28.2
Stabilisatio on of new w capacities to drive e growth g in n volume CY12 and C CY13.
19.0 1 16.8 16.0 12.7
Capacity Sourc Company da Tata Securities Research. ce: ata,
Sales volume
ACC volume growth vs industry vo Cs olume grow (monthl wth ly)

25.0 (%)
After three y years of flat t volume gro owth, there e is a pick-up in the past p t four quarter rs.
20.0 15.0 10.0 5.0 0.0 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 -5.0 -10.0 ACC Sourc CMA, Compa data. ce: any Industry Jan-12
22 2
ACC A
Low exposur in South India help volume g wer re ps growth
A we ell-diversified ed presence p negates es concentratio risk. Also c on o, volume grow is getting v wth g a boost du to smal ue all presence p in the he oversupplied South India o d ia market. m
Central C 22%
North 25%
South 18% West 14%
Eas st 21% %
Sourc Company da ce: ata.
Rea alisations to improve with uptick in demand o w d

4,7 750 4,503 248 4,2 3,938 3,696 3,489 3,091 3,426 3,605
Improvemen in demand I nt d outlook wou o ould lead to better b pricing g environment e t.
(Rs/ton n)
4,2 250 3,7 750 3,2 250 2,7 750 2,2 250 CY06 CY07 CY08 CY09 9 CY10
CY11
CY1 12E
CY13E
Sourc Company da Tata Securities Research. ce: ata,
Cos pressures mostly fac st s ctored

3,6 600 3,4 428 3,229 3,503
Cost pressu C sures woul ld moderate ov m ver the nex xt few quarte fe ers as coa al prices, both d p domestic an nd imported, h im have nearly ly stabilised. s
3,4 400 3,2 200 3,0 000 2,8 800 2,6 600 2,4 400 2,2 200 2,0 000
(Rs/ton n)
2,857 2,532 2,227 2,614 4 2,554
CY06
CY07
CY08
CY09 9
CY10
CY11
CY1 12E
CY13E
23 3
ACC A
EBI ITDA/ton to improve o

1,5 500 1,3 300
(Rs/ton n) 1,142
We expect pro e ofitability to imp mprove in CY Y12 & CY!3 as realisation improve ns nd cost and pressures mo oderate.
1,1 100 900 9 700 7 500 5 300 3 CY06 865
958 812 748 82 20 709
999
CY07
CY08
CY09 9
CY10
CY11
CY1 12E
CY13E
Ope erating leve erage to benefit PAT g growth

2 22.5 (Rs bn) ) (%) 40.0 20.0 (20.0) (40.0) CY07 CY08 CY09 C CY10 0 CY11 CY12E CY1 13E 18.0 13.5 9.0 4.5 0.0 60.0
No significant capex and o t fav vourable debt-toeq quity ratio t result in to he ealthy PAT gr rowth.
Recurring PAT Sourc Company da Tata Securities Research. ce: ata,
PAT gr rowth
Low gearing, improving profitability result in b w p y better FCF

15 5.0 (Rs bn) 12 2.0 10.0 13.1 11.6 9.8 7.1 8 5.8 12.2
Mo odernisation n/debo ottlenecking investment t alo ong with h better r ind dustry ration onality leads s to improved p profitability y nd CF. an healthy FC
9.0 9 6.0 6 3.0 3 0.0 0 -3 3.0 -0.3 CY06 CY07 CY08 CY09 CY10 2.4 0.7
CY11
CY05 (9M)
CY12E
CY13E
FY05
24 4
ACC A
Hea althy balanc sheet wi low gearing levels (net debt-t ce ith to-equity)
1 100 91 (in %)
Hea althy balan nce sheet wit net cash o ~Rs21bn th of in C CY11 augur well for rs futu expansio plans. ture on
80 60 40 20 0 -20 -40 -60 FY05
41
-4 -29 -19 -22 -29 -33 CY11 -32 -36
CY05
CY06
CY07
CY08 8
CY09
CY1 10
CY Y12E CY13E
Ret turn ratios t improve to

45 4 36 3 27 2 18 1 9 0 FY04 Y05 FY CY05 CY Y06 CY07 C CY08
RoE
(%)
Mid d-cycle prof fitability an nd util lisation rate led to a tes dec cline in retu urn ratios. A An incr crease in uti ilisation rate es wou ould help to improv ve retu ratios. turn
CY09
RoCE
C CY10
CY11 CY12E CY13E C
Tab of assum ble mptions

(Rs s/ton) Sale Vol (mn ton) es Gro owth (YoY - %) Rea alisation Gro owth (YoY - %) Raw Material w Gro owth (YoY - %) Pow & Fuel wer Gro owth (YoY - %) Freight Gro owth (YoY - %) Tot Expenditure tal Gro owth (YoY - %) EBI ITDA Gro owth (YoY - %) Tax rate (%) x CY08 21.3 6.5 3,426 (1.8) 375 (2.2) 750 20.7 470 (0.4) 2,614 3.2 812 (15.2) 30.2 CY09 21.7 1.8 3,696 7.9 410 9.6 709 (5.4) 486 3.4 2,554 (2.3) 1,142 40.5 30.0 CY10 21.4 (1.4) 3,605 (2.5) 525 27.8 747 5.3 500 3.0 2,857 11.9 748 (34.5) 27.4 CY11 24.0 12.0 3,938 9.2 596 13.5 911 22.0 585 17.0 3,229 13.0 709 (5.2) 25.1 CY12E C 26.0 8.5 4,248 7.9 645 8.2 999 9.7 620 6.1 3,428 6.2 820 15.7 28.0 CY Y13E 28.2 8.2 4,503 4 6.0 665 3.1 1,022 1 2.3 639 3.0 3,503 3 2.2 999 21.8 28.0
25 5
ACC
Valuation We estimate ACC would post revenues of Rs113bn and Rs130bn on the back of cement volumes of 26mn tons and 28.2mn tons in CY12 and CY13 respectively. Going forward, we expect cement realisations to improve modestly, which shall lead to the company reporting an EBITDA of Rs820/ton and Rs999/ton in CY12 and CY13 respectively. The stock trades at CY12 and CY13 EV/EBITDA of 9.5x and 7x respectively and at CY13 EV/ton of US$145. We value the company at an average of CY13 EV/EBITDA of 8x and EV/ton of US$160 to arrive at a target price of Rs1,480/share, indicating an upside of 10%. We rate the stock as Buy. EV/ton
270 225 180 135 90 45 0 (US $) (US $) 30 25 20 15 10 5 0
EV/EBITDA
25 20 15 10 5 0
Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11
(x)
(%)
35 30 25 20 15 10 5 0
Apr-95
Apr-97
Apr-99
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Apr-11
EV/ton - LHS
EBITDA/ton - RHS
EV/EBITDA - LHS
EBITDA margin - RHS
Source: Company data, Tata Securities Research.
26
ACC
Financials
Profit & Loss (YE December)
(Rs Mn) Net sales CY10 79,113 CY11 CY12E CY13E 96,603 112,818 129,556
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth CY10 1,880 62,815 64,695 5,238 3,615 73,548 80,770 29,945 50,824 15,628 3,914 9,150 1,783 23,913 5,239 561 37,464 3,182 73,548 CY11 1,880 70,043 71,923 5,107 5,184 82,214 96,454 34,378 62,075 4,353 3,583 10,997 2,604 29,192 5,903 150 36,644 12,202 82,214 (0.0) CY12E 1,880 79,431 81,311 5,107 5,184 91,602 104,454 39,652 64,801 5,000 3,583 15,144 4,238 31,185 7,328 183 39,862 18,217 91,602 0.0 CY13E 1,880 94,086 95,966 5,107 5,184 106,257 112,454 45,292 67,162 5,000 3,583 17,294 5,557 39,822 8,501 213 40,874 30,511 106,257 0.0
YoY (%)
Total expenses R.M. consumed P&F Outward Freight SG&A EBIDTA
(3.4)
11,232 15,987 10,703 23,238 17,953
22.1
14,280 21,832 14,017 27,267 19,207
16.8
16,768 25,983 16,139 30,265 23,663
14.8
18,713 28,766 17,992 33,159 30,926
Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets
YoY (%) EBIDTA (%)

Depreciation EBIT Interest Other income PBT Less: Taxation
(32.1) 22.7
3,927 14,027 568 985 14,444 4,234
7.0 19.9
4,753 14,454 969 1,919 15,404 4,431
23.2 21.0
5,274 18,389 1,053 2,529 19,865 5,562
30.7 23.9
5,640 25,286 1,021 2,915 27,180 7,610
Effective tax rate (%)

Recurring PAT
29.3
10,209
28.8
10,973
28.0
14,303
28.0
19,570
YoY (%) PAT (%)

Exceptional items Reported PAT
(36.5) 12.9
1,938 12,147
7.5 11.4
2,280 13,253
30.3 12.7
0 14,303
36.8 15.1
0 19,570
Key Ratios
CY10 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Net Debt Equity Ratio (%) Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) EV/ton (US$) EV/sales (x) 24.7 13.0 17.8 3.9 188 2.9 23.0 11.8 16.0 3.5 171 2.4 17.6 9.5 12.9 3.1 150 2.0 12.9 7.0 10.0 2.6 145 1.7 54.3 75.1 343.9 30.4 (28.9) 55 8 96 14.3 15.6 2.3 CY11 58.3 83.6 382.3 27.9 (33.5) 52 10 91 15.2 16.2 2.1 CY12E 76.0 104.1 432.3 22.5 (32.1) 62 14 85 16.9 18.1 1.7 CY13E 104.0 134.0 510.2 22.5 (36.2) 64 16 85 20.0 21.5 1.7
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Capex Investments Investing cash flow Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash CY10 12,147 3,927 123 4,690 20,887 (7,234) (489) (7,724) (6,677) (937) (431) (8,046) 0 5,117 18,796 23,913 CY11 13,253 4,753 1,568 (3,741) 15,833 (4,729) 331 (4,399) (6,110) 85 (131) (6,156) 0 5,279 23,913 29,192 CY12E 14,303 5,274 0 (4,022) 15,555 (8,647) 0 (8,647) (4,915) (0) 0 (4,915) 0 1,993 29,192 31,185 CY13E 19,570 5,640 0 (3,658) 21,551 (8,000) 0 (8,000) (4,915) 0 0 (4,915) 0 8,636 31,185 39,822
27
Ambuja Cement
Hold
CMP: Rs 169
Target Price: Rs 180 Potential Upside: 7%
Key Statistics
M cap (INR bn/USD mn) : 258.8/5,156 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 2,428,964 : US$8.0mn : 1,535 : ABUJ.BO : ACEM IN : 17,466 : 5,318 : 182/120
Ambuja Cement
Losing its crowning glory
Company Update Ambuja Cement Ltd (ACL) is slipping from its leadership position, both in terms of superior profitability and valuation. The higher operating margins commanded by ACL due to fiscal benefits and export potential have now converged to industry level. Also, with Holcim acquiring more than 50% stake in the company, we believe the acquisition premium would fade. Though it primarily caters to the moderately oversupplied regions of North and West India, ACL would see volumes increasing in line with the industry growth. The stock currently trades at CY13 EV/ton and EV/EBITDA of US$161 and 7.2x respectively. We rate the stock as Hold with a target price of Rs180.
Key highlights
Holcim acquires 50% stake in ACL: In 2QCY11, Holcim raised its stake in ACL to 50.2%. Going forward, we do not expect it to increase the stake beyond this level; thus, ACLs acquisition premium is expected to taper down. We believe a merger will take some time as Holcim is working on operational and integration issues. Volume growth in line with industry: We assume ACLs volumes would grow in line with the industry growth rate. As expansions of Rauri and Bhatapara have already stabilised, and with no new additions coming on stream in the medium term, we believe the company would just be able to maintain its market share with utilisation rates of 81% and 87% in CY12 and CY13 respectively. Low exposure to South India market, a positive: ACLs non-existence in the South India market results in its plants running at higher utilisation rates and the company facing lesser pricing volatility. Also, a strong presence in West India gives it the flexibility to increase export volumes as the MENA market demand-supply equilibrium improves. Expensive valuation: The stock trades at CY12 and CY13 EV/EBITDA of 9.1x and 7.2x respectively and at CY13 EV/ton of US$161. We value ACL at an average of CY13 EV/EBITDA of 8x and EV/ton of US$170 to arrive at a target price of Rs180, indicating an upside of 7% from the current levels. We rate the stock as Hold.
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 160 140 120 100 80 60 Aug-11 Mar-11 May-11 Mar-12 Oct-11 Jan-12 ACEM
50.3 25.0 13.6 11.2
Sensex Analysts:
Financial summary
Year-end December CY2010 CY2011E CY2012E CY2013E Sales (Rs mn) 75,176 86,029 97,352 110,214 YoY EBITDA YoY (%) 4.7 14.4 13.2 13.2 (Rs mn) 19,510 19,945 24,947 29,926 NP YoY (%) (1.5) (1.2) 31.3 22.5 EPS (Rs) 7.8 7.8 10.2 12.5 YoY (%) (1.9) (1.2) 31.3 22.5 PE EV/EBITDA EV/ton PBR (x) 21.5 21.8 16.6 13.5 (x) 12.1 11.5 9.1 7.2 (US$) 206 182 169 161 (x) 3.5 3.2 2.9 2.5 RoE (%) 16.8 14.9 17.6 19.1 RoCE DPS Div Yield (%) 15.9 14.2 16.7 18.2 (Rs) 2.6 3.2 3.4 3.6 (%) 1.5 1.9 2.0 2.1 (%) (Rs mn) (1.0) 12,000 2.2 25.1 20.0 11,858 15,575 19,079
28 28
Am mbuja Cem ment
Amb buja Cement part of the Holcim gro t, e oup along w with ACC, is the third lar rgest cem ment company in India. It has a mark share of ~ y t ket ~9.5% with a focus on N North and West region Being ge ns. eographically located in t y the western region, it is the s seco ond largest e exporter of cement, with ~3-5% of production being exported. f Historically, ACL has reporte superior p L ed profitability c compared to peers, whic is o ch also reflected in its better re o eturn ratios. Company ha successfu complete its as ully ed curr rent phase o capacity addition and is in the process of fin of a nalising the next phas of capex The healt se x. thy balance sheet, desp pite the curr rent down-c cycle, posi itions it as o one of the strongest players in the Indian cem e ment market As t. Holc has acqu cim uired more th 50% sta in both A han ake ACC and ACL we expect it to L, mer both the companies eventually, h rge e however we d not expec it to happe in do ct en the near term. rrent phase of capacity additions complete e y Cur
35 3 29 2 (mn ton) ) 27.4 5.0 25 22.0 18.5 8 16.8 17.6 22.0 18.8 20.0 20.9 2 2 22.2 27.4 27.4 23.9
With curre W ent phase of capex plans over in CY1 c s 11, we w expect vo volumes to se ee an a uptick i CY12 an in nd beyond. b
23 2 17 11 5 CY07
CY08
CY09
Capacity
CY10 C
CY1 11
Sales volu ume
CY12E
CY13E
Ambuja volum growth vs industry volume gro me v owth (mont thly)

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 Jan-12 Feb-12 (%)
Volume grow V owth over th he next n few w quarte ers expected to be bette e ter than the ind t dustry growth th.
Ambuja a Sourc CMA, Compa data. ce: any
Industr ry
29 9
Am mbuja Cem ment
High dependen on Nort and Wes region nce th st

South 2% Central C 5%
North 35%
Pick-up in demand in P North and West region N ons key to Amb k bujas volum me growth. g
West 40%
East t 18% %
Rea alisations to be relativ o vely stable

5,0 000 4,5 500 4,0 000 (Rs/to on) 4,072 3,358 3 2,773 2,044 45 3,54 3,766 3,696 4,329 4,546
In I the ligh of exces ht ess supply and low deman s nd growth, g realisation ons would rem w main volatil le. We W expect improveme ent in cement pricing in i t FY13. F
3,5 500 3,0 000 2,5 500 2,0 000 1,5 500 1,0 000 FY04 FY05 CY06 6 1,885
CY07
CY0 08
CY09
CY10 C
CY11
E CY12E CY13E
Clin nker capacit additions lead to co savings ty ost

Addition A of clinker er capacities in CY09-10 c 0 led to sign l nificant cost st savings. s
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY04 FY05 CY06 CY07 CY08 CY09 CY Y10 CY11 CY12E CY13E C 1,370 1,475 1,830 2,138
(Rs/ton) ) 3,161 34 2,53 2,772 2,7 784
3,260 3
3,358
30 0
Am mbuja Cem ment
EBI ITDA/ton im mprovemen to be sub nt bdued

1,4 400
n) (Rs/ton 944
1,219 1,011 993 1,069 912 9 912
1,188
1,0 050
Given the volatility in G n cement pric c cing and cost st pressures, we expect p ct profitability to improve p y e at a a slow pac ace.
700 7 514 350 3
569
0 FY04 FY05 6 CY06 CY07 CY0 08 CY09 CY10 C CY11 E CY12E CY13E
PAT growth to be in line with indust T o w try

22 2.5 18 8.0 13 3.5 9.0 9 4.5 4 0.0 0 CY07 CY08 CY09 C CY10 CY11 CY12E CY13 3E (Rs bn) (% %) 40.0 30.0 20.0 10.0 (10.0) (20.0)
Recurring PAT T
PAT gro owth
Low capex, sta w able profita ability resul in better FCF lt

20 0.0 (Rs bn) 15 5.0 12.5 5 7.7 6.0 5.0 5 5.4 15.9 11.0 7.2 7.7 7
FCF F generat tion has been n strong on th back of no s he o significant s expansion n over the las couple of o ast years. y
10 0.0
0.0 0
-5 5.0 FY05 CY06 CY0 07
-4.0 CY08
CY09
CY10
CY11
CY Y12E
CY13E
31 1
Am mbuja Cem ment
Bala ance sheet remains st trong

60 40 55 (in %) 39
Net debt t-to-equity
Ambuja has one of the A s e strongest s balance e sheets am s mong peers, s, with a ne cash of w et ~Rs23bn in CY11.
20 0 -20 -40 -60 FY04 FY05
4 -14 -26
-20 -3 31 -35 -35 -41
CY06
CY07
CY08 8
CY09
CY Y10
CY11
CY12E CY13E C
Ove ersupply, lo demand result in de ow eclining ret turn ratios

36 3
Return ratio to remain R os n muted unti utilisation m il n rates impro r rove beyond d 85%. 8
27 2
18 1
0 FY04 FY05 F CY06 CY07 CY08 8 CY09 CY Y10 CY11 CY12E C CY13E
RoE E
RoCE E

(Rs s/ton) Sale Vol (mn ton) es Gro owth (YoY - %) Rea alisation Gro owth (YoY - %) Raw Material w Gro owth (YoY - %) Pow & Fuel wer Gro owth (YoY - %) Freight Gro owth (YoY - %) Tot Expenditure tal Gro owth (YoY - %) EBI ITDA Gro owth (YoY - %) Tax rate (%) x CY08 17.6 4.9 3,545 5.6 348 28.2 754 24.0 694 6.8 2,534 18.5 1,011 (17.1) 28.8 CY09 18.8 6.9 3,766 6.2 513 47.6 757 0.4 717 3.3 2,772 9.4 993 (1.7) 32.4 CY10 20.0 6.4 3,696 (1.9) 298 (41.9) 849 12.1 805 12.3 2,784 0.4 912 (8.2) 25.6 CY11 20.9 4.6 4,072 10.2 276 (7.4) 960 13.0 923 14.6 3,161 13.5 912 (0.0) 30.6 CY12E C 22.2 6.2 4,329 6.3 291 5.3 1,007 5.0 991 7.3 3,260 3.1 1,069 17.3 29.0 CY Y13E 23.9 7.7 4,546 4 5.0 303 4.3 1,041 1 3.3 1,020 1 3.0 3,358 3 3.0 1,188 1 11.1 29.0
32 2
Ambuja Cement
Valuation
We estimate the company would post revenues of Rs97bn and Rs110bn on the back of cement volumes of 22.2mn tons and 23.9mn tons in CY12 and CY13 respectively. We expect the cement realisations to improve by 6% CAGR over CY11-13. Thus, we estimate Ambuja would report an EBITDA of Rs1,069/ton and Rs1,188/ton in CY12 and CY13 respectively. The stock trades at CY12 and CY13 EV/EBITDA of 9.1x and 7.2x respectively and at CY13 EV/ton of US$161. We value ACL at an average of CY13 EV/EBITDA of 8x and EV/ton of US$170 to arrive at a target price of Rs180, indicating an upside of 7% from the current levels. We rate the stock as Hold. EV/ton
270 225 180 135 90 45 0 (US $) (US $) 35 30 25 20 15 10 5 0
2 14 10 20 6 10 0
EV/EBITDA
18 (x) (%) 50 40 30
Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
EV/ton - LHS
EBITDA/ton - RHS
33
Ambuja Cement
Financials
Profit & Loss (YE December)
(Rs Mn) Net sales CY10 75,176 CY11E 86,029 CY12E CY13E 97,352 110,214
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets 9,019 1,282 23,543 4,676 170 23,942 14,748 79,260 0.0 9,250 2,409 28,698 6,129 239 26,942 19,782 87,624 0.0 12,894 2,371 31,796 6,631 239 26,760 27,171 97,115 0.0 14,298 2,978 42,972 7,364 239 30,348 37,503 109,751 0.0 CY10 3,060 70,241 73,301 650 5,309 79,260 87,788 31,511 56,278 8,037 198 CY11E 3,069 77,626 80,694 494 6,436 87,624 97,023 35,158 61,865 5,320 658 CY12E 3,069 87,116 90,185 494 6,436 97,115 104,023 40,057 63,966 5,320 658 CY13E 3,069 99,752 102,821 494 6,436 109,751 111,023 45,433 65,590 6,000 658
YoY (%)
4.7
5,963 16,973 16,101 16,629 19,510
14.4
5,774 20,063 19,301 20,946 19,945
13.2
6,456 22,374 21,999 21,576 24,947
13.2
7,246 24,886 24,395 23,761 29,926
YoY (%) EBIDTA (%)

(1.0) 26.0
3,872 15,638 487 1,203 16,353 4,354
2.2 23.2
4,452 15,493 526 2,305 17,271 5,413
25.1 25.6
4,899 20,048 504 2,393 21,937 6,362
20.0 27.2
5,376 24,550 395 2,717 26,872 7,793

Recurring PAT
27
12,000
31
11,858
29
15,575
29
19,079
YoY (%) PAT (%)

(1.5) 16.0
636 12,636
(1.2) 13.8
430 12,289
31.3 16.0
0 15,575
22.5 17.3
0 19,079
Key Ratios
CY10 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Net Debt Equity Ratio (%) Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) EV/ton (US$) EV/sales (x) 7.8 10.4 47.9 2.6 (31.2) 59 6 73 15.9 16.8 1.5 21.5 12.1 16.3 3.5 206 3.1 CY11E 7.8 10.7 52.7 3.2 (35.0) 51 10 74 14.2 14.9 1.9 21.8 11.5 15.8 3.2 182 2.7 CY12E 10.2 13.4 59.0 3.4 (34.7) 65 9 65 16.7 17.6 2.0 16.6 9.1 12.6 2.9 169 2.3 CY13E 12.5 16.0 67.2 3.6 (41.3) 65 10 65 18.2 19.1 2.1 13.5 7.2 10.6 2.5 161 2.0
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Capex Investments Investing cash flow Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash CY10 12,636 3,872 450 3,646 20,604 (7,912) 1,051 (6,861) (4,625) 581 (1,007) (5,051) 23 8,715 14,827 23,543 CY11E 12,289 4,452 1,127 (699) 17,169 (6,504) (459) (6,964) (5,703) 808 (157) (5,052) 2 5,155 23,543 28,698 CY12E 15,575 4,899 0 (4,404) 16,069 (6,887) 0 (6,887) (6,084) 0 0 (6,084) 0 3,098 28,698 31,796 CY13E 19,079 5,376 0 759 25,214 (7,595) 0 (7,595) (6,443) 0 0 (6,443) 0 11,176 31,796 42,972
34
Grasim
Buy
CMP: Rs 2,759
Key Statistics
M cap (INR bn/USD mn) : 253.1/5,042 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 70,966 : US$3.7mn : 92 : GRAS.BO : GRASIM IN : 17,466 : 5,318 : 2,928/1,982
Grasim
Holding company discount to narrow
Grasim Industries Ltd (Grasim) stands to gain from its market leadership in key businesses, VSF and cement. In the VSF segment, we believe the improving macro outlook would lead to an improvement in demand. The cement business performance would remain volatile due to the current low demand and apparent oversupply scenario in the industry. The expansive capex plan of Rs144bn laid out by the company would translate into sustenance of its market leadership position in both the businesses. The stock currently trades at FY13 and FY14 PER of 9.6x and 7.6x respectively. We rate the stock as Buy rating with a SOTPbased target price of Rs3,484. Company Update
Key highlights
VSF business gets stronger: We expect the VSF business to report strong profitability growth on the back of a pick-up in demand as the global environment improves in the medium term. High level of backward integration (including recent acquisition of 33% stake in Domsjo) would lead to the company being well-positioned to face cost pressures. With capacity increasing by ~156k tons, we expect significant volume growth coming from FY14. Cement profitability to benefit from high South India exposure: Post consolidation of its cement business with Ultratech, Grasim now holds ~60% stake in the cement business. It plans to add another 9.2mn tons to the existing 49mn tons in India by setting up two units in Chhattisgarh and Karnataka. Given that more than 30% of the capacity is in South India, we expect volume growth to be lower compared to the industry; however, in terms of profitability, it would outperform peers. Capex plan to help sustain market leadership: Grasim is increasing capacity in both its businesses with a capex plan of ~Rs144bn. While on the one hand it would help in sustaining its market leadership position, on the other it would enhance cost competitiveness through investment into backward linkages. Holding company discount for Ultratech to narrow: We estimate the company would post revenue and earnings CAGR of 13.1% and 13.5% respectively over FY11-14. The stock currently trades at FY13 and FY14 PER of 9.6x and 7.6x respectively. At CMP, its stake in Ultratech is valued at a holding company discount of 49%, which we believe is unjustified. We ascribe a holding company discount of 25% and arrive at a SOTP-based target price of Rs3,484. We rate the stock as Buy.
NP YoY (%) 10.1 5.2 26.3 EPS (Rs) 249 274 288 364 YoY (%) 10.1 5.2 6.3 PE EV/EBITDA P/Sales PBR RoE RoCE DPS Div Yield (x) 10.1 9.6 7.6 (x) 5.0 4.4 3.9 3.0 (USD) 1.2 1.0 1.0 0.8 (x) 1.7 1.5 1.3 1.1 (%) 16.7 15.9 14.5 15.9 (%) (Rs) 11.8 20.0 11.2 21.0 11.0 22.0 12.2 22.0 (%) 0.7 0.8 0.8 0.8
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 130 110 90 70 Aug-11 May-11 Oct-11 Jan-12 GRASIM Mar-11 Mar-12
25.5 23.5 18.0 33.0
Sensex Analysts:
Financial summary
Year-end March FY2011 FY2012E FY2013E FY2014E Sales (Rs mn) 216,008 241,903 265,124 312,168 YoY EBITDA YoY (%) 7.1 12.0 9.6 17.7 (Rs mn) 55,045 61,691 77,636 (%) (Rs mn) 9.8 12.1 25.8 25,101 26,405 33,360
50,150 (16.7) 22,790 (20.2)
(20.2) 11.1
20 March 2012 ISIEmergingMarketsPDF in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF. 20 March 2012
35
35
Gra asim
Gras Industrie (Grasim) is a diversifie company under the Aditya Birla Group sim es i ed A with presence in VSF, chemicals, textiles and cemen It has adopted a stra h n s nt. ategy of t two business models, with focus o VSF and cement bus s w on sinesses; in this cont text, compan disposed off its spon ny nge iron bus siness in FY1 Globally, the 10. , Adit tya Birla gr roup (Grasim and oth her group companies) is the lar rgest man nufacturer o VSF, with a global market sha of h are of 21% Grasim solely %; com mmands a 10% global ma arket share. I has high le It evel of backw ward integra ation, with ~85% of pulp and 100% caustic soda proc h c cured from internal sources. i Com mpany hold ~ ~60% stake in Ultratech, which is the cement business of the e f grou Grasim m up. merged its own cement business w o with Ultratech to make it the h t large cement p est player in Ind and ninth largest in t world; co dia h the ompany also has o inve estments in v various listed companies o the group of p. Conso olidated rev venue mix
Chemicals 3% VSF F 17% % JV's 4% Others O 1%
solidated EBITDA mix x Cons

Chemicals C 3% JV's J 2% 2 Others s 4%
VSF 23%
Cement 75% Source: Company data.
Cemen nt 68% %
Con nsolidated r revenues, EBITDA CAG of 19% over FY04E GR -14

350 0 300 0 (Rs bn)
Cement bus C usiness wou uld continue t c to constitut ute ~75% of re revenues; VS VSF business w b would have a share of ~1 s 17% in overa all revenues. r
250 0 200 0 150 0 100 0 50 0 0 FY04 FY Y05 FY06 FY Y07 FY08 FY09 F FY10 FY11 FY12E FY13E FY14E
Revenues s Sourc Company da TATA Secur ce: ata, rities Research.
EBITD DA
36 6
Gra asim
Global cotton production and consumption

28 2 (bn kg)
Global cotto demand is G on expected e ve to improv marginally b 3% in FY1 m by 12 and a a furthe her improvemen would b i nt be on o the back of stability in k global econo g omy.
25 2
22 2
18 1
15 1 FY04 FY05 FY06 6 FY07 Production Sourc Crisil Resear ce: rch. FY08 FY09 FY10E FY11P FY12P
Consumptio on
Cotton, fibre p prices stabil lising

18 80 (Rs/kg)
After a shar fall durin A arp ng 1QFY12, c cotton price ces have h stab bilised. VSF VS prices have also followe p ed the t cotton p price trend.
16 60 14 40 12 20 10 00 80 8 60 6 40 4 Feb-09 Jun-09 Oct-09 Feb-10 F VSF Sourc Crisil Resear ce: rch. Jun-10 Oct-10 Feb b-11 PS SF Jun-11 Oct-11 O Feb-12 2
Cotton C
Globa fibre pie ( al (CY10 80 0mn tons)

Others 1% Raw Wool 1%
Global market share VS (CY10 3.2mn tons t SF s)

Other AV Birla group cos 11% Others 3% Chinese 55%
Cotton 31%
Grasim 10%
Synt thetic 63 3%
VSF 4% Lenzing 21%
Source: Company data.
37 7
Gra asim
Cap pacity addit tion in FY14 to improv volume g 4 ve growth

500 5 ('000 ton ns) (% %) 110.0
400 4
97.5
300 3
85.0
Given the de G demand-supp ply balance, we expect th b e he utilisation ra u ates to rema ain in i the rang of 88-91% ge % over FY12-1 o 13.
200 2
72.5
100 1 FY12E FY13E FY14E FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
60.0
Capacity Sourc Company da Tata Securities Research. ce: ata,
Utilisation - RHS
High cotton pr rices lead to improving VSF realis o g sations

330 3 ('000 ton ns) (Rs/kg) 150.0
273 2
127.5
Improvemen in cotto I nt on prices led to an increas p ase in i VSF rea alisations. W We expect rea e alisations t to improve by ~ i ~5% in FY13 13.
215 2
105.0
158 1
82.5
100 1 FY12E FY13E FY14E (%) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
60.0
Sales volume Sourc Company da Tata Securities Research. ce: ata,
Realisa ation
Global recover aided pro ry ofitability im mprovemen nt

60 0.0 (Rs/kg) 50.0
In I line wit the glob th bal economys r e recovery, VS VSF EBITDA imp E proved on th the back b of f increase ed volumes v and bette ter profitability margins. p y
45 5.0
37.5
30 0.0
25.0
15 5.0
12.5
0.0 0 FY04 FY Y05 FY06 FY0 FY08 FY09 FY10 FY11 FY12E FY13E F 07 9 FY14E EBITDA Sourc Company da Tata Securities Research. ce: ata, EBITDA mgn
0.0
38 8
Gra asim
VSF realisation and EBIT F ns TDA stabilis in 3QFY ses Y12

16 60 (Rs/kg) (Rs s/kg) 70 55 40 25 10 1QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 1200 1050 900 750 600 FY07 FY08 FY09 FY10 Sales volume e Sourc Company da Tata Securities Research. ce: ata, FY11 E FY12E EBITD DA FY13E FY14E F 20.0 16.0 12.0 8.0 4.0 7 FY12E FY13E FY Y14E FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 F Recurring PAT R Sourc Company da Tata Securities Research. ce: ata, PAT ma argin 2QFY10 2Q 10
VSF V profitabili ity stabilised in 3QFY12 a s n as VSF V price es improve ed marginally. Hereon, w m we expect ma e argins to b be stable as VS prices hav s SF ve improved fro its lows. i om
12 25 90 9 55 5 20 2
Realisation Sourc Company da ce: ata.
EBITDA A
Cem ment EBITD to impro as dema DA ove and growth rises h

50.0 s) (mn tons 40.2 34.8 42.4 (Rs/ /ton) 47.6
As industry utilisatio A ry on improves in FY13, w i we expect prici e cing power t to improve, re i resulting int nto better profit b tability.
40.0 30.0 20.0 10.0 0.0 17.7 17.1 18.2 2 20.2
PAT margins to stabilise at ~10% T o a

36 6.0 31 1.5 27 7.0 (Rs bn) (% %)
Improvemen in cemen I nt nt profitability would resul p ult in a CAGR of 7% i R in consolidated PAT ove c d er FY11-13. F
22 2.5 18 8.0 13 3.5 9.0 9 4.5 4 0.0 0
39 9
Gra asim
Bala ance sheet remains st trong (net d debt-to-equ uity)

10 00.0 (%) 91.8 70.8 67.7 57.8
Even with a expansiv E an ve capex plan of Rs144bn c n, the t balan nce shee et remains heal r althy with ne et cash of ~R c Rs12.5bn i in FY13. F
80.0 8 60.0 6 40.0 4 20.0 2 0.0
64.5
29.6
(1.5) -2 20.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10
(1.8)
(6.1)
(7.6)
(9.5)
FY13E FY14E FY11 FY12E F
Ove ersupply, lo demand result in de ow eclining ret turn ratios

45 40 35 (%)
Increasing capital cos I st and lower profitabilit a ty has h led to a d decline in th he return r rati tios. Retur rn ratios would improve a r d as utilisation ra u ates improv ve both in the cement an b nd VSF V business s.
30 25 20 15 10 5 0 FY05 FY06 FY07 FY08 FY09 9 FY10 FY Y11 FY12E FY13E F FY14E
RoE Sourc Company da Tata Securities Research. ce: ata,
RoCE
Cap plan on schedule pex

(R bn) Rs VSF expansion - Vi F ilayat & Harihar Oth capex her Che emical biz - Vilay yat Bal. capex (incl nor . rmal capex for chemicals) c Tot tal Cem ment - Chhatisgarh & Karnataka a Mat terial Evacuation and Logistic Infra n Mod dernisation, Upg gradation and others o RMC Plants & new products C Pow plants (63MW) wer Tot tal Gra and Total * Net of capex incur t rred till FY11 end Sourc Company da ce: ata. Net Capex * 21.1 3.4 7.6 1.7 33.8 51.5 11.1 37.4 3.3 6.8 110.0 143.8 47.1 63.9 62.9 9 79.9 9 11.3 1 15.5 1 16.8 17.0 0 4.1 FY Y12 FY13 & onward d Capex spe ent in 1HFY1 12
40 0
Grasim
Table of assumptions
FY09 Cement (Consolidated) Sales volume (mn tons) Blended realisations (Rs/ton) EBITDA/ton (Rs) VSF Volume sales ('000 tons) Realisations (Rs/kg) EBITDA (Rs/kg) Chemicals Volume sales ('000 tons) ECU realisation (Rs/kg) EBITDA (Rs/kg) 208 21.6 7.5 230 18.1 5.4 241 18.7 5.1 253 23.7 4.9 245 26.0 4.8 314 26.0 5.4 238 97 22 308 106 43 304 127 54 287 133 43 294 137 46 330 137 49 34.7 3,466 1,073 39.6 3,504 1,204 40.0 3,855 785 40.2 4,414 919 42.4 4,653 1,004 47.6 4,653 1,168 FY10 FY11 FY12E FY13E FY14E
Price band charts

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 8x 5x 3x (Rs ) 12 x
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Source: Bloomberg, Tata Securities Research.
Valuation We estimate that Grasim would report revenue and PAT CAGR of 13.1% and 13.5% respectively over FY11-14. The stock currently trades at FY13 and FY14 PER of 9.6x and 7.6x respectively. We rate the stock as Buy rating with a SOTPbased target price of Rs3,484. SOTP-based target price of 3,484
Particulars VSF Chemicals Textiles Equity Investments Enterprise Value (excl Ultratech) Add: Net Cash Equity Value excl Ultratech Ultratech's 60.3% stake Total equity value Source: Tata Securities Research. Value (Rs mn) 56,433 3,943 263 25,354 85,993 22,260 108,253 211,227 319,480 Value per share (Rs) 615 43 3 276 938 243 1,181 2,303 3,484 Holding company discount of 25% Net Cash (incl liquid investment) for FY13 Basis EV/EBITDA of 4x FY14 EV/EBITDA of 3x FY14 EV/EBITDA of 3x FY14 Holding company discount of 25%
Apr-11
41
Grasim
Financials (Consolidated)
Profit & Loss (YE March)
(Rs Mn) Net sales FY11 FY12E FY13E FY14E 216,008 241,903 265,124 312,168
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth Minority Interest Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Goodwill Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets 27,216 14,346 70,432 14,356 22 43,524 82,849 276,690 31,740 16,569 78,181 15,888 22 47,013 35,670 18,886 82,561 17,508 22 50,709 41,124 22,237 90,900 19,626 22 58,062 115,845 378,251 FY11 917 144,817 145,734 43,514 67,827 19,616 276,691 228,078 83,749 144,328 13,578 24,191 11,744 FY12E 917 167,684 50,177 67,827 19,616 FY13E 917 191,748 57,325 67,827 19,616 FY14E 917 222,768 223,685 67,123 67,827 19,616 378,251 332,078 121,607 210,471 16,000 24,191 11,744
YoY (%)
7.1
45,048 43,629 30,917 46,264 50,150
12.0
46,388 49,646 33,094 57,731 55,045
9.6
48,111 53,969 36,028 65,324 61,691
17.7
56,012 62,790 41,638 74,093 77,636
168,601 192,666
306,221 337,434 240,078 257,078 95,188 144,889 30,010 24,191 11,744 107,526 149,552 48,010 24,191 11,744
YoY (%) EBIDTA (%)

(16.7) 23.2
11,384 38,767 4,056 4,255 38,966 9,576
9.8 22.8
11,439 43,606 3,266 5,802 46,143 12,713
12.1 23.3
12,338 49,353 4,395 4,709 49,668 14,326
25.8 24.9
14,081 63,555 4,109 4,253 63,698 18,091

Net Profit Minority Interest Exceptional items Recurring PAT
25
29,390 6,600 22,790
28
33,430 8,329 25,101
29
35,341 8,936 26,405
28
45,607 12,247 33,360
YoY (%) PAT (%)
(20.2) 10.6
10.1 10.4
5.2 10.0
26.3 10.7
95,387 103,938 306,221 337,434
Key Ratios
FY11 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Debt Equity Ratio Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) Market cap/sales (x) EV/sales (x) 249 445 1,589 20.0 0.5 60 24 48 11.8 16.7 0.7 11.1 5.0 6.2 1.7 1.2 1.2 FY12E 274 489 1,839 21.0 0.4 62 25 47 11.2 15.9 0.8 10.1 4.4 5.6 1.5 1.0 1.0 FY13E 288 520 2,101 22.0 0.4 64 26 47 11.0 14.5 0.8 9.6 3.9 5.3 1.3 1.0 0.9 FY14E 364 651 2,439 22.0 0.3 64 26 47 12.2 15.9 0.8 7.6 3.0 4.2 1.1 0.8 0.7
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Goodwill Capex Investments Investing cash flow Minority Interest Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash FY11 22,790 11,384 (442) (8,299) 25,433 (4,120) (23,763) (450) 5,966 (2,237) (66) 11,835 15,498 0 12,598 57,834 70,432 FY12E 25,101 11,439 0 (4,789) 31,751 0 (28,432) 0 6,663 (2,234) (0) 0 4,429 (0) 7,748 70,432 78,181 FY13E 26,405 12,338 0 (4,171) 34,572 0 (35,000) 0 7,149 (2,341) 0 0 4,808 0 4,380 78,181 82,561 FY14E 33,360 14,081 0 (3,569) 43,872 0 (42,990) 0 9,798 (2,341) 0 0 7,457 0 8,338 82,561 90,900
(28,333) (28,432) (35,000) (42,990)
42
India Cements
Buy
CMP: Rs 103
Target Price: Rs 119 Potential Upside: 16%
Key Statistics
M cap (INR bn/USD mn) : 31.7/632 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 1,333,411 : US$2.4mn : 307 : ICMN.BO : ICEM IN : 17,466 : 5,318 : 122/62
India Cements
Attractive valuations
India Cements Ltds (ICL) concentrated presence and market leadership in South India is leading to low capacity utilisation, resulting into single digit RoEs of 8-9% in FY13-14. An oversupply in the region has resulted in utilisation rates of 60-70%. However the scenario is improving with an uptick in demand in South India. Companys investments in ships, IPL and 1.5mn ton Greenfield expansion in Rajasthan would start generating returns higher than its cost of capital, thereby improving its return ratios. The cost saving initiatives (100MW of captive power plants, coal mines in Indonesia) would also happen in a phased manner over the next two years. Company Update
Key highlights
Capacity utilisation to improve to 76%: Given the oversupply situation in South India, we believe ICLs utilisation rates would remain in the range of 7278%. Stabilisation of the Rajasthan plant would help improve volume growth for the company. We estimate ICL would report volume growth of 7.5% and 8.3% in FY13 and FY14 respectively. Pricing dependent on production discipline: Cement prices in South India have been stable for the past four quarters due to the ongoing production discipline. Lower production had a positive impact on pricing and profitability. Going forward, we believe an improvement in demand growth would be the key to sustain the production discipline and pricing stability. Cost saving efforts to yield results over next two years: In its efforts to rationalise costs, ICL is setting up 100MW thermal CPPs. Also, it is developing a coal mine in Indonesia to take care of coal requirements. This would happen in a phased manner over the next two years, with the first 50MW CPP in Tamil Nadu already commissioned. The 50MW CPP in Andhra Pradesh would take 12 months, as the equipment orders were placed in 4QFY11.
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 130 110 90 70 Aug-11 Oct-11 May-11 Jan-12 Mar-11 Mar-12
25.8 27.0 15.9 31.3
Sensex Analysts:
ICEM
Low custom duty on coal to benefit earnings: The removal of customs duty on imported coal would benefit ICL the most. With ~70% of its coal requirement being imported, it would see its PBT going up by 3.5% in FY13. Low return ratios to keep valuation subdued: The stock trades at FY13 and FY14 EV/EBITDA of 5.9x and 5.2x respectively and at FY14 EV/ton of US$79. We value ICL at an average of FY14 EV/EBITDA of 5.5x and EV/ton of US$85 (a 25% discount to the replacement cost due to the low return ratios for the company). We arrive at a target price of Rs119, indicating an upside of 16%. We rate the stock as Buy.
NP 400 3,450 3,154 3,854 YoY (%) (87.1) 762.1 (8.6) 22.2 EPS (Rs) 1.4 12.0 11.0 13.4 YoY (%) 762.1 (8.6) 22.2 PE EV/EBITDA EV/ton PBR RoE (x) 8.6 9.4 7.7 (x) 12.5 6.2 5.9 5.2 (US$) 84.5 76.4 79.5 78.9 (x) 0.7 0.7 0.7 0.6 (%) 1.1 9.3 8.0 9.1 RoCE DPS Div Yield (%) 2.4 8.4 7.4 8.0 (Rs) 1.5 1.8 2.0 2.2 (%) 1.5 1.7 1.9 2.1
Financial summary
Year-end March FY2011 FY2012E FY2013E FY2014E Sales (Rs mn) 35,146 41,807 47,029 52,706 YoY EBITDA YoY (%) (7.7) 19.0 12.5 12.1 (Rs mn) 4,475 9,168 9,935 11,189 (48.2) 104.9 8.4 12.6 (%) (Rs mn)
(87.7) 73.9
20 March 2012 ISIEmergingMarketsPDF 20 March 2012
43
43
In ndia Ceme ents
India Cements is the larges player in South India, with a cap st , pacity of 14.1mn tons and it rece s, ently commis ssioned a 1.5mn tons ca apacity in Ra ajasthan in N North India. It has an all-India ma arket share o ~5%, while its marke share in S of et South India stands ~1 17-18%. Cur rrently, comp pany is addin 100MW of captive po ng o ower capa acity at its A Andhra Pradesh and Tam Nadu pla mil ants; hence, we expect cost savings on the P&F expense It owns a cricket franchise in the Indian Pre es. e emier Leag gue (IPL) na amed Chennai Super K Kings, which was acquir h red at a cos of st US$ $91mn. Rece ently, ICL sh howed inten to enter the infrastructure busin nt ness. Though no conc crete plans are present, given the cu a urrent state of infrastruc cture projects and the financials we believ an entry into this business would be eir s, ve d nega ative for the company. Larg gest player in South India; recen entry in N r nt North India market a
20 2 16 13.0 12 8 4 0 FY05 FY06 F FY07 FY08 FY09 FY10 11 FY1 FY12E FY Y13E FY14E 7.7 7.7 8.5 8.8 (mn to on) 15.6 14.1 14.1 15.6 15.6
ICL is the m I market leade der in i South I India with a capacity of 14.1mn ton c ns. It I has also forayed int o nto the North India mark t ket with the co w commissionin ng of o a 1.5mn 1 ton ons in Greenfield G plant Rajasthan. R
ICL volume growth vs ind L dustry volume growth (monthly) h )

40.0 4 30.0 3 (%)
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
India Cem ments Sourc CMA, Compa data. ce: any
Industry
3QFY12
Given the low deman G nd, mainly m fro rom Andh hra Pradesh, So P outh India is witnessing a negativ w ive despatch g d growth. IC CL also saw lower-than a anindustry vo i olume growt wth over o the past fiv ive quarters. q
20.0 2 10.0 1 0.0 -1 10.0 -2 20.0
44 4
In ndia Ceme ents
Dep pendent on market dynamics in S South India a

Maharashtra 14
Tamil Nadu T 36
With a pre W esence in a all four South Indian state f tes and Mahara a ashtra, ICL is geared to ta advantag g ake ge of o any imp provement in demand gro d owth in Sout uth India. I
kerala 17
Andhra Pradesh A h 18 Karnataka 15 Sourc Company da ce: ata.
Production dis scipline led to improve realisatio ed ons

5,0 000 on) (Rs/to (( (mn tons) 12 2
The T conti inuing pro od -uction disc cipline due t to low demand resulted in l d lower outpu l put. Howeve er, cement real c lisations hav ve improved i significant tly from the low of 2QFY11 f ws 1.
4,0 000
10 0
3,0 000
2,0 000
1,0 000 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1 FY12E FY13 FY14E 3E Realisations Sourc Company da Tata Securities Research. ce: ata, Sales volum - RHS me
P&F freight co drive up total expe F, ost p enses

4,0 000 3,5 500 3,586
(Rs/ton n) 2,686 2,948
3,251 2,665
3,448
Company C primari rily depends on imported co d oal and the risin coal price a ing ces have impact h cted P&F cos st. Also, a chan A nge in mark ket mix m led to a increase in an lead distan l nce, thereb by leading to a increase in l an freight cost. f .
3,0 000 2,5 500 2,0 000 1,5 500 1,0 000 500 5 0 FY05 FY06 FY07 7 FY08 1,871 1,757 1,808 8 2,132
FY0 09
FY10
FY11 F
FY12E
FY13E
FY14E
45 5
In ndia Ceme ents
EBI ITDA/ton im mprovemen at the cos of lower volumes nt st

1,5 500 1,2 200
n) (Rs/ton 1,152 865 92 29 974 982 1,021
The sharp improveme T ent in i profitabi bility in FY1 12 has been o account of h on better realis b sations due t to the ongoing productio t ng on discipline. d
900 9 600 6 343 300 3 0 FY05 FY06 229
618 4 427
7 FY07
FY08
FY0 09
FY10
F FY11
FY12E
FY13E
FY14E
Ove ersupply sit tuation resu ulting in low profitabil w lity

7.0 0 6.0 0 (Rs bn) (%) 25% 20% 15% 10% 5% 0% FY06 F FY07 FY08 FY09 FY10 0 FY11 FY12E FY13E FY14E F
We W exp xpect net n profitability to rema p y ain low as the industry is l e operating a mid-cyc o at cle profitability levels. Als p y so, the t low utilis isations wou uld lead to low profitabili l w ity levels. l
5.0 0 4.0 0 3.0 0 2.0 0 1.0 0 0.0 0
Rec curring PAT Sourc Company da Tata Securities Research. ce: ata,
PAT margi - RHS in
Better profitab bility, low capex result in FCF imp c t provement

3.5 3 2.5 2 1.5 1 (Rs bn) ) 2.2 2.1 3.1 2.2 2.0
We W expec ct FCF to t improve in FY12 an i n nd FY13 as capex cyc F cle nears n its end an nd profitability improves. p y
0.5 0 (0 0.5) (1 1.5) (2 2.5) (3 3.5) (4 4.5) FY05 FY06 FY07 FY08 FY09 9 FY10 -1.7 -2.8 8 3.9 -3 FY Y11 FY12E FY Y13E FY14E -0.4 -0.3
46 6
In ndia Ceme ents
Lev verage looks high in co s omparison t peers (net debt-toto -equity)

80 70 (%) 64 53 56 68 7 67
67
62
Net N debt-to-equi d ity remains at a high level in r comparison to peer c rs. Though it h T has been ab ble to t improve it from th e he last down-cy l cycle, net D/ D/E of o 0.7x wo would lead t to lower l pro ofitability in comparison to peers. c
60 50 40 30 20 10 0
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
Low utilisation poor capi w n, ital allocati ion lead to low return ratios
45 40 35 (%)
ICL witness I ssed a shar arp decline in return ratio d ios due d to low u utilisation an nd poor profit p tability. Als so, in its i inves stments shipping, IP and Nort s PL rth India expan I nsion are y yet to t generate returns.
30 25 20 15 10 5 0 FY06 FY07 FY0 08 FY09 RoE Sourc Company da Tata Securities Research. ce: ata, FY10 FY11 RoCE E FY12E FY1 13E FY14E

(Rs s/ton) Sale Vol (mn ton) es Gro owth (YoY - %) Rea alisation Gro owth (YoY - %) Raw Material w Gro owth (YoY - %) Pow & Fuel wer Gro owth (YoY - %) Freight Gro owth (YoY - %) Tot Expenditure tal Gro owth (YoY - %) EBI ITDA Gro owth (YoY - %) Tax rate (%) x FY09 9.1 (1.0) 3,594 9.4 406 19.4 978 30.4 489 5.8 2,665 25.0 929 (19.4) 33.3 FY10 11.0 20.2 3,304 (8.1) 452 11.3 912 (6.7) 539 10.3 2,686 0.8 618 (33.5) 33.3 FY11 10.0 (9.1) 3,375 2.2 518 14.7 1,024 12.3 652 21.0 2,948 9.8 427 (30.9) 24.2 FY12 9.4 (5.5) 4,225 25.2 580 11.9 1,117 9.1 785 20.4 3,251 10.3 974 128.1 18.3 FY13E F 10.1 7.5 4,430 4.8 619 6.7 1,166 4.4 824 4.9 3,448 6.0 982 0.8 30.0 FY Y14E 11.0 8.3 4,607 4 4.0 657 6.2 1,210 1 3.7 849 3.1 3,586 3 4.0 1,021 1 4.0 30.0
47 7
India Cements
Valuation
We estimate the company would post revenues of Rs47bn and Rs53bn on the back of cement volumes of 10.1mn tons and 11mn tons in FY13 and FY14 respectively. We expect ICLs cement realisations to improve by 11% CAGR over FY11-14, with an improvement in the cement environment. Thus, we estimate the company would report an EBITDA of Rs982/ton and Rs1,021/ton in FY13 and FY14 respectively. The stock trades at FY13 and FY14 EV/EBITDA of 5.9x and 5.2x respectively and at FY14 EV/ton of US$79. We value ICL at an average of FY14 EV/EBITDA of 5.5x and EV/ton of US$85 (a 25% discount to the replacement cost due to the low return ratios for the company). We arrive at a target price of Rs119/share, indicating an upside of 16% from the current levels. We rate the stock as Buy. EV/ton
250 200 150 100 50 0 (US $) (US $) 35 30 25 20 15 10 5 0
EV/EBITDA
120 100 80 60 40 20 0 (x) (%) 40 30 20 10 0
EV/ton - LHS
EBITDA/ton - RHS
48
India Cements
Financials
(Rs Mn) Net sales FY11 35,146 FY12E 41,807 FY13E 47,029 FY14E 52,706
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets 0 3,854 4,973 2,544 439 20,986 204 11,184 17,963 68,201 5,365 3,814 1,053 22,428 216 11,567 21,309 72,015 (0.0) 6,098 4,911 785 23,721 224 12,339 23,400 74,826 0.0 6,825 6,225 1,544 24,398 234 13,132 26,094 78,235 0.0 FY11 3,072 37,826 40,898 24,561 2,743 68,201 59,260 20,915 38,345 10,398 1,495 FY12E 3,072 39,640 42,711 26,561 2,743 72,015 63,260 23,502 39,758 9,453 1,495 FY13E 3,072 41,451 44,522 27,561 2,743 74,826 68,260 26,206 42,054 7,878 1,495 FY14E 3,072 43,860 46,932 28,561 2,743 78,235 73,260 29,178 44,082 6,565 1,495
YoY (%)
(7.7)
5,162 10,201 6,500 8,808 4,475
19.0
5,459 10,513 7,393 9,275 9,168
12.5
6,258 11,797 8,336 10,703 9,935
12.1
7,202 13,256 9,308 11,752 11,189
YoY (%) EBIDTA (%)

(48.2) 12.7
2,440 2,035 1,417 0 618 218
104.9 21.9
2,587 6,581 2,510 57 4,128 678
8.4 21.1
2,704 7,230 2,770 45 4,505 1,352
12.6 21.2
2,972 8,217 2,862 151 5,506 1,652 30 3,854

Recurring PAT
24
400
18
3,450
30
3,154
YoY (%) PAT (%)

(87.1) 1.1
281 681
762.1 8.3
-418 3,033
(8.6) 6.7
0 3,154
22.2 7.3
Key Ratios
FY11 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Debt-equity ratio (x) Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) EV/ton (US$) EV/sales (x) 1.4 9.9 142.4 1.5 0.7 59 26 60 2.4 1.1 1.5 73.9 12.5 10.4 0.7 84 1.6 FY12E 12.0 21.0 148.7 1.8 0.7 60 33 60 8.4 9.3 1.7 8.6 6.2 4.9 0.7 76 1.4 FY13E 11.0 20.4 155.0 2.0 0.7 60 38 60 7.4 8.0 1.9 9.4 5.9 5.1 0.7 80 1.2 FY14E 13.4 23.8 163.4 2.2 0.7 60 43 60 8.0 9.1 2.1 7.7 5.2 4.3 0.6 79 1.1
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Capex Investments Investing cash flow Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash FY11 681 2,440 50 (2,039) 1,133 (4,968) 645 FY12E 3,033 2,587 0 (2,732) 2,888 (3,055) 0 FY13E 3,154 2,704 0 (2,359) 3,500 (3,424) 0 FY14E 3,854 2,972 0 (1,935) 4,891 (3,687) 0
(4,323) (3,055) (3,424) (3,687) (537) (604) 3,233 2,092 0 (1,099) 1,538 439 (627) (592) 2,000 781 0 614 439 1,053 (716) (626) 1,000 (343) 0 (268) 1,053 785 (788) (657) 1,000 (445) 0 759 785 1,544
49
Shree Cement
Hold
CMP: Rs 2,892
Key Statistics
M cap (INR bn/USD mn) : 100.8/2,007 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 10,668 : US$0.5mn : 35 : SHCM.BO : SRCM IN : 17,466 : 5,318 : 2,999/1,520
Shree Cement
Power biz, North India presence to aid profitability
Company Update Shree Cement Ltd (SCL), the leader in a stable North India market, is expected to report a volume growth in line with the industry. Company would continue to report industry-leading profitability due to its near 100% captive power business and concentrated presence in North India. Investments in the merchant power business would also enable it to reduce volatility in cement earnings. We value the cement business at an average of FY14 EV/EBITDA of 6x and EV/ton of US$120 and the power business at a P/B of 1.5x to arrive at a target price of Rs3,135/share. We rate the stock as Hold.
Key highlights
Cement business performance to be volatile in medium term: We believe that cost pressures have peaked in 9MFY12 and would moderate hereon as coal prices have stabilised. Cement prices would remain volatile due to the low capacity utilisation levels in the industry. We expect the situation to stabilise only in FY13. Power business to support volatility in cement earnings: By end-FY12, the company would have ~560MW of power capacity. Of this, it would be able to sell power of ~430MW, thereby contributing 18% and 20% to total revenues and EBITDA respectively in FY13. We have assumed an EBITDA/unit of Rs1.3 in FY13. We believe that in the medium term, the merchant power business would see an EBITDA of ~Re1/unit. EBITDA to post 16% CAGR: On the back of 5% CAGR in cement volumes, we estimate EBITDA would increase from Rs8.9bn in FY11 to Rs17.1bn in FY14, indicating a CAGR of 24.3%. The power business would also report an EBITDA CAGR of 9% as merchant sales pick up with the commissioning of 300MW power plants in 2HFY12. Strong balance sheet; new capex plan awaited: SCL has a net debt-toequity of 0.2x as at end-FY11, compared to ~0.8x in the last down-cycle. And with an utilisation rate of 70-75%, it is not in a hurry to add new capacities. Currently, company is in the process of acquiring land in Karnataka and Chhattisgarh. It has set a target of attaining 20mn ton capacity by FY17, for which timelines are yet to be set.
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 180 160 140 120 100 80 60 May-11 Aug-11 Oct-11 Mar-11 Jan-12 SRCM Mar-12
64.8 8.2 5.0 22.0
Sensex Analysts:
Financial summary
Year-end March FY2011 FY2012E FY2013E FY2014E Sales (Rs mn) 35,141 44,416 54,233 59,177 YoY EBITDA YoY (%) (3.5) 26.4 22.1 9.1 (Rs mn) 8,879 11,200 12,456 17,058 NP YoY (%) (65.1) (19.6) 111.4 85.7 EPS (Rs) 74.1 59.6 126.0 234.0 YoY (%) PE EV/EBITDA EV/ton PBR RoE (x) (x) 11.7 9.3 8.2 5.9 (US$) 164 159 159 155 (x) 5.1 4.7 4.0 3.1 (%) 13.3 10.0 18.7 28.0 RoCE DPS Div Yield (%) 15.0 10.9 14.3 20.5 (Rs) 14.0 15.0 16.0 17.5 (%) 0.5 0.5 0.6 0.6 (%) (Rs mn) (41.3) 2,582 26.1 11.2 37.0 2,077 4,390 8,153
(65.1) 39.0 (19.6) 48.5 111.4 22.9 85.7 12.4
20 20 March 2012 March 2012 ISIEmergingMarketsPDF
50 50
Shree Cem S ment
Shre Cement i the marke leader in North India with a cap ee is et a pacity of 13.5mn tons It is one of the most efficient pla s. t ayers with p profitability exceeding pe e eers. Com mpany is amo the sele few in the sector to h ong ect e have 100% captive powe it c er; start ted with a s segment that sold power on mercha basis. Cu ant urrently, it h a has capa acity of 260M of captive power an is adding 300MW of merchant po MW nd ower capa acity. This e expansion ha come on s as stream in 2H HFY12, there boosting the eby g reve enue growth in FY13. SCL was one among the fir to use pe coke in its kiln, rst et thus resulting in significant cost savings. s c Cap pacity doub bled in past three years s
16.0 1 14.0 1 12.0 1
(mn to ons) 10.210.2 8.5
3.5 13 10.3
13.5 10.9
13.5 6 11.6
13.5 12.0
SCL doubled its capaci S d ity to t 13.5mn t tons in Nort rth India. It has also set up 3 I s p grinding un g nits near i its target mark in order t t ket to reduce logis r stics cost an nd expand the m e market reach ch.
10.0 1 8.0 6.0 4.0 2.0 0.0 FY08 8 6.8 6.6
9.0
FY09
FY10 Capacity
FY11
FY12E
FY13E
FY14E
Sales volum me
SCL volume gr L rowth vs ind dustry volu ume growth (monthly) h )

40.0 4 (%) 30.0 3 20.0 2 10.0 1 0.0 -1 10.0 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
We W expect S SCL to repo ort a volume g growth in lin ne with the in w ndustry, goin ng forward. I f In the nea ear term, we expect it t t to outperform the industr o ry, given g th he slight tly improving i deman nd outlook in N o North India.
Shree Cement Sourc CMA, Compa data. ce: any
Industry
51 1
Shree Cem S ment
Dive ersified pre esence in North India

Punjab 8 Others 6 Rajas sthan 23 3
SCL has a w S well-diversifie ed market in most Nort m rth Indian state I tes. It wou uld benefit from a pick-up in b m organised re estate an o eal nd infrastructur demand in i re the t region.
Uttarakhand 6
Delhi 12
UP 26
Haryana 19
Rea alisations im mprove in current fisca year c al

4,500 4,000 3,500 (Rs/ton n) 3,193 2,767 1,895 2,039 3,112 3,372 3,622 3,114 4,130
3, ,860
As A the industry is operating o ow at lo utilisation le u evels to matc tch demand, d ceme ent realisations r hav ve improved b over 10% i by 0% YoY Y in FY12 2.
3,000 2,500 2,000 1,500 1,000 500 0 FY05 FY06
FY07
FY08
FY09 9
FY10
FY11
FY12E FY Y13E FY14E
High coal price impact to es otal expens ses

3, ,500 3, ,000 (Rs/ton) 2,417 1,888 1,569 2,041 2 2,031 1 2,657
2,878
3,051
SCL primaril depends o S ily on pet coke a p and importe ted coal. The in c ncreasing co ost of o coal has t thus adverse ely impacted i cost of production. p
2, ,500 2, ,000 1, ,500 1, ,000 500 0 FY07 FY08
FY09
FY10 0
FY11
FY12E
FY13 3E
FY14E
52 2
Shree Cem S ment
EBI ITDA declines sharply in current d down-cycle e

1, ,600 1, ,400 (Rs/ton) 1,19 98
1,306 72 1,07
1,341 1,079
After A witn nessing lo ow profitability in FY11, th p y the industry sa i aw operatin ng profits impro p roving in FY1 12 on o the back of productio k on discipline. d
1, ,200 1, ,000 800 600 400 200 0 FY05 FY06 558 669
965 97 69
982 9
FY07
FY08
FY09 9
FY10
FY11
FY12E FY Y13E FY14E
Pow capacit increases manifold wer ty s

66 60 55 50 (MW)
560
560 430
560 430
Power P ca apacity has ha increased to 560MW. SC i o CL has h 100% c captive powe wer and the exc a xcess is bein ng sold on merc s rchant basis.
44 40 33 30 22 20 120 11 10 0 FY09 FY10 FY11 FY12E 4 34 66 210 139 260 254
FY13E
FY14E
Total pow capacity wer Sourc Company da Tata Securities Research. ce: ata,
Merchant pow capacity wer
Pow capacit addition to boost po wer ty t ower sales

2,500 (mn uni its) 2,000 1,500 6.0 1,000 524 500 0 FY09 FY10 FY11 FY12E FY13E F Re ealisation FY14E 134 265 2.0 0.0 6.7 4.9 (Rs/unit) 1,897 2,3 360 10.0 8.0 6.0 4.0 4.0
With the co W commissionin ng of o 300MW W mercha ant power p capacity c in 2HFY12, me 2 erchant powe wer sales would see a shar s d arp increase. i We expe ect merchant po m power rates of Rs4.5 and Rs4/unit in R FY12 F and a FY1 13 respectively r y.
6.3 779
5.0
Merch hant Power sale es Sourc Company da Tata Securities Research. ce: ata,
53 3
Shree Cem S ment
No significant capex lead to high FCF ds

9.0 9 8.0 8 7.0 7 6.0 6 5.0 5 4.0 4 3.0 3 2.0 2 1.0 0.0 0 (1.0) (2.0) FY05 FY06 -0.5 -1.1 FY07 FY08 9 FY09 FY10 FY1 11 FY12E FY Y13E FY14E 1.7 0.9 3.9 2.8 1.9 6 0.6 3.4 3 (Rs bn) ) 7.8
FCF would s F see a sharp rp in ncrease as SCL ha s as completed m co most of it ts capex plans The nex ca s. xt phase of exp p pansion plan n is yet to be an s nnounced.
Hea althy balanc sheet reflected by l ce low leverag ge

120 1 100 1 (%) 80 101 105
The net de T ebt-to-equity ty stood at a comfortable st le 0.2x in FY1 0 11. It would ld im mprove fur rther as no major capex is lined up m
80 60 40 20 0 -20 -40 -
40 15 8 18 5 14
-16 FY05 FY06 FY07 FY08 9 FY09 FY10 FY1 11 FY12E FY Y13E FY14E
High depreciat tion, post capex, leads to low ret c s turn ratios
70 60 (%)
Return ratio R ios took a beating due to increased b ed depreciation and low d w operating pro o ofits.
50 40 30 20 10 0 FY05 FY06 FY07 FY08 FY09 RoE Sourc Company da Tata Securities Research. ce: ata, FY10 RoCE FY Y11 FY12E FY13E F FY14E
54 4
Shree Cement
Table of assumptions
(Rs/ton) Sales Vol (mn ton) Growth (YoY - %) Realisation Growth (YoY - %) Raw Material Growth (YoY - %) Power & Fuel Growth (YoY - %) Freight Growth (YoY - %) Total Expenditure Growth (YoY - %) EBITDA Growth (YoY - %) Tax rate (%) FY09 8.5 27.9 3,112 (2.5) 291 (8.8) 678 22.0 413 (24.2) 2,041 8.1 1,072 (17.9) 20.0 FY10 10.2 21.3 3,372 8.3 316 8.5 548 (19.2) 445 7.9 2,031 (0.5) 1,341 25.1 22.1 FY11 10.3 0.2 3,114 (7.6) 363 14.8 748 36.4 411 (7.7) 2,417 19.0 697 (48.1) -90.0 FY12 10.9 6.0 3,622 16.3 380 4.8 686 (8.2) 685 66.8 2,657 9.9 965 38.5 -10.0 FY13E 11.6 6.1 3,860 6.6 394 3.7 732 6.7 713 4.0 2,878 8.3 982 1.8 15.0 FY14E 12.0 3.9 4,130 7.0 422 6.9 775 5.9 748 5.0 3,051 6.0 1,079 9.9 20.0
EV/ton
250.0 200.0 150.0 100.0 50.0 0.0 (US $) (US $) 35 30 25 20 15 10 5 0
EV/EBITDA
25 20 15 10 5 0 (x) (%) 50 40 30 20 10 0
Apr-95
Apr-97
Apr-99
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Apr-95
Apr-97
Apr-99
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Apr-11
EV/ton - LHS
EBITDA/ton - RHS
EV/EBITDA - LHS
EBITDA margin - RHS
Valuation The stock trades at FY13 and FY14 EV/EBITDA of 8.2x and 5.9x respectively and at FY14 EV/ton of US$121 (excluding the power segment valuation). We value the cement business at an average of FY14 EV/EBITDA of 6x and EV/ton of US$120 and the power business at a P/B of 1.5x to arrive at a target price of Rs3,135, indicating an upside of 8% from the current levels. We rate the stock as Hold. Target price valued at Rs3,135
(Rs mn) EV/EBITDA EV/Ton Cement EV Power Segment - P/BV Add: Net Cash Target Value Source: Tata Securities Research. 1.5 15000 Multiple 6.0 120 Driver 14,227 13.5 Amount 85,361 77,760 81,561 22,500 5,139 109,199 Per share (Rs) 2,450 2,232 2,341 646 148 3,135
Apr-11
55
Shree Cement
Financials
(Rs Mn) Net sales FY11 35,141 FY12E 44,416 FY13E 54,233 FY14E 59,177
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth Minority Interest Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets 4,042 1,082 16,573 4,431 225 9,084 17,269 39,218 #REF! 5,460 1,094 17,162 4,456 236 7,052 21,356 40,509 0.0 6,867 1,333 18,930 4,871 248 8,964 23,286 44,285 0.0 6,924 1,455 25,218 5,694 260 10,931 28,619 51,762 FY11 348 19,513 19,862 0 20,079 (723) 39,218 40,421 28,750 11,671 10,278 0 FY12E 348 20,922 21,270 0 20,079 (840) 40,509 52,921 36,768 16,153 3,000 0 FY13E 348 24,697 25,046 0 20,079 (840) 44,285 60,921 42,835 18,086 2,913 0 FY14E 348 32,174 32,523 1 20,079 (840) 51,763 68,921 48,678 20,243 2,900 0
YoY (%)
(3.5)
3,723 9,123 5,829 7,587 8,879
26.4
4,137 11,764 9,525 7,789 11,200
22.1
4,554 16,996 10,679 9,548 12,456
9.1
5,060 14,807 11,533 10,718 17,058
YoY (%) EBIDTA (%)

(41.3) 25.3
6,758 2,121 1,753 1,220 1,588 (994)
26.1 25.2
8,018 3,183 1,983 696 1,896 (180)
11.2 23.0
6,067 6,388 2,008 785 5,165 775
37.0 28.8
5,843 11,215 2,209 1,184 10,190 2,038

Minority Interest Recurring PAT
(62.6)
0 2,582
(9.5)
0 2,077
15.0
0 4,390
20.0
1 8,153
YoY (%) PAT (%)

(65.1) 7.3
(485) 2,097
(19.6) 4.7
(94) 1,982
111.4 8.1
0 4,390
85.7 13.8
0 8,153
Key Ratios
FY11 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Debt Equity Ratio Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) EV/ton (US$) EV/sales (x) 74.1 268.1 570.1 14.0 1.0 56 11 17 15.0 13.3 0.5 39.0 11.7 10.8 5.1 164 3.0 FY12E 59.6 289.8 610.6 15.0 0.9 60 9 16 10.9 10.0 0.5 48.5 9.3 10.0 4.7 159 2.3 FY13E 126.0 300.2 718.9 16.0 0.8 60 9 18 14.3 18.7 0.6 22.9 8.2 9.6 4.0 159 1.9 FY14E 234.0 401.8 933.6 17.5 0.6 60 9 20 20.5 28.0 0.6 12.4 5.9 7.2 3.1 155 1.7
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Capex Investments Investing cash flow Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash FY11 2,097 6,758 (599) 1,294 9,550 (11,513) 0 (11,513) (568) (0) (983) (1,551) 0 (3,513) 20,086 16,573 FY12E 1,982 8,018 (118) (3,497) 6,385 (5,222) 0 FY13E 4,390 6,067 0 (162) 10,295 (7,913) 0 FY14E 8,153 5,843 0 955 14,951 (7,987) 0 (7,987) (675) 0 0 (675) 0 6,288 18,930 25,218
(5,222) (7,913) (574) 0 0 (574) 0 590 16,573 17,162 (614) 0 0 (614) 0 1,768 17,162 18,930
56
UltraTech Cement
Buy
CMP: Rs 1,480
Key Statistics
M cap (INR bn/USD mn) : 405.7/8,083 Avg 3m daily volume Avg 3m daily value Shares O/S (mn) Reuters Bloomberg Sensex Nifty 52-Wk High/Low : 166,905 : US$4.4mn : 274 : ULTC.BO : UTCEM IN : 17,466 : 5,318 : 1,520/914
UltraTech Cement
Market leadership to narrow valuation gap
Company Update Ultratech Cement Ltd (UTCEM) has an all-India market share of ~18%, with a domestic capacity of 48.8mn tons. The 9.2mn-ton expansion plan of greenfield capacity by 1HFY14 would help to maintain its market share. We believe that UTCEM would report superior earnings, compared to other players, due to higher share of revenues coming from South India and due to the white cement business. ETA Stars acquisition (capacity of 3.1mn tons) would dampen the companys medium term margin profile, as the oversupply situation in MENA region leads to low profitability. We value the stock at an average of FY14 EV/EBITDA of 8x and EV/ton of US$160, arriving at a target price of Rs1,703, indicating an upside of 15%. We rate the stock as Buy.
Key highlights
Early mover in next phase of capacity expansion: Company has started work on its next phase of 9.2mn-ton expansion, with plants coming up in Chhattisgarh and Karnataka for a capex of Rs51.5bn. This early-mover advantage would lead to market share gains for UTCEM, in comparison to peers, who are yet to announce the expansion plans. Company would also invest Rs58.5bn over the next few years on CPPs and other modernisation & logistics infrastructure. High exposure to South India to benefit: UTCEM has ~24% of its revenues coming from the South market. We expect South India players to report superior profitability on the back of continuing production discipline in the region. However, the oversupply and low demand in the region continue to be a risk to cement pricing scenario; sustenance of production discipline would be key to pricing stability. ETA Star acquisition to be margin dilutive: Company acquired a majority stake in ETA Star Cement, which has a capacity of 3.1mn tons, with primary exposure in MENA region. Given the current oversupply scenario in the region, UTCEM is reporting low profitability. Thus, we believe the acquisition would be margin dilutive for the company in near term. Market leadership to improve valuation: Post the merger with Samruddhi Cement, UTCEM is the largest cement company in the country. The capex on modernisation and logistics infrastructure would lead to an improvement in profitability. Going forward, we believe the stock would attract a premium valuation, compared to peers.
NP 12,787 20,995 22,526 30,873 YoY (%) 17.0 64.2 7.3 37.1 EPS (Rs) 46.7 76.6 82.2 112.7 YoY (%) 64.2 7.3 7.7 PE EV/EBITDA EV/Ton PBR RoE RoCE DPS Div Yield (x) 19.3 18.0 13.1 (x) 15.3 10.3 9.0 6.9 (US$) 169 161 162 135 (x) 3.8 3.2 2.8 2.3 (%) 16.5 17.9 16.5 19.2 (%) 12.4 13.0 12.9 15.4 (Rs) 6.0 7.0 8.0 9.0 (%) 0.4 0.5 0.5 0.6
Shareholding Pattern (Dec11) (%) Promoter FIIs MFs, FIs & Banks Others Relative Performance 160 140 120 100 80 60 Aug-11 May-11 Jan-12 UTCEM Mar-11 Mar-12 31.7 46.0 12.7 29.6 Oct-11
63.4 16.1 6.4 14.2
Sensex Analysts:
Financial summary
Year-end March FY2011 FY2012E FY2013E FY2014E Sales (Rs mn) 133,511 179,574 199,018 237,350 YoY EBITDA YoY (%) 87.6 34.5 10.8 19.3 (Rs mn) 26,835 39,187 44,177 57,274 (%) (Rs mn)
(46.9) 31.7
57 57
Ultra aTech Cem ment
Ultra atech Cemen part of th Aditya Bir group, ha a capacity of 48.8mn tons nt, he rla as y in In ndia and ano other 3.1mn tons from th acquisitio of ETA Sta Cement in the he on ar n MEN region. Po the merg of Grasim cement b NA ost ger ms business (Sam mruddhi Cem ment) with the company, Grasim now holds ~ h n ~60% stake in UTCEM. With the merger, W alon with the grey ceme ng ent business UTCEM o s, operates the white cem e ment busi iness and th entire RM business of the gro he MC s oup. It is th first comp he pany amo ong peers to announce a capacity e o expansion of 9.2mn ton in the cur f ns rrent phas which w se, would be ope erational by 1HFY14. Th would enable UTCEM to his M main ntain its mar rket share of ~18% in the domestic m f market. Dom mestic capa acity double with mer es rger of Sam mruddhi Cem ment
70. .0 60. .0
s) (mn tons 48.8 34.8 21.9 18.2 23.1 20.2 48.8 0.2 40 48.8 42.4
58.0 47.6
The merger of Grasim T r ms cement busi c siness double ed UTCEMs U domest tic capacity to 48.8mn ton c ns. Also, it has acquired ET A TA Star Ceme S ent with a capacity of 3 c 3.1mn tons in the Middle East an t e nd Bangladesh. B ..
50. .0 40. .0 30. .0 20. .0 10. .0 0. .0 FY08 FY09 FY10 Capacity 18.2 17.1
FY11 F
FY12 2E
FY13E
FY14E
Sales volum me
UTC CEMs volum growth vs industry volume gr me y rowth (mon nthly)

21.0 2 (mn ton)
14.5 1
Given its h G high exposu ure in i South I India, volum me growth g has h lagge ed, compared t peers an c to nd the t industry y.
8.0
1.5
-5.0 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 Jan-12 Feb-12
Ultratech Sourc CMA, Compa data. ce: any
Industry
58 8
Dive ersified pre esence with large expo h osure in So outh India
UTCEM has a diversifie U s ed presence p across th he country. D c Due to i its relative high exposure in r h South S Ind dia, volum me growth wou g uld be lowe wer than the ind t dustry.
Central 13 South 24 We est 27
North 18 East 18
Rea alisations im mprove sha arply in curr rent fiscal y year

6,000 5,000 (Rs/ton n) 4,414 3,220 3,000 2,000 1,000 0 FY05 FY06 FY07 FY08 9 FY09 FY10 FY1 11 FY12E FY Y13E FY14E 1,767 2,121 2,779 3,511 3,485 3,798 4,653
4,950
Perk-up in F P FY11 blende ed realisation is due t r to inclusion of white ceme i f ent and RMC revenues in a total revenu t ues
4,000
High coal price transportation cost impact to es, t otal expense es

4, ,500 4, ,000 3, ,500 (Rs/ton) 3,495 067 3,0 2,57 73 1,765 7 1,977 2,211 2,511 ,649 3,
3,782
We W do not expect tot t tal expenses to increas e ase significantly now as mo s y ost of o the cos escalation st ons are a over.
3, ,000 2, ,500 2, ,000 1, ,500 1, ,000 500 0 FY05 FY06 FY07 FY08 1,512
FY09 9
FY10
FY Y11
FY12E FY Y13E FY14E
59 9
EBI ITDA stable as product e tion discipline keeps p prices stead dy

1,400 1,200 1,000 (Rs/ton) 1,009 802 31 73 939 975 919 1,004 1,168
We W expe pect stab ble operating p o profit scenar rio with some short ter w e rm volatility. v
800 600 400 200 0 FY05 FY06 FY07 FY08 FY09 9 FY10 356 255
FY11
FY12E FY Y13E FY14E
No significant capex lead to high FCF ds

14 4.0 12 2.0 10 0.0 (Rs bn) 11.7 10.2 8.5 8 7.2 3.8 0.3 4.2 9.0
Strong FCF g S generation t to help next phase of h t capacity exp c pansion.
8.0 8 6.0 6 4.0 4 2.0 2 0.0 0 (2.0) (4.0) (6.0) FY05 FY06 FY07 FY08 9 FY09 FY10 -3.4 3.0
FY1 11
FY12E
FY Y13E
FY14E
Hea althy balanc sheet reflected by l ce low leverag (net deb ge bt-to-equity y)
70 7 60 6 50 5 58.4 56.1
Due to h D healthy FC CF generation, balance she g eet stands at a comfortab s ble position, wit net cash of p ith Rs3.2bn by e R end-FY12.
40 4 30 3 20 2 10 1 0 -1 10 FY07 FY08 FY Y09 FY10 FY11E -2.0 FY12E F -4.9 FY13E E -6.2 FY14E -2.1 4.8 9.1 29
60 0
RoE and RoCE to remain stable at cu E urrent levels

60 50 40 30 20 10 0 FY05 FY06 FY07 FY08 FY09 9 RoE Sourc Company da Tata Securities Research. ce: ata, FY10 FY1 11 RoCE FY12E FY Y13E FY14E (%)

(Rs s/ton) Sale Vol (mn ton) es Gro owth (YoY - %) Rea alisation Gro owth (YoY - %) Raw Material w Gro owth (YoY - %) Pow & Fuel wer Gro owth (YoY - %) Freight Gro owth (YoY - %) Tot Expenditure tal Gro owth (YoY - %) EBI ITDA Gro owth (YoY - %) Tax rate (%) x FY09 18.2 6.3 3,511 9.1 377 20.1 942 28.6 679 5.3 2,573 16.3 939 (6.9) 28.2 FY10 20.2 11.3 3,485 (0.7) 475 26.0 707 (24.9) 679 0.0 2,511 (2.4) 975 3.8 31.2 FY11 34.8 72.0 3,798 9.0 519 9.3 898 26.9 829 22.2 3,067 22.1 731 (25.0) 26.5 FY12 40.2 15.5 4,414 16.2 580 11.7 1,072 19.4 808 (2.5) 3,495 14.0 919 25.7 29.2 FY13E F 42.4 5.7 4,653 5.4 614 5.9 1,122 4.8 833 3.1 3,649 4.4 1,004 9.2 30.0 FY Y14E 47.6 12.2 4,950 4 6.4 642 4.7 1,167 1 3.9 858 3.0 3,782 3 3.6 1,168 1 16.4 30.0
61 1
UltraTech Cement
Valuation We estimate the company would post revenues of Rs199bn and Rs237bn on the back of cement volumes of 42.4mn tons and 47.6mn tons in FY13 and FY14 respectively. We expect UTCEMs cement realisations to improve at a CAGR of 9% over FY11-14 and estimate it would report an EBITDA of Rs1,004/ton in FY13 and Rs1,168/ton in FY14. The stock trades at FY13 and FY14 EV/EBITDA of 9x and 6.9x respectively and at FY14 EV/ton of US$135. We value the stock at an average of FY14 EV/EBITDA of 8x and EV/ton of US$160, arriving at a target price of Rs1,703, indicating an upside of 15%. We rate the stock as Buy. EV/ton
(US $)
EV/EBITDA
14 12 10 8 6 4 2 0
Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11
250.0 200.0 150.0 100.0 50.0 0.0
(US $)
(x)
30 25 20 15 10 5 0
(%)
40 30 20 10 0
Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
EV/ton - LHS
EBITDA/ton - RHS
EV/EBITDA - LHS
EBITDA margin - RHS
62
UltraTech Cement
Financials
(Rs Mn) Net sales FY11 FY12E FY13E FY14E 133,511 179,574 199,018 237,350
Balance Sheet
(Rs Mn) Equity capital Reserves Net worth Minority Interest Total borrowings Deferred tax Total liabilities Gross block Less: Acc. depreciation Net block CWIP Investments Current assets Inventories Debtors Cash & equivalents Loans and advances Others Current liabilities Net current assets Total assets 19,565 6,023 36,276 10,539 12 34,539 37,876 165,407 25,000 5,829 43,993 10,590 12 37,579 47,845 27,574 7,573 45,548 11,566 12 40,505 51,769 32,068 10,332 47,206 13,062 12 48,680 54,000 227,157 0.0 FY11 2,740 103,920 106,660 0 41,446 17,301 165,407 179,423 65,420 114,003 11,053 2,475 FY12E 2,740 122,686 0 41,446 17,301 FY13E 2,740 142,664 0 38,446 17,301 FY14E 2,740 170,670 173,411 1 36,446 17,301 227,158 256,423 95,741 160,682 10,000 2,475
YoY (%)
87.6
18,053 31,226 28,849 28,548 26,835
34.5
23,281 43,039 32,470 41,596 39,187
10.8
26,039 47,634 35,370 45,798 44,177
19.3
30,593 55,545 40,877 53,061 57,274
125,426 145,404
184,173 201,151 191,423 206,423 74,571 116,852 17,000 2,475 84,517 121,906 25,000 2,475
YoY (%) EBIDTA (%)

31.7 20.1
7,657 19,178 2,771 1,455 17,862 5,075
46.0 21.8
9,150 30,037 2,574 2,181 29,644 8,648
12.7 22.2
9,946 34,231 3,595 1,544 32,180 9,654
29.6 24.1
11,224 46,050 3,370 1,424 44,104 13,231

Recurring PAT
28.4
12,787
29.2
20,995
30.0
22,526
30.0
30,873
YoY (%) PAT (%)

Minority Interest Exceptional items Reported PAT
17.0 9.6
1,255 14,042
64.2 11.7
20,995
7.3 11.3
22,526
37.1 13.0
1 30,873
184,173 201,151 0.0 0.0
Key Ratios
FY11 EPS (Rs) CEPS (Rs) Book value (Rs) Dividend per share (Rs) Debt Equity Ratio Inventory Days Debtor Days Creditors Days ROCE (%) ROE (%) Dividend Yield (%) Valuation Ratios PE (x) EV/EBITDA (x) Cash P/E (x) Price/book value (x) EV/ton (US$) EV/sales (x) 31.7 15.3 19.8 3.8 169 3.1 19.3 10.3 13.5 3.2 161 2.2 18.0 9.0 12.5 2.8 162 2.0 13.1 6.9 9.6 2.3 135 1.7 46.7 74.6 389.2 6.0 0.4 67 16 57 12.4 16.5 0.4 FY12E 76.6 110.0 457.7 7.0 0.3 65 12 49 13.0 17.9 0.5 FY13E 82.2 118.5 530.6 8.0 0.3 65 14 49 12.9 16.5 0.5 FY14E 112.7 153.6 632.8 9.0 0.2 65 16 49 15.4 19.2 0.6
Cash Flow
(Rs Mn) Net profit Depn and w/o Deferred tax Change in working cap Operating cash flow Capex Investments Investing cash flow Dividend Fresh Equity Debt Financing cash flow Others Net change in cash Opening cash Closing cash FY11 14,042 7,657 8,993 (704) 29,988 (80,703) (1,947) FY12E 20,995 9,150 0 (2,252) 27,893 (17,947) 0 FY13E 22,526 9,946 0 (2,369) 30,103 (23,000) 0 FY14E 30,873 11,224 0 (573) 41,524 (35,000) 0
(82,649) (17,947) (23,000) (35,000) (1,911) 48,443 25,401 71,932 0 19,272 17,004 36,276 (2,229) 0 0 (2,229) 0 7,717 36,276 43,993 (2,548) 0 (3,000) (5,548) 0 1,555 43,993 45,548 (2,866) 0 (2,000) (4,866) 0 1,657 45,548 47,206
63
Tata Securities Limited

One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai 400 001 Tel: 91 22 6745 9000 Fax: 91 22 6610 6722 Web: www.tatasecurities.com
SEBI Registration Number BSE INB010664150 INF011207954 NSE INB/F/E231288730 Portfolio Manager INP000003872 Depository Participant of CDSL IN-DP-CDSL-450-2008 Depository Participant of NSDL: IN-DP-NSDL298-2008 Merchant Banker INM 000011302 Compliance Officer: Mr. Umesh Maskeri : 022 - 61827805 email:umesh.maskeri@tatacapital.com
DISCLAIMER
Analyst Certification: We, Niraj Agarwalla and Viral Shah, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Tata Securities Limited, hereinafter referred to as TSL) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclaimer This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. TSL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of the TSL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. TSL will not treat recipients as customers by virtue of their receiving this report. Neither this document nor any copy of it may be taken or transmitted into the United States (to US Persons), Canada or Japan or distributed, directly or indirectly, in the United States or Canada or distributed, or redistributed in Japan to any residents thereof. The distribution of this document in other jurisdictions may be restricted by the law applicable in the relevant jurisdictions and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. It is confirmed that Mr. Niraj Agarwalla (MBA) and Viral Shah (MBA) the author of this report have not received any compensation from the companies mentioned in the report in the preceding 12 months. Our research professionals are paid in part based on the profitability of TSL, which include earnings from other business. Neither TSL nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information contained in this report. The report is based upon information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. TSL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. TSL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. TSL and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities related to the information contained in this report. To enhance transparency, TSL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement in Cement as on March 20, 2012 1. Name of the analyst: 2. Qualifications of the analyst: 3. Analysts ownership of any stock including the long & short position related to the information contained: 4. Ownership of any stock held by the dependent family members of the analyst including the long & short position: 5. TSL ownership of any stock related to the information contained including the long & short position: 6. Broking relationship with company covered: 7. Investment Banking relationship with company covered: NIL NO NO NIL NO Niraj Agarwalla/ Viral Shah MBA / MBA
This information is subject to change without any prior notice. TSL reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, TSL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employee of TSL accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research.
Copyright in this document vests exclusively with Tata Securities Limited.
64

Cement Sector

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

Uploaded by

Copyright:

Available Formats

Cement - Overweight

20 March 2012 Downloaded by in-mascot1

ACC Ambuja Grasim India Cem Shree Cem Ultratech

BUY HOLD BUY BUY HOLD BUY

ISIEmergingMarketsPDF 20 20 March 2012 March 2012

in-mascot1 from 122.170.99.169 on 2012-03-29 01:43:07 EDT. DownloadPDF.

Valuation: Invest with a long term horizon

EBITDA mgn (%)

PAT mgn (%)

Sales growth (%)

PAT growth (%)

Average ACC * Ambuja * Grasim India Cem Shree Cem Ultratech

217 252 258 253 32 101 406

15.7 17.6 16.6 9.6 9.4 22.9 18.0

11.2 12.9 13.5 7.6 7.7 12.4 13.1

2.5 3.1 2.9 1.3 0.7 4.0 2.8

2.1 2.6 2.5 1.1 0.6 3.1 2.3

7.6 9.5 9.1 3.9 5.9 8.2 9.0

5.9 7.0 7.2 3.0 5.2 5.9 6.9

144.1 150.2 169.1 NA 79.5 159.3 162.5

135.0 144.6 161.0 NA 78.9 155.5 135.0

22.7 21.0 25.6 23.3 21.1 23.0 22.2

25.0 23.9 27.2 24.9 21.2 28.8 24.1

10.8 12.7 16.0 10.0 6.7 8.1 11.3

12.9 15.1 17.3 10.7 7.3 13.8 13.0

18.8 21.5 19.1 15.9 9.1 28.0 19.2

14.4 14.8 13.2 17.7 12.1 9.1 19.3

38.4 36.8 22.5 26.3 22.2 85.7 37.1

Rating BUY HOLD BUY BUY HOLD BUY

CMP (Rs) 1,340 169 2,759 103 2,892 1,480

TP (Rs) 1,480 180 3,484 119 3,135 1,703

Upside (%) 10.4 6.9 26.2 15.7 8.4 15.1

Valuations not factoring in improvement in operating performance

Source: CMA, Company data.

Cem ment deman tracks GDP growth by avg. 1.2 nd G h 2x

Cement growth / GDP growth

Sourc CMA,CSO, T ce: Tata Securities Research. R

730 7 475 440 310 210 0

0 Japan Iran Turkey China World Brazil USA

Sourc Industry dat ce: ta.

Hou using: Still the large consum est mer

Seg gment-wise breakup of cement demand e o

Infrastructur sector to keep cem re o ment demand strong g

Sourc ce: Planning Co ommission

Exp ports to be minimal e

Cement Ex xport Sourc CMA ce:

Clink Export ker

Surplus capacity to persist for a while

More than 85mn tons of capacity addition in FY10-11

Cap pacity addit tion: FY08-1 beats pa 15-year additions 11 ast r

Sourc CMA, Indust data, Tata Securities Research. ce: try S

Cap pacity addition grow to tape down... wth er

(m tons) mn (mn tons) 46

Sourc CMA, Indust data, Tata Securities Research. ce: try S

Sourc CMA, Indust data, Tata Securities Research. ce: try S

Market conso olidation, the way fo t orward...

Sourc CMA, Tata S ce: Securities Resea arch.

...high price expectations - big hurdle

Source: Industry Reports, Tata Securities Research.

Reg gional fact tors play a big role

Sou India c uth continues to be the w weak link

Sourc CMA, Indust data, Tata Securities Research. ce: try S

Pri icing to remain volatile