Indian Cement Sector

Equity Research
April 21, 2008

BSE Sensex: 16481 INDIA
Cement sector
Strapping foundations
Reason for report: Initiating coverage
The Indian cement industry, which has been in an uptrend since ’04, is caught up
ACC
SELL (Rs799) in growing concerns of impending overcapacity by FY09, which we believe is
overdone. We met with key equipment suppliers to fairly assess incremental
Ambuja Cement supplies likely in the next three years. We estimate that cement demand could
SELL (Rs113)
surprise by posting a CAGR of over 11% in the next five years. We believe that
Grasim FY09 would continue to witness supply shortage while FY10 could witness
BUY (Rs2,569) demand-supply parity, based on our analysis of incremental supply and expected
India Cements robust demand. While the industry would continue to face cost pressures as well
HOLD (Rs180) as Government intervention, we feel their impact would be largely passed on.
However, we rule out aggressive price hikes by cement players and thus prefer
J K Cement
BUY (Rs150) stocks with strong volume growth and/or cost savings. We rate Grasim and
Shree Cement (SCL) as our top picks.
Shree Cement
BUY (Rs1,078) f Fears of oversupply unrealistic. With the Street expecting oversupply in FY09E
itself, we met up with cement equipment manufacturers for a fair assessment of
UltraTech Cement
BUY (Rs784) expected supplies over the next two years. Many projects are running behind
schedule, with average period of project execution having risen to 30-36 months
from 24 months. This coupled with a 3-4mth ramp-up would ensure that incremental
supplies are much lower than market expectations. We expect FY09E and FY10E
incremental supplies to be 16mnte and 29mnte respectively.
f Demand could surprise. We believe that there could be rise in the historical
cement-to-GDP at 1.3x, given large-scale investment in infrastructure in the XI Five
Year Plan (FYP). This coupled with continued housing demand as well as
incremental demand for commercial spaces and special economic zones (SEZs)
could drive demand at CAGR of 11.6% over the next five years. Consequently,
while we expect supply shortage in FY09, we believe there would be demand-
supply parity in FY10E. Hence, we do not envisage pricing pressures till FY10E.
f Cost pressures to be passed on. The cement industry is likely to face severe cost
pressures from rising cost of coal, pet coke, fly ash and freight. However, these
would be passed on in a scenario of supply tightness, although we rule out
aggressive price hikes due to fear of Government intervention.
f Our top picks – Grasim and Shree Cement. Based on our belief that price upside
for the next two years would offset cost escalations, we prefer stocks that are likely
to report robust volume growth and/or cost savings. Grasim and SCL are likely to
benefit from capacity additions; this coupled with their inexpensive valuations make
Novonil Guha them extremely attractive.
novonil_guha@isecltd.com
+91 22 6637 7385
Please refer to important disclosures at the end of this report

Cement sector, April 21, 2008 ICICI Securities
TABLE OF CONTENTS
Investment summary .......................................................................................................3

Oversupply fears exaggerated........................................................................................3
Demand growth of 11-12% achievable ...........................................................................3
Pricing pressure unlikely till FY11E.................................................................................3
Cost escalations to be passed on ...................................................................................4
Attractive valuations ........................................................................................................5
Oversupply fears hyped ..................................................................................................6
Announced capacities likely to be delayed .....................................................................6
Incremental supply overstated ........................................................................................8
12% demand growth achievable.....................................................................................9
Cement demand – High correlation with GDP ................................................................9
Housing to remain largest demand contributor .............................................................10
Infrastructure share to rise ............................................................................................12
Corporate capex............................................................................................................13
SEZs, commercial construction ....................................................................................13
Demand-supply parity likely in FY10 ...........................................................................15
Pricing pressure unlikely, but upside limited too.......................................................16
Government intervention impacts sentiment.................................................................17
Cost pressures a concern, but to be passed on.........................................................19
Power and fuel ..............................................................................................................19
Freight costs..................................................................................................................20
Cost comparison – Key cement companies..................................................................20
Attractive valuations......................................................................................................22
We prefer stocks with volume upside and/or cost savings ...........................................23
Key risks .........................................................................................................................24
Estimates – Incremental supply and demand ...............................................................24
Government pressure ...................................................................................................24
Input cost pressure........................................................................................................24
Index of Tables and Charts ...........................................................................................25
Companies
ACC ................................................................................................................................. 27
Ambuja Cement .............................................................................................................. 39
Grasim ............................................................................................................................. 49
India Cements ................................................................................................................. 63
JK Cement ...................................................................................................................... 75
Shree Cement ................................................................................................................. 87
UltraTech Cement ........................................................................................................... 99
Prices as on April 21, ’08
2
Investment summary
Oversupply fears exaggerated
Poor performance by the cement sector since December ’07 has been primarily due
to reluctance by cement manufacturers to raise cement prices and overall adverse
conditions in the market. Inability of cement producers to hike prices along with fears
of oversupply likely in FY09 made the future of the cement sector seem bleak.
However, price hikes were effected in March ’08 and April ’08 to pass on rise in input
costs, although we believe that the expectation of oversupply is highly overdone.
As per our meetings with cement equipment manufacturers, FY09E and FY10E
incremental supplies are likely to be much lower than stated capacities. Regulatory
delays for new projects, capacity constraints by equipment suppliers and lack of
availability of civil contractors are key factors for increase in average project execution
time to 30-36 months at present from 24 months a couple of years ago. We estimate
an incremental supply of 16mnte for FY09E and ~29mnte for FY10E vis-à-vis the
stated capacity additions of 31mnte for FY09E and 33mnte for FY10E.
Demand growth of 11-12% achievable

Cement demand is likely to remain quite robust for the next five years mainly driven
by housing and infrastructure sectors. Higher disposable income, rising population,
changing demographics and reduction in average size of household will aid housing
demand. We expect ~584mnte of cement to be consumed by the housing sector over
the next five years. Roads, ports, power, urban infrastructure and irrigation are likely
to boost infrastructure demand. Historically, cement demand has high correlation with
GDP. Over the past 10 years, cement-to-GDP has been 1.3x. However, with planned
infrastructure investment in the XI FYP to be more-than-double vis-à-vis X FYP, we
expect the ratio to increase. Also, we expect cement demand to post CAGR of 11.6%
over the next five years.
Pricing pressure unlikely till FY11E
Cement prices have moved up with rising operating rates. Our assessment of the
demand-supply scenario for the next two years suggests that the industry will see
supply tightness in both FY09E and FY10E. Consequently, high operating rates would
ensure ruling out any possibility of pricing pressure. However, despite the expected
supply shortage, we do not envisage aggressive price increases from cement players.
With Government intervention at regular intervals since January ’06, cement players
have been cautious about attracting Government interest. Consequently, we expect
price increases to pass on major impact of rising input costs. We have assumed all-
India average prices to improve ~4% for FY09E and remain flat for FY10E.
3
Chart 1: Utilisation versus cement prices
255 Capacity Utilisation (RHS) All India Avg Price per bag (LHS) 120
235
215 110
195
100
175
(Rs)
(%)
155
90
135
115 80
95
75 70
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Aug-02
Aug-03
Aug-04
Aug-05
Aug-06
Aug-07
Source: CMA, I-Sec Research
Cost escalations to be passed on
Power and fuel constitute a significant 18-22% of cement companies’ revenues. The
cement industry is dependant on domestic coal, imported coal and pet coke as the
main fuels used in kilns and CPPs. While Coal India (CIL) has raised prices of
domestic coal 10-15% on an average since December ’07, prices of international coal
have seen sharp rise since September ’08 (~70%, currently higher than September
’07 levels). This coupled with rising bulk freight rates would result in substantial
increase in landed cost of imported coal. Companies such as India Cements (ICL),
ACL and UTCL would be impacted by imported coal prices. Similarly, pet coke prices
have risen in line with crude oil prices, thereby affecting companies such as SCL,
Grasim and JK Cement (JKCL). However, cement companies have endeavoured to
moderate impact of higher fuel costs by shifting to captive power sources.
Freight costs, which constitute 12-18% of cement companies’ revenues, have also
been rising with increasing cost of diesel. Cement companies have started setting up
split grinding units closer to fly ash sources or to markets to achieve savings in freight
as transportation of clinker is cheaper than that of cement.
Overall, rising costs of fly ash, coal and pet coke remain a serious concern for cement
companies. However, given the anticipated short supply expected in FY09E and
FY10E, we expect such cost pressures to be passed on to consumers.
4
Attractive valuations
Based on Government intervention that is a regular feature at present, we do not
envisage substantial price hikes despite expected shortage in supply. However, we
believe that the impact of cost increase would be passed on to consumers.
Consequently, we prefer stocks that have volume upside and/or are expected to
register cost reduction. Hence, we recommend a BUY on Grasim, UTCL, SCL and
JKCL on the back of impressive earnings growth and cheaper valuations. We
recommend SELL on ACC and ACL due to expensive valuations and sluggish
bottomline growth. Grasim and SCL are our top picks in the sector.
Table 1: Relative valuations

CMP EPS (Rs) P/E (x) EV/E (x) EV/ton
(Rs) FY09E FY10E FY09E FY10E FY09E FY10E (US$) Reco
ACC 799 73.2 78.4 10.9 10.2 6.7 6.2 165 Sell
Grasim 2,574 299.2 361.7 8.6 7.1 5.8 4.6 130 Buy
Ambuja Cement 113 9.6 10.8 11.8 10.5 7.0 6.0 222 Sell
UltraTech Cement 784 105.3 122.3 7.4 6.4 5.4 4.4 130 Buy
India Cements 180 26.2 30.3 6.9 5.9 5.1 4.3 129 Hold
JK Cement 150 51.8 60.6 2.9 2.5 3.2 2.4 101 Buy
Shree Cement 1,078 175.1 235.4 6.2 4.6 3.1 2.2 97 Buy
Source: Company data, I-Sec Research
5
Oversupply fears hyped

Announced capacities likely to be delayed
The Indian cement industry has seen rising prices since ’04 due to slowdown in
capacity additions and rising operating rates. Buoyed by higher prices and
consequent strong cash accruals, cement players started announcing capacity
additions ’05-06 onwards. While total announced capacities are over 100mnte at
present, we believe incremental cement supplies are likely to be significantly lower
than official company announcements.
Based on our interaction with cement equipment manufacturers and cement

companies for assessing effect of capacity additions going forward, average project
set-up time has increased to 30-36 months from ~24 months a couple of years ago.
Further, most announced capacities are likely to be delayed by at least six months
mainly due to:
• delay in land acquisition and acquiring mining leases,
• delay in obtaining various regulatory and environmental clearances,
• increase in lead time for delivery of machinery, with equipment suppliers boasting
of full order books at present, and
• delays due to lack of availability of quality civil contractors that may result in a
longer stabilisation period.
There are only few players worldwide that have the capability of supplying key
equipment for cement plants. Amongst these, Polysius, KHD Humboldt Wedag and
FLSmidth are the main players in India. Further, there are other players such as
Loesche and GBER Pfeiffer that specialise in other equipment such as vertical roller
mills and gear boxes.
Chart 2: Key cement equipment suppliers and market share (excl. China)
Others
16% Sinoma
24%
FLSmidth
29% Polysius
19%
KHD Humboldt
Wedag
12%
Source: FLSmidt
6
While India saw demand for new capacities ’05 onwards, construction boom in the
Middle East resulted in strong cement equipment order inflow from ’03 itself. Besides
India and the Middle East, demand for fresh kiln capacity is seen in Asia and North
America.
Chart 3: Global contracted kiln capacity trend (excl. China)
Source: FLSmidth
Chart 4: Order inflow and backlog trend of key companies
20,000 700
FLS DK Kmn KHD US$mn (RHS)
18,000
600
16,000
14,000 500
12,000
400
10,000
8,000 300
6,000 200
4,000
100
2,000
0 0
2004 2005 2006 2007
Source: FLSmidth, KHD Humboldt Wedag
With demand for new capacities seeing a sharp rise not just in India, most equipment
suppliers are facing capacity constrains for implementing new orders. Consequently,
lead time for delivery of key equipment has been increasing and is expected to rise
going forward.
7
Incremental supply overstated
We have attempted to estimate incremental supplies for FY09E, FY10E and FY11E
based on our interaction with equipment suppliers. It usually takes 3-4 months for a
new plant to stabilise, during which output is minimal. Further, for capacities getting
commissioned mid year, incremental supply would only be for operational months for
that year (adjusted for stabilisation time), which in turn would be significantly lower
than the stated capacity. Further, with ~136mnte announced as on date, ~37mnte
(including Reliance ADAG Group’s 20mnte) has not been ordered out yet.
Chart 5: Expected incremental supplies over the next three years
Stated capacity Incremental Supply

35
30
25
20
(mn te)
15
10
0
FY09E FY10E FY11E
Source: I-Sec Research
Thereby, we estimate that only 16mnte of incremental cement supply is likely in

FY09E as against stated capacity of ~32mnte. Similarly, only 28mnte of incremental
supplies are likely in FY10E as against stated capacity additions of 33mnte. Further,
incremental supply of 29mnte is expected in FY11E. Hence, we believe that the
market has considerably over-estimated the incremental supply scenario for the next
couple of years.
8
12% demand growth achievable
Cement demand in India has registered ~8% CAGR for the past ten years. Housing
continues to be the main driver, constituting ~60% of overall demand. However, we
believe that with Government thrust on infrastructure, the cement sector could see
increase in share of overall demand in the next five years.
Chart 6: Production and consumption trend
180
Producion Domestic consumption
160
140
120
(mn te)
100
80
60
40
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Cement demand – High correlation with GDP

Cement demand is directly linked to economic activity. Since infrastructure
investments and construction activity, which are the main drivers of cement demand,
are key components of GDP, cement demand growth has high correlation to GDP
growth. Further, housing (both rural and urban), also a determinant of cement
demand, depends on agricultural productivity and income levels, which are again a
key components of GDP.
Based on past 10-year data (FY1998-07) on cement consumption growth versus GDP
growth, the cement-to-GDP stands at 1.3x. With planned investment in infrastructure
to more-than-double in the XI FYP vis-à-vis X FYP, we may see an improvement in
the cement-to-GDP. Consequently, with GDP expected to grow 8.5-9%, we believe
cement demand would grow 11-12% till FY12E. We expect housing, infrastructure,
corporate capex, commercial construction and SEZs to be key demand drivers going
forward.
9
Chart 7: GDP versus cement demand growth
17
GDP grow th Cement consumption grow th
12
(%)
2
-3
FY98
FY99
FY00
FY02
FY03
FY04
FY05
FY06
FY07
FY01
Source: CMA, Bloomberg
Housing to remain largest demand contributor

Housing constitutes ~60% of total cement demand. Main factors driving housing
demand are:
• rise in disposable income levels
• continued growth in population and change in population profile
• changing demographics (migration from rural to urban areas)
• decrease in number of people per household (average size of household) with
breakdown of the joint family system into nuclear families
• fiscal incentives provided by the Government and easy availability of finance
Higher income levels. Strong economic growth helps boost disposable income. This
coupled with easy availability of finance enables households to migrate from non-
pucca houses to urban pucca housing and results in increase in demand for larger
houses, thereby raising average size of dwelling units.
Shift in population profile. Based on decline in average age of home purchasers

coupled with higher income levels, we believe that the population within the 25-44yr
age group is critical to the growth in housing demand. As per the Census of India ’01
report, ~27.7% of India’s population in ’01 that was in the 25-44yr age group is likely
to increase to ~32% in ’26, which implies an annual addition of ~6.5mn people to this
age bracket.
10
Chart 8: Share of the 25-44yr age group in total population
1,600 Total Population % share of 25-44 age group (RHS) 33
32
1,400
31
1,200
(mn)
(%)
30
1,000
29
800
28
600 27
2001 2006 2011 2016 2021 2026
Source: Census of India ’01, I-Sec Research
Nuclear families and urbanisation. The joint family system in India has been
gradually moving towards nuclear families. Migration of population towards urban
areas due to better job opportunities coupled with rapid urban infrastructure
development would effect the decline in average size of an Indian household. Hence,
with the ever-growing population, expected reduction in the size of an average Indian
household, outlook for housing demand remains extremely positive.
Fiscal incentives to continue boosting cement demand. Fiscal incentives granted

by the Central Government have provided boost to housing demand. Fiscal benefits,
existent since the FY00 Budget, give tax incentives on both interest payments and
principal repayments on mortgage loans, thereby reducing effective cost of financing
and stimulating housing demand.
Table 2: Housing demand projection

2008 2009 2010 2011 2012
Estimated housing stock (mn) 133.8 138.3 142.9 147.8 152.8
Housing stock (bn sqft) 90.3 94.8 99.4 104.3 109.5
Average size (sqft) 675 685 696 706 717
Incremental demand (bn sqft) 4.2 4.4 4.7 4.9 5.1
Cement demand (mnte) 105.9 111.2 116.6 122.4 128.4

Source: CRISIL, I-Sec Research
As per CRISIL, housing stock is expected to post 3.4% CAGR over the next five
years. Further, housing stock in terms of area in square feet is expected to rise at a
higher 4.9% CAGR over the same period, given the expected increase in average
size of dwelling units. Hence, we expect ~584mnte of cement to be consumed by the
housing sector over the next five years.
11
Infrastructure share to rise
The Planning Commission has projected Rs20,271bn investment in infrastructure for
the XI FYP, 2.3x higher than infrastructure investment anticipated in X FYP. Main
sectors that would drive cement demand are roads, power, ports, airports, irrigation
and urban infrastructure.
Chart 9: Infrastructure spending in X & XI FYPs

25,000 Pow er Roads Railw ays
Irrigation Urban Infrastructure Ports
Airports Others
20,000
15,000
(Rs bn)
10,000
5,000
0
Xth Plan XIth plan
Source: Planning Commission
Road Projects. Various road projects under the National Highway Development
Programme (NHDP) that include phases II-VII are expected to generate cement
demand of ~42.5mnte till end XI FYP.
Table 3: Road projects under NHDP

Cement
Length consumption*
Project Description Completion (km) (mnte)
NHDP – Phase II NSEW Corridor 27% 7,142 6.65
Port connectivity Connects major ports 44% 1,342 0.96
Connecting state capital & places of
economic and tourist importance to phases
Phase III I & II 3% 12,109 14.98
Upgradation of existing highways to two-
Phase IV lane - 20,000 12.75
Six-laning of the Golden Quadrilateral (GQ)
Phase V and high-density corridor - 6,500 4.14
Phase VI Expressways - 1,000 3.00
Ring roads, bypasses and flyovers and Not yet
Phase VII selected stretches - decided -
Total 42.5
*Cement demand, assuming 25% of roads made of concrete
Source: National Highway Authority of India (NHAI), Committee on Infrastructure, I-Sec Research
Additionally, various State Governments too have undertaken road projects including
repair and upgradation of existing roads. Total investment in such projects is expected
to be ~Rs1,000bn, with ~18mnte demand expected over the next five years. Further,
investments of ~Rs790bn in rural roads are likely to generate further 14mnte demand.
Overall, we expect ~75mnte demand from Central, state and rural road projects over
the next five years.
12
Power projects. The XI FYP envisages total capacity addition of ~78,577MW, of
which 16,500MW would be hydro projects where cement consumption is significantly
higher than other projects. We expect ~46mnte of cement consumption for power
generation projects over the next five years.
Table 4: Demand from power projects

Capacity Construction Demand
(MW) component (%) (mnte)
Thermal coal 54,355 20 14.3
Thermal gas 4,289 10 0.4
Hydro 16,553 70 29.4
Nuclear 3,380 30 2.3
Total 78,577 46.4
Source: Central Electricity Authority (CEA), National Institute For Construction Management & Research
(NICMAR), I-Sec Research
Based on investments projected in the XI FYP, we estimate total cement requirement

of 248mnte over the next five years. Further, we expect share of cement demand from
infrastructure to rise to ~23% in the XI FYP from ~17% of total demand in the X FYP.
Table 5: Demand from infrastructure

Construction Demand
X FYP XI FYP component (%) (mnte)
Power 2,919 6,165 46.4
Roads 1,449 3,118 75.0
Railways 1,197 2,580 42 31.0
Irrigation 1,115 2,231 60 38.3
Urban Infrastructure 648 1,991 60 34.1
Ports 41 739 50 10.6
Airports 68 347 42 4.2
Others 1,369 3,099 10 8.9
Total 8,805 20,272 248.4
Source: NHAI, CEA, NICMAR, Planning Commission, I-Sec Research
Corporate capex
Backed by healthy growth of the Indian economy, most industries are operating at
peak utilisation levels. With demand expected to remain firm from various sectors,
most industries have announced large capacity expansion plans. CRISIL estimates an
investment of ~Rs6,900bn over the next five years for various industrial projects.
Consequently, we expect cement demand of ~69mnte for these projects.
SEZs, commercial construction

Commercial construction includes malls, multiplexes, office space, hotels, hospitals
etc. Demand for office space is largely driven by the IT/ITES industry, which
comprises 75-80% of commercial demand at present. The sector is expected to grow
25-30% annually over the next few years and would be the key driver of commercial
demand.
13
SEZs are areas notified under the SEZ Act ’05, with benefit of fiscal incentives from
both Central and State Governments along with minimal regulatory requirements and
quality infrastructure for boosting economic growth. Approvals for 439 SEZs have
been granted by the Government as on date, of which ~63% relate to the IT/ITES
sector. Quality infrastructure requirement for SEZs would be the main driver for
cement demand.
We expect aggregate cement demand of 1.08bnte over the next five years, an 11.6%
CAGR over FY08-12E.
Table 6: Sector-wise projected cement demand (FY08-12E)

Demand (mnte) Share (%)
Housing 585 54.0
Infrastructure 248 22.9
Commercial, SEZ, Defence etc 160 14.8
Industrial capex 69 6.4
Exports 21 1.9
Total 1,083 100.0
14
Demand-supply parity likely in FY10
Despatches for FY08 were depressed due to capacity constrains. While overall
31mnte is expected to be added in FY09, we believe incremental supplies are likely to
be ~16mnte. Thereby, demand for FY09 would also be restricted to 16mnte even
though incremental demand would have been ~20mnte at 12% growth rate. In such a
scenario, the remaining ~4mnte demand not met in FY09 would get deferred to FY10.
Consequently, total demand for FY10 would be the incremental demand of 23mnte
(assuming 12% growth rate) coupled with the ~4mnte (from FY09E, mentioned
above) totalling to 27mnte. As per our estimates, incremental supplies for FY10E
would be ~29mnte. Hence, despite the expected commissioning of 33mnte capacity,
we expect to see demand-supply parity in FY10E too.
Table 7: Demand/supply
(’000 te)
FY05 FY06 FY07 FY08E FY09E FY10E
Capacity 153,590 159,800 166,740 180,030 211,830 245,130
Inoperative capacity 7,428 7,428 7,430 7,430 4,843 4,843
Effective capacity 146,162 152,372 159,310 172,600 206,987 240,287
Production 127,571 141,805 155,655 166,940 183,300 212,628
Change (%) 8.6 11.2 9.8 7.3 9.8 16.0
Blending ratio (x) 1.23 1.25 1.31 1.31 1.35 1.38
Utilisation (%) 83.1 88.7 93.4 92.7 86.5 86.7
Total availability 127,571 141,805 155,655 166,940 183,300 212,628
Total despatches 127,150 141,594 155,262 166,518 182,837 212,091

Change (%) 8.5 11.4 9.7 7.3 9.8 16.0
Exports 4,072 6,007 5,892 3,750 4,118 4,323
Change (%) 21.1 47.5 (1.9) (36.4) 9.8 5.0
Domestic consumption 123,078 135,587 149,370 162,768 178,719 207,767
Change (%) 8.2 10.2 10.2 9.0 9.8 16.3
Table 8: Regional demand/supply scenario

(mnte)
Incremental demand & supply FY09E FY10E FY11E
North
Demand 3.9 4.4 4.9
Supply 7.9 9.0 5.9
Surplus/(deficit) 3.95 4.61 0.97
Central
Demand 3.0 3.3 3.7
Supply 0.9 4.0 2.2
Surplus/(deficit) (2.08) 0.71 (1.56)
West
Demand 3.8 4.2 4.8
Supply - 1.3 5.6
Surplus/(deficit) (3.79) (2.95) 0.80
East
Demand 3.2 3.6 4.0
Supply 0.2 3.7 3.1
Surplus/(deficit) (3.05) 0.11 (0.93)
South
Demand 5.8 6.4 7.2
Supply 7.3 10.7 11.8
Surplus/(deficit) 1.55 4.25 4.61
15
Pricing pressure unlikely, but upside limited too

Upsurge in cement prices was marked by rising operating rates aided by slowdown in
capacity additions. This, coupled with significant jump in road freight costs following
the Supreme Court’s ban on overloading, forced cement manufacturers to raise prices
~Rs45/bag within three months, January ’06 onwards; thereafter, prices in most
regions have touched all-time highs.
Chart 10: Rising utilisation levels and prices
235 12 month rolling capacity utilisation (RHS) 105

102
220 12 month rolling prices
99
205 96
(Rs/50kg)
93
190
90
(%)
175
87
160 84
81
145
78
130 75
Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07
Chart 11: All-India average cement price trend
240
220
200
(Rs/bag)
180
160
140
120
Jan-02
Jun-02
Nov-02
Jan-04
Jun-04
Nov-04
Feb-06
Jul-06
Nov-06
Feb-08
Sep-01
Sep-03
Sep-05
Sep-07
Apr-03
Apr-05
Apr-07
Source: Cement Manufacturers Association (CMA), I-Sec Research
While our analysis indicates that the industry would continue to witness supply
shortage in FY09E, we do not envisage substantial increase in price levels despite
sharp rise in various input costs for cement companies. Aggressive price increases in
January ’06 managed to catch Government attention, post which the administration
has undertaken various steps to moderate cement prices.
16
Government intervention impacts sentiment
Table 9: Calendar of events (since January ’07)
Date Government action Impact
Jan-07 Reduction of import duty from 12.5% to NIL No impact, international prices still higher
Feb-07 Excise duties raised for cement sold for Cement companies pass on the hike instead of
over Rs190/bag and lowered for cement reducing prices to avail lower excise rate
sold at/below Rs190/bag
Mar-07 Commerce Minister announces price freeze Price freeze operational in most regions except
for one year South
Apr-07 CVD and SAD on cement imports No impact, absence of bulk storage and handling
abolished facilities at ports prevents large quantities of cement
imports
May-07 Three-tier excise duty announced No impact
Jun-07 Finance Minister denies existence of price Prices remain stable in most regions except the
freeze south where they were up Rs35-40/bag despite
price freeze operating earlier
Aug-07 Government mandates MMTC to import No impact, port infrastructure still the problem –
cement from Pakistan quantities of cement imported not enough to impact
prices
Dec-07 MRTP finds cartelisation between cement Cease and desist order issued – No impact
companies for a legal case in 1990
Feb-08 Excise duties on bulk cement and clinker Impact of higher excise passed on
raised
Mar-08 Withdrawal of DEPB scheme for cement No impact – only 2% of cement output exported
exports
Apr-08 Government bans export of cement Prices not likely to come under pressure. However,
upside likely to be capped in coastal Gujarat and
Maharashtra
Various actions by the Government have had minimal real impact. While the
announcement of a price freeze saw cement prices remain largely static in most
regions, the South saw significant prices hikes of Rs35-40/bag during the operation of
the freeze.
Similarly, Government initiatives for encouraging imports with reduction of import

duties, abolition of counter veiling duty (CVD) and easing of Bureau of India
Standards (BIS) procedures for cement imported from Pakistan through Metals &
Mineral Trading Corporation (MMTC) have also not impacted cement prices.
Construction activity in the Middle East has resulted in higher cement prices in its
market. Consequently, export realisations (FOB) have also improved for Pakistani
cement players from US$60-65/te to US$70-75/te at present. Based on FOB imports
at US$70/te, we estimate landed cost of cement at Rs216/bag assuming just 100km
of lead distance from the port. However, lack of bulk storage and handling facilities at
our ports act as the biggest barrier for import of large quantities of cement.
The recent Government action to ban exports of cement and clinker is not likely to
have any major impact on domestic prices as only 3.6% of total cement production is
exported. However, pricing upside may be capped in coastal Gujarat and
Maharashtra.
We feel that the Government’s excessive focus on maintaining cement prices due to
inflation concerns is unjustified. Cement constitutes just 1.7% weightage in the
wholesale price index (WPI). Hence, moderated price hikes are likely to impact
inflation minimally.
17
Table 10: Landed cost of cement from Pakistan
(per tonne)
FOB (US$) 70
Freight (US$) 8
CIF (US$) 78
US$ rate 40
Total (Rs) 3,120
Import duty -
Special additional duty – 4% -
Finance charges (Rs) 40
Handling charges (Rs) 250
Packing charges (Rs) 115
CVD (Rs) -
3,525
Freight for minimum 100km 140
Total 3,665
Dealer margin – 5% (Rs) 183

Subtotal (Rs) 3,848
VAT (Rs) 481
Landed costs 4,329

Landed costs (Rs/bag) 216
However, repeated Government intervention has created uncertainty as regards

sector prospects and cement players themselves have become more cautious while
exercising price increases. We believe that the recent rise in various input costs of
coal, fly ash, pet coke etc will force cement companies to pass them on to consumers.
However, we expect cement companies to desist from aggressive price hikes, as
seen in January ’06, despite expected supply shortage in FY09E to avoid Government
attention. Consequently, we expect average prices to grow 4% in FY09E and remain
flat in FY10E.
18
Cost pressures a concern, but to be passed on
Power and fuel
Power and fuel costs constitute 18-22% of cement companies’ revenues. Indian
cement companies largely depend on domestic coal, imported coal and pet coke as a
source of fuel. Fuel is primarily used in kilns and CPPs. While CIL raised average
prices of coal 10-15% in December ’08, international coal and pet coke prices have
seen a sharper rise since October ’08 (whence international coal up ~60%). This
coupled with hardening of bulk freight rates has resulted in substantial rise in landed
cost of imported coal.
Cement companies such as ACL, ICL and UTCL use imported coal. Lower cost of
captive power for both ACL and UTCL would partly offset impact of fuel costs. ICL has
endeavoured to minimise international freight rates via purchase of two bulk freight
carriers. Other companies such as SCL, Grasim and JKCL that use pet coke are also
likely to face steep rise in fuel costs. However, both Grasim and JKCL will manage
offsetting this impact through commissioning of CPPs.
Companies such as ACC that have high dependence on domestic coal are likely to
face lower cost escalation compared with peers. However, due to the current coal
shortage, cement companies are entitled to only 70% of the linkages. For the
remaining requirement, they have to purchase the fuel from open markets, where
costs are 30-40% higher than linkage coal.
Chart 12: International coal price movement

Coal Spot (Richard Bays SA Index) - US$/te
130
115
100
85
70
55
40
25
Dec-04
Mar-05
Jun-05
Dec-05
Mar-06
Jun-06
Dec-06
Mar-07
Jun-07
Dec-07
Mar-08
Sep-05
Sep-06
Sep-07
Source: Bloomberg
19
Chart 13: Baltic dry freight index
12000
10000
(Baltic Dry Freight Index)

8000
6000
4000
2000
Dec-03
Dec-04
Dec-05
Dec-06
Jul-07
Nov-07
Mar-08
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Apr-07
Source: Bloomberg
Freight costs
Freight costs constitute 12-18% of cement companies’ revenues and depend on lead
distances to markets, freight mix between road, rail & sea as well as proximity to
source of raw material such as fly ash. Freight costs have also seen rising trend on
account of rising diesel prices. However, companies are planning to split grinding
units located closer to key markets or to fly ash sources to reduce impact of higher
freight costs.
Table 11: Freight mix for cement companies

(%)
Rail Road Sea
ACC 50 50 -
Grasim 47 53 -
Ambuja Cement 23 60 17
India Cements 26 74 -
JK Cement 22 78 -
Shree Cement 29 71 -
UltraTech Cement 37 52 11
We believe that cost escalations would be easily passed on to consumers, with the
scenario of excess supply not likely till FY10E.
Cost comparison – Key cement companies

Amongst cement companies in the I-Sec universe, ACC, Ambuja Cement (ACL) and
SCL have the lowest per-tonne power & fuel costs. ACC’s lower power & fuel costs
are on account of high dependence on domestic coal. SCL uses 100% pet coke that
has the least ash content and high calorific value, resulting in higher efficiencies.
However, whilst most companies are expected to see higher energy costs in FY09
vis-à-vis FY08, we expect JKCL and UTCL to register lower energy costs per tonne as
benefits of captive power start kicking in.
20
Chart 14: Power fuel costs for key companies (FY08)
850
800
750
700
650
(Rs/te)
600
550
500
450
400
350
ACC ACL Grasim ICL JKCL SCL UTCL
SCL has the advantage of the lowest lead distance to markets and, hence, the lowest
freight cost per tonne. Usually, regional players (SCL and ICL) have lower freight
costs as their markets are spread over a smaller area. However, JKCL’s higher freight
costs are on account of higher lead distances to markets and higher share of road
freight.
Chart 15: Freight costs for key companies (FY08)
800
700
600
(Rs/te)
500
400
300
200
ACC ACL Grasim ICL JKCL SCL UTCL
21
Poor performance of cement stocks since December ’07 was mainly on account of
expectations on price hikes not materialising, fear of oversupply and overall negative
market sentiment. Consequently, most stocks have declined 16-25% from their
January ’08 levels. Fear of Government intervention has further dampened sentiment
in the sector. However, given strong sector fundamentals with demand-supply parity
likely in FY10E too, we do not see any risk to cement prices for the next two years.
Hence, we feel that the current inexpensive valuations are inexpensive and we are
Overweight on the sector.
Table 12: Relative valuations

Company/price Net sales Adj. PAT EPS P/E EV/Sales EV/E RoCE Reco &
(Rs) Year (Rs mn) (Rs mn) (Rs) (x) (x) (x) (%) EV/te (US$)
ACC CY05 32,034 2,732 19.6 40.7 4.9 30.3 18.0 Sell
799 CY06 58,035 10,810 56.9 14.0 2.6 9.4 38.2
CY07P 70,072 12,640 66.5 12.0 2.2 7.9 35.9 165
CY08E 78,880 13,754 73.2 10.9 1.9 6.7 33.2
CY09E 88,065 14,727 78.4 10.2 1.7 6.2 30.3
Grasim FY06 101,919 10,365 113.0 22.8 2.7 13.0 17.8 Buy
2,574 FY07 140,952 19,675 214.6 12.0 2.0 7.1 31.0
FY08E 163,573 27,436 299.2 8.6 1.8 5.8 31.0 130
FY09E 194,492 33,162 361.7 7.1 1.5 4.6 30.3
FY10E 163,573 36,447 397.5 6.5 1.2 3.9 30.1
Ambuja Cement CY05 26,058 4,358 3.2 35.1 6.3 22.8 15.8 Sell
113 CY06 62,683 15,033 9.9 11.4 2.9 8.4 20.7
CY07P 57,049 13,047 8.6 13.2 2.8 7.9 38.4 222
CY08E 62,769 14,568 9.6 11.8 2.4 7.0 34.7
CY09E 69,745 15,896 10.5 10.8 2.1 6.0 31.6
UltraTech FY06 32,995 2,298 18.5 42.4 3.6 21.1 12.0 Buy
784 FY07 49,108 7,823 62.8 12.5 2.4 8.3 36.0
FY08E 55,692 10,373 83.3 9.4 2.1 6.8 37.0
FY09E 67,544 13,109 105.3 7.4 1.8 5.4 37.4 141
FY10E 78,683 15,226 122.3 6.4 1.5 4.4 36.0
India Cements FY06 15,417 357 1.6 110.8 3.5 20.9 7.9 Hold
180 FY07 22,552 4,788 20.7 8.7 2.7 8.1 21.7
FY08E 30,628 7,023 24.0 7.5 2.3 6.2 27.6
FY09E 38,221 7,650 26.2 6.9 1.9 5.1 28.6 129
FY10E 44,710 8,852 30.3 5.9 1.6 4.3 27.9
Shree Cement FY06 6,948 396 11.4 94.7 6.0 18.8 8.8 Buy
1,078 FY07 14,055 1,575 45.2 23.8 3.1 7.3 17.0
FY08E 19,575 2,869 82.4 13.1 2.1 5.1 26.7
FY09E 27,490 6,099 175.1 6.2 1.3 3.1 44.4 97
FY10E 33,353 8,200 235.4 4.6 0.9 2.2 44.4
JK Cement FY06 8,737 326 4.7 32.1 1.6 10.3 13.4 Buy
150 FY07 12,333 1,786 25.5 5.9 1.2 4.4 31.4
FY08E 14,901 2,926 41.8 3.6 1.0 3.2 35.6
FY09E 16,761 3,625 51.8 2.9 1.1 3.2 32.7 101
FY10E 21,872 4,236 60.6 2.5 0.7 2.4 30.5
22
Cement companies get divergent valuations based on parameters such as plant
location, diversified businesses, efficiently levels and EBITDA margin. Historically,
ACL was valued at a premium over peers due to efficiency levels while Grasim always
received a conglomerate discount on account of diversified businesses. However,
over time, with capacity expansion and foray into new markets, ACL has gradually lost
its competitive edge. Hence, we feel that the current valuation premium to peers is
unjustified. Similarly, we believe that companies (such as JKCL and UTCL) that have
been registering sustainable improvement in efficiencies are likely to get re-rated.
Further, current valuations of SCL do not seem to factor its high efficiency levels.
We prefer stocks with volume upside and/or cost savings

Our expectation of 4% and 0% growth in average realisations for the next two years
would mean that companies that are likely to show strong volume growth and/or
significant cost savings would register higher earnings growth. We expect Grasim,
UTCL and SCL to report higher volumes from fresh capacities commissioned recently,
while UTCL and JKCL would benefit from lower cost of captive power. ACC and ACL
are expected to register lower earnings growth on account of volume growth
restriction, although impact of rising costs would partly be offset by captive power
capacities. ACC and ACL are most expensive in the I-Sec Cement universe and,
hence, we initiate coverage on them with a SELL. We initiate coverage on Grasim,
UTCL, JKCL and SCL with a BUY, with Grasim and SCL being our top picks in the
sector.
23
Key risks
Estimates – Incremental supply and demand
Our FY09 and FY10 incremental supply estimates are based on our interaction with
cement equipment suppliers and are at variance with claims of cement companies.
Should large number of capacities get commissioned before schedule, an oversupply
could result in pricing pressures from FY09 itself. Further, with housing and
infrastructure being key demand drivers, significant slowdown in infrastructure project
implementation could affect demand estimates.
Government pressure
We have assumed a conservative 4% and 0% growth in prices for FY09E and FY10E
respectively, despite our belief of supply shortage during the period. We expect
cement companies to avoid aggressive price hikes to evade Government intervention.
However, given the current inflationary pressures, the Government may compel
cement players to cut prices or avoid future price increases. Such a scenario (such as
a price freeze in March ’07) could impact our forecast as well as dampen valuations
and sentiment.
Input cost pressure

While cement companies have been facing sharp cost increases since the past six
months, they have recently begun passing on the increases via price hikes. Our
forecast assumes fuel prices at the current high levels. However, should price of pet
coke and international coal rise substantially from current levels, inability of effecting
price hikes from fear of Government intervention could put severe pressure on
margins.
24
Index of Tables and Charts
Tables
Table 1: Relative valuations..................................................................................................5
Table 2: Housing demand projection ..................................................................................11
Table 3: Road projects under NHDP ..................................................................................12
Table 4: Demand from power projects................................................................................13
Table 5: Demand from infrastructure ..................................................................................13
Table 6: Sector-wise projected cement demand (FY08-12E).............................................14
Table 7: Demand/supply .....................................................................................................15
Table 8: Regional demand/supply scenario........................................................................15
Table 9: Calendar of events (since January ’07) ................................................................17
Table 10: Landed cost of cement from Pakistan ................................................................18
Table 11: Freight mix for cement companies......................................................................20
Table 12: Relative valuations..............................................................................................22
Charts
Chart 1: Utilisation versus cement prices .............................................................................4
Chart 2: Key cement equipment suppliers and market share (excl. China) .........................6
Chart 3: Global contracted kiln capacity trend (excl. China).................................................7
Chart 4: Order inflow and backlog trend of key companies..................................................7
Chart 5: Expected incremental supplies over the next three years ......................................8
Chart 6: Production and consumption trend .........................................................................9
Chart 7: GDP versus cement demand growth ....................................................................10
Chart 8: Share of the 25-44yr age group in total population...............................................11
Chart 9: Infrastructure spending in X & XI FYPs ................................................................12
Chart 10: Rising utilisation levels and prices ......................................................................16
Chart 11: All-India average cement price trend ..................................................................16
Chart 12: International coal price movement ......................................................................19
Chart 13: Baltic dry freight index.........................................................................................20
Chart 14: Power fuel costs for key companies (FY08) .......................................................21
Chart 15: Freight costs for key companies (FY08) .............................................................21
25
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26
Equity Research
April 21, 2008 INDIA
BSE Sensex: 16481
ACC SELL
Lacking strength Rs799

Cement
Shareholding pattern ACC, the largest cement player in India, will likely witness muted volume growth
Sep Dec Mar in the next two years. While the company is expected to add ~1.5mnte capacity
'07 '07 '08
Promoters 43.0 43.0 43.0 towards end-CY08E, larger expansions at Wadi and Chanda (3mnte each) would
Institutional
investors 36.3 36.4 36.2 be operational only in H2CY09E and CY10E respectively. Overall, ACC will post
MFs and UTI 1.8 2.0 3.1
Insurance Cos. 15.5 15.8 17.8
slower earnings growth versus peers. At the current market price, it is amongst
FIIs 18.8 18.4 15.1 the most expensive stocks in the I-Sec Cement universe. We initiate coverage
Others 20.7 20.6 20.8
Source: CMIE with SELL rating and Rs769/share price target in the next 12-18 months.
f Muted topline growth. ACC plans capacity additions of 1.28mnte at Bargarh,
Orissa and 0.22mnte at Madukkarai, Tamil Nadu, both to be operational by end-
CY08. While these capacities are small, the benefits would only accrue in CY09.
Further, benefits of larger capacity additions at Wadi and Chanda would accrue
mainly in CY10E. Hence, the company’s topline growth will face capacity
constraints.
Price chart
f Lower impact of rising fuel costs. ~90% of ACC’s fuel requirements are met
1,400
through domestic coal, for which price hikes are much lower than international coal
1,200 or pet coke. However, the company will need to buy 20% of its requirement from
open market at higher rates. We believe that the impact from this will be lower than
(Rs)
1,000
peers with higher share of pet coke or imported coal. Consequently, ACC could
800 witness margin expansion, primarily aided by moderate realisations.
600 f Earnings slowdown. We expect ACC to post earnings CAGR of 8% in the next two
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
years, mainly owing to volume constraints and higher fixed costs. Strong free
cashflow (FCF) of over Rs14bn would help lower D/E to 0.4x in CY08E and further
to 0.3x in CY09E.
f Expensive valuations. ACC trades at CY08E & CY09E P/E of 10.9x and 10.2x
respectively and EV/te of US$165. The company is the second most expensive
stock in the I-Sec Cement universe and, given the muted earnings growth, we
initiate coverage with SELL and fair value of Rs769/share in the next 12-18 months.
Market Cap Rs863.3bn/US$21.6bn Year to Dec CY06 CY07P CY08E CY09E

Reuters/Bloomberg ACC.BO/ACC IN Revenue (Rs mn) 58,035 70,072 78,880 88,065
Shares Outstanding (mn) 188 Net Income (Rs mn) 10,810 12,640 13,754 14,727
52-week Range (Rs) 1315/608 EPS (Rs) 56.9 66.5 73.2 78.4
Free Float (%) 57.0 % Chg YoY 190.0 16.9 10.0 7.1
FII (%) 15.1 P/E (x) 14.0 12.0 10.9 10.2
Daily Volume (US$'000) 16,730 CEPS (Rs) 71.1 81.5 88.9 96.4
Absolute Return 3m (%) (7.4) EV/E (x) 9.4 7.9 6.7 6.2
Absolute Return 12m (%) (21.9) Dividend Yield 1.0 2.5 2.5 2.6
Novonil Guha Sensex Return 3m (%) (13.3) RoCE (%) 38.2 35.9 33.2 30.3
+91 22 6637 7385 Sensex Return 12m (%) (18.8) RoE (%) 41.0 34.7 29.7 26.2

ACC, April 21, 2008 ICICI Securities
Largest player, but volume growth muted
While ACC added ~1.7mnte capacity in CY07 mainly through de-bottlenecking, it
would be adding another ~1.5mnte in CY08. Capacity additions in CY08 are not large
and will materialise at end year. Consequently, volume growth in CY08 is expected to
be benign as benefits from capacity augmentation will largely accrue in CY09.
Table 1: Capacity addition plans

CY07 CY08E CY09E CY10E
Tikaria (Uttar Pradesh) 0.31
Lakheri (Rajasthan) 0.90
Kymore (Madhya Pradesh) 0.50
Bargarh (Orissa) 1.28
Madukkarai (Tamil Nadu) 0.22
Wadi (Karnataka) 3.00
Chanda (Maharashtra) 3.00
Total 1.71 1.50 3.00 3.00
Source: Company data
ACC’s 3mnte expansion at Wadi and its split grinding unit will likely be commissioned
only in mid-CY09E. At present, most capacity additions are lagging behind their
original timelines and even a three-month delay in this project would erode substantial
volume benefits for CY09E. However, in our forecasts, we have assumed that the
plant will be commissioned as per schedule.
Continues to be largest player in India

Table 2: Key markets and market share
Market % of total 9-yr consumption Share of total
share (%) despatches CAGR (%) consumption (%)
North
Uttar Pradesh & Uttaranchal 20.2 19.8 8.9 12.2
Rajasthan 1.9 1.0 9.9 6.1
Punjab 30.9 10.9 6.0 4.4
Haryana 6.50 2.0 12.2 3.8
Himachal Pradesh 45.7 4.6 14.4 1.3
West
Goa 35.8 0.8 0.7 6.8
Maharashtra 14.0 13.7 7.2 12.2
South
Tamil Nadu 2.6 1.8 7.4 8.6
Karnataka 16.0 9.6 11.2 7.5
Kerala 11.9 4.5 6.8 4.7
Andhra Pradesh 4.7 3.1 8.5 8.2
East
West Bengal 15.9 5.9 6.7 4.6
Bihar & Jharkhand 20.5 7.9 10.1 4.8
Orissa 18.9 4.5 10.9 3.0
Central
Madhya Pradesh and Chhattisgarh 11.0 6.2 9.6 7.0
Total 12.4 96.3 8.1 100.0

28
ACC remains the largest cement player with pan-India presence. The company’s all-
India presence helps it insulate itself from regional variations in demand and prices.
However, ACC’s market share has been eroding gradually (excluding FY04, when it
acquired IDCOL Cement) due to slower pace of capacity additions compared with
peers. We expect market share erosion to continue in the next couple of years till
Wadi and Chanda expansions go onstream.
Chart 1: Market share trends in key regions
22 All India Norh East
20
18
(%)
16
14
12
10
FY03 FY04 FY05 FY06 FY07
29
Lower impact of fuel costs versus peers

~90% of ACC’s coal requirements are sourced domestically. Imported coal is primarily
used at its 1mnte plant in Tamil Nadu. However, Coal India (CIL) has raised coal
prices by an average of 10-15% in December ’07. Further, of the total domestic coal
consumed, ~20-25% has to be sourced from open markets (due to shortage of
domestic coal), where prices are ~25-30% higher than CIL rates. This exposes the
company to significant variations in the coal cost depending on the share of coal
purchased from open markets. However, we believe that ACC’s fuel costs are going to
be more benign than most of its peers who use imported coal or pet coke.
Savings in power costs unlikely

~70% of ACC’s power requirements are met captively. This share has risen post
commissioning of a 25MW captive power plant (CPP) at Lakheri, Rajasthan along with
capacity augmentation in CY07. Another 30MW CPP in Orissa and the Bargarh
expansion is expected by end CY08 following which, we expect share of captive
power to be ~82%. ACC would continue to purchase power from the grid for its
Himachal Pradesh plant as it is inexpensive hydro power. We believe CPP additions
are too small to have substantial impact on power cost savings.
Chart 2: Power and fuel costs trend

800 Pow er & Fuel 3.5
Average per unit cost of pow er (RHS)
700 3.0
600
2.5
500
(Rs/kWh)
2.0
(Rs/te)
400
1.5
300
1.0
200
100 0.5
0 0.0
9M2006 CY06 CY07P CY08E CY09E
30
Sharp surge in SG&A, likely to sustain
During CY07, ACC’s administrative and other expenses surged sharply due to various
management initiatives such as marketing excellence, ERP implementation and other
HR initiatives. While some costs (such as part of ERP-implementation costs) are one-
time expenses, we expect other costs to remain high without any commensurate
financial benefit.
Chart 3: SG&A expenses

5,500 1,100
SG&A expenses SG&A (RHS)
5,000 1,000
4,500 900
4,000 800
(Rs mn)
(Rs/te)
3,500 700
3,000 600
2,500 500
2,000 400
1,500 300
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07
31
Earnings growth unimpressive

Table 3: Performance trend and forecast assumptions
(’000 te}
CY06 CY07 CY08E CY09E CY10E
Capacity 19,909 21,619 23,039 26,039 29,039
Production 18,733 19,876 21,267 23,819 26,201
Capacity utilisation (%) 94.1 91.9 92.3 91.5 90.2
Sales 18,357 19,876 21,267 23,819 26,201
Growth (%) 45.4 8.3 7.0 12.0 10.0
Realisations (Rs/te) 2,893 3,299 3,480 3,480 3,236
Growth (%) 32.1 14.0 5.5 - (7.0)
Moderate topline growth. We expect ACC to post topline CAGR of 12% over the
next two years. The company’s volumes are likely to improve 7% and 12% in CY08E
and CY09E respectively. We expect ACC to add just 1.5mnte as of end-CY08E and
another 3mnte at Wadi by mid-CY09E. Hence, substantial benefits from capacity
additions are likely to come only in CY09E, resulting in lower volume growth in CY08E.
We have assumed average realisations to grow 5.5% in CY08E and remain flat for
CY09E.
Chart 4: Sales, EBITDA and EBITDA margin movement
100,000 Net sales EBITDA EBITDA Margin (RHS) 30

90,000 28
80,000 26
70,000 24
60,000 22
(Rs mn)
(%)
50,000 20
40,000 18
30,000 16
20,000 14
10,000 12
0 10
Margin improvement in CY08. Rising fuel cost would have relatively lower impact on
ACC’s operations versus peers as 90% of the company’s coal requirements are met
from domestic sources. While cost of international coal has risen ~50-60%, domestic
coal prices surged just 10-15% in December ’07. While ACC will also have to
purchase coal from the open markets for ~20% of its requirements, the net increase in
the cost of fuel for the company would be lower than peers using international coal or
pet coke. Hence, the expected growth in realisations for CY08E would more-than-
offset impact of higher input costs (coal, fly ash etc) and SG&A costs. Consequently,
we expect 120bps rise in margins for CY08E. In CY09E, however, margins are
expected to decline 112bps on account of flat realisations.
ACC’s EBITDA/te is expected to improve to Rs1,060 in CY08E from Rs965 in CY07,

before falling to Rs1,015 in CY09E.
32
Slower topline growth, margin contraction in CY09 and higher interest costs would
result in moderate earnings growth of 8% in the next two years.
Chart 5: Key costs and EBITDA/te

1,200 Pow er & Fuel Freight EBITDA/tonne
1,000
(Rs/te) 800
600
400
200
0
Chart 6: FCF and D/E

19,000 Free cashflow D/E (RHS) 1.5
14,000 1.0
9,000 0.5
(Rs mn)
(x)
4,000 0.0
(1,000) -0.5
(6,000) -1.0
ACC is likely to generate FCF in excess of Rs14bn in the next two years despite
substantial capex of ~Rs29bn for Wadi (3mnte) and Chanda (3mnte). Therefore, we
expect ACC’s D/E to remain benign at 0.4x & 0.3x in CY08E & CY09E respectively.
33
Chart 7: RoCE and RoE trends
45
RoCE RoE
40
35
(%) 30
25
20
ACC’s return ratios are expected to witness a declining trend, mainly owing to
earnings growth slowdown and large capex plan (6mnte), the returns from which are
only expected H2CY09E onwards.
34
Expensive valuations
At the current market price, ACC is valued at CY08E & CY09E P/E of 10.9x and 10.2x
and EV/E of 6.7x & 6.2x respectively. On EV/te, the company is valued at US$165.
ACC is among the most expensive companies under our coverage universe (second
only to Ambuja Cement). However, with volume growth likely to be restricted, cost
escalation will result in lower earnings growth in the next two years. Consequently, we
believe that the current valuations are expensive. Our target price of Rs769 assumes
CY08E P/E & EV/E of 10.5x & 6.5x respectively. We initiate coverage with SELL.
Chart 8: Rolling P/E bands
1,600
1,400
18x
1,200
1,000 14x
(Rs)
800
10x
600
400
200
0
Jul-02
Oct-02
Feb-03
May-03
Dec-03
Jul-04
Nov-04
Feb-05
May-05
Dec-05
Jul-06
Nov-06
Feb-07
Jun-07
Dec-07
Sep-03
Sep-05
Sep-07
Apr-02
Apr-04
Apr-06
Apr-08
Source: Bloomberg, I-Sec Research
Chart 9: Rolling EV/E bands
400,000
350,000
300,000
15x
250,000
(Rs mn)
200,000 10x
150,000
100,000 5x
50,000
0
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
35
Financial Summary
Table 4: Profit and Loss Statement Table 6: Cash Flow Statement
(Rs mn, year ending Dec 31) (Rs mn, year ending Dec 31)
CY06 CY07 CY08E CY09E CY06 CY07 CY08E CY09E
Operating Revenues (Sales) 58,035 70,072 78,880 88,065 Operating Cash flow 12,744 12,498 16,470 17,676
of which Domestic 58,035 70,072 78,880 88,065 Working Capital changes 461 (2,607) (1,719) (1,883)
Operating Expenses 41,803 50,897 56,347 63,898 Capital Commitments (4,358) (11,281) (11,802) (9,623)
EBITDA 16,232 19,175 22,533 24,168 Net Operating FCF 8,848 (1,391) 2,948 6,170
% margins 28 27 29 27 Investing Activities (633) (264) 328 656
Depreciation & Amortisation 2,543 2,668 2,950 3,373 Issue of Share Capital 22 1 - -
Gross Interest 752 808 974 1,062 Buyback of shares - - - -
Other Income 1,560 1,857 1,920 2,248 Inc(Dec) in Borrowings (2,602) 4,474 2,899 (280)
Recurring PBT 14,498 17,556 20,529 21,980 Dividend paid (1,713) (4,283) (4,283) (4,498)
Add: Extraordinaries 1,508 1,748 - - Extraordinary Items 1,508 1,748 - -
Less: Taxes 3,688 4,917 6,774 7,254 Chg. in Cash & Bank 5,174 - 620 682
- Current tax 3,740 4,565 5,337 5,715 Source: Company data, I-Sec Research
- Deferred tax (52) 351 1,437 1,539
Less: Minority Interest - - 1 2 Table 7: Key Ratios
Net Income (Reported) 12,318 14,388 13,754 14,727
Recurring Net Income 10,810 12,640 13,754 14,727 (Year ending Dec 31)
Source: Company data, I-Sec Research CY06 CY07 CY08E CY09E
Per Share Data (Rs)
Table 5: Balance Sheet EPS(Basic) 65.6 76.6 73.2 78.4
(Rs mn, year ending Dec 31) Diluted Recurring EPS 56.9 66.5 73.2 78.4
CY06 CY07 CY08E CY09E Diluted Recurring CEPS 71.1 81.5 88.9 96.4
Assets Dividend per share 8.0 20.0 20.0 21.0
Total Current Assets 19,683 21,494 23,869 26,471 Book Value 167.3 221.1 271.5 326.0
of which 6,202 6,202 6,822 7,504
Cash & cash equivalents Growth Ratios (% YoY)
Current Liab. & Prov. 14,890 12,790 13,074 13,396 Operating Income 81.2 20.7 12.6 11.6
Net Current Assets 4,792 8,704 10,795 13,075 EBITDA 213.1 18.1 17.5 7.3
Investments of which 5,035 7,147 8,778 10,410 Recurring Net Income 295.7 16.9 8.8 7.1
Strategic/Group 789 780 819 860 Diluted Recurring EPS 190.0 16.9 10.0 7.1
Marketable 4,247 6,367 7,959 9,551 Diluted Recurring CEPS 201.6 14.6 9.1 8.3
Net Fixed Assets* 29,225 36,661 34,961 47,188
of which Valuation Ratios (x)
Intangibles - - - - P/E 14.0 12.0 10.9 10.2
Capital Work-in-Progress 4,734 5,920 16,433 10,416 P/CEPS 11.2 9.8 9.0 8.3
Total Assets 43,787 58,432 70,967 81,089 P/BV 4.8 3.6 2.9 2.5
EV / EBITDA 9.4 7.9 6.7 6.2
Liabilities EV / Operating Income 2.6 2.2 1.9 1.7
Borrowings 9,160 13,633 16,532 16,252 EV / Operating FCF 11.5 15.3 10.3 9.5
Deferred Tax Liability 3,207 3,271 3,435 3,607
Minority Interest - - 1 2 Operating Ratios (%)
Equity Share Capital 1,878 1,878 1,878 1,878 Raw Material / Sales 15.4 15.0 14.6 14.6
Face value per share (Rs) 10 10 10 10 SG&A / Sales 4.3 5.0 5.0 5.0
Reserves & Surplus* 29,552 39,656 49,127 59,356 Other Income / PBT 10.8 10.6 9.4 10.2
Less: Misc. Exp n.w.o. 9 7 5 4 Effective Tax Rate 22.8 25.0 33.0 33.0
Net Worth 31,420 41,527 51,000 61,230 NWC / Total Assets (0.0) 0.0 0.1 0.1
Total Liabilities 43,787 58,432 70,967 81,089 Inventory (x) 4.9 5.2 4.8 4.7
Source: Company data, I-Sec Research Receivables (days) 11.7 11.3 12.0 12.5
*excluding revaluation reserves Payable (days) 71.0 58.3 50.0 44.1
D/E Ratio (x) 0.4 0.4 0.4 0.3
Profitability Ratios (%)

Rec. Net Income Margins 18.1 17.6 17.0 16.3
RoCE 38.2 35.9 33.2 30.3
RoNW 41.0 34.7 29.7 26.2
Dividend Payout 14.1 30.1 27.3 26.8
36
Tables
Table 1: Capacity addition plans.........................................................................................28
Table 2: Key markets and market share.............................................................................28
Table 3: Performance trend and forecast assumptions ......................................................32
Table 4: Profit and Loss Statement ....................................................................................36
Table 5: Balance Sheet.......................................................................................................36
Table 6: Cash Flow Statement............................................................................................36
Table 7: Key Ratios.............................................................................................................36
Charts
Chart 1: Market share trends in key regions.......................................................................29
Chart 2: Power and fuel costs trend ...................................................................................30
Chart 3: SG&A expenses....................................................................................................31
Chart 4: Sales, EBITDA and EBITDA margin movement ...................................................32
Chart 5: Key costs and EBITDA/te .....................................................................................33
Chart 6: FCF and D/E .........................................................................................................33
Chart 7: RoCE and RoE trends...........................................................................................34
Chart 8: Rolling P/E bands..................................................................................................35
Chart 9: Rolling EV/E bands ...............................................................................................35
37
38
Equity Research
April 21, 2008 INDIA
BSE Sensex: 16481
Ambuja Cement SELL
Cement Shedding sheen Rs113

Ambuja Cement (ACL), which previously featured amongst the most efficient
Shareholding pattern cement companies, has gradually lost its cost advantage on account of expansion
Sep Dec Mar
'07 '07 '08 and foray into new markets. With large capacity addition (6mnte) expected to
Promoters 37.8 46.5 46.5 come onstream only in mid-to-late CY09, capacity constraints and cost pressure
Institutional
investors 44.8 37.6 36.7 would slowdown earnings growth in the next two years. At the current market
MFs and UTI 2.6 0.6 0.3
Insurance Cos. 14.6 13.5 13.4 price, ACL is the most expensive stock in the I-Sec Cement universe and we
FIIs 27.6 23.5 23.1 believe these premium valuations are unjustified. We initiate coverage with SELL
Others 17.4 16.0 16.8
Source: CMIE rating and price target of Rs109/share.
f Topline growth subdued. ACL’s expansions in Bhattapara, Chhattisgarh and Rauri

(in Himachal Pradesh) at 3mnte each are expected to be operational in mid-to-late
Price chart CY09. Though the company is adding a 4mnte grinding unit, increase in output
160 would be insignificant. Consequently, capacity constraints would slowdown topline
150 growth.
140
f Cost pressure to affect margins. ACL depends on imported coal for ~40% of its
(Rs)
130
fuel requirements, the cost of which has risen sharply. ACL plans to commission
120
~178MW of captive power by end-CY08, of which 60MW has already been
110
commissioned in Gujarat. However, impact of imported coal would be partly offset by
100
the commissioning of captive power, resulting in margin contraction.
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
f Earnings growth slowdown. We expect ACL’s earnings CAGR at 10% in the next
two years, mainly owing to cost escalations and volume constraints. ACL should
generate free cashflows (FCFs) of ~Rs18bn despite large capex plans. We expect
ACL’s CY08E D/E to be benign at 0.11x but further dip to 0.08x in CY09E.
f Expensive valuations. ACL trades at CY08E & CY09E P/E of 11.8x & 10.8x and
EV/te of US$222 ACL is the most expensive stock in the I-Sec Cement universe and
the current premium to peers is unjustified. Consequently, we initiate coverage with
SELL rating and Rs109/share fair value.
Market Cap Rs171.6bn/US$4.3bn Year to Dec CY06 CY07P CY08E CY09E

Reuters/Bloomberg ABUJ.BO/ACEM IN Revenue (Rs mn) 62,683 57,049 62,769 69,745
Shares Outstanding (mn) 1,517 Net Income (Rs mn) 15,033 13,047 14,568 15,896
Free Float (%) 53.5 % Chg YoY 207.4 (13.2) 11.7 9.1
FII (%) 23.1 P/E (x) 11.4 13.2 11.8 10.8

Ambuja Cement, April 21, 2008 ICICI Securities
New capacity addition only in CY09; volume growth
muted
ACL is currently implementing two projects that are expected to be commissioned only
in CY09 – 3mnte plant at Bhatapara, Chhattisgarh, likely to be operational by Q2CY09
and 3mnte plant at Rauri, Himachal Pradesh, expected to be commissioned in
Q4CY09. In the interim, ACL is expected to set up four grinding units at Surat,
Panipat, Ahmedabad and Dadri totalling 5mnte. Two additional grinding units at
Nalagarh (Himachal Pradesh, 1.5mnte) and Barh (Bihar, 1mnte) are scheduled to be
operational only in CY10. These grinding units are strategically located close to power
plants which will allow cheaper sourcing of fly ash.
Table 1: Capex plans

Capex plans CY07 CY08 CY09
Rajasthan (Clinker) 0.4
Farakka, West Bengal (Grinding) 1.0
Rourkee, Uttar Pradesh (Grinding) 1.0
Surat, Gujarat (Grinding) 1.0
Dadri, Uttar Pradesh (Grinding) 1.5
Panipat, Haryana (Grinding) 1.0
Rauri, Himachal Pradesh (Clinker) 3.0
Bhatapara, Chhattisgarh, (Clinker) 3.0
Ahmedabad, Gujarat (Grinding) 1.5
Total 2.4 2.0 7.5
Given that substantial capacities are expected only in CY09, volume growth in CY08 is
likely to be muted. Even for CY09, only part of the benefit from new capacities will flow
in as the plants will be operational during the course of the year. While ACL has
already commissioned two grinding units in CY07 and would commission a 4.5mnte
grinding unit in CY08, these will only marginally enhance production capacity though
help in freight and logistic benefits. ACL is likely to see market erosion till CY09.
Chart 1: Market share trend
22 All India Norh West East
20
18
16
(%)
14
12
10
6
40
Previously, ACL primarily focused on western and northern regions. However, with the
acquisition of Ambuja Cement Eastern (erstwhile Modi Cement) and its subsequent
merger with ACL, the company now has strong foothold in the East. Since FY06, only
the East has seen market share improvement.

North
Rajasthan 14.0 8.7 9.9 6.1
Punjab 28.7 12.7 6.0 4.4
Haryana 14.1 5.3 12.2 3.8
Himachal Pradesh 48.3 6.1 14.4 1.3
Chandigarh (UT) 20.6 0.5 0.2
West
Gujarat 19.7 13.5 4.5 6.8
Maharashtra 19.7 24.4 7.2 12.2
Central
East
West Bengal 19.2 9.0 6.7 4.64
Assam 8.1 0.6 7.4 0.70
Orissa 3.8 1.2 10.9 2.99
Total 9.88 93.2 8.1 100.0

Efficiencies to be affected by rising fuel cost

ACL was previously amongst the most efficient companies in India due to use of
captive and cheap power as well as lower freight costs from sea transport. However,
over the years, with rising diesel cost, capacity expansion in new markets, reduction in
share of sea freight and increase in average lead distances, the company has
gradually lost its key cost advantages.
To address the rising diesel cost concern and ensure reliability and quality of power,
ACC is currently implementing fresh thermal capacities totalling 178MW. We expect
average Re1/unit savings from captive power plant (CPP) operations.
Table 3: Capex on captive power

Time of
Location Power (MW) commissioning
Ambujanagar (Gujarat) 30 Q1CY07
Bhattapara (Chhattisgarh) 15 Q2CY08
Bhatapara (Chhattisgarh) 33 Q4CY08
Rabariyawas (Rajasthan) 19 Q1CY08
Chandrapur (Maharashtra) 15 Q1CY08
Ropar (Punjab) 6 Q2CY07
Total 178
41
Chart 2: Power and fuel costs trend
Pow er & Fuel

700 3.5
600 3.0
500 2.5
(Rs/kWh)
(Rs/te)
400 2.0
300 1.5
200 1.0
100 0.5
0 0.0
FY05 CY06 CY07P CY08E CY09E
While the commissioning of CPPs is likely to bring down the unit cost of power in the
next two years, it would only partly offset the impact of rising fuel costs. ACL imports
~40% of its total coal requirements at present and the sharp rise in international coal
prices along with bulk freight rates is bound to affect overall energy costs. Further,
power plants located in Gujarat would have to use international coal for operations,
thereby reducing potential savings from captive power.
Chart 3: Key cost trend
1,400 Pow er & Fuel Freight EBITDA/te
1,200
1,000
800
(Rs/te)
600
400
200
0
42
Lower earnings growth versus peers

(’000 te)
CY06 CY07P CY08E CY09E CY10E
Capacity 23,450 17,050 17,300 23,300 23,300
Production 22,633 16,839 17,512 19,439 22,355
Capacity utilisation (%) 96.5 98.8 101.2 83.4 95.9
Sales 22,602 16,839 17,512 19,439 22,355
Growth (%) 77.7 (25.5) 4.0 11.0 15.0
Realisation (Rs/te) 3,102 3,842 4,071 4,080 3,806
Growth (%) 30.5 23.9 6.0 0.2 (6.7)
Exports 2,503 1,600 1,401 1,361 1,565
Growth (%) 42.6 (36.1) (12.4) (2.9) 15.0
Muted topline growth. We expect ACL to face volume growth constraints in CY08
and in some part of CY09. While the company’s grinding units at Surat and Panipat
will help achieve freight and logistic benefits, incremental volumes will only flow in from
clinkerisation units at Bhatapara and Rauri that are expected to be commissioned in
H2CY09. Consequently, we expect volume growth of 4% and 11% in CY08E and
CY09E respectively. This coupled with 5.5% higher realisations in CY08E and flat
realisation growth in CY09E will result in revenue growth of 10.6% in the next two
years.

70,000
35
60,000
30
50,000
(Rs mn)
(%)
40,000 25
30,000
20
20,000
15
10,000
0 10
Captive power to partly offset rising input costs. The rising cost of international
coal along with bulk freight rates is bound to affect ACL’s efficiencies (~40% of the
company’s coal requirements are imported). However, the company is implementing
~178MW of CPPs (60MW already commissioned), which should be commissioned by
end-CY08 and help partly offset the impact of rising imported coal. However, the
60MW plant, which has already been commissioned, would rely on imported coal as
fuel, thereby minimising the benefits of captive power.
43
With Holcim acquiring management control over ACL, the management is
implementing various programmes across the company, which include HR-related
programmes and building robust business systems & processes through ERP
implementation. These initiatives would result in higher SG&A expenses without an
immediate financial benefit. Consequently, we expect ~92bps decline in EBITDA
margin to 34.8% in CY08E and further 32bps decline to 34.4% in CY09E.
Chart 5: EBITDA/te
1,400
1,200
1,000
800
(Rs/te)
600
400
200
0
Lower topline growth coupled with cost pressures will slowdown earnings growth for
ACL in the next two years. Consequently, we expect ACC to post bottomline CAGR of
10% in the next two years, much lower than most of peers.
ACL, which exports ~7-8% of its output at present, is likely to be affected by the recent
export ban. However, the impact could be marginal as export quantities are expected
to be absorbed by the western markets, given the acute supply shortage expected in
FY09. Further, domestic realisations, which are ~Rs250/te higher than export rates,
are likely to part compensate for the loss of export volumes. While the export ban is
unlikely to be a long-term measure, ACL’s earnings would be affected ~2-6% if the
ban continues through the year.

16,000 0.7
14,000 0.6
12,000
0.5
(Rs mn)
10,000
(x)
0.4
8,000
0.3
6,000
4,000 0.2
2,000 0.1
0 0.0
Source: Company, I-Sec Research
44
ACL is a cash-rich company and a significant part of its capex (till CY09) will be largely
met via internal accruals. Hence, despite the current capex plan, the company is likely
to generate FCFs of ~Rs17.9bn in the next two years. The company’s D/E would be
as low as 0.11x in CY08E and further decline to 0.08x in CY09E. ACL is currently net
cash positive and will continue to remain so in CY09E.
ACL’s return ratios are expected to decline, mainly due to significant capex, the
benefits of which can be expected only after commissioning of the 6mnte capacity post
H2CY09E.

45
RoCE RoE
40
35
(%)
30
25
20
15
45
Expensive valuations
At the current market price, ACL is trading at CY08E & CY09E P/E of 11.8x & 10.8x
and EV/E of 7.0x and 6.0x respectively. On EV/te, the company is valued at US$222.
ACL is the most expensive company under the I-Sec Cement universe. Historically,
the company has been valued at a premium to peers given its high efficiency and
freight cost advantages. ACL is also likely to see volume growth restriction in the next
two years and only part of its cost escalations would be offset by captive power. Over
the years, owing to rising fuel costs, expansion and foray in new markets, the
company has gradually lost its key cost advantages. Consequently, we believe that
current substantial premiums to peers are likely to shrink. Our target price of Rs109
assumes CY08E P/E and EV/E of 11.5x and 6.9x respectively. We initiate coverage
with SELL.

200
180 18x
160
140 13x
120
(Rs)
100
80
60 8x
40
20
0
Jul-02
Nov-02
Mar-03
Dec-03
Jan-05
May-05
Oct-05
Feb-06
Jun-06
Nov-06
Mar-07
Jul-07
Dec-07
Aug-03
Apr-04
Aug-04
Apr-08

300,000
12x
250,000
200,000 9x
(Rs mn)
150,000
6x
100,000
50,000
0
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
46
Financial Summary
(Rs mn, year ending Dec 31) (Rs mn, year ending Dec 31)
CY06 CY07 CY08E CY09E CY06 CY07 CY08E CY09E
of which Exports 5,146 3,898 3,485 3,224 Working Capital changes (543) (639) (845) (467)
of which Domestic 57,537 53,152 59,284 66,521 Capital Commitments (14,095) 2,260 (9,457) (5,394)
Operating Expenses 41,352 36,695 40,957 45,732 Net Operating FCF 5,460 17,063 5,879 12,047
EBITDA 21,331 20,354 21,812 24,012 Investing Activities 1,991 (1,244) (1,319) (5,202)
% margins 34 36 35 34 Issue of Share Capital 330 - - -
Depreciation & Amortisation 3,261 2,363 2,546 3,104 Buyback of shares - - - -
Gross Interest 1,132 590 363 271 Inc(Dec) in Borrowings (2,621) (4,713) (1,285) (649)
Other Income 1,479 1,697 2,210 2,739 Dividend paid (2,768) (2,941) (2,941) (2,941)
Recurring PBT 18,416 19,098 21,113 23,376 Extraordinary Items 523 (2,194) (1,228) (1,597)
Add: Extraordinaries - 4,644 3,082 - Chg. in Cash & Bank 2,916 10,615 2,188 1,658
Less: Taxes 3,384 6,050 6,545 7,480 Source: Company data, I-Sec Research
- Current tax 3,353 6,059 5,278 5,844
- Deferred tax 31 (9) 1,267 1,636 Table 8: Key Ratios
Less: Minority Interest - - - -
Net Income (Reported) 15,033 17,691 17,650 15,896 (Year ending Dec 31)
Recurring Net Income 15,033 13,047 14,568 15,896 CY06 CY07 CY08E CY09E
Source: Company data, I-Sec Research Per Share Data (Rs)
EPS(Basic) 9.9 11.7 11.6 10.5
Diluted Recurring EPS 9.9 8.6 9.6 10.5
Table 6: Balance Sheet Diluted Recurring CEPS 12.1 10.2 11.3 12.5
(Rs mn, year ending Dec 31) Dividend per share 1.6 1.7 1.7 1.7
CY06 CY07 CY08E CY09E Book Value 23.0 31.2 40.9 49.4
Assets
Total Current Assets 11,776 23,175 26,210 28,898 Growth Ratios (% YoY)
of which Cash & cash 3,781 14,396 16,584 18,243 Operating Income 140.6 (9.0) 10.0 11.1
equivalents EBITDA 194.6 (4.6) 7.2 10.1
Current Liab. & Prov. 7,016 8,898 8,909 9,482 Recurring Net Income 245.0 (13.2) 11.7 9.1
Net Current Assets 4,760 14,277 17,301 19,416 Diluted Recurring EPS 207.4 (13.2) 11.7 9.1
Investments of which 11,331 8,558 9,229 17,170 Diluted Recurring CEPS 158.3 (15.8) 11.1 11.0
Strategic/Group 9,861 4,146 1,289 1,289
Marketable 1,470 4,411 7,940 15,880 Valuation Ratios (x)
Net Fixed Assets* 31,241 32,333 42,100 44,390 P/E 11.4 13.2 11.8 10.8
of which P/CEPS 9.4 11.1 10.0 9.0
Intangibles - - - - P/BV 4.9 3.6 2.8 2.3
Capital Work-in-Progress 6,349 6,124 14,804 1,500 EV / EBITDA 8.4 7.9 7.0 6.0
Total Assets 47,333 55,167 68,631 80,976 EV / Operating Income 2.9 2.8 2.4 2.1
EV / Operating FCF 9.1 10.8 10.0 2.9
Liabilities
Borrowings 8,654 3,941 2,657 2,008 Operating Ratios (%)
Deferred Tax Liability 3,839 3,877 3,916 3,955 Raw Material / Sales 9.4 9.8 10.7 10.2
Minority Interest - - 1 2 SG&A / Sales 3.3 3.5 3.4 3.3
Equity Share Capital 3,034 3,034 3,034 3,034 Other Income / PBT 8.0 8.9 10.5 11.7
Face value per share (Rs) 2 2 2 2 Effective Tax Rate 18.4 31.7 31.0 32.0
Reserves & Surplus* 31,883 44,392 59,101 72,056 NWC / Total Assets 0.0 (0.0) 0.0 0.0
Less: Misc. Exp n.w.o. 77 77 77 77 Inventory (x) 7.7 5.2 5.1 5.0
Net Worth 34,840 47,349 62,058 75,013 Receivables (days) 3.5 4.8 4.3 4.3
Total Liabilities 47,333 55,167 68,631 80,976 Payable (days) 29.3 44.5 40.2 37.9
Source: Company data, I-Sec Research D/E Ratio (x) 0.4 0.2 0.1 0.1
*excluding revaluation reserves
RoCE 20.7 38.4 34.7 31.6
RoNW 35.4 31.7 26.6 23.2
47
Tables
Table 1: Capex plans .......................................................................................................... 40
Table 2: Key markets and market share............................................................................. 41
Table 3: Capex on captive power ....................................................................................... 41
Table 4: Performance trend and forecast assumptions ...................................................... 43
Table 5: Profit and Loss Statement .................................................................................... 47
Table 6: Balance Sheet....................................................................................................... 47
Table 7: Cash Flow Statement............................................................................................ 47
Table 8: Key Ratios............................................................................................................. 47
Charts
Chart 1: Market share trend ................................................................................................ 40
Chart 2: Power and fuel costs trend ................................................................................... 42
Chart 3: Key cost trend ....................................................................................................... 42
Chart 4: Sales, EBITDA and EBITDA margin movement ................................................... 43
Chart 5: EBITDA/te ............................................................................................................. 44
Chart 6: FCF and D/E ......................................................................................................... 44
Chart 7: RoCE and RoE trends........................................................................................... 45
Chart 8: Rolling P/E bands.................................................................................................. 46
Chart 9: Rolling EV/E bands ............................................................................................... 46
48
Equity Research
April 21, 2008
INDIA
BSE Sensex: 16481
Grasim BUY
Bedrock of strength Rs2,569

Cement Reason for report: Initiating coverage
We expect Grasim’s key divisions, cement and viscose staple fibre (VSF), to drive
Shareholding pattern the topline growth supported by capacity additions. While revenue growth is likely
Jun Sept Dec to be impressive, impact of rising input costs would largely be offset by
'07 '07 '07
Promoters 25.2 25.2 25.2
commissioning of captive power plants (CPPs). Based on this and UltraTech
Institutional Cement’s (UTCL, Grasim’s recent acquisition) impressive performance, Grasim is
investors 44.1 43.3 43.2
MFs and UTI 7.9 9.2 10.2 likely to post earnings CAGR of 15% in the next two years. Our sum-of-the-parts
Insurance Cos. 13.2 10.6 10.7 (SOTP) valuations indicate Rs3,638 fair value with 42% upside from current levels.
FIIs 23.0 23.4 22.4
Others 30.7 31.5 31.6 We initiate coverage with BUY rating.
Source: CMIE
f Cement to be key growth driver. We expect Grasim’s cement division growth to be
boosted with the commissioning of two plants (Shambhupura: 4.5mnte, Kotputli:
4.4mnte) in Rajasthan. Further, while cement companies are troubled by rising input
Price chart costs, commissioning of two CPPs with 75MW total capacity will help moderate cost
4,000 pressures. Improvement in UTCL’s parameters will also boost the overall
performance of the cement division.
3,500
f VSF to see margins pressure. While the division’s revenue growth is expected to
(Rs)
3,000 be impressive owing to 64,000te capacity addition, realisations could come under
pressure with VSF prices already reaching peak levels. This along with rising cost of
2,500
pulp would result in EBITDA margin contraction in FY09. However, sponge iron
2,000 division, with lower operating rates, could benefit from improvement in gas supplies
in June-July ’08
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
f Consolidated earnings growth to impress. We expect Grasim to report a strong

15% bottomline growth over FY08E-10E, aided partly by cost-reduction measures
and strong performance from UTCL. Grasim is expected to generate free cashlow
(FCF) of Rs53bn on standalone basis in the next two years. Consequently, D/E is
likely to decline to 0.4x in FY09E and further to 0.2x in FY10E.
f Inexpensive valuations. At FY09E and FY10E P/E of 7.2x and 6.5x respectively,
Grasim’s valuations remain inexpensive. At the current market price, the cement
division is valued at EV/te of US$128, a significant discount to peers though with
better efficiency parameters. Our SOTP valuations indicate Rs3,638/share fair value
with 42% upside from current levels. Grasim is our top pick in the sector. Initiate
coverage with BUY.
Market Cap Rs235.5bn/US$5.9bn Year to March FY07 FY08E FY09E FY10E

Reuters/Bloomberg GRASIM.BO/GRASIM IN Revenue (Rs mn) 140,952 163,573 194,492 215,008
Shares Outstanding (mn) 91.7 Net Income (Rs mn) 19,675 27,436 33,162 36,447
FII (%) 22.4 P/E (x) 12.0 8.6 7.1 6.5
Sensex Return 12m (%) (18.8) RoE (%) 34.4 34.4 31.3 27.4
+91 22 6637 7385

Grasim, April 21, 2008 ICICI Securities
Large conglomerate with cement as key driver
On a consolidated basis, Grasim is the largest domestic player in the cement industry
with pan-India presence. The company is also the largest VSF manufacturer in India,
enjoying near-monopoly. Grasim’s gas-based sponge iron division with annual
capacity of 0.9mnte is a standalone plant located in Raigad, Maharashtra.
Cement division – Impressive growth

Grasim’s capex plan includes 4.5mnte capacity expansion in Shambhupura,
Rajasthan and another 4.4mnte increase at Kotputli, Rajasthan. A 1.5mnte split
grinding unit at Panipat, Haryana has also been set up. Shambhupura and Panipat
have just been commissioned, while Kotputli should be operational by September-
October ’08. Consequently, the company’s volume growth, which was restricted in the
past two years by the installed capacity, is likely to post robust growth in the next two
years.

North
Rajasthan 17.0 5.4 9.9 6.1
Punjab 17.9 4.1 6.0 4.4
Haryana 18.0 3.5 12.2 3.8
West
Gujarat 38.6 10.9 4.5 6.8
Maharashtra 34.9 21.2 7.2 12.2
South
Tamil Nadu 14.0 6.3 7.4 8.6
Karnataka 29.9 11.6 11.2 7.5
Kerala 8.9 2.2 6.8 4.7
East
West Bengal 24.1 5.8 6.7 4.6
Orissa 26.4 4.1 10.9 3.0
Central
Madhya Pradesh & Chhattisgarh 26.0 9.5 9.6 7.0
Total 20.0 100.0 8.1 100.0

Since the acquisition of UTCL, Grasim has become the largest player in India on
consolidated basis with market share of ~20%. Grasim and UTCL are market leaders
in Orissa (26.4%), Gujarat (38.6%), Goa (52.5%), Maharashtra (34.9%), Madhya
Pradesh (21.7%), Chhattisgarh (33.2%) and Karnataka (30%).
50
Chart 1: Key market share trends (Standalone)
15.0 All India Norh West South
13.0
(%)
11.0
9.0
7.0
Grasim’s market share has remained stable in the key northern markets, while in other
regions it has gradually dipped owing to the gap in capacity additions. However, we
expect the company’s market share in the North to surge significantly, while market
share erosion is possible in the West. On a consolidated basis, the company would
gain market share in the South with UTCL’s 4.9mnte capacity just being
commissioned.
Captive power to reduce impact of sharp fuel cost rise

As regards costs, Grasim is setting up a 50MW CPP in Jawad, Madhya Pradesh and
another 25MW plant in Raipur, Chhattisgarh. While 50MW thermal power plant (TPP)
should be operational in beginning-Q1FY08, the 25MW plant is expected to be
commissioned by September ’08. We expect ~Rs2/unit savings from the plant at
Madhya Pradesh, which currently uses diesel generator (DG) sets. However, the
company’s TPP in Raipur, which currently uses grid power, we estimate ~Rs1/unit
savings from the use of coal middlings (leftovers from coal washery), the lower
calorific value of which is more-than-offset by its inexpensive cost.
Chart 2: Power and fuel cost trend
800 Pow er & Fuel Average per unit cost of pow er (RHS) 4.5
700
4.0
600
3.5
500
(Rs/kWh)
(Rs/te)
400 3.0
300
2.5
200
2.0
100
0 1.5
FY06 FY07 FY08E FY09E FY10E
51
We expect Grasim to save Rs685bn in power costs in the next two years. However,
this will only partially offset the impact of higher fuel costs. Grasim relies on domestic
coal for ~50% of its total fuel requirement, while the balance is a mix of domestic pet
coke, imported pet coke, international coal and alternate fuels. While Coal India (CIL)
has raised prices 10-15% in December ’07, prices of international coal and pet coke
have risen steeply.
Grinding units to aid better logistics and freight cost savings

Grasim will set up another 1.3mnte grinding unit at Dadri in Uttar Pradesh. The
grinding units at Panipat and Dadri will help the company source cheaper fly ash and
would reduce the lead distances to the markets, aiding savings in freight costs.
Chart 3: Key cost trends
1,400 Pow er & Fuel Freight EBITDA/te
1,200
1,000
800
(Rs/te)
600
400
200
0
Stake sale in Shree Digvijay Cement positive

Grasim has sold its 54% stake in Shree Digvijay Cement (SDCL) to Cempor for
Rs3.22bn, which implies EV/te of US$161. SDCL had inherent cost disadvantages
such as high lead distances from limestone mines, higher power cost due to captive
DG sets and lack of investment for efficiency improvements. Hence, despite cement
prices at all-time highs, there was no substantial improvement in margins (Q2FY08
EBITDA margin just 3.7%). Consequently, we believe that the decision to divest stake
in SDCL was a step in the right direction.
52
VSF to benefit from volumes but prices may dip
The VSF division’s performance has been impressive in the past two years with
demand being strong and prices continuously uptrending. VSF demand is likely to
remain firm going forward owing to: i) shift in textile manufacturing hubs to the East,
ii) rising consumer preference for natural comfort fabrics due to global warming,
iii) availability of advanced spinning technologies aiding the use of VSF and
iv) slowdown of cotton production worldwide.
Table 2: Global cotton production and consumption

Year (August-July) 06-07 07-08 07-09
Production 26.7 25.7 26.9
Consumption 26.6 27.2 27.5
Ending stocks 12.7 11.2 10.7
YTDFY08, Grasim has been operating above its rated capacity to meet the rising
demand. However, the company is expected to commission another 64,000te capacity
in Kharach, Gujarat in April ’08, which will ensure robust volume growth in FY09 too.
Chart 4: VSF – Quarterly realisations trend
110
105
100
95
(Rs/kg)
90
85
80
75
70
Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308
Strong VSF demand implies that Grasim easily passed on any rise in input costs
(specifically pulp) to the consumers in the past three years. However, while VSF
demand is expected to remain robust, we expect Grasim to face pricing pressure
going forward. Most domestic textile manufacturers have been affected by the US
slowdown and dollar depreciation. Hence, as a strategy, the company is expected to
offer discounts to its customers so as to not burden them with higher input costs.
Consequently, we have assumed a decline in VSF prices for FY09E.
This coupled with rising pulp cost and sharp jump in prices of other inputs such as
sulphur would pressurise the division’s margins, though absolute EBITDA is likely to
remain flat, mainly owing to higher output from the new 64,000te plant at Kharach,
Gujarat.
53
Chart 5: International pulp prices
900
FOEX PIX Pulp Europe NBSK Price
850
800
750
700
650
600
550
Jul-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Nov-07
Jan-08
Mar-08
Sep-04
Sep-05
Sep-06
Sep-07
Source: Bloomberg
In order to address the problem of pulp shortage, Grasim has focused on backward
integration. The company would require additional supplies of pulp for its new plant in
Kharach. For this, Grasim had acquired 45% stake in AV Nackawic Pulp Mill in
Canada at end-FY05. This mill, which initially produced paper grade pulp, was
converted for producing rayon grade pulp with total capacity of ~200,000te. Grasim
would be entitled to ~90,000te, which would meet the requirements of its new Kharach
plant.
As a long-term strategy to secure pulp supplies, Grasim has initiated a pulp-cum-

plantation project in Laos. About 2,000 hectares (ha) have been planted till date, while
another 7,000ha will be planted in the next year. However, pulp output is expected
only in FY12-13.
Table 3: Sources of Rayon Grade Wood Pulp for Grasim

(%)
FY08 FY09 FY10
Captive 25.5 22.3 20.6
AV Cell 14.6 12.7 11.8
AP Rayon 32.8 28.7 26.5
Sapi and others 27.0 15.9 14.7
AV Nackawic 0.0 20.3 26.5
Total 100.0 100.0 100.0
54
Sponge iron – Operations affected due to gas shortage
The sponge iron division constitutes only 8% of the total standalone revenues. It has
the largest gas-based merchant power plant in India with flexibility of using multiple
feedstock. Historically, this plant faced gas supply shortage from GAIL resulting in
lower operating rates. But with sponge iron prices uptrending, Grasim has been able
to use more expensive feedstock such as naphtha and propane in order to improve
capacity utilisation rates.
Chart 6: Sponge iron realisations
16,500
15,500
14,500
(Rs/te)
13,500
12,500
11,500
10,500
Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308
Sponge iron prices are expected to remain firm owing to higher global scrap prices
and record bulk freights rates. While gas supplies are expected to improve from June
’08, uncertainty over gas pricing remains a cause for concern.
55
Consolidated PAT to grow 15%
Cement
Capacity (’000 te) 13,115 13,115 14,115 23,015 24,015
Production (’000te) 13,826 14,418 15,283 19,104 21,492
Capacity utilisation (%) 105 110 108 83 89
Sales (’000 te) 14,328 14,849 15,283 19,104 21,492
Growth (%) 16.7 3.6 2.9 25.0 12.5
Growth (%) 8.8 34.6 17.0 4.0 -
VSF
Capacity (te) 257,325 270,100 270,100 333,975 333,975
Production (te) 228,981 246,833 270,000 307,591 337,315
Capacity utilisation 89 91 100 92 101
Sales (te) 242379 246540 265493 302457 331684
Growth (%) 6.9 1.7 7.7 13.9 9.7
Growth (%) (9.8) 14.2 24.0 (3.5) 3.0
Sponge Iron
Capacity (’000 te) 900 900 900 900 900
Production (’000 te) 506 525 576 675 702
Capacity utilisation (%) 56 58 64 75 78
Sales (’000 te) 478 571 576 675 702
Growth (%) (38.1) 19.4 0.9 17.2 4.0
Growth (%) 0.6 2.5 18.0 (3.0) 2.0
On a standalone basis, Grasim would post topline CAGR of 15% in the next two years,
mainly aided by strong cement performance and stable VSF demand. While we expect
VSF volumes to post impressive growth supported by additional capacity at Kharach,
Gujarat, VSF prices will likely come under pressure. While we expect the company’s
cement division to register revenue CAGR of 21% in the next two years, we believe
that its VSF and sponge iron divisions would post revenue CAGR of 11% each over
the same period.
Overall operating margins are expected to decline marginally 64bps in FY09E, mainly
on account of lower VSF prices and higher cost of pulp, sulphur, coal fly ash etc. We
expect VSF margins to decline ~400bps owing to lower realisations and cost
pressures. However, we estimate 50bps and 10bps improvement in cement and
sponge iron margins respectively in FY09E. Overall, EBITDA margin is expected to
improve 43bps in FY10E, mainly aided by the VSF division.
We expect Grasim to post 14% standalone earnings CAGR in the next two years. On
a consolidated basis, we expect Grasim’s PAT to grow 15% in the next two years,
partly helped by strong UTCL earnings.
56
140,000
30
120,000
100,000 25
(Rs mn)
(%)
80,000
60,000 20
40,000
15
20,000
0 10
Grasim had planned significant capex since ’06, which included 8.9mnte cement
capacity and ~64,000te VSF capacity. While 4.5mnte cement capacity has already
been commissioned, the balance 4.4mnte and the VSF expansion are expected in
FY09E. Consequently, we expect the company’s FCF to turn negative in FY08.
However, strong FCF generation of Rs53bn is likely in the next two years.
Consequently, D/E is likely to decline to 0.4x in FY09E and further to 0.2x in FY10E.
30,000
0.6
20,000
(Rs mn)
(x)
10,000 0.4
0
0.2
(10,000)
(20,000) 0.0
57
At the current market price, Grasim is trading at FY09E & FY10E P/E of 7.2x and 6.5x
and EV/E of 4.6x and 3.9x respectively. On EV/te, the company is valued at US$128.
The company has historically quoted at a significant discount to peers due its
diversified business. However, with 70% of its revenues coming from the cement
division (post the acquisition of UTCL) and its exit from non-core business such as
textiles, we believe a re-rating is imminent.

4,500
4,000
3,500
3,000
11x
2,500
(Rs)
2,000
8x
1,500
1,000
5x
500
0
Jul-02
Oct-02
Feb-03
May-03
Dec-03
Jul-04
Nov-04
Feb-05
May-05
Dec-05
Jul-06
Nov-06
Feb-07
Jun-07
Dec-07
Sep-03
Sep-05
Sep-07
Apr-02
Apr-04
Apr-06
Apr-08

600,000
500,000
400,000 8x
(Rs mn)
300,000 6x
200,000
4x
100,000
0
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
58
Table 5: SOTP valuations
Current price Target Price
VSF
Operating profits (Rs mn) 10,909 10,909
EV/EBITDA (x) 5.2 8.5
Value of VSF (Rs mn) 56,728 92,729
Chemicals
Value of VSF (Rs mn) 3,656 4,178
Cement
Capacity (Mn tonnes) 24.2 24.2
EV/tonne US$ 128 180
Value of Cement business (Rs mn) 123,495 174,096
Sponge Iron
Value of Sponge Iron business (Rs mn) 3,450 5,175
Textiles
Operating profits (Rs mn) 64 64
Value of Textiles business (Rs mn) 95 95
Others
Operating profits (Rs mn) 438 438
Value of business (Rs mn) 438 438
Total value of business (Rs mn) 187,863 276,712

Net debt (Rs mn) 5,513 5,513
Net value (Rs mn) 182,350 271,198
No of shares (mn) 92 92
Value per share (Rs mn) 1,989 2,958
UltraTech
Capacity (mnte) 21.9 21.9
EV (Rs mn) 123,326 140,160
UltraTech – Ev/te (Rs mn) 141 160
Less net debt (Rs mn) 25,776 25,776
Market cap (Rs mn) 97,550 114,384
Grasim – Consolidated market cap (Rs mn) 235,515 333,538
Value per share (Rs) 2,569 3,638
We have valued Grasim’s VSF division at 20% premium to Lenzing (the largest VSF
player in the world with 375,000te capacity) as Grasim’s VSF margins are 2x
Lenzing’s. We have assumed ~40% discount to Tata Steel for the sponge iron division
as Tata Steel is a large integrated player with cost advantages. Grasim’s cement
division is valued at US$180, at a slight premium to ACC’s valuations as Grasim’s
cement margins are significantly better than ACC’s. Our SOTP valuations give us a
target price of Rs3,638 with 42% upside from current levels. Grasim is our top pick in
the sector. Initiate coverage with BUY.
59
Financial Summary (Consolidated)
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY07 FY08E FY09E FY10E FY07 FY08E FY09E FY10E
Working Capital changes 464 (3,431) (5,194) (820)
EBITDA 39,723 51,938 62,375 68,070 Net Operating FCF (14,061) (26,745) 14,724 24,191
% margins 28 32 32 32 Investing Activities 3,177 3,812 4,024 4,578
Depreciation & Amortisation 6,100 6,133 7,577 9,818 Issue of Share Capital - - - -
Gross Interest 2,286 2,482 3,342 2,221 Buyback of shares - - - -
Other Income 3,177 3,812 4,024 4,578 Inc(Dec) in Borrowings 11,532 19,983 (13,856) (20,832)
Add: Extraordinaries - - - - Extraordinary Items 4,952 7,198 2,657 2,743
Less: Taxes 10,921 14,925 16,185 17,774 Chg. in Cash & Bank 1,318 (1,407) 1,259 3,812
- Deferred tax (51) 1,161 1,381 1,507
Less: Minority Interest (3,919) (4,774) (6,132) (6,387) Table 9: Key Ratios
Recurring Net Income 19,675 27,436 33,162 36,447 (Year ending March 31)
Source: Company data, I-Sec Research FY07 FY08E FY09E FY10E
Per Share Data (Rs)
(Rs mn, year ending March 31)
Diluted Recurring CEPS 281.1 366.1 444.3 504.6
FY07 FY08E FY09E FY10E
Dividend per share 41.0 47.5 52.3 56.5
Assets Book Value 723.5 1,017.9 1,295.0 1,601.4
Total Current Assets 33,216 33,511 43,659 50,671
of which 3,692 2,285 3,545 7,357 Growth Ratios (% YoY)
Cash & cash equivalents Operating Income 38.3 16.0 18.9 10.5
Current Liab. & Prov. 24,632 28,671 33,548 36,623 EBITDA 91.2 30.7 20.1 9.1
Net Current Assets 6,523 8,585 4,840 10,111 Recurring Net Income 89.8 39.4 20.9 9.9
Investments of which 22,719 24,730 29,495 35,214 Diluted Recurring EPS 89.8 39.4 20.9 9.9
Strategic/Group 22,719 24,730 29,495 35,214 Diluted Recurring CEPS 61.1 30.2 21.4 13.6
Marketable - - - -
Net Fixed Assets* 65,001 88,710 136,146 143,239 Valuation Ratios (x)
of which P/E 12.0 8.6 7.1 6.5
Intangibles P/CEPS 9.2 7.0 5.8 5.1
Capital Work-in-Progress 19,721 47,869 7,451 3,701 P/BV 3.6 2.5 2.0 1.6
Goodwill 19,217 19,217 19,217 19,217 EV / EBITDA 7.1 5.8 4.6 3.9
Total Assets 135,242 185,366 202,420 215,419 EV / Operating Income 2.0 1.8 1.5 1.2
EV / Operating FCF 13.6 10.3 8.4 6.1
Liabilities
Borrowings 48,793 68,776 54,920 34,087 Operating Ratios (%)
Deferred Tax Liability 11,526 11,804 12,282 12,777 Raw Material / Sales 20.3 19.4 20.6 19.9
Minority Interest 8,587 11,456 16,484 21,721 SG&A / Sales 2.9 3.3 3.0 3.0
Equity Share Capital 917 917 917 917 Other Income / PBT 10.4 9.0 8.2 8.4
Face value per share (Rs) 10 10 10 10 Effective Tax Rate 35.7 35.2 32.8 32.8
Reserves & Surplus* 65,419 92,413 117,818 145,916 NWC / Total Assets 3.6 1.4 3.2 3.1
Less: Misc. Exp n.w.o. - - - - Inventory (x) 5.6 5.4 5.6 5.5
Net Worth 66,336 93,330 118,735 146,833 Receivables (days) 16.5 16.9 16.5 17.3
Total Liabilities 135,242 185,366 202,420 215,419 Payable (days) 48.2 49.6 46.2 48.7
Source: Company data, I-Sec Research D/E Ratio (x) 0.9 0.9 0.6 0.3
*excluding revaluation reserves
RoCE 31.0 31.0 30.3 30.1
RoNW 34.4 34.4 31.3 27.4
60
Financial Summary
Working Capital changes (571) (1,145) (1,186) (11)
Operating Expenses 62,663 70,204 84,874 93,331 Capital Commitments (17,455) (44,385) 3,095 (7,750)
EBITDA 23,372 33,196 38,968 43,712 Net Operating FCF (4,375) (18,692) 29,755 24,209
% margins 27 32 31 32 Investing Activities (3,229) 1,230 (575) (906)
Depreciation & Amortisation 3,179 3,520 4,547 5,922 Issue of Share Capital - - - -
Other Income 2,818 2,690 2,886 3,247 Inc(Dec) in Borrowings 9,719 22,360 (23,121) (13,422)
Add: Extraordinaries 371 39 - - Extraordinary Items 841 (785) (888) (1,012)
Less: Taxes 6,906 9,927 11,102 12,364 Chg. in Cash & Bank (392) 136 520 3,640
- Deferred tax (18) 931 1,067 1,197
Less: Minority Interest - - - - Table 13: Key Ratios
Per Share Data (Rs)
(Rs mn, year ending March 31) Diluted Recurring EPS 167.5 230.5 267.0 300.1
FY07 FY08E FY09E FY10E Diluted Recurring CEPS 198.1 268.5 316.6 364.7
Total Current Assets 23,424 25,819 29,704 34,855 Book Value 679.5 866.2 1,082.4 1,325.6
of which 1,164 1,300 1,820 5,460
Investments of which 42,747 43,724 47,185 51,337 Recurring Net Income 88.2 40.8 16.1 12.4
Strategic/Group 26,247 25,763 25,763 25,763 Diluted Recurring EPS 88.2 40.8 16.1 12.4
Marketable 16,500 17,961 21,421 25,574 Diluted Recurring CEPS 66.9 35.5 17.9 15.2
Net Fixed Assets* 45,971 87,321 79,678 81,506
Intangibles - - - - P/E 15.7 11.2 9.6 8.6
Total Assets 97,642 137,266 134,154 143,208 P/BV 3.8 3.0 2.4 1.9
EV / EBITDA 11.3 8.6 6.7 5.6
Deferred Tax Liability 5,826 5,971 6,150 6,335
Minority Interest - - - - Operating Ratios (%)
Equity Share Capital 917 917 917 917 Raw Material / Sales 26.0 25.5 26.7 25.8
Less: Misc. Exp n.w.o. - - - - Effective Tax Rate 31.0 32.0 31.2 31.0
Net Worth 62,300 79,419 99,249 121,540 NWC / Total Assets 7.9 3.6 4.1 3.4
Total Liabilities 97,642 137,266 134,154 143,208 Inventory (days) 5.9 5.6 5.8 5.8
D/E Ratio (x) 0.6 0.7 0.4 0.2

RoCE 26.6 27.6 27.5 29.6
RoNW 26.7 29.8 27.4 24.9
61

Tables
Table 1: Key markets and market share............................................................................. 50
Table 2: Global cotton production and consumption .......................................................... 53
Table 3: Sources of Rayon Grade Wood Pulp for Grasim.................................................. 54
Table 4: Performance trend and forecast assumptions ...................................................... 56
Table 5: SOTP valuations ................................................................................................... 59
Table 6: Profit and Loss Statement .................................................................................... 60
Table 7: Balance Sheet....................................................................................................... 60
Table 8: Cash Flow Statement............................................................................................ 60
Table 9: Key Ratios............................................................................................................. 60
Table 10: Profit and Loss Statement .................................................................................. 61
Table 11: Balance Sheet..................................................................................................... 61
Table 12: Cash Flow Statement.......................................................................................... 61
Table 13: Key Ratios........................................................................................................... 61
Charts
Chart 1: Key market share trends (Standalone) ................................................................. 51
Chart 2: Power and fuel cost trend ..................................................................................... 51
Chart 3: Key cost trends ..................................................................................................... 52
Chart 4: VSF – Quarterly realisations trend........................................................................ 53
Chart 5: International pulp prices ........................................................................................ 54
Chart 6: Sponge iron realisations........................................................................................ 55
Chart 7: Sales, EBITDA and EBITDA margin movement ................................................... 57
Chart 8: FCF and D/E ......................................................................................................... 57
Chart 9: Rolling P/E bands.................................................................................................. 58
Chart 10: Rolling EV/E bands ............................................................................................. 58
62
Equity Research
April 21, 2008
INDIA
BSE Sensex: 16481
India Cements HOLD
Mixed bag Rs180

Cement Reason for report: Initiating coverage
India Cements (ICL) is the largest South-based cement player with ~9mnte
Shareholding pattern capacity. The company intends to enhance its capacity to 14mnte by December
Sep Dec Mar ’08 to ensure continued volume growth. However, with 70% of its fuel being based
'07 '07 '08
Promoters 30.4 28.1 28.1 on imported coal, ICL is bound to face input cost pressures. This coupled with
Institutional
investors 45.4 50.9 48.3 rise in effective tax rate is likely to slowdown earnings growth despite robust
MFs and UTI 10.6 9.9 7.8 revenues in the next two years. This coupled with uncertainty over Indian Premier
FIIs 26.3 32.2 31.4 League (IPL) investments will likely impact stock performance. Consequently, we
Others 24.2 21.1 23.6
Source: CMIE initiate coverage with HOLD rating.
f Revenue growth to be impressive. ICL is expected to add additional 5mnte by

December ’08 through a mix of new line additions, kiln upgrades and improvement in
blending ratios. The 5mnte expansion, which is planned at significantly lower captive
cost of ~US$50/te, would help boost volumes.
f Higher share of imported coal to affect margins. ICL imports 70% of its coal
Price chart requirement, leading to substantial surge in power and fuel costs. The company has
350 acquired two bulk freight carriers to minimise the impact of rising international bulk
freight rates, thereby reducing the landed cost of coal. However, these initiatives are
300 likely to partially offset the impact of rising input costs, resulting in margin
contraction.
(Rs)
250
200 f Muted earnings growth. We expect ICL to register earnings CAGR of 12% in the
next two years despite robust revenue growth, mainly due to cost pressures and
150
higher effective tax rate. The company’s free cashflow (FCF) will be marginal in
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
FY09, albeit jumping sharply in FY10E to Rs2.3bn. Consequently, FY10E D/E

should be down to 0.5x.
f Valuations. ICL trades at FY09E & FY10E P/E of 6.9x and 5.9x and EV/te of
US$129. While these valuations may seem inexpensive, slower-than-expected
earnings growth and uncertainty over investments in IPL may hamper stock
performance. Consequently, we initiate coverage with HOLD rating.

Reuters/Bloomberg ICMN.BO/ICEM IN Revenue (Rs mn) 22,489 30,563 38,154 44,641
Free Float (%) 71.9 % Chg YoY 1,175.9 16.1 8.9 15.7
FII (%) 31.4 P/E (x) 8.7 7.5 6.9 5.9
Sensex Return 12m (%) (18.8) RoE (%) 43.0 40.0 30.6 26.7
+91 22 6637 7385

India Cements, April 21, 2008 ICICI Securities
Leading player in South but diversification on cards
ICL is the largest player in the South with total installed capacity of ~9mnte. It enjoys
18% total market share in the South and is a market leader in Andhra Pradesh, Tamil
Nadu and Kerala.
ICL, which was suffering losses in FY04 and FY05, managed a successful turnaround
buoyed by higher cement prices and a CDR (corporate debt restructuring) package
from lenders. With cement prices remaining firm, the consequent robust cash
generation has helped ICL plan capacity increases to maintain market share.
Chart 1: Market share trends
25 Andhra Pradesh Tamil Nadu

Karnataka Kerela
21
(%)
17
13
9
ICL proposes to raise its capacity to ~14mnte by December ’08 from 9mnte at present
at a lower capital cost of US$50/te. The company is set to achieve capacity
augmentation through kiln upgrades at Yerraguntla (400te/day-TPD), Malkapur
(350TPD), Raasi (1,300TPD) and Sankarnagar (300TPD). ICL is also planning a new
line at Malkapur and two 1-mnte grinding units in Chennai (Tamil Nadu) and Parli
(Maharashtra).
Table 1: Capex plans

Plant Location Capacity (mnte) Time of commissioning
Sankaridurg Tamil Nadu 0.3 September ’07
Sankarnagar Tamil Nadu 0.5 September ’08
Dalavoi Tamil Nadu 0.6 December ’07
Chimalkur Andhra Pradesh 0.2 December ’08
Yerraguntla Andhra Pradesh 0.2 September ’08
Raasi Andhra Pradesh 0.2 June ’08
Malkapur Andhra Pradesh 1.0 December ’08
Grinding units 2.2 June ’08
Total 5.2
64
South
Tamil Nadu 20.1 29.8 7.4 8.62
Karnataka 14.2 18.3 11.2 7.46
Kerala 19.3 15.5 6.8 4.68
Andhra Pradesh 17.9 25.1 8.5 8.18
Pondicherry (UT) 29.3 1.31 19.4 0.26
West
Maharashtra 3.9 8.2 7.2 12.21
Total 0.7 98.2 8.1 100.0

ICL to foray in new markets

As a part of its phase II of expansion plans, ICL is foraying into new markets for pan-
India presence and diversifying to avoid the risk of being a regional player. The
company is primarily active in the North, where it proposes to set up a 3.5mnte plant.
For this, ICL has already signed a memorandum of understanding (MoU) for a plant at
Himachal Pradesh and has secured mining leases in Rajasthan. The company is also
exploring to acquire limestone deposits in Madhya Pradesh; we expect this project to
cost ~Rs1.2bn and likely be commissioned by mid-FY11.
65
Dependence on imported coal to pressurise margins
Rising input costs, a concern
ICL sources only 30% power from the grid. Most of its power requirements are fulfilled
from low cost sources such as wind farms, waste heat recovery power and a group
company, Coromandel Electric Company.
Table 3: Power sources

%
Grid 39.1
Wind farms 9.1
Coromandel Electric Company 24.5
Andhra Pradesh Gas Power Corporation (APGPCL) 20.0
Waste heat recovery 7.3
Total requirement 100.0
However, ICL imports ~70% of its coal requirements. Sharp rise in international coal
prices and international freight rates in the past quarters have been serious concerns.
Hence, to temper the impact of higher fuel prices, the company has purchased two
bulk-cargo carriers from Essar Shipping at US$57mn. The two ships with 41,824DWT
(dead weight tonne) & 38,002DWT capacity respectively would be able to meet ICL’s
entire imported coal requirement. While current international freight rates vary from
US$25/te to US$40/te, freight cost is likely to be lower at ~US$12-15/te if ICL operates
its own ships.
Chart 2: Power and fuel costs

1,000 4.0
Pow er & Fuel
900 Average per unit cost of pow er (RHS)
800 3.6
700
600 3.2
(Rs/kWh)
(Rs/te)
500
400 2.8
300
200 2.4
100
0 2.0
ICL is also actively mulling to invest in coal mines abroad to secure high-quality coal at
reasonable prices.
66
Chart 3: Key cost trends
1,200
1,000
800
(Rs/te) 600
400
200
0
IPL – Marketing strategy

ICL won the IPL franchise for the Chennai team at ~Rs3.6bn (US$91mn) payable over
10 years. Hence, the yearly cash outflow would be just US$9mn. Also, the company
will have to incur the players’ costs, team maintenance, marketing, administration,
travel and accommodation. These expenses are likely to be ~US$5mn per year.
On the other hand, the teams will be entitled to their share of television rights, which
have been sold to Sony for US$1bn for the next 10 years. 80% of these revenues will
be distributed among the franchises for the first five years and this share would come
down to 60% in the next five years. In addition, the franchises are also entitled to
~60% of title sponsorship revenues. ICL will be entitled to 100% of local revenues
(gate collection, sale of logos, stadium advertising, merchandising etc).
While the yearly outflow of Rs360mn may not be very significant, the success of
revenue streams other than television rights and title sponsorship revenues would
depend on the success of the 20-20 game format used for IPL. With other local cricket
tournaments not being much of a success on account of limited viewership, we believe
that a clear picture would emerge after the first season of tournaments. We have not
factored in the implications of the IPL investment in our model.
67
12% earnings CAGR through FY08-10E
Capacity (’000 te) 8,530 9,430 13,930 13,930
Production (’000 te) 8,424 9,284 11,141 13,035
Capacity utilisation (%) 98.8 98.5 80.0 93.6
Sales (mnte) 8,414 9,284 11,141 13,035
Growth (%) 15.9 10.3 20.0 17.0
Realisations (Rs/te) 3,090 3,847 4,001 4,001
Growth (%) 25.1 24.5 4.0 -
Revenues to be driven by timely expansion. We expect ICL’s topline to be boosted

by incremental volumes from debottlenecking and capacity expansion. ICL is expected
to raise its installed capacity to 14mnte by December ’08. Consequently, we expect
cement volumes to surge 20% and 17% in FY09E and FY10E respectively. This
coupled with 4% growth in average realisations in FY09E and flat prices in FY10
would aid revenue CAGR at 21% in the next two years.
50,000 Net sales EBITDA EBITDA Margin (RHS) 40%

45,000 35%
40,000
30%
35,000
30,000 25%
(Rs mn)
25,000 20%
20,000 15%
15,000
10%
10,000
5,000 5%
0 0%
Rising fuel costs to affect margins. Since 70% of ICL’s coal requirements are
imported, the company will face sharp rise in coal costs. However, purchase of two
bulk-freight carriers will help contain the impact with savings in freight. Hence, despite
an expected 4% increase in average realisations, we expect the company’s EBITDA
margin to contract 36bps to 37% in FY09E. In FY10E, EBITDA margin is likely to
decline further 84bps to 36.1%.
68
Chart 5: EBITDA/te
1,400
1,200
1,000
800
(Rs/te)
600
400
200
0
ICL is expected to post interest cost CAGR of 10% through FY08-10E, mainly on
account of planned capex in the South and the North going forward. The company’s
effective tax rate is expected to jump to 33% from the current ~23% as the company
has exhausted all tax shelters in FY08. As a result, earnings are expected to grow a
moderate 12% in the next two years.
Chart 6: Positive FCF from FY08

5,000 Free Cashflow D/E (RHS) 2.5
4,000
3,000 2.0
2,000
1.5
(Rs mn)
1,000
(x)
0
1.0
(1,000)
(2,000) 0.5
(3,000)
(4,000) 0.0
ICL’s FCF is expected to turn positive FY08 onwards. Further, in FY10E, FCF is likely
to rise sharply post completion of significant capex. Robust cash generation will aid
repayment of debt, which will bring down D/E to ~0.5x in FY10E.
ICL, similar to most other cement companies, will see a decline in return ratios owing
to large capex plans, limited cement pricing upside and cost pressures.
69
50 RoCE RoE
40
30
(%) 20
10
0
70
Valuations
ICL is valued at FY09E & FY10E P/E of 6.9x and 5.9x with EV/E of 5.1x and 4.3x
respectively. On EV/te, the company is valued at US$129. Though ICL’s topline
growth is likely to be impressive, input cost pressures (primarily international coal) and
higher effective tax rate would slowdown earnings growth. Though we have not
factored in the impact of IPL investment in our estimates, uncertainly over the success
of IPL is likely to limit stock performance going forward. Hence, despite inexpensive
valuations, we initiate coverage with HOLD.
400
12x
300
8x
(Rs)
200
5x
100
0
Jun-05
Dec-05
Mar-06
May-06
Nov-06
Feb-07
May-07
Jul-07
Oct-07
Jan-08
Sep-05
Apr-05
Aug-06
Apr-08
140,000
120,000
100,000 9x
(Rs mn)
80,000
60,000 7x
40,000
5x
20,000
0
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Apr-07
Aug-07
Apr-08
71
Financial Summary
of which Domestic 22,552 30,628 38,221 44,710 Working Capital changes 119 (2,293) (502) (1,771)
EBITDA 7,343 11,432 14,127 16,149 Net Operating FCF (3,214) 370 583 4,306
% margins 3,256 3,733 3,696 3,612 Investing Activities 101 117 (6) (357)
Depreciation & Amortisation 1,026 1,196 1,368 1,505 Issue of Share Capital 696 208 - -
Other Income 101 224 235 247 Inc(Dec) in Borrowings 5,085 (1,216) 1,238 (1,932)
Recurring PBT 4,920 9,061 11,418 13,211 Dividend paid (501) (493) (576) (576)
Add: Extraordinaries - - - - Extraordinary Items (302) (735) (1,129) (1,308)
Less: Taxes 131 2,039 3,768 4,360 Chg. in Cash & Bank 1,866 (1,750) 110 132
- Current tax 17 1,359 2,626 3,039 Source: Company data, I-Sec Research
- Deferred tax 114 680 1,142 1,321
Less: Minority Interest 1 2 3 4 Table 8: Key Ratios
Per Share Data (Rs)
(Rs mn, year ending March 31) Diluted Recurring EPS 20.7 24.0 26.2 30.3
FY07 FY08E FY09E FY10E Diluted Recurring CEPS 22.3 29.2 32.1 36.8
Total Current Assets 17,175 17,819 19,069 21,395 Book Value 23.5 49.4 78.5 111.8
of which 2,302 552 662 795
Investments of which 551 658 900 1,504 Recurring Net Income 1,239.5 46.7 8.9 15.7
Strategic/Group 497 497 497 497 Diluted Recurring EPS 1,175.9 16.1 8.9 15.7
Marketable 54 161 403 1,007 Diluted Recurring CEPS 271.7 30.9 9.7 14.8
Net Fixed Assets* 27,958 29,543 36,888 35,883
Intangibles P/E 8.7 7.5 6.9 5.9
Total Assets 34,952 40,967 49,843 56,749 P/BV 7.7 3.6 2.3 1.6
EV / EBITDA 8.1 6.2 5.1 4.3
Deferred Tax Liability 430 443 456 470
Minority Interest - - - - Operating Ratios (%)
Equity Share Capital 2,604 2,812 2,812 2,812 Raw Material / Sales 10.6 9.4 10.1 10.3
Less: Misc. Exp n.w.o. 331 400 400 401 Effective Tax Rate 2.7 22.5 33.0 33.0
D/E Ratio (x) 1.5 0.9 0.7 0.5

RoCE 21.7 27.6 28.6 27.9
RoNW 43.0 40.0 30.6 26.7
72
Tables
Table 1: Capex plans ..........................................................................................................64
Table 3: Power sources ......................................................................................................66
Table 8: Key Ratios.............................................................................................................72
Charts
Chart 1: Market share trends ..............................................................................................64
Chart 2: Power and fuel costs.............................................................................................66
Chart 3: Key cost trends .....................................................................................................67
Chart 5: EBITDA/ te ...........................................................................................................69
Chart 6: Positive FCF from FY08........................................................................................69
Chart 8: Rolling P/E bands..................................................................................................71
Chart 9: Rolling EV/E bands ...............................................................................................71
73
74
Equity Research
April 21, 2008
JK Cement BUY
Cement
Cost-pruning to fructify Rs150
Shareholding pattern Rajasthan-based JK Cement (JKCL) primarily caters to northern Indian markets.
Sept Dec Mar
'07 '07 '08 The company was incorporated post restructuring of JK Synthetics and is
Promoters 61.6 61.6 61.6 engaged in the production of both grey and white cement at present. JKCL is
Institutional
investors 24.2 23.5 21.4 likely to see improvement in both volume growth and cost savings in the next
MFs and UTI 5.4 4.4 4.0
Insurance Cos. 3.9 4.0 4.0 couple of years. The stock is attractively valued on an EV/te of US$101 and FY09E
FIIs 14.8 15.1 13.4 P/E of 2.9x. We initiate coverage with BUY recommendation.
Others 14.3 14.9 17.1
Source: CMIE
f Volume upside. JKCL is expected to register robust volumes even in the face of
imminent supply shortage. The company is expected to add 0.4mnte from April ’08.
Further, the company’s 3mnte Karnataka project is likely to be operational by mid
Price chart
FY10E. Consequently, the company would continue posting impressive volumes in
260
both FY09E and FY10E.
240
220 f Cost control initiatives to bear fruit. JKCL has invested ~Rs2.5bn towards cost-
200 cutting measures, which involve a 20MW pet coke-based captive power plant and
(Rs)
180 13.2MW waste-heat recovery plant as well as replacement of its 7.5MW turbine with
160
a 10MW one. The company is expected to operate with 100% captive power on the
140
120 back of these measures. Full benefits from captive power would start flowing from
beginning FY09E, thereby minimising impact of rising fuel costs.
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
f Earnings growth to impress. We expect JKCL to register a strong 20% bottomline

growth over FY08-10E, aided primarily by cost-reduction measures. However, free-
cash flows (FCFs) are expected to turn negative in FY09E as the 3mnte plant at
Karnataka would require an investment of Rs10.5bn. Despite borrowing Rs5.5bn for
the plant, the D/E is expected to rise only marginally to 0.7x in FY09E before falling
to 0.4x in FY10E.
f High prospects of re-rating. JKCL’s valuations seem attractive at FY09E and
FY10E P/E of 2.9x and 2.5x respectively. The company is likely to see a re-rating,
with savings from power expected to improve margins. We estimate fair value of
Rs209/share (FY09E P/E of 4x), implying a 39% potential upside. Initiate coverage
with BUY recommendation.
Market Cap Rs10.5bn/US$260mn Year to March FY07 FY08E FY09E FY10E
Reuters/Bloomberg JKCE.BO/JKCE IN Revenue (Rs mn) 12,333 14,901 16,761 21,872
FII (%) 13.4 P/E (x) 5.9 3.6 2.9 2.5

JK Cement, April 21, 2008 ICICI Securities
Key player in supply-deficit market
North to continue seeing impressive demand
JKCL is a key player in northern Indian markets, with an installed capacity of ~4mnte
of grey cement and 0.5mnte of white cement. JKCL’s plants, located in Nimbehera
and Mangrol in Rajasthan, primarily cater to the northern markets, where the
company has ~7% market share, with Haryana, Rajasthan and Delhi being key
markets.
In FY07, the northern region (including Uttar Pradesh) consumed ~46mnte of cement.
We expect the region to grow over 10%, driven by the strong boom in real estate,
hydro power projects and incremental demand for the Common Wealth Games 2010.
While the region is facing supply shortage (YTDFY08; capacity utilisation including
inoperative capacities in the region was 101%) at present, we feel that the market
would easily absorb recently commissioned capacities (of Grasim, Shree Cement),
with some supplies moving to Gujarat. Consequently, we expect prices in the region
to remain firm.
Volume growth expected from acquisition of Nihon Nirman

JKCL added 0.5mnte in August ’06 and is expected to add a further 0.4mnte by April
’08 via Nihon Nirman, a 0.1mnte white cement plant acquired by JKCL in January ’07.
JKCL expects to convert it into a 0.4mnte grey cement plant and commission it by
April ’08, thereby ensuring volume growth in the face of supply tightness in the
industry.

North
Haryana 20.0 30.7 12.2 3.8
Punjab 4.3 7.8 6.0 4.4
Rajasthan 8.9 22.4 9.9 6.1
Delhi 14.5 11.9 3.2 2.0
Jammu & Kashmir 0.6 0.2 13.0 0.8
West
Gujarat 1.6 4.4 4.5 6.8
Central
Madhya Pradesh 3.3 5.8 9.8 7.0
Total 2.4 100.0 8.1 100.0

76
Efficiency improvement and capex on track
Cost-cutting measures to bear fruit in FY09E
JKCL’s high dependence on grid power led to enhanced power and fuel costs,
resulting in lower margins than peers. Consequently, the company undertook an
aggressive restructuring exercise to reduce its dependence (by setting up captive
power plants) and planned a 20MW pet coke-based power plant and a 13.5MW
waste-heat recovery-based power plant at Nimbehera. Further, the company is likely
to replace its 7.5MW turbine at its power plant in Bamania, Rajasthan with a 10MW
one.
While the pet coke-based power plant has already been commissioned in Q3FY08,
the waste-heat recovery plant would be commissioned in a phased manner in
Q3/Q4FY08 as it would have to be hooked up with kilns inline with scheduled
maintenance shutdowns.
Table 2: Captive power consumption and per unit rate

FY08E FY09E
mn units (MU) rate/unit MU rate/unit
13MW waste heat recovery CPP 7 0.35 84 0.35
20MW pet coke-based CPP 53 2.71 127 2.75
Total/average rate 60 2.44 210 1.80
Post commissioning of the plants, we expect significant reduction in the per-unit cost
of power. While the average cost is ~Rs4.5/unit at present, cost of power from the pet
coke unit is expected to be just Rs2.75/unit (initially, expected at ~Rs2.25/unit but,
following sharp rise in pet coke prices, cost of generation is also expected to
increase). Further, at the waste-heat recovery plant, costs are even lower at
~Rs0.35/unit. Consequently, average cost of power from the company’s captive units
would be below Rs2/unit. We believe that the lower cost of power along with the
strong cement-price outlook would significantly contribute to margin improvement.
Chart 1: Power and fuel costs

800
4.5
750
700 4.0
(Rs/KwH)
(Rs/te)
650
3.5
600
550 3.0
500
2.5
450
400 2.0

Pow er & Fuel Rs/tonne Freight EBITDA/tonne

1,400
1,200
1,000
(Rs/te)
800
600
400
200
0
Also, the company’s power plants would be entitled to income-tax exemption under
Section 80IA for the next ten years, which would reduce effective tax rate for the
company to 24% from ~33% at present.
Capex plans and funding on track

JKCL has already announced plans to set up a 3mnte plant in Karnataka, to be
located in Mugdol and in proximity to the Bangalore market. Further, the nearest
cement plant is located at 600km from the proposed location. We expect the plant to
be commissioned in Q2FY10E.
The unit would have clinker capacity of 2.3mnte and, based on the blend of fly ash
and slag, production could increase to as high as 3.5mnte. We expect the blending
ratio to be conservative at 1.3x.
Total cost of the Karnataka project is expected to be ~Rs10.5bn. With prices reigning
at all-time highs and expected to rise further, JKCL is likely to generate operating
cashflows of ~Rs12.2bn over the next three years. Hence, despite expected
borrowings of ~Rs5.5bn, the company’s D/E is likely to remain benign till FY10.
While the cost of setting up CPPs (~Rs 2.5bn) would be met via the equity issue in
February ‘06, operating cash flows for FY07 (~Rs1.7bn) would be used to part finance
the Nihon Nirman acquisition & upgradation (~Rs1.1bn).
78
White cement – Low growth but stable business
JKCL is the country’s second-largest producer of white cement, with a 0.4mnte
capacity, located at Gotan in Rajasthan.
The white cement industry has grown ~4% over the past ten years. It is seen as a
high-end product, primarily for aesthetic use. Further, unlike grey cement that has no
substitute, white cement constantly faces threat from substitutes such as marble and
the ceramic-tile industry.
The white cement production process is slightly different from that of grey cement and
involves higher cost of production.
• Impurities such as iron, manganese, titanium and chromium have to be physically

removed from limestone (involving higher mining costs) as against mechanised
mining, which is not viable
• China clay is then mixed with limestone and ground before being fed to the kiln
• Coal-based fuels cannot be used to heat kilns as ash residue would affect the
‘whiteness’ of clinker. Hence, petroleum-based fuels (that are costlier), are used in
kilns
• Cooling of clinker needs absence of oxygen to prevent colour addition to the
clinker due to oxidisation
Despite only two major players (Grasim and JKCL) in the white cement industry, it is
expected to see only moderate rise in both volumes and prices mainly due to stiff
competition from substitutes. JKCL plans to focus on value-added products such as
wall putty that would help it achieve higher realisations.
Table 3: White cement operating parameters

(’000 te)
Capacity 350 400 400 400 400
Production 227 249 254 262 268
Sales 221 247 254 262 268
Gross realisations (Rs/te) 7,219 7,342 7,599 7,751 7,751
We expect white cement volumes to grow ~3% and 2% in FY09 and FY10
respectively. Further, we believe that white cement realisations would rise ~2% in
FY09 and remain flat in FY10.
Estimate 20% earnings CAGR through FY08-10E
(’000 te)
Capacity 4,000 4,400 4,400 7,400
Production 3,641 3,806 4,136 5,542
Capacity utilisation (%) 91 87 94 75
Sales (mnte) 3,640 3,806 4,136 5,542
Growth (%) 4 5 9 34
Growth (%) 35 18 4 0
Volumes – Main revenue driver. JKCL acquired Nihon Nirman, a white cement plant
with 0.1mnte capacity, in January ’07. The company is in the process of converting
this plant into a 0.4mnte capacity grey cement one by April ’07. This would help boost
volumes in FY09E. Further, JKCL’s Karnataka plant is expected to be commissioned
by Q4FY09E; however, we have assumed a six-month delay for its commissioning,
given delays in fresh capacities at present. Consequently, we expect ~9% and 34%
rise in volumes in FY09E and FY10E respectively. We estimate realisations to rise 4%
in FY09E and remain flat in FY10E. Overall, topline is expected to post CAGR of 21%
over the next two years.
JKCL’s installed capacity is likely to be 4.4mnte by April ’08. However, this rated
capacity is on the basis of a 70:30 PPC-to-OPC mix. Since the company is receiving
Government orders (that include only OPC cement) at present at Rs20/bag higher
prices than market price of PPC, it has raised share of OPC production to 50%.
Consequently, despite an effective capacity of 4.4mnte (including Nihon Nirman) in
FY09E, we have assumed sales of only 4.1mnte.
Chart 3: Sales, EBITDA and EBITDA margin movement line light
30
20,000
25
15,000
(Rs mn)
20
(%)
10,000 15
10
5,000
5
0 0
80
Cost savings to help margin expansion. Cost savings along with cement price
improvements are likely to boost FY09E margins despite sharp rise in fuel costs. With
pet coke and waste-heat recovery plants already commissioned in September ’07 and
February ’08 respectively, a substantial part of the benefit from lower costs would
accrue in FY09E too. However, margins would be under pressure in FY10E due to
limited upside on prices. We expect JKCL’s EBITDA/te to jump to Rs1,249 in FY09E
from Rs1,091 in FY08 before declining to Rs1,177 in FY10E.
Chart 4: EBITDA/te
1,400
1,200
1,000
800
(Rs/te)
600
400
200
0
JKCL is expected to register interest cost CAGR of 29% over FY08-10E, mainly on
account of borrowings for the expansion at Karnataka. The company will benefit from
lower effective tax rate via exemptions under Section 80IA for power plants.
Consequently, with effective tax rate at 24% over the next two years, we expect PAT
to post an impressive CAGR of 20% over FY08-10E.
Chart 5: Negative FCF from FY08 due to capex for Karnataka plant

1,000 1.6
0 1.4
(1,000) 1.2
(Rs mn)
(2,000) 1.0
(x)
(3,000) 0.8
(4,000) 0.6
(5,000) 0.4
(6,000) 0.2
(7,000) 0.0

The cost of the Karnataka project is ~Rs10.5bn, which includes a 50MW captive
power plant. While JKCL is expected to borrow Rs5.5bn for the project, the balance
would be met via internal accruals. However, we have assumed a ~six-month delay in
commissioning of the plant. This would enable further cash accruals of six months for
the company. Consequently, the FCF would turn negative in FY09E before turning
positive in FY10E, thereby leading to D/E rising to 0.7x in FY09E before falling to 0.4x
in FY10E.
50
40
30
(%)
20
10
0
Buoyed by robust cement prices over the past couple of years, JKCL’s return ratios
saw significant jump till FY07. However, large capex for the Karnataka plant would
result in return ratios dipping as return from investments in Karnataka would start
flowing in only from FY10E.
82
Inexpensive valuations
We value JKCL at FY09E and FY10E P/E of 2.9x and 2.5x and EV/E of 3.2x and 2.4x
respectively. On the EV/te front, the company is valued at US$101. Historically, the
company’s poor operational efficiencies have been reflected in valuations. However,
with the company expected to achieve operating margins of over 30% supported by
cost-cutting initiatives coupled with 20% CAGR over the next two years, we expect it
to get re-rated. Based on FY09E P/E of 4x, we target a price of Rs208, an upside of
39% from current levels. We initiate coverage with a BUY rating.
Chart 7: P/E bands
400
350
7x
300
250
5x
(Rs)
200
150
3x
100
50
0
Jun-05
Dec-05
Mar-06
Jun-06
Nov-06
Feb-07
May-07
Oct-07
Jan-08
Sep-05
Aug-06
Aug-07
Apr-08
Chart 8: EV/EBITDA bands

30,000
9x
25,000
7x
20,000
(Rs mn)
15,000
5x
10,000
5,000
Jun-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Nov-07
Jan-08
Sep-05
Sep-06
Sep-07
Apr-08

Summary financials
Operating Income (Sales) 12,333 14,901 16,761 21,872 Operating Cash flow 2,461 3,350 4,146 4,961
of which Working Capital changes (1,214) 92 (371) (466)
Domestic 12,333 14,901 16,761 21,872 Capital Commitments (1,830) (2,956) (6,798) (2,452)
Operating Expenses 9,042 10,472 11,267 15,032 Net Operating FCF (583) 486 (3,023) 2,043
EBITDA 3,292 4,429 5,495 6,840 Investing Activities 182 117 89 76
% margin 26.7 29.7 32.8 31.3 Issue of Share Capital - - - -
Depreciation & Amortisation 332 411 463 725 Buyback of shares - - - -
Gross Interest 529 438 430 738 Inc(Dec) in Borrowings (245) (1,430) 3,552 (1,350)
Other Income 288 171 169 196 Dividend paid (245) (350) (367) (315)
Recurring PBT - - 108 522 Extraordinary Items (39) (133) (221) (260)
Add: Extraordinaries - - - - Chg. in Cash & Bank (929) (1,309) 31 194
Less: Taxes 934 825 1,145 1,338 Source: Company data, I-Sec Research
- Current tax 718 675 906 1,059
- Deferred tax 215 150 239 279
Less: Minority Interest (3) (2) (1) -
Net Income (Reported) 1,786 2,926 3,625 4,236 Table 8: Key Ratios
Per Share Data (Rs)
(Rs mn, year ending March 31) Diluted Recurring CEPS 30.3 47.7 58.5 70.9
FY04 FY05E FY06E FY07E Dividend per share 3.5 5.0 5.3 4.5
Assets Book Value 29.9 70.0 119.8 179.1
of which Growth Ratios (% YoY)
Cash & cash equivalents 1,925 616 647 841 Operating Income 41.2 20.8 12.5 30.5
Net Current Assets 3,165 1,694 2,072 2,777 Recurring Net Income 448.0 63.8 23.9 16.8
Investments of which 159 212 292 412 Diluted Recurring EPS 448.0 63.8 23.9 16.8
Strategic/Group 53 53 53 53 Diluted Recurring CEPS 233.0 57.6 22.5 21.3
Marketable 106 160 239 359
Net Fixed Assets* 9,224 10,950 11,024 20,835 Valuation Ratios (x)
of which P/E 5.9 3.6 2.9 2.5
Capital Work-in-Progress 1,644 2,500 8,798 750 P/CEPS 4.9 3.1 2.6 2.1
Goodwill - - - - P/BV 5.0 2.1 1.2 0.8
Total Assets 11,145 12,422 19,364 22,067 EV / EBITDA 3.2 3.2 2.4 1.7
EV / Operating Income 1.0 1.1 0.7 0.4
Liabilities EV / Operating FCF 4.2 4.7 3.6 1.8
Borrowings 5,577 4,147 7,699 6,349
Deferred Tax Liability 432 449 467 486 Operating Ratios (%)
Minority Interest - - - - Raw Material / Sales 9.8 9.5 8.9 9.7
Equity Share Capital 699 699 699 699 SG&A / Sales 2.5 2.5 2.5 2.5
Face value per share (Rs) 10 10 10 10 Other Income / PBT 10.6 4.5 3.5 3.5
Reserves & Surplus* 7,502 10,078 13,337 17,258 Effective Tax Rate 34.3 22.0 24.0 24.0
Less: Misc. Exp # 17 17 17 17 NWC / Total Assets 11.1 8.7 7.4 8.8
Net Worth 5,136 7,826 11,198 15,232 Inventory (days) 5.9 5.4 5.0 5.9
Total Liabilities 11,145 12,422 19,364 22,067 Receivables (days) 13.9 14.6 15.3 14.3
Source: Company data, I-Sec Research Payable (days) 41.7 39.4 42.7 32.8
*excluding revaluation reserves; # = not written off D/E Ratio (x) 1.2 0.6 0.7 0.4

RoCE 31.4 35.6 32.7 30.5
RoNW 41.2 45.1 38.1 32.1
84
Tables
Table 2: Captive power consumption and per unit rate ......................................................77
Table 3: White cement operating parameters.....................................................................79
Table 8: Key Ratios.............................................................................................................84
Charts
Chart 1: Power and fuel costs.............................................................................................77
Chart 2: Key cost trend .......................................................................................................78
Chart 3: Sales, EBITDA and EBITDA margin movement line light.....................................80
Chart 4: EBITDA/te .............................................................................................................81
Chart 5: Negative FCF from FY08 due to capex for Karnataka plant.................................81
Chart 7: P/E bands..............................................................................................................83
Chart 8: EV/EBITDA bands.................................................................................................83
86
Equity Research
April 21, 2008
Shree Cement BUY

Cement
Proficient performer Rs1,078
Shareholding pattern Reason for report: Initiating coverage
Sept Dec Mar Shree Cement (SCL) is the most efficient cement manufacturer in India at
'07 '07 '08
Promoters 63.7 63.7 63.7 present, with inherent cost advantages from lower lead distances to markets and
Institutional
investors 14.1 14.4 14.8 usage of 100% pet coke as fuel. SCL has regularly augmented capacities over the
MFs and UTI 6.3 5.8 6.5 past couple of years, which would help it post the highest topline growth
FIIs 7.0 7.3 7.7 amongst cement companies in the I-Sec universe. Despite an expected earnings
Others 22.2 21.9 21.5
Source: CMIE
CAGR of 70% over the next two years, the company is valued at FY09E and
FY10E EV/E of 3.1x and 2.2x respectively. We initiate coverage with a BUY
recommendation, targeting a price of Rs1,686/share over next 12-18 months.
f Highest volume growth amongst peers. SCL has added 3mnte capacity since
Price chart September ’07, taking its total installed capacity to 9mnte. The company has also
1,700 commissioned a 3mnte grinding unit at Khushkhera, Rajasthan over the same
period. This would help it register volume growth of 31% and 21% in FY09E and
1,500
FY10E respectively as well as push up overall revenues 31% over the next two
(Rs)
1,300 years.
f Margins to be under pressure. SCL is the only cement company in India to use
1,100
100% pet coke at its kilns and captive power plants (CPPs). While pet coke has the
900 least amount of ash content and high calorific value that enhances operating
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
efficiencies, the raw material prices have seen sharp rise in line with rising crude
prices. While the split grinding unit at Khushkhera should help savings in freight,
overall margins are likely to see marginal contraction.
f Earnings growth to impress. SCL’s strong topline growth would directly help post
PAT CAGR of 70% over the next two years. Also, the company is expected to
generate free cash flows (FCFs) of ~Rs13.3bn over FY08-10E, with substantial
capex plans already reaching completion. Strong cash generation should aid a
sharp fall in D/E to ~0.6x in FY10E from 1.7x in FY08.
f Attractive valuations. At FY09E and FY10E EV/E of 3.1x and 2.2x respectively
and EV/te of US$106, SCL’s valuations are inexpensive. The company is expected
to register the highest earnings growth amongst peers, which should drive stock re-
rating. We estimate fair value of Rs1,686/share (FY09E EV/E of 5.1x), implying a
56% potential upside. Initiate coverage with BUY recommendation.
Market Cap Rs37.6bn/US$939mn Year to March FY07 FY08E FY09E FY10E

Reuters/Bloomberg SHCM.BO/SRCM IN Revenue (Rs mn) 14,055 19,575 27,490 33,353
FII (%) 7.7 P/E (x) 23.8 13.1 6.2 4.6
Daily Volume (US$'000) 203 CEPS (Rs) 169.5 214.6 268.5 322.7

Shree Cement, April 21, 2008 ICICI Securities
Timely capex to boost growth

Only player to commission capacities prior to schedule
In the current scenario, where most cement equipment manufacturers boast of full
order books, large capacity additions are expected to get delayed. However, over the
past couple of years, SCL has consistently managed to commission its expansions on
or before the scheduled date.
SCL follows a strategy of planning relatively smaller capacities that aid quicker
implementation as many ancillary components such as mills, switch gears etc can be
sourced from various suppliers, thus avoiding delay in supply. On the other hand,
larger capacities would require components from few suppliers that have specific
capabilities; this could delay overall project implementation.
Table 1: Capacity additions

Time of
Plants Location commissioning Capacity (mnte)
Unit III Ras, Rajashtan February ’06 1.5
Unit IV Ras, Rajashtan March ’07 1.5
Unit V Ras, Rajashtan September ’07 1.5
Grinding units Khushkhera, Rajashtan September ’07 2.0
Grinding units Khushkhera Rajashtan December ’07 1.5
Unit VI Ras, Rajashtan March ’08 1.5
Unit VII Ras, Rajashtan H2FY10 1.0
SCL’s unit V along with phase I of the grinding unit at Khushkhera was commissioned
almost three months prior to schedule. Further, commissioning of its unit VI, which
was moved forward ~six months, recently got commissioned. Post addition of unit VI,
SCL’s installed capacity has increased to ~9mnte from ~4.5mnte at end FY06. Also,
the company is implementing another 1mnte expansion, expected to be operational
by Q2FY10. Whilst most cement players have witnessed muted volume growth due to
capacity constraints, SCL has and would take full advantage of the robust cement
demand.
SCL to continue gaining market share in key markets

SCL is amongst the largest players in northern India and the market leader in
Rajasthan and Delhi. Further, the company is the second-largest supplier in Haryana.
With commissioning of its Khushkhera grinding unit (located near Gurgaon, Haryana),
we expect the company to gain market leadership in Haryana too by FY09E. With the
company’s timely capacity additions, market share in other key markets is also likely
to see further boost.
88
Market % of total 9-yr consumption share of
North
Haryana 19.0 22.1 12.2 3.8
Punjab 7.3 9.9 6.0 4.4
Rajasthan 20.4 38.7 9.9 6.1
Delhi 17.9 11.1 3.2 2.0
Jammu & Kashmir 4.5 1.2 13.0 0.8
Total 3.2 99.8 8.1 100.0
Cement demand in northern India is expected to see substantial growth from various
infrastructure projects, especially hydro power and the Common Wealth Games 2010.
SCL will likely benefit from the robust demand and also register the highest volume
growth amongst peers in FY09E.
Chart 1: Key market share trends
24
Haryana Punjab Rajasthan Delhi
20
16
(%)
12
4
FY05 FY06 FY07

Remains most efficient player
Power & fuel costs advantage
SCL is the only company in India to use 100% pet coke as fuel for its kilns and power
plants. Pet coke has the advantage of being the cheapest in terms of cost per kcal
compared with domestic/imported coal. Further, pet coke has the lowest percentage
of ash content, thus resulting in higher kiln efficiency.
SCL’s major power requirement is met via captive pet coke-based power plants.
Whilst cost of pet coke has seen significant rise in line with cost of petroleum
products, per unit cost would still be cheaper than domestic or imported coal, the cost
of which has also risen.
Chart 2: Power & fuel costs trend
700 Average per unit cost of pow er (RHS)

2.5
600
2.0
500
(Rs/kWh)
(Rs/te)
400 1.5
300
1.0
200
0.5
100
0 0.0
Locational advantage helps lower freight cost

SCL has the distinct advantage of its plants being located in proximity to its key
markets. Consequently, average lead distances for the company are much lower vis-
à-vis competitors. However, rising fuel costs are expected to translate into higher road
freight for all cement players in FY09. Commissioning of the company’s 3.5mnte
grinding unit at Khushkhera, Rajasthan is expected to partly mitigate impact of higher
freight costs. Fly ash would be sourced from the Panipat Thermal Station nearby,
reducing cost of fly ash. Cement from this unit would primarily cater to the Haryana
market.
90

1,400
1,200
1,000
(Rs/te)
800
600
400
200
0

Estimate 70% earnings CAGR over FY08-10E

(’000 te)
Capacity 6,000 7,500 9,000 10,000
Production 4,799 5,985 7,830 9,500
Sales (mnte) 4,833 5,985 7,830 9,500
Growth (%) 51 24 31 21
Growth (%) 30 17 4 0
Volumes boost strong revenue growth. SCL is likely to see very impressive volume
growth aided by capacity additions (3mnte) in FY08. The company’s strategy of
planning smaller capacities and commissioning them prior than scheduled would help
it post highest volume growth amongst peers. We expect the company to post 31%
and 21% rise in volumes in FY09E and FY10E respectively. We have assumed 4%
and 0% improvement in realisations in FY09E and FY10E respectively. We expect the
company’s topline to post CAGR of 31% over the next two years.

40,000 Net sales EBITDA EBITDA Margin (RHS) 45%
35,000
40%
30,000
35%
25,000
(Rs mn)
20,000 30%
15,000
25%
10,000
20%
5,000
0 15%
Margins to come under pressure. While SCL’s topline is likely to see an impressive
rise, higher input costs (especially pet coke) and rising freight costs are expected to
pressurise operating margins. Consequently, we expect EBITDA margin to decline
marginally ~67bps to 40.4% in FY09E and further 68bps to 39.7% in FY10E. We
estimate the company’s EBITDA/te to rise to Rs1,418 in FY09E, before falling to
Rs1,394 in FY10E.
92
Chart 5: EBITDA/te
1,600
1,400
1,200
1,000
(Rs/te)
800
600
400
200
0
SCL’s interest cost is expected to rise with the commissioning of units V & VI and the
grinding unit at Khushkhera at end-FY08. SCL has been charging depreciation on the
WDV (written down value) as per the Income Tax Act, 1961. Thereby, depreciation
should see substantial decline in FY09E and FY10E. Post assuming an effective tax
rate of ~25% for the next couple of years, we expect the company to post earnings
CAGR of 70% over the next two years.
Chart 6: Strong FCF over next couple of years

6,000
5,000 2.0
4,000
3,000 1.5
(Rs mn)
(x)
2,000
1,000 1.0
0
(1,000) 0.5
(2,000)
(3,000) 0.0
SCL should see robust cash generation over the next two years, partly aided by firm
cement prices and incremental volumes. We expect the company to generate FCFs of
~Rs13.3bn over the next two years. The company’s D/E should also see a sharp fall
to ~0.6x in FY10 from 1.7x in FY08.
80
RoCE RoE
70
60
50
(%)
40
30
20
10
0
Buoyed by rising cement prices over the past couple of years, most cement
companies saw a sharp jump in their return ratios over the period. SCL would see its
RoCE stabilising over the next two years, while return-on-equity could decline in
FY10E.
94
Inexpensive valuations
SCL is valued at FY09 and FY10 P/E of 6.2x and 4.6x and EV/E of 3.1x and 2.2x
respectively. On the EV/te front, the company is valued at US$97. SCL is the most
efficient cement manufacturer in India. SCL is likely to post the highest earnings
growth (70%) amongst cement companies under I-Sec coverage. Hence, we believe
that the current valuations are inexpensive, with the stock likely to get re-rated. Our
target price of Rs1,686/share, which is a 56% upside from current levels, assumes an
EV/E of 5.1x our FY09 estimates. Consequently, we initiate coverage with a BUY
rating. SCL is our top pick in the sector.
Chart 8: P/E bands

3,500
3,000
2,500 20x
2,000
(Rs)
1,500 13x
1,000
8x
500
0
Jul-02
Oct-02
Jan-03
May-03
Nov-03
Mar-04
Jun-04
Dec-04
Jul-05
Oct-05
Jan-06
May-06
Nov-06
Mar-07
Jun-07
Dec-07
Sep-04
Sep-07
Apr-02
Aug-03
Apr-05
Aug-06
Apr-08

200,000
180,000
160,000
36x
140,000
120,000
(Rs mn)
100,000
80,000 28x
60,000
40,000 20x
20,000
0
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08

Summary financials
of which Working Capital changes (1,573) (184) 148 (430)
Domestic 14,055 19,575 27,490 33,353 Capital Commitments (6,553) (4,034) (2,700) (3,595)
Operating Expenses 8,133 11,539 16,389 20,113 Net Operating FCF (2,408) 2,500 6,069 5,974
EBITDA 5,922 8,036 11,101 13,241 Investing Activities 212 752 908 1,453
% margin 4,214 4,105 4,038 3,970 Issue of Share Capital - - - -
Depreciation & Amortisation 4,331 4,607 3,254 3,041 Buyback of shares - - - -
Gross Interest 104 406 623 719 Inc(Dec) in Borrowings 5,586 1,652 (591) 1,611
Other Income 212 752 908 1,453 Dividend paid (230) (871) (1,045) (1,254)
Recurring PBT 1,700 3,775 8,132 10,934 Extraordinary Items 42 (0) - 0
Add: Extraordinaries 195 11 - - Chg. in Cash & Bank 3,342 4,098 5,342 7,784
Less: Taxes 124 906 2,033 2,733 Source: Company data, I-Sec Research
- Current tax 852 906 2,033 2,733
- Deferred tax (727) - - -
Less: Minority Interest 1 2 3 4
Net Income (Reported) 1,770 2,880 6,099 8,200 Table 7: Key Ratios
Per Share Data (Rs)
(Rs mn, year ending March 31) Diluted Recurring CEPS 169.5 214.6 268.5 322.7
FY07 FY08E FY09E FY10E Dividend per share 6.6 25.0 30.0 36.0
Assets Book Value 116.3 174.0 319.1 518.5
of which 3,533 7,631 12,974 20,758 Growth Ratios (% YoY)
Cash & cash equivalents Operating Income 102.3 39.3 40.4 21.3
Net Current Assets 4,895 9,183 14,202 22,205 Recurring Net Income 297 82 113 34
Investments of which 500 500 500 500 Diluted Recurring EPS 297 82 113 34
Strategic/Group 500 500 500 500 Diluted Recurring CEPS 1.9 0.3 0.3 0.2
Marketable - - - -
Net Fixed Assets* 5,482 7,875 6,592 7,751 Valuation ratio (x)
of which P/E 23.8 13.1 6.2 4.6
Capital Work-in-Progress 3,438 471 1,200 595 P/CEPS 6.4 5.0 4.0 3.3
Total Assets 13,822 17,483 21,946 30,503 P/BV 9.3 6.2 3.4 2.1
EV / EBITDA 7.3 5.1 3.1 2.2
Deferred Tax Liability (37) (37) (37) (37)
Minority Interest - - - 1 Operating Ratios (%)
Equity Share Capital 348 348 348 348 Raw Material / Sales 11.5 10.3 12.1 12.0
Less: Misc. Exp # - - - - Effective Tax Rate 6.5 23.9 25.0 25.0
*excluding revaluation reserves; # = not written off Payable (days) 56.0 60.1 60.9 54.8
D/E Ratio (x) 2.0 1.7 0.9 0.6

RoCE 17.0 26.7 44.4 44.4
RoNW 42.0 51.7 67.2 54.4
96

Tables
Table 1: Capacity additions.................................................................................................88
Table 7: Key Ratios.............................................................................................................96
Charts
Chart 1: Key market share trends .......................................................................................89
Chart 2: Power & fuel costs trend .......................................................................................90
Chart 3: Key cost trend .......................................................................................................91
Chart 5: EBITDA/te ............................................................................................................93
Chart 6: Strong FCF over next couple of years ..................................................................93
Chart 8: P/E bands..............................................................................................................95
Chart 9: EV/EBITDA bands.................................................................................................95
98
Equity Research
April 21, 2008
UltraTech Cement BUY
Cement Stalwart of success Rs784

Shareholding pattern UltraTech Cement (UTCL), having witnessed capacity constraints in the past, is
Sept Dec Mar
'07 '07 '08
likely to benefit from commissioning of a 4.9mnte plant in Tadipatri, Andhra
Promoters 53.7 54.1 54.4 Pradesh. Besides volume growth, UTCL would see cost savings from
Institutional
investors 17.3 16.7 15.5 commissioning of 190MW captive power in FY09E. The company’s impressive
MFs and UTI 1.9 1.8 1.9
earnings of 21% over FY08-10E would be aided by improvement in both topline
FIIs 9.5 8.0 6.7 and margins. We believe that current valuations are inexpensive and initiate
Others 29.0 29.2 30.1
Source: CMIE coverage with BUY recommendation, targeting a price of Rs1,105/share over the
next 12-18 months.
f Volumes to boost topline. While UTCL has already commissioned its 3.3mnte
clinkerisation unit in Andhra Pradesh end-March ’08, its grinding unit is likely to be
operational in the next couple of months. As a result, an additional 4.9mnte would
help strong revenue growth going forward vis-à-vis the company facing capacity
constraints in the past couple of years. Further, UTCL is implementing two grinding
Price chart units in Gujarat along with port terminals, the benefits from which are likely to accrue
1,200 largely in FY11E.
1,100 f Captive power to aid margin expansion. UTCL would commission a 92MW
1,000 lignite-based plant at Gujarat from April ’08 in a phased manner. Additionally, the
(Rs)
company is expected to commission a 50MW thermal power plant (TPP) at

900
Chhattisgarh and another 50MW TPP along with the Tadipatri expansion. Savings
800 resulting from these two plants would help offset impact of rising international coal
700 prices, thereby leading to margin expansion.
Jun-07
Nov-07
Jan-08
Sep-07
Apr-07
Apr-08
f Earnings growth to impress. We expect UTCL to post earnings CAGR of 21%

over the next two years, backed by both volume growth and cost savings. While the
company’s FY09E free cash flow (FCF) should turn negative, an estimated free
cash generation of Rs12bn in FY10E would ensure D/E falling to 0.4x.
f Attractive valuations. UTCL is currently trading at attractive valuations of FY09E
and FY10E EV/E of 5.4x and 4.4x respectively and EV/te of US$141. Although the
company is comparable with ACC in terms of size and width of market presence at
present, it is likely to achieve operating margins higher than ACC’s. We estimate a
fair value of Rs1,105share (FY09E EV/E of 7.1x), which is a 41% upside from
current levels. We initiate coverage with BUY recommendation.
Reuters/Bloomberg ULTC.BO/UTCEM IN Revenue (Rs mn) 49,108 55,692 67,544 78,683
Shares Outstanding (mn) 124 Net Income (Rs mn) 7,823 10,373 13,109 15,226
FII (%) 6.7 P/E (x) 12.5 9.4 7.4 6.41
Novonil Guha
Sensex Return 3m (%) (13.3) RoCE (%) 36.0 37.0 37.4 36.0

UltraTech Cement, April 21, 2008 ICICI Securities
New plant operations to boost growth
Post Grasim’s acquisition of UTCL in ’03, UTCL was initially focusing on improving
overall efficiencies, maximising existing volume potential through debottlenecking and
improving its balance sheet. Thereafter, helped by higher cement prices, consequent
cash generation and improvement in operational efficiency levels, the company
embarked on a 4.9mnte brownfield capacity expansion along with a 50WM captive
TPP in Tadipatri, Andhra Pradesh in mid ’06. A clinkerisation unit of 3.3mnte has just
been commissioned while the grinding unit is expected to be operational in Q1FY09.
UTCL’s volume growth has been muted in the past, primarily due to capacity
constraints; however, with commissioning of new capacity, we expect impressive
growth as the company gets full benefit of the robust demand.
Market leader in key markets

8-year
Market % of total consumption Share of total
West
Gujarat 29.6 16.6 4.5 6.8
Maharashtra 21.9 27.9 7.2 12.2
South
Tamil Nadu 7.2 6.9 7.4 8.6
Karnataka 12.0 10.0 11.2 7.5
Kerala 4.6 2.4 6.8 4.7
East
West Bengal 18.0 9.3 6.7 4.6
Orissa 20.3 6.7 10.9 3.0
Assam 17.3 1.3 7.4 0.7
Central
Total 9.7 98.3 8.1 100

UTCL’s key market is the western region, where the company is the market leader in
Maharashtra and Gujarat. Maharashtra also happens to be the largest cement
consuming state in India. UTCL and Grasim together hold ~35% market share in
Maharashtra and ~39% market share in Gujarat. Further, UTCL is also a significant
player in the South and East. UTCL, along with Grasim, is the market leader in Orissa
(26%), Madhya Pradesh (22%), Chhattisgarh (33%) and Karnataka (30%). With
significant presence in key markets coupled with synergy gains, especially in logistics
and freight, we expect the company to post strong performance going forward.
Further, commissioning of the second unit at Tadipatri would boost market share in
Andhra Pradesh, Karnataka and Kerala. However, UTCL has negligible presence in
the northern markets, which is primarily catered to by Grasim.
100
Chart 1: Key market-share movement
35
Gujarat Maharashtra Karnataka
WB Orissa
30
25
(%)
20
15
10
FY04 FY05 FY06 FY07
101
Captive power to moderate rising costs
UTCL imports ~30% of total coal requirements at present and, hence, is exposed to
sharp rise in prices of international coal and bulk freight rates. While the company is
expected to see higher impact of fuel costs as against peers using domestic coal,
commissioning of captive power plants would help partly neutralise the impact.
Investment in efficiency improvements to bear fruit

UTCL has consistently focused on higher efficiencies and modernisation. Initial
investments were aimed at achieving rated capacity (historically, UTCL has operated
at very low utilisation due to production bottlenecks). High cost of power was also a
concern for the management, thereby prompting it to set up captive power plants;
UTCL is implementing three captive power plants totalling 175MW (excluding the
50MW brownfield expansion at Tadipatri). Of these plants, a 92MW lignite-based
plant at Pipavav (Gujarat) is expected to be commissioned from Q1FY08 in a phased
manner while a 50MW coal-based TPP at Hirmi (Chhattisgarh) is likely to be
commissioned by September ’08.
The lignite-based TPP will replace the current naphtha-based plant, which has
become operationally unviable due to restrictive cost of naphtha. The company uses
grid power at Gujarat at present and the lignite-based TPP would save over Rs2/unit
of power.
The TPP at Hirmi would be based on coal middlings (leftovers from coal washery),
which are lower on calorific value and even lower on cost. The plant uses grid power
at present and switching to captive power would result in ~Re1/unit savings in power
costs. Overall, we expect ~Rs1bn savings for UTCL over the next couple of years.
Chart 2: Power & fuel costs and average unit cost of power
Pow er & Fuel

900 5
800
700 4
600
(Rs/te)
(Rs/kWh)
3
500
400
2
300
200 1
100
0 0
102
Chart 3: Key cost and EBITDA/te
1,400
Pow er & Fuel Freight EBITDA/tonne
1,200
1,000
800
(Rs/te) 600
400
200
0
Grinding units to have logistic and freight benefits

Amongst other capex plans, UTCL is implementing two grinding units at Gujarat as
well as port terminals along coastal Gujarat and Maharashtra. Consequently, the
company would meet its western Maharashtra cement demand from Gujarat itself
using the cheaper transportation mode of sea freight, resulting in significant savings in
freight from transporting cement from its Chandrapur plant in eastern Maharashtra.
However, these benefits are likely to accrue only in FY11E.
103
Estimate 21% earnings CAGR over FY08-10E
Capacity (’000 te) 17,000 17,000 21,900 23,900
Production (’000 te) 14,635 15,436 18,615 22,227
Sales (mnte) 17,669 17,436 19,615 22,477
Growth (%) 13.6 (1.3) 12.5 14.6
Realisation (Rs/te) 3,318 3,923 4,080 4,080
Growth (%) 32.0 18.3 4.0 -
Tadipatri expansion to drive topline. UTCL’s volumes that were constrained by

installed capacity would witness a boost, primarily from its 4.9mnte Tadipatri
brownfield expansion. We expect volumes to grow 12.5% and 14.6% for FY09E and
FY10E respectively. Further, we expect share of clinker as part of total sales to dip
over the next two years. Assuming 4% and 0% realisations growth over FY09E and
FY10E respectively, we expect the company’s topline to post CAGR of 19% over the
next two years.

80,000 35
70,000
30
60,000
25
(Rs m)
50,000
(%)
20
40,000
15
30,000
20,000 10
10,000 5
0 0
Margin improvement from captive power. While UTCL is expected to face the brunt
of steep rise in prices of imported coal along with international freight rates, the impact
is expected to be partly neutralised by the commissioning of ~140MW of captive
power. This coupled with the expected 4% growth in prices in FY09E is likely to result
in ~250bps rise in operating margins for the year. However, for FY10E, EBITDA
margin is expected to decline 55bps due to lack of any significant pricing upside.
104
Chart 5: EBITDA/te
1,400
1,200
1,000
800
(Rs/te) 600
400
200
0
Source: Company, I-Sec Research
UTCL’s interest depreciation is expected to rise in FY09E with commissioning of the

4.9mnte Tadipatri plant. UTCL’s effective tax rate is likely to remain high at ~33% for
the next couple of years. Aided by robust topline growth and cost savings, the
company is expected to post earnings CAGR of 21% over the next two years.
The recent export ban is likely to impact Gujarat based companies to some extent.
However, the impact is expected to be marginal as export quantities are expected to
be absorbed by the western markets given the acute supply shortage expected in
FY09E. While the export ban is not likely to be a long term measure, should it be
effective for the entire year, and we expect about 3-4% earnings impact for UTCL.
14,000 2.5
Free cashflow D/E (RHS)
12,000
10,000 2.0
8,000
1.5
(Rs mn)
6,000 (x)
4,000
1.0
2,000
0 0.5
(2,000)
(4,000) 0.0
UTCL’s FCF is expected to turn negative in FY09E, mainly due to capex for the
Tadipatri expansion. However, the company is expected to generate FCF of ~Rs12bn
in FY10. UTCL’s D/E is also likely to see substantial reduction to ~0.4x in FY10E.
105
Chart 7: RoCE trend
60
RoCE RoE
50
40
(%)
30
20
10
0
FY04 FY05 FY06 FY07 FY08E FY09E FY10E
UTCL’s return ratios saw substantial improvement in FY07, primarily helped by rising
cement prices. However, we expect RoCE to stabilise at ~36% in FY10E while RoE is
likely to decline to 35% in FY10 from ~47% in FY08.
106
At the current market price, the stock is trading at FY09E and FY10E P/E of 7.4x and
6.4x and EV/E of 5.4x and 4.4x respectively. On EV/te, the company is valued at
US$141. UTCL is the closest to ACC in terms of size and market spread. However,
despite its operating efficiencies being better than ACC’s, UTCL is valued at a
significant 32% discount to ACC in P/E terms. We believe that UTCL should get a
marginal premium to ACC, given higher earnings growth and operational efficiencies.
On the basis of FY09E EV/E of 7.1x, we target a price of Rs1,105/share, which is a
41% upside from current levels. We initiate coverage with a BUY recommendation.
Chart 8: P/E bands

1,800
1,600
15x
1,400
1,200
11x
1,000
(Rs)
800
8x
600
400
200
0
Oct-04
Dec-04
Feb-05
May-05
Jul-05
Nov-05
Jan-06
Mar-06
May-06
Jun-06
Oct-06
Dec-06
Feb-07
May-07
Jul-07
Nov-07
Jan-08
Mar-08
Sep-05
Sep-07
Aug-04
Apr-05
Aug-06
Apr-07

250,000
200,000
9x
150,000
(Rs mn)
7x
100,000
5x
50,000
0
Jul-05
Oct-05
Jan-06
Jul-06
Oct-06
Jan-07
Jul-07
Oct-07
Jan-08
Apr-05
Apr-06
Apr-07
Apr-08
107
Summary financials
of which Working Capital changes 602 (1,741) (693) (1,228)
Exports 6,928 5,527 3,938 2,463 Capital Commitments (7,352) (10,343) (17,691) (5,411)
Domestic 42,180 50,165 63,606 76,220 Net Operating FCF 2,076 1,709 (2,553) 11,922
Operating Expenses 34,930 38,224 44,670 52,465 Investing Activities (2,496) (191) 504 (4)
EBITDA 14,178 17,467 22,874 26,218 Issue of Share Capital 1 - - -
% margin 29 31 34 33 Buyback of shares - - - -
Depreciation & Amortisation 2,263 2,308 2,998 3,855 Inc(Dec) in Borrowings 1,268 439 4,557 (9,064)
Gross Interest 868 748 1,388 896 Dividend paid (1,408) (1,867) (2,360) (2,741)
Other Income 615 957 1,078 1,259 Extraordinary Items - - - -
Recurring PBT 11,662 15,367 19,565 22,725 Chg. in Cash & Bank 280 90 148 113
Add: Extraordinaries - - - - Source: Company data, I-Sec Research
Less: Taxes 3,839 4,994 6,457 7,499
- Current tax 4,006 4,764 6,163 7,158
- Deferred tax (167) 231 293 341
Less: Minority Interest 3 4 5 6 Table 6: Key Ratios
Net Income (Reported) 7,823 10,373 13,109 15,226 (Year ending March 31)
Recurring Net Income 7,823 10,373 13,109 15,226 FY07 FY08E FY09E FY10E
Source: Company data, I-Sec Research Per Share Data (Rs)
EPS(Basic) 62.8 83.3 105.3 122.3
Table 4: Balance Sheet Diluted Recurring EPS 62.8 83.3 105.3 122.3
Diluted Recurring CEPS 81.0 101.9 129.4 153.3
(Rs mn, year ending March 31) Dividend per share 9.9 13.2 16.6 19.3
FY07 FY08E FY09E FY10E Book Value 141.7 210.0 296.4 396.6
Assets
Total Current Assets 9,602 11,116 13,120 15,537 Growth Ratios (% YoY)
of which Cash & cash 896 985 1,133 1,247 Operating Income 48.8 13.4 21.3 16.5
equivalents EBITDA 1.6 0.2 0.3 0.1
Current Liab. & Prov. 7,552 9,073 10,744 12,218 Recurring Net Income 240.5 32.6 26.4 16.1
Net Current Assets 2,050 2,043 2,376 3,319 Diluted Recurring EPS 240.3 32.6 26.4 16.1
Investments of which 4,835 5,983 6,557 7,819 Diluted Recurring CEPS 1.3 0.3 0.3 0.2
Strategic/Group 242 242 242 242
Marketable 4,592 5,740 6,314 7,577 Valuation Ratios (x)
Net Fixed Assets* 25,173 24,364 50,259 53,974 P/E 12.5 9.4 7.4 6.4
of which P/CEPS 9.7 7.7 6.1 5.1
Intangibles - - - - P/BV 5.5 3.7 2.6 2.0
Capital Work-in-Progress 6,970 15,813 4,610 2,451 EV / EBITDA 8.3 6.8 5.4 4.4
Goodwill - - - - EV / Operating Income 2.4 2.1 1.8 1.5
Total Assets 39,027 48,202 63,802 67,564 EV / Operating FCF 12.5 9.8 8.1 6.6
Liabilities Operating Ratios (%)

Borrowings 15,786 16,226 20,783 11,718 Raw Material / Sales 8.6 8.6 9.7 9.4
Deferred Tax Liability 5,603 5,833 6,127 6,467 SG&A / Sales 2.6 3.4 2.9 2.6
Minority Interest - - 1 2 Other Income / PBT 5.3 6.2 5.5 5.5
Equity Share Capital 1,245 1,245 1,245 1,245 Effective Tax Rate 32.9 32.5 33.0 33.0
Face value per share (Rs) 10 10 10 10 NWC / Total Assets 0.0 0.0 0.0 0.0
Reserves & Surplus* 16,393 24,899 35,648 48,133 Inventory (x) 5.8 5.2 5.1 4.9
Less: Misc. Exp # - - - - Receivables (days) 11.8 11.7 11.9 12.0
Net Worth 17,638 26,144 36,893 49,378 Payable (days) 40.9 45.3 43.9 44.4
Total Liabilities 39,027 48,202 63,802 67,564 D/E Ratio (x) 1.2 0.8 0.7 0.4
*excluding revaluation reserves; # = not written off Profitability Ratios (%)
RoCE 36.0 37.0 37.4 36.0
RoNW 55.8 47.4 41.6 35.3
108

Tables
Table 1: Key markets and market share...........................................................................100
Table 2: Performance trend and forecast assumptions ....................................................104
Table 3: Profit and Loss Statement ..................................................................................108
Table 4: Balance Sheet.....................................................................................................108
Table 5: Cash Flow Statement..........................................................................................108
Table 6: Key Ratios...........................................................................................................108
Charts
Chart 1: Key market-share movement..............................................................................101
Chart 2: Power & fuel costs and average unit cost of power............................................102
Chart 3: Key cost and EBITDA/te .....................................................................................103
Chart 4: Sales, EBITDA and EBITDA margin movement .................................................104
Chart 5: EBITDA/te ...........................................................................................................105
Chart 6: FCF and D/E .......................................................................................................105
Chart 7: RoCE trend .........................................................................................................106
Chart 8: P/E bands............................................................................................................107
Chart 9: EV/EBITDA bands...............................................................................................107
109
110
ANALYST CERTIFICATION
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personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
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111
EQUITIES
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Equity Research

April 21, 2008

Please refer to important disclosures at the end of this report

Investment summary .......................................................................................................3

Prices as on April 21, ’08

Demand growth of 11-12% achievable

Pricing pressure unlikely till FY11E

Cost escalations to be passed on

Table 1: Relative valuations

Oversupply fears hyped

Based on our interaction with cement equipment manufacturers and cement

Chart 3: Global contracted kiln capacity trend (excl. China)

Chart 4: Order inflow and backlog trend of key companies

Source: FLSmidth, KHD Humboldt Wedag

Chart 5: Expected incremental supplies over the next three years

Stated capacity Incremental Supply

Source: I-Sec Research

Thereby, we estimate that only 16mnte of incremental cement supply is likely in

Chart 6: Production and consumption trend

Cement demand – High correlation with GDP

Housing to remain largest demand contributor

Shift in population profile. Based on decline in average age of home purchasers

1,600 Total Population % share of 25-44 age group (RHS) 33

Source: Census of India ’01, I-Sec Research

Fiscal incentives to continue boosting cement demand. Fiscal incentives granted

Table 2: Housing demand projection

Incremental demand (bn sqft) 4.2 4.4 4.7 4.9 5.1

Cement demand (mnte) 105.9 111.2 116.6 122.4 128.4

Chart 9: Infrastructure spending in X & XI FYPs

Source: Planning Commission

Table 3: Road projects under NHDP

Table 4: Demand from power projects

Based on investments projected in the XI FYP, we estimate total cement requirement

Table 5: Demand from infrastructure

SEZs, commercial construction

Table 6: Sector-wise projected cement demand (FY08-12E)

Total despatches 127,150 141,594 155,262 166,518 182,837 212,091

Table 8: Regional demand/supply scenario

Pricing pressure unlikely, but upside limited too

Chart 10: Rising utilisation levels and prices

235 12 month rolling capacity utilisation (RHS) 105

Source: CMA, I-Sec Research

Chart 11: All-India average cement price trend

Source: Cement Manufacturers Association (CMA), I-Sec Research

Similarly, Government initiatives for encouraging imports with reduction of import

Dealer margin – 5% (Rs) 183

Landed costs 4,329

However, repeated Government intervention has created uncertainty as regards

Chart 12: International coal price movement

(Baltic Dry Freight Index)

Table 11: Freight mix for cement companies

Cost comparison – Key cement companies

Source: I-Sec Research

Chart 15: Freight costs for key companies (FY08)

Source: I-Sec Research

Table 12: Relative valuations

We prefer stocks with volume upside and/or cost savings

Input cost pressure

This page has been intentionally left blank

Lacking strength Rs799

Market Cap Rs863.3bn/US$21.6bn Year to Dec CY06 CY07P CY08E CY09E

Please refer to important disclosures at the end of this report