Cement Sector Analysis Report Karvy

16 September 2011
INSTITUTIONAL EQUITIES INDIA RESEARCH
CEMENT SECTOR
+91-22-22895030 rajesh.ravi@karvy.com
Rajesh Kumar Ravi
+91-22-22895028 prasun.kumar@karvy.com
Prasun Kumar
CEMENT SECTOR
16 September 2011
Faltering Demand, Declining Pricing Power

Outlook Negative
Thematic Production Discipline to Wane Off; Profitability to Decline

Cement large caps have outperformed The cement majors with pan India presence have outperformed the Sensex by ~24% YTD due to their strong comparative advantages. On the other hand, the mid cap and small cap cement companies have declined by 10 35% YTD. We believe the large caps will remain relative outperformers in the sector despite weakening industry fundamentals. Expect large cap cement stocks to correct: Despite a stable EBIDTA outlook for the large cap cement companies, we believe they are over valued and hence we expect their stock prices to correct from 12 month perspective amid weakening demand, declining pricing power and rising cost pressure resulting in lower profitability going forward. Capacity utilisation at 20 year lows until FY14E Sector in a Down cycle: While capacity growth is expected to slow down, lower demand off take would widen the gap between demand and supply thereby reducing cement producers pricing power. On a regional basis, utilisation levels in the northern and central regions should remain above 85% during FY11 13E and under 65% in the southern region. Production discipline to manage cost pressure unlikely to sustain: The cement producers led by the larger players resorted to production discipline led price hikes to stabilize their profitability amid weakening demand growth, and rising operating costs. However, we expect industrys pricing power may not sustain with declining utilisation levels. Further, as industrys fragmentation continues and smaller producers continue to gain incremental market share, we believe that the threat to production discipline would intensify. Hence, we expect the industrys margins and profitability to come under further pressure going forward. Gross State Domestic Product (GSDP) trends: We have analyzed GSDPs of states in each region and the companies present in those regions to draw regional demand inference. The GSDP growth rates that have been strong in northern, southern and western states have been improving in the eastern states, while cooling down in the central states. Initiate coverage on five Companies: We initiate coverage on the three pan India producers ACC, Ambuja Cements & UltraTech Cement with SELL recommendations, and on the regional players India Cements & Shree Cement with HOLD recommendations. Exhibit 1: Valuation Summary
Stocks ACC* ACEM* ICEM SRCM UTCEM M Cap (Rs Bn) Rating EBITDA/MT (Rs)
FY11 FY12E FY13E FY11
Analyst Contact
Rajesh Kumar Ravi +91 22 22895030 Rajesh.ravi@karvy.com Prasun Kumar +91 22 22895028 Prasun.kumar@karvy.com
ACC (ACC IN)

CMP Target Price Upside (%) 52 Week High/Low (Rs) Avg. Daily Volume ( 000)
SELL
1,065 952 11 1,143/917 242
Ambuja Cements (ACEM IN)

SELL
151 127 16 166/111 1,841
India Cements (ICEM IN)

HOLD
73 76 5 127/62 814
Shree Cements (SRCM IN)

CMP Target Price Upside (%) 52 Week High/Low (Rs) Avg. Daily Volume (000)
HOLD
1,700 1786 5 2,350/1,500 27
UltraTech Cement (UTCEM IN)

SELL
1,149 972 15 1,188/890 136
RoCE (%)
FY12E FY13E
EV/EBITDA (x)
FY11 FY12E FY13E
EV/MT (US$)
FY11 FY12E FY13E
200.1 230.2 22.3 59.2 314.9
SELL SELL HOLD HOLD SELL
859 968 385 718 686
811 906 621 713 748
742 857 583 707 734
15.9 17.1 2.6 15.9 13.7
14.5 13.6 3.4 8.9 11.2
12.4 12.0 3.1 16.0 10.1
9.1 10.2 9.4 6.1 11.5
9.1 10.4 6.9 6.4 8.7
9.1 10.0 6.7 5.5 8.6
123 176 81 89 134
130 164 95 95 133
124 159 87 90 132
Source: Karvy Institutional Research
* FY11, FY12E, FY13E refers to their CY10, CY11E, CY12E financials
16 September, 2011
Cement Sector Thematic
Table of Contents
Page Executive Summary..3
Valuations Exceed Our Fair Value Estimates Outlook Negative.. 3 Capacity Utilisation at 20 year lows till FY14E Expect a Down cycle. 3 Production Discipline Unlikely to Sustain.. 3 Initiate Coverage on Five Companies.. 4 Valuation Summary of Five Stocks.. 4
Cement Majors Have Outperformed the Market.. 5

Outperformance attributed to companies fundamental strengths. 5 Expect Stock Prices to Decline Going Forward Outlook Negative... 5 Key Triggers. 6 Key Upside Risks.6 Summary of Companies Covered in the Report.6 Sensitivity Analysis of the Five Companies.9
Demand Supply Dynamics.10

Long term Cement Demand Fundamentals Remain Intact10 Project Executions Slump in the Near term.. 12 Supply Pressure to Remain High....15 Demand Supply Mismatch to Continue till FY14E..16 Cement Sector in the Midst of another Down Cycle17 Region wise Demand Supply Dynamics....19
Cost Pricing Dynamics .25

Operating Cost Pressure Mounting; Utilisation Level Expected to Drop 25 Ensuing Production Discipline Not A Long term Substitute to Demand Growth..26 RoE Analysis during Production Discipline..27 Inter Region Movement of Cement is Limited. 28 Risk to Pricing Power Increases . 30
Comparative Analysis of Major Cement Companies32

Captive Power Sourcing ..32 Fuel Linkages .... 32 Logistical Infrastructure .. 33 Geographical Diversification... 34 Revenue Diversification .. 34 Asset Sweating ..35 Balance Sheet Strength..35
Valuation Methodology36
We Prefer EV/EBITDA over Asset based Valuation 36 We Use Last Down cycle Valuation Multiple... 36
Companies Section
ACC. 37 Ambuja Cements... 46 India Cements... 56 Shree Cement. 68 UltraTech Cement. 78
16 September, 2011
Executive Summary
Valuations Exceed Our Fair Value Estimates Outlook Negative
The cement stocks and especially the large producers ACC, Ambuja Cements & UltraTech have outperformed the markets over last one year. While this is in line with their strong fundamental strengths, the recent run ups in the stocks do not seem to have factored in the increasing risk to the industrys pricing power and hence subsequent risk to their profitability. Cement stocks are trading at higher valuation multiples despite rising risk to their earnings. Lower cement realization and further cost pressure should set in a declining trend in companies profits in the ensuing quarters. We expect the declining profitability, and further rate hike announcements by RBI should trigger a sell off in the cement stocks.
Capacity Utilisation at 20 year lows till FY14E Sector in a Down cycle phase
While the long term cement demand growth metrics are in place, slow down in project executions across both realty and infrastructure sectors since Q2FY11 would dampen cement demand CAGR to 6% in FY11 13E. Channel checks with industry participants in the infrastructure and realty sectors suggest new project off takes have been on a decline over the last one year. Additionally, cement capacity is expected to increase at a 7% CAGR in FY11 13E, which implies demand supply mismatch would remain until FY14E. Lower capacity utilisation due to widening gap between supply and demand would in turn reduce the pricing power of the cement producers. With capacity utilisation of ~75% in FY11 14E, the Indian cement industry is in the midst of another down cycle phase. Industrys capacity utilisation during this phase would be at 20 year lows, in our view. On a regional basis, utilisation levels in the northern and central regions should remain above 85%, while the Southern regions utilisation would remain under 65% in FY11 13E.
Production Discipline Unlikely to Sustain

Industrys operating costs have shot up by ~40% during the last four years while its capacity utilisation has been on a decline. The cement producers across India (led by the large producers) resorted to production discipline since the start of Q2FY11 to firm up cement prices thereby stabilizing their profitability against rising cost pressure. Weakening demand during the preceding quarter had dragged down cement prices across all regions. While the production discipline has so far helped cement manufacturers to pass on their cost pressure fully, threat to the ensuing production discipline looms large. While capacity utilisation is expected to fall to 20 year low levels during FY11 14E, industrys fragmentation continues. Further, the large manufacturers may get wary of continuously losing their market share to their smaller peers over the last one year during the ensuing production discipline. These factors should reduce industry pricing power and the manufacturers ability to fully pass on their cost pressure. Hence, we expect the industrys margins and profitability to come under further pressure going forward.
16 September, 2011
Cement Sector Thematic Our estimates of companies operating profits and fair value can decline by 15 25% if net realization growth in FY13E is lower by 5% that our current estimates.
Initiate Coverage on Five Companies

We initiate coverage on the three large producers ACC, Ambuja Cements & UltraTech Cement with SELL recommendation, as these stocks are trading above their last down cycle valuations. Amongst the regional players, we initiate coverage on India Cements with a HOLD recommendation, as the stock has already corrected by ~25% over the last one year in line with its weak fundamental strengths. We initiate coverage on Shree Cement with HOLD recommendation due to off take risks to its merchant power business while the cement business outlook remains stable.
Valuation Summary of Five Stocks

We have valued ACC & Ambuja Cements at 8.2x their CY12E EBITDA, while we have valued UltraTech Cements at 7.5x its FY13E EV/EBITDA, (implying 10% discount to ACC & Ambuja). We estimate this valuation differential would exist over the next one or two years until the various logistical and infrastructural upgradation capex enhances UltraTechs asset turnover in line with ACC & Ambuja Cements. We have valued Shree Cements cement business at 6.5x its FY13E EBITDA and its merchant power business at 5x FY13E EBITDA. We value India Cements standalone cement business at 6x FY13E EBITDA (~25% discount to ACC & Ambuja) and its 100% ownership of the CSK at Rs. 20 per share.
16 September, 2011
Cement Majors have Outperformed the Market

The cement sector and primarily the cement majors (UltraTech, ACC and Ambuja Cements) have outperformed the BSE Sensex by ~24% YTD. The large cap stocks have delivered ~11% return over the last one year. In contrast, the stocks of smaller cement companies are down 15 40% over last one year. Exhibit 2: Price performance of major cement companies in India
CMP Cement Stock Performance (%) UltraTech Cement Ltd. Ambuja Cements Ltd. ACC Limited Jaiprakash Associates Limited Shree Cement Limited Century Textiles & Industries Limited Birla Corporation Limited India Cements Limited Madras Cement Limited Orient Paper & Industries Limited
Source: Bloomberg, Karvy Institutional Research
Mkt cap (Rs bn) 315 232 201 149 60 27 25 23 24 12
Absolute return (%) 3m 11 15 8 (15) (1) (15) (12) (12) 14 4 6m 13 21 7 (13) (3) (7) 6 (18) 10 35 1 yr 11 10 12 (44) (16) (44) (16) (33) (11) (3) YTD 6 6 0 (34) (15) (33) (12) (32) (5) 13
2 yr CAGR 18 21 15 (8) 6 (8) (5) (5) 21 11
3 yr CAGR 20 28 14 (7) 4 (0) 13 (11) 17 42
Relative to Sensex (%) 3m6m 25 23 26 (30) (3) (30) (2) (20) 2 10 23 23 17 (17) 2 (15) 6 (15) 13 30 1 yr 24 23 17 (34) 7 (24) 6 (24) (5) 6 YTD 27 24 21 (11) 46 (12) 31 (19) (7) 24
(Rs) 1,149 151 1,070 70 1,715 288 319 74 101 62
Outperformance attributed to companies fundamental strengths: The strong outperformance of the cement majors can be attributed
to their strong fundamental drivers both operational and financial. As shown in the table below, we have ranked three cement majors (UltraTech, ACC and Ambuja Cements) and three regional companies (Shree Cement, India Cements, Madras Cements) on those fundamental drivers on a score of One to Five. We have ascribed a higher score to the companies for a particular driver which increases its operational or financial strength. Exhibit 3: Comparative analysis of fundamental strengths of major cement companies in India
Fundamental Drivers Captive power sourcing Fuel linkages Logistical infrastructure support Geographical diversification Revenue diversification Asset Sweating Balance Sheet strength Overall (out of 35) UltraTech 4 3 4 4 2 3 4 24 ACC 4 4 4 4 2 4 3 25 Ambuja Cements 4 3 4 4 2 4 4 25 India Cements 2 2 2 2 2 2 1 13 Shree Cement 5 1 1 2 4 4 3 20 Madras Cements 2 1 1 2 2 2 1 11
Source: Companies, Karvy Institutional Research
Score of 5 implies strong driver, 1 implies weak driver
Expect Stock Prices to Decline Going Forward; Sector Outlook Negative

We have a Negative stance on the sector as we expect profitability to decline during FY11 13E. Lower capacity utilisation and increasing industrys fragmentation would impact producers pricing power. Hence, we expect they should not be able to fully pass on their rising cost pressure. We expect the industrys RoE to contract from ~12% in FY11 to ~9% by FY13E. However, as suggested by their higher fundamental strengths, we expect the large manufacturers to deliver higher operating margins of ~20% in FY13E vs. industry average of 17%. These manufacturers should deliver higher RoEs of ~13% against industrys 9% RoE in FY13E, in our view.
16 September, 2011
Cement Sector Thematic Exhibit 4: Declining profitability to drag down stock performance going forward
40 32 24 16 8 FY12E FY13E RoE (%) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 0 100 90 80 70 60
Capacity Utilisation (%) RHS Source: CMA, Karvy Institutional Research
OPM (%)
Exhibit 5: Relative Valuations & Target Multiples

Companies Recommendation CMP Rs ACC* Ambuja Cements* India Cements Shree Cement UltraTech Cement SELL SELL HOLD HOLD SELL 1,065 151 73 1,700 1,149 M cap Rs bn 200.1 230.2 22.3 59.2 314.9 EV/EBITDA (x) FY11 9.1 10.2 9.4 6.1 11.5 FY12E 9.1 10.4 6.9 6.4 8.7 FY13E 9.1 10.0 6.7 5.5 8.6 EV/MT (US$) FY13E 124 159 87 90 132 Target multiple EV/EBITDA (x) 8.2 8.2 6.0 6.5 7.5 Target Price Rs 952 127 76 1,786 972 Implied EV/MT US$ 112 130 88 96 115
Source: Company, Karvy Institutional Research
* FY11, FY12E, FY13E refers to their CY10, CY11E, CY12E financials
Key Triggers
Declining profitability over the next three quarters led by lower realization and higher cost pressure Further interest rate hikes being announced by the RBI
Key Upside Risks

If the production discipline sustains through in FY13E, net realization growth could be 2 4% higher than our estimates and hence the producers can fully pass on their incremental cost pressure. These could lead to fair value estimates of the companies under coverage being higher by 10 20% than our current estimates. However, even if this scenario plays out, there are limited upsides in the stocks at their current market prices.
Summary of Companies Covered in the Report

ACC: We initiate coverage with SELL recommendation on the stock with a
target price of Rs. 952 per share, valuing ACC at 8.2x its CY12E EBITDA. x Pan India presence with strong fundamentals: ACC is Indias oldest cement company in India with 30 mn MT of installed cement capacity and a pan India presence. It has ~353MW of thermal CPP which meets ~80% of its electricity requirements. ACC also has captive railway sidings and railway wagons which help to control its logistics cost. ACC meets ~50% of its coal requirements through low cost linkage coal. Declining profitability & return ratios: While operating costs are likely to grow by ~5.5% CAGR in CY11 12E, weak pricing power wont allow ACC to fully pass on these cost pressure to the end consumers. Hence, operating margins should contract by ~420 bps in CY11 12E, which in turn would lead to its EBITDA and PAT to decline in CY10 12E at 11% and 15% CAGR respectively.
6
16 September, 2011
Ambuja Cements: We initiate coverage with SELL recommendation on the stock with a target price of Rs. 127 per share valuing Ambuja Cements at 8.2x its CY12E EBITDA. The target price implies a replacement cost of US$130/MT.
x
Third largest pan India cement manufacturer: Ambuja Cements is the third largest cement manufacturer in India having 27 mn MT of cement grinding capacity and 19.6 mn MT of clinker capacity. It is amongst the Top 4 manufacturers in the western, eastern regions and northern regions. It does not have any presence in the southern region. Operating profits to remain flat despite cost efficiencies: Ambuja Cements is one of most cost efficient producers in India with ~77% usage of captive power. With the increase in fuel and freight expenses, we expect operating costs to grow by ~5% YoY in CY11 12E, while net realization would rise by ~2% YoY. This should result in lower EBITDA/MT going forward and hence we expect EBITDA to remain flat in CY11 12E. We expect both RoE and RoCE to continue downward in CY11 12E. However, the Company should continue to deliver industry leading return ratios.
India Cements: We initiate coverage with HOLD recommendation with

target price of Rs. 76, valuing India Cements standalone cement business at 6x its FY13E EBITDA, Trinetra Cement at US$60 per MT and CSKs franchise right at US$140 mn (Rs. 20 per share). x Strong realization growth in FY12E due to production discipline: The production discipline has been most effective in the southern region, where India Cements has leading presence. This would help the Company to register 12% YoY net realization growth in FY12E. However, lower capacity utilisation (<65% during FY12 13E) in the southern region would reduce producers pricing power thereby moderating net realization growth going forward. EBITDA to decline at 8% CAGR in FY11 13E: Lower sales volume off take, moderating realization growth and sustained operating cost pressure would result in a negative EBITDA CAGR of 8% in FY11 13E, as against +2% CAGR in the previous three years. Lower profitability to keep RoE & RoCE suppressed: We expect India Cements return ratios to remain under 4% in FY12 13E due to lower profitability.
Shree Cements: We initiate coverage on the stock with HOLD

recommendation valuing Shree Cements cement business at 6.5x its FY13E cement EBITDA and its merchant power business at 5x its FY13E power EBITDA thereby arriving at a SOTP valuation of Rs. 1,786 per share. x Largest cement producer in northern region: Shree Cement is the second largest cement producer in the northern region after Holcim Group (ACC & Ambuja Cements). Expect flat EBITDA/MT in FY11 13E: Shree Cement mostly sells its cement in the northern region, where capacity utilisation is likely to remain at ~90% in FY11 13E. Hence, we expect manufacturers in this region would be able to mostly pass on their incremental cost pressure thereby helping the Company to post flattish EBITDA/MT in FY11 13E. EBITDA CAGR of 5% in FY12 13E, return ratios to improve in FY13E: We expect Shree Cements EBITDA to improve marginally in FY12 13E led by 5% cement sales growth and increased contribution from the power sales. We expect its RoE to recover to 23% in FY13E due to improvement in
7
16 September, 2011
Cement Sector Thematic asset turn over and net margins. We believe that RoCE of 16% in FY13E would benefit from 10% YoY EBITDA growth in FY13E.
UltraTech Cement: We initiate coverage on UltraTech with a SELL

recommendation as the stock has run up ahead of its fair value, in our view. We value UltraTech at 7.5x its FY13E EBITDA (implying 10% discount to ACC and Ambuja). We estimate this valuation differential should exist over the next one or two years until the various logistical and infrastructural up gradation capex enhances UltraTechs asset turnover in line with ACC & Ambuja Cements. x Largest pan India Company with strong comparative advantages UltraTech Cement is Indias largest and Worlds ninth grey cement manufacturer. In India, it is amongst the Top 3 manufacturers in all the regions. The Company has ~540MW of thermal CPP which meets ~80% of electricity requirements. It has been a major user of sea transportation on the western coast of India. High exposure in southern & western regions to impact realization growth: Over 50% of UltraTechs capacity is located in the southern and western regions, where the price discipline is holding on the most. However, the capacity utilisation in the southern region is expected to decline to 63% in FY11 13E period. Similarly, the capacity utilisation in the adjacent western region would contract to 73% in FY11 13E period. We expect that declining utilisation levels in these regions would severely affect the pricing power of the producers thereby leading to the ongoing price stability in these regions. Earnings growth to moderate, return ratios on a decline: We expect UltraTech Cements sales volume growth would moderate to ~2% YoY in FY13E despite factoring in ~83% utilisation for UltraTech in FY12 13E. We believe that declining pricing power would reduce UltraTechs ability to fully pass on incremental cost pressure in FY13E. We expect UltraTechs RoE to decline by 690 bps in FY11 13E period.
Exhibit 6: Key performance metrics of the five companies covered in the report
Companies ACC Year CY10 CY11E CY12E ACEM CY10 CY11E CY12E ICEM FY11 FY12E FY13E SRCM FY11 FY12E FY13E UTCEM FY11 FY12E FY13E Sales Vol Growth (%) (1.7) 12.9 4.0 8.2 4.1 6.0 (9.1) (2.8) 7.0 0.2 5.8 5.6 4.2 4.4 1.5 Realization Growth (%) (2.5) 3.9 2.0 (1.8) 2.5 2.1 2.0 11.6 1.9 (7.6) 3.4 3.6 4.6 4.9 4.3 EBITDA/MT (Rs) 859 811 742 968 906 857 385 621 583 718 713 707 686 748 734 OPM (%) 22.7 20.7 18.6 26.0 23.6 21.8 11.1 16.1 14.8 25.2 22.5 20.6 20.1 20.9 19.7 EBITDA growth (%) (31.5) 6.6 (4.8) (0.9) (1.6) 0.3 (50.5) 56.5 0.4 (41.4) 1.0 10.1 32.1 30.8 0.2 FCF/EBITDA (X) 0.5 0.5 0.1 0.7 (0.0) 0.1 (0.7) 0.5 0.4 0.1 0.5 0.2 (0.9) 0.2 0.0 RoE (%) 17.9 15.8 13.4 18.1 14.4 12.7 1.6 2.5 2.1 13.5 9.9 22.9 19.9 15.3 13.1 RoCE (%) 15.9 14.5 12.4 17.1 13.6 12.0 2.6 3.4 3.1 15.9 8.9 16.0 13.7 11.2 10.1
Source: Companies, Karvy Institutional research
16 September, 2011
Sensitivity Analysis of the Five Companies

The following tables enumerate the impact on profitability and valuations of the five stocks covered in the report due to variations in key parameters in FY13E. Exhibit 7: Impact of 1% increase in the following parameters on EBITDA (%)
Sales Vol ACC ACEM UTCEM SRCM ICEM 1.2 0.9 0.7 0.9 0.6 Realization 5.1 4.3 4.1 3.2 7.0 Fuel cost (1.2) (1.2) (1.3) (1.8) (2.0) Freight cost (0.9) (1.0) (1.1) (0.7) (1.5) ACC ACEM UTCEM SRCM ICEM
Exhibit 8: Impact of 1% increase in the following parameters on EPS (%)

Sales Vol 1.5 1.1 1.0 1.5 4.0 Realization 6.5 5.3 6.0 5.0 45.3 Fuel cost (1.5) (1.4) (1.9) (2.8) (12.7) Freight cost (1.2) (1.3) (1.6) (1.1) (9.6)
Exhibit 9: Impact of 1% increase in the following parameters on RoE (bps)

Sales Vol ACC ACEM UTCEM SRCM ICEM 19 13 12 30 6 Realization 81 63 73 101 64 Fuel cost (19) (17) (23) (57) (18) Freight cost (15) (15) (20) (22) (14)
Exhibit 10: Impact of 1% increase in the following parameters on Target Price (%)
Sales Vol ACC ACEM UTCEM SRCM ICEM 1.1 0.8 0.7 1.1 1.0 Realization 4.8 3.8 4.4 3.8 12.5 Fuel cost (1.1) (1.0) (1.4) (2.2) (3.6) Freight Cost (0.9) (0.9) (1.2) (0.8) (2.7)
Two Key Observations

I. While the variations in sales volume, fuel cost and freight expenses affect earnings and valuation by ~0.5 1.5x, the variations in net realization have almost 4 6x impact on these parameters. This implies that if producers pricing power continues to reduce, their profitability and subsequent valuations should decline significantly. Low debt levels in case of the ACC, Ambuja Cements, UltraTech and Shree Cement reduces their EPS and RoE volatility. We expect India Cements RoE to remain under 3% during FY11 13E. Its high debt levels increases its financial leverage multifold.
II.
16 September, 2011
Demand Supply Dynamics

Long term Cement Demand Fundamentals Remain Intact
Over the last twenty years, the cement demand in India has grown at ~1.22x GDP growth. Housing / Realty sector has so far accounted for ~75% of total cement consumption in India, while the infrastructure sector and industrial construction accounted for 25% the remaining demand. Exhibit 11: Cement demand grew at 1.22x GDP growth during the last 20 years
16% 11% 6% 1% 2012E 2013E 4% 2014E 1100 900 700 500 FY05 09 Housing Infrastructure Commercial Construction Industrial FY10 14E Total demand (mn mt) RHS 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GDP growth (%) Source: CMA, RBI, Karvy Institutional Research
Cement Consumption Growth (%)
Exhibit 12: GDP and cement consumption (per capita) are strongly correlated
Cement Demand (Kg/capita)
180 160 140 120 100 80 25,000
30,000
35,000
40,000
45,000
50,000
India s GDP (Rs/capita)

Source: CMA, RBI, Karvy Institutional Research
Exhibit 13: Expanding share of infrastructure sectors cement consumption

100% 80% 60% 40% 20% 0% 6% 13% 17% 5% 11% 30%
64%
54%
Source: CRISIL Research, Karvy Institutional Research
10
16 September, 2011
Cement Sector Thematic However, the infrastructure sector is expected to gain a larger share of the cement demand pie on back of large investments pegged to improve Indias infrastructure facilities. The Government of India has been doubling its investment outlay in each of the 10th, 11th & 12th Five Year Plan (FYPs) to support the GDP growth momentum. As per CRISIL Research the cement consumption share of infrastructure and industrial sectors is expected to expand to 35% during FY10 14E as against 23% during FY05 09 Exhibit 14: Cement Demand from Infrastructure Sector to double to ~480 mn MT in FY13 17E as per planned capex outlay in 12th Five Year Plan
200 160 120 80 40 0 Power Roads Telecom Railways Irrigation Water & Ports & Sanitation Airports XIIth Plan Others
XIth Plan Source: Planning Commission of India, Karvy Institutional Research
Exhibit 15: Power Capacity Expansion Schedule for FY10 15E period Strong order book in pipeline to aid long term cement consumption growth
16 12 8 4 10 000 MW 000 MW 30
20
FY10 Central
FY11E
FY12E State
FY13E Private
FY14E
FY15E Total Capex (RHS)
Source: CEA, Karvy Institutional Research
Exhibit 16: Out of 50,405kms under NHAI, 70% still to be completed over next four to five years
16,000 12,000 8,000 4,000 16,000 12,000 8,000 4,000
P1&2 Done
P3
P4
P5
P6 Remaining
P7
GQ Total (RHS)
Under Implementation
Source: NHAI, Karvy Institutional Research
11
16 September, 2011
Project Executions Slump in the Near term Denting Demand Growth to below 10% in FY11 13E
While we expect the long term cement demand to follow the Cement Demand Factor (CDF = Cement Demand Growth / GDP Growth) of 1.22x, there are no measures to meaningfully assess the near term cement demand growth. Hence, we have tried to analyze trends in CDF to identify the near term demand trends. Over the last 20 years, the CDF has remained above one except for four instances when it was below one. In fact, in FY01, the factor was negative owning to a decline in the cement demand growth. In all the four instances when the CDF was below one, it rebounded to more than one in the subsequent year. Additionally, the CDF has stabilized over the last six to seven years, as against the high volatility it witnessed during the preceding ten years. Based on the two trends as discussed above, we expect the cement demand in FY12 13E would be higher than 4.7% in FY11. Exhibit 17: Cement Demand Factor (CDF) trend over the last 17 years
2.60 2.20 1.80 1.40 1.00 0.60 0.20 0.20 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10
Cement demand factor Source: RBI, CMA, Karvy Institutional Research
The cement consumption in FY11 shrunk to ~4.7%, as activities slumped across both realty and infrastructure sectors. Rising interest costs has impacted sales off take for the realty sector. The bureaucratic inactivity after unearthing of a slew of scams and scandals has slowed down both Government led infrastructure activities as well as private sector led projects. Exhibit 18: Rising cost of capital to impact demand off take till FY12E
9.0 8.0 7.0 6.0 5.0 4.0 Oct 05 Mar 06 Aug 06 Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 May 10 Oct 10 Mar 11 Aug 11
Repo Rate Trend Source: RBI, Karvy Institutional Research
12
16 September, 2011
Cement Sector Thematic Exhibit 19: Housing Credit Growth Recovery muted in FY11 as interest rate started to surge
60% 50% 40% 30% 20% 10% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Exhibit 20: Revenue (Rs bn) trends of nine realty companies in India
150 120 90 60 30 50% 40% 30% 20% 10% 0% 10% Realty Source: Bloomberg, Karvy Institutional Research 3 yr CAGR
Source: RBI, Karvy Institutional Research
Exhibit 21: Banks Credit O/S YoY to Infra Sector (%) Trending downwards
60% 40% 20% 0% Sep 08 Feb 09 May 10 Dec 09 Oct 10 Mar 11 Apr 08 Jul 09
Exhibit 22: Revenues (Rs bn) of 28 Infrastructure & Power sector companies; Growth slowing down
3,200 2,400 1,600 800 10% 0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
30% 20%
Banks credit O/S to Infra Sector YoY change (%) Source: RBI, Karvy Institutional Research
Construction and power sectors Source: Bloomberg, Karvy Institutional Research
3 yr CAGR
Channel checks with industry participants in the infrastructure and realty sectors suggest that the new project off takes in realty sector have been on a decline over the last one year. As per realty research firm PropEquity, the housing projects launches across top eight cities in India have dropped 31% since Q3FY11. Slow demand has been attributed to rising construction cost, higher interest rate. Moreover, delayed deliveries have further added to reduction in new project announcements. Infrastructure projects have also suffered as investments in new projects have been on a decline in 2011 vs. 2010. The execution delay has resulted in 22% increase in project costs. Land acquisition delays, change in scope of projects, escalating material cost, service outlay, etc. are the other reasons, which can be attributed to the cost overruns. Factoring in the execution delays, we expect the CDF may remain under 1x at least during FY12 13E even though it may increase subsequently from its FY11 levels. Hence, we expect cement demand CAGR of 6% during FY11 13E as against 10% demand CAGR during FY11 13E period.
13
16 September, 2011
Cement Sector Thematic Exhibit 23: Cost Over runs in Central Sector Mega Projects (Rs Bn)
Sectors Atomic energy Civil aviation Coal Fertilizer Mines Steel Petroleum Power Railways Road Transport & Highways Shipping & Ports Telecom Urban Development Water Resources Grand Total No. of Projects 3 2 7 3 1 5 36 44 28 10 5 3 2 1 150 Anticipated Cost 226 32 159 41 44 621 1,490 1,655 705 156 70 42 305 12 5,558 Cost Overrun 48 0 29 0 3.1 244 102 45 340 12 4.1 5.52 154 6.44 993 Rise (%) 27.2 0 21.9 0 7.6 64.5 7.4 2.8 93.3 8.2 6.2 15.2 102.4 118.6 21.8
Source: MOSPI, Project Monitor, Karvy Institutional Research
Exhibit 24: Most of the 150 central sector mega projects are behind schedules as on April 2011
Exhibit 25: Cost overrun ratio has started to surge again led by project execution delays
80%
Faced time overruns, 69
60% 40% 20% Commission ing date not fixed, 26 0% 1991 2000 Feb/08 Apr/11 Cost overrun ratio Source: MOSPI, Project Monitor, Karvy Institutional Research
On Schedule, 55
Source: MOSPI, Project Monitor, Karvy Institutional Research
14
16 September, 2011
Supply Pressure to Remain High

High return ratios during the last 5 6 years prompted capacity expansion drive, as the incumbent ploughed their internal accruals and new players grabbed the opportunity provided by 10% cement demand CAGR projections. Hence, many new projects were announced and commissioned over the last three to four years. The industry added ~80 mn MT during FY10 and FY11, and another 42 mn MT capacity is likely to get commissioned in FY12 13E period. We believe that the supply pressure would remain high even though the expansion rate expected to slow down to 7% CAGR in FY11 13E vs. 16% in FY08 10. Exhibit 26: Capacity Expansion plans for next two years in India (mn MT)
Companies Andhra Cements KJS Cement JK Lakshmi Jaypee Group Birla Corporation Madras Cements Jaypee Group (SAIL JV) Birla Corporation JSW Steel ABG Cement Jaypee Group Jaypee Group Heidelberg Sagar Cements Century Plywood Century Plywood Century Textiles Jaypee Group Jaypee Group SAIL Birla Corporation JK Lakshmi Total
District Dachapalli Satna Nalgonda Durgapur, Ariyalur, Bokaro Chanderia Kurnool Kutch, Churk Bina Imlai, Jhansi Gulbarga, Guwahati Kahlegaon, Murshidabad Roorkee Sidhi Kulti Chanderia Durg Total Additions
State AP MP Haryana AP WB Tamil Nadu Jharkhand Rajasthan AP Gujarat UP UP UP Karnataka Assam Bihar WB Uttrakhand UP WB Raj Chhattisgarh
Region S C N S E S E N S W C C C S E E E N C E N N
FY12E 2.1 2.2 0.5 3.5 0.6 2.0 2.1 1.2 1.5 3.3
FY13E
19.0
1.5 2.0 2.9 2.8 1.6 1.6 1.5 1.0 2.0 2.0 1.5 2.7 23.1
Region wise Capacity Expansion: While the southern region leads in capacity expansion in FY11 13E, the central and the eastern regions would gain traction in FY13E. Out of the total additions of 72 mn MT in FY11 13E period, the southern region accounts for 23 mn MT (~33% share). We believe this would keep the utilization levels suppressed in southern regions at least for the next two years. The eastern and the central regions would account for 65% of new additions during FY13E. While we expect these two regions to continue to grow at >8% during FY12E and FY13E, we expect the imports from near by regions to reduce in these regions as these new capacities get commissioned.
15
16 September, 2011
Cement Sector Thematic Exhibit 27: Capacity Additions region wise over the next two years
(mn MT) Regions Northern Eastern Western Central Southern Capacity Additions FY11 FY12E FY13E 3.2 1.7 5.2 2.7 6.7 10.5 3.3 4.3 2.2 8.4 11.8 9.1 2.8 29.8 19.0 23.1 Year End Installed Capacity FY11 FY12E FY13E 62 64 69 37 40 46 52 55 55 35 38 46 110 119 122 296 315 338 Share of new additions FY11 FY12E FY13E 11% 9% 23% 0% 14% 29% 35% 17% 0% 14% 12% 36% 40% 48% 12% 100% 100% 100%
Exhibit 28: Southern region to account for ~33% of total new capacity additions (mn MT) in FY11 13E
25.0 20.0 15.0 10.0 5.0 Northern FY11 Eastern Western FY12 Central FY13 Southern
Exhibit 29: Eastern and Central regions to account for higher incremental additions in FY13E
100% 80% 60% 40% 20% 0% Northern FY11 Eastern Western FY12 Central FY13 Southern
Source: CMA, Karvy Institutional Research
Demand Supply Mismatch to Continue until FY14E

Based on the demand supply projections as discussed below, we expect industrys capacity utilization to remain under 80% until FY14E. Lower capacity utilisation should in turn negatively impact the pricing power of the cement manufacturers. Exhibit 30: Demand Supply matrix for the Indian Cement Industry
Demand Supply Matrix (mn MT) Installed cement capacity (mn MT) Addition during the year Effective Cement Capacity (mn MT) Effective Capacity Growth (%) Cement Production (mn MT) Effective Capacity Utilization (%) Cement consumption (mn MT) Consumption growth (%)
FY07 166 6 166 5.0 155.7 93.9 155 9.7
FY08 190 24 179 8.1 168.3 93.9 168 8.0
FY09 212 22 205 14.3 181.0 88.3 181 7.9
FY10 266 54 235 14.6 200.3 85.2 200 10.4
FY11 296 30 278 18.3 209.2 75.3 209 4.7
FY12E 315 19 303 9.2 221.7 73.1 222 6.0
FY13E 338 23 324 6.8 239.4 73.9 239 8.0
FY14E 353 15 339 4.5 263.4 77.8 263 10.0
16
16 September, 2011
Cement Sector in the Midst of A Down Cycle

Long term capacity utlisation trend during FY11 20E to be lower compared to previous two decades
Over the last forty years, the Indian cement industry has seen multiple down cycle periods when the utilization levels declined prominent among them being 1971 1974 period (~3 years), 1980s (the whole decade) and the 2001 2004 period (~4 years). Even though the pace of capacity addition would slow down in the coming years, we estimate average capacity utilisation of ~82% in FY11 20E would be 370 bps lower compared to that in FY01 10 period and 130 bps lower compared to that in the preceding decade (FY91 00). This is primarily on account surge in capacity addition rate during the first few years of the current decade. Exhibit 31: Cement Capacity Utilization Trend over the last Forty Years
100 95 90 85 80 75 70 65 60 FY68 FY71 FY74 FY77 FY80 FY83 FY86 FY89 FY92 FY95 FY98 FY01 FY04 FY07 FY10 FY13 EV (US$/MT) 70 128 130
Note: The Dotted Lines represent Ten Year Average trend
Cement Cycles in India in Last Ten Years

x Down cycle Period (FY01 FY04): During this period, the demand growth slumped, while the capacities grew at a faster pace, which resulted in a slump in capacity utilisation. Moreover, higher dependence on external power sources and logistics support kept the operating costs high. Up cycle Period (FY05 FY10): During this period, the capacity utilisation started to firm up and rose above 90% levels, as cement demand grew at ~10% CAGR. In additions, the manufacturers invested in captive power and logistic infrastructure support, which improved the industrys cost efficiency. Though the profitability and return ratios improved during the period, increased returns and cash flow attracted higher investment into new capacities in FY10 11 periods.
Exhibit 32: Various fundamental and profitability parameters during the cement cycle over the last ten years
Cycle Period Capacity (mn MT) 132 182 311 Capacity CAGR (%) 7.6 9.2 6.7 Utilisation (%) 81 89 75 Avg Prices (Rs/bag) 142 207 248 GDP growth (%) 6.4 8.6 8.0 EBIDTA (Rs/MT) 467 905 830 RoE (%) 13.1 25.2 14.1 PE (x) 16.3 13.0 17.4 EV/EBITDA (x) 7.9 7.0 8.6
Down cycle Up cycle Down cycle
FY01 FY04 FY05 FY10 FY11 FY14E
Source: CMA, Karvy Institutional Research, Notes 1) Valuations are the averages of ACC and Ambuja Cements 2) Valuations for current down cycle period is till 31st Aug 2011
17
16 September, 2011
Exhibit 33: Cement industrys capacity utilisation to remain under 80% until FY14E
Down cycle 15 Upcycle Down cycle 100 90 80 70 (5) 2011E 2012E 2013E 2014E 100 90 80 70 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E RoE (%) 60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 60
Effective Cap. Utilisation (RHS) Source: CMA, Karvy Institutional Research
Capacity growth
Demand growth
Exhibit 34: Cement industrys profitability & return ratios trending towards last down cycle levels
40 32 24 16 8 0
OPM (%)
Current Down cycle Period FY11 14: During the current down cycle, the industrys capacity utilisation is expected to decline to ~75%, one of the lowest levels during the last twenty years. There has been the dual impact of a surge in capacity growth as well as of a slowdown in the demand growth led by the governmental inactions and rising cost of capital.
During the current down cycle period, the valuations would contract from their current levels in line with decline in profitability of the cement industry.
18
16 September, 2011
Region wise Demand Supply Dynamics

Northern Region: Low demand growth but firm capacity utilisation
Demand drivers in the region: In line with higher Gross State Domestic Product (GSDP) growth, the cement demand has been robust during FY07 10 period and companies have been able to get higher realization on the cement sales. The Commonwealth Games was a major demand driver in FY09 10. With projects coming to an end by mid FY11, cement demand got impacted in FY11. Other demand drivers in the region have been hydel projects to the tune of 1800MW to be commissioned over the next three years, independent housing projects in the semi urban and rural areas, especially in Punjab and urban infra projects in the NCR and Chandigarh. Exhibit 35: Northern Region Lower Demand CAGR of 5.6% in FY11 13E vs. 8.6% in FY08 10
Demand Supply Matrix (mn MT) Effective Cement Capacity (mn MT) Effective Capacity Growth (%) Cement Production (mn MT) Effective Capacity Utilization (%) Cement consumption (mn MT) Consumption growth (%)
FY07 33 11 32 99 30 10.3
FY08 38 18 36 95 34 12.0
FY09 48 26 41 85 35 4.8
FY10 51 6 47 92 38 9.4
FY11 60 17 52 86 40 3.9
FY12E 63 5 55 88 42 5.5
FY13E 66 5 59 89 45 7.6
Exhibit 36: GSDP growth rates have been strong in the northern states (%)
Northern Region Haryana Punjab Rajasthan Himachal Pradesh Uttarakhand FY06 8.8 5.4 6.7 8.4 13.5 FY07 11.6 10.2 11.7 9.1 14.6 FY08 9.8 9.3 5.1 8.6 18.2 FY09 8.6 6.6 7.0 7.4 8.0 FY10 10.0 7.8 4.0 8.1 10.7 GSDP CAGR (%) 9.7 7.8 6.9 8.3 12.9 Shree Cement, UltraTech, Ambuja Cement, Binani Cement, ACC Major Cement Players in the region
Source: National Planning Commission, Karvy Institutional Research
Exhibit 37: Cement Consumption (per capita) has been than all India average levels
15.0 10.0 5.0 0.0
Haryana Punjab Rajasthan Himachal Pradesh Uttarakhand
Exhibit 38: Price Trend High Capacity Utilisation should keep prices stable over the next two years
300 250 Rs/bag
400 300 200
200 100 150 Jan 09 Oct 09 Apr 09 Oct 10 Jan 11 Jan 10 Jul 09 Jul 10 Apr 10 0 Apr 11 Jul 11
Per Cap Cement Consumption Kg (RHS)
GSDP CAGR (%)
North Source: CMA, Karvy Institutional Research
India Avg
Source: National Planning Commission, CMA, Karvy Institutional Research
The cement demand CAGR of 5.6% in the northern region in FY11 13E would be slightly lower than the industry demand CAGR of 6.2%. Lower demand projections are on account of a slowdown in realty off take across India as well as due to slump in infrastructure project executions. However, with capacity expansions remaining under check, the capacity utilisation in the region would remain strong (~89%) in FY12 13E, which in turn would keep cement prices stable in the region. The cement consumption intensity is above the all India average of ~180kg/capita.
19
16 September, 2011
Eastern Region: Industry leading demand growth; utilisation to get impacted in FY13E as new capacities get commissioned
Demand drivers in the region: Though the consumption intensity has been the lowest in the region, with stable and growth focused governments in most states of this regions, cement demand in the region has been upwards of 10% since start of FY09 thereby boosting the demand CAGR to 11.4% in FY04 10. The region is a net importer of cement, as the capacity addition has lagged demand growth. The demand drivers have been various industrial projects implemented by states such as Orissa, Jharkhand & Chhattisgarh (all these are rich in mineral resources), along with IT/ITeS related demand from West Bengal & Bihar. Exhibit 39: Eastern Region: Demand CAGR of 9% in FY11 13E vs. 11.5% in the preceding three years
Demand Supply Matrix (mn MT) FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Effective Cement Capacity (mn MT) Effective Capacity Growth (%) Cement Production (mn MT) Effective Capacity Utilization (%) Cement consumption (mn MT) Consumption growth (%)
25 7 22.1 88 24.0 5.9
28 10 23.9 86 25.3 5.7
30 8 26.0 87 28.2 11.3
34 15 28.9 84 33.4 18.4
37 9 30.0 80 36.5 9.3
39 5 32.1 82 39.3 7.7
43 11 33.5 77 43.2 9.9
Exhibit 40: GSDP growth rates have improved in the eastern states over the last few years (%)
Eastern Region Bihar Orissa West Bengal Chhattisgarh Jharkhand FY06 0.9 5.5 6.3 3.2 (3.2) FY07 18.1 13.0 7.4 18.6 2.4 FY08 8.5 10.9 8.0 8.6 20.5 FY09 13.1 7.2 5.2 6.8 4.7 FY10 8.6 10.6 9.0 11.9 6.6 GSDP CAGR (%) 9.7 9.4 7.2 9.7 5.9 ACC, UltraTech, Lafarge India, OCL India, Ambuja Cement Major Cement Players in the region
Exhibit 41: Low cement consumption provides growth opportunity

15.0 10.0 5.0 0.0
Bihar Orissa W Bengal
intensity
Exhibit 42: Cement prices in the region may come under pressure in FY13 as utilisation levels decline to <80%
300 250 Rs/bag
200 150 100 50 0

Chhattisgarh Jharkhand
200 150 Apr/09 Apr/10 Apr/11 Jan/09 Jan/10 Jan/11 Jul/10 Jul/09 Oct/09 Oct/10 Jul/11
GSDP CAGR (%)
East Source: CMA, Karvy Institutional Research
India Avg
20
16 September, 2011
Central Region: While the demand growth is expected to slow down, the utilisation is also likely to be affected in FY13E, as new capacities getting commissioned.
Demand drivers in the region: Though Madhya Pradesh (MP) and Uttar Pradesh (UP) are two of the most populated states in the region, the cement consumption intensity has been another low in the region. The cement demand witnessed CAGR of 8.4% in FY04 10. Housing projects both rural and urban and hydel projects implemented in UP have been key demand drivers so far. The housing demand in the central region would be led by various government schemes. Other demand triggers should be key central projects like Pradhan Mantri Gram Sadak Yojna, Bharat Nirman and Indira Awas Yojna. Cement prices have remained volatile in this region despite its stable capacity utilisation as there has been continuous influx of cement from adjoining northern region. We expect the price volatility to remain in the region going forward led by lower demand growth. Exhibit 43: Central Region: Demand CAGR to cool down to 7% in FY11 13E vs. 11% in FY08 10 period
Demand Supply Matrix (mn MT) FY07 26 FY08 27 FY09 29 FY10 29 FY11 34 FY12E 38 FY13E 38
2
24.0 94 22.4 8.9
4
25.0 94 23.8 6.1
8
26.1 91 26.2 10.4
(0)
29.8 105 30.7 17.2
18
30.6 91 33.5 9.0
13
32.4 86 35.7 6.6 33.8 89 37.8 5.9
Exhibit 44: GSDP growth rate trends of two states in the region (%)
Central Region Madhya Pradesh Uttar Pradesh
FY06
5.3 6.3
FY07
9.2 8.2
FY08
4.7 7.5
FY09
7.8 6.1
FY10
8.5 7.2
GSDP CAGR (%)

7.1 7.0
Major Cement Players in the region

J P Associates, ACC, UltraTech, Century Textiles, Birla Corporation
Exhibit 45: Low cement consumption intensity in both the states

7.1 7.1 7.1 7.0 7.0 Madhya Pradesh Uttar Pradesh GSDP CAGR (%) Per Cap Cement Consumption Kg (RHS) 50 0 150 100
Exhibit 46: We expect the price volatility to continue as demand growth expected to slow down
300 250 200 150 Apr/09 Apr/10 Apr/11 Jan/09 Jan/10 Jan/11 Jul/09 Jul/10 Oct/09 Oct/10 Jul/11 Rs/bag
Central Source: National Planning Commission, CMA, Karvy Institutional Research Source: CMA, Karvy Institutional Research
India Avg
The cement demand in the region is likely to slow down due to recent delays in policy implementation by the Government. Hence, we expect demand CAGR to slow down to 7% in FY11 13E period.
21
16 September, 2011
Western Region: Despite higher growth rate, the capacity utilisation is expected to remain low, while the adjacent southern states pose further risk to pricing power.
Demand drivers in the region: The western region has one of highest cement consumption intensities in India. The cement demand has grown at a CAGR of 8.9% in FY04 10 driven by real estate boom in the major cities Mumbai, Pune, Ahmedabad and Surat and strong demand from infrastructure and commercial segments in these cities. However, the cement demand in FY12 13E period is expected to decline led by a slump in the realty sector as well as due to non availability of labourers in the two states. The western region consumes more cement than that is produced in the region. The deficit is mostly met by the neighboring southern states. The cement prices in the region has benefitted from the production discipline in vogue across India. However, continued lower capacity utilisation in FY12 13E period would affect the abilities of the cement manufacturers to pass on the incremental cost pressure going forward. Exhibit 47: Western Region Demand CAGR of 8.6% in FY11 13E vs. 9.8% in FY08 10
Demand Supply Matrix (mn MT) FY07 29 FY08 29 FY09 33 FY10 35 FY11 43 FY12E 47 FY13E 49
1
27.3 94 28.3 9.1 28.8 98 32.2 14.0
14
28.4 85 34.0 5.4
4
30.2 87 37.5 10.4
24
31.4 73 41.5 10.7
9
34.4 73 44.7 7.7
4
36.6 75 48.1 7.6
Exhibit 48: Both the states have posted strong GSDP growth rate (%)
Western Region Gujarat Maharashtra
FY06
15.0 14.5
FY07
8.4 14.1
FY08
11.0 10.8
FY09
7.0 7.8
FY10
10.2 8.7
GSDP CAGR (%)

10.3 11.1
Major Cement Players in the region

UltraTech, Ambuja Cement, Mehta Group, J P Associates, Sanghi Industries
Exhibit 49: Cement consumption intensity has been higher than all India average
11.5 11.0 10.5 10.0 9.5 Gujarat Maharashtra GSDP CAGR (%) 230 220 210 200 190 180
Exhibit 50: Cement prices to remain volatile due to lower utilisation levels in the western and southern regions
300 250 200 150 Jul/09 Jul/10 Apr/09 Apr/10 Apr/11 Oct/09 Oct/10 Jan/09 Jan/10 Jan/11 Jul/11 Rs/bag
West Source: National Planning Commission, CMA, Karvy Institutional Research Source: CMA, Karvy Institutional Research
India Avg
The chances of increase in supply influx from the southern states as demand firms up in the western region is high thereby exerting downward pressure on cement prices.
22
16 September, 2011
Southern Region: While the utilisation levels in the region are on continuous decline, threat to ensuing price discipline looms large.
Demand drivers in the region: The southern region has been the leading cement producer and consumer region in India. Cement consumption intensity in the southern region is the highest in India. The IT/ITeS sector has been a major contributor to demand CAGR of 10% in FY05 10 period. While the boom in the IT/ITeS sector led to strong demand for commercial and residential constructions, infrastructure investments in roads, irrigation, airports and various government projects have provided further boost to cement demand in the region. However, the region witnessed a contraction in cement consumption as Andhra Pradesh (AP) & Karnataka faced political instability. These two states constitute ~17 18% of total cement consumption in India. Hence, lack of decision making led to a contraction in cement consumption. The situation does not seem to improve in the near term. However, the cement consumption growth in Tamil Nadu & Kerala is expected to remain better compared to AP & Karnataka led by stable and growth focused governments in those states. Exhibit 51: Southern Region; Demand CAGR of 2.7% in FY11 13E vs. 8.4% in FY08 10
Demand Supply Matrix (mn MT) FY07 FY08 FY09 FY10 FY11 FY12E FY13E
54 6 50.2 93 44.8 13.8
57 7 54.2 94 49.2 9.7
67 17 59.8 89 54.3 10.4
86 28 64.2 75 57.2 5.3
101 18 65.3 64 55.6 (2.7)
111 9 67.4 61 57.4 3.2
120 8 76.9 64 62.0 8.0
Exhibit 52: GSDP growth rate trends of the major states in the region (%)
Southern Region Andhra Pradesh Karnataka Kerala Tamil Nadu Goa FY06 9.6 11.0 10.1 13.3 7.8 FY07 11.2 9.9 7.9 14.9 9.7 FY08 12.0 12.6 8.8 5.9 5.6 FY09 5.0 3.8 7.2 5.8 9.5 FY10 5.8 5.0 9.7 9.0 13.0 GSDP CAGR (%) 8.7 8.4 8.7 9.7 9.1 India Cements, UltraTech, Madras Cements, ACC, Dalmia Cement Major Cement Players in the region
While the demand growth has slowed down, the southern region remains an over surplus zone, as the capacity expansion rate is expected to remain high in FY11 13E period. This has resulted in capacity utilisation declining to below 65% in FY11 13E. The cement manufacturers have been able to increase cement prices in Oct10 Jan11 period and to hold on to those price levels over the subsequent eight months led by production cut to match the incremental demand. This discipline has held on despite the southern region being the most fragmented regions of all. This discipline would not help the manufacturers in the region to pass on their incremental cost pressure until demand growth firms up beyond 10% to stabilize utilization levels at over 75%. As such high demand growth may not be achieved in FY12 13E, we expect the cement prices to correct in the region.
23
16 September, 2011
Cement Sector Thematic Exhibit 53: Cement consumption intensity is highest in India
10.0 9.5 9.0 8.5 8.0 7.5 Andhra Pradesh Karnataka Kerala Tamil Nadu Goa 240 230 220 210 200 190 150 Jul/09 Jul/10 Apr/09 Apr/10 Apr/11 Oct/09 Oct/10 Jan/09 Jan/10 Jan/11 Jul/11 200
Exhibit 54: Prices surged led by production cuts, we expect this stability to come under threat
300 250 Rs/bag
GSDP CAGR (%)
South Source: CMA, Karvy Institutional Research
India Avg
24
16 September, 2011
Cost Pricing Dynamics

Operating Cost Pressure Mounting while Utilisation Level Expected to Decline
Exhibit 55: Operating Cost Structure of a Cement Manufacturer
Variable Cost (65 75%) Raw materials (limestone, gypsum, and other blending additives fly ash, slag, etc) 15 20% Fuel cost (coal, pet coke used for clinkerisation, and if CPP then power generation) 15 20% Power cost (for grinding, assisting other processes) 10 15% Transport cost (Clinker transfer between plants, finished cement to markets) 20% 25%
Fixed Costs (25 30%) Employee cost 5 10% SG&A (Maintenance, advertising) 20 25% packaging,
Exhibit 56: Operating Costs (Rs/MT) has shot up by ~40% over the last four years while industrys capacity utilisation (%, RHS) has trended downwards
2,800 2,600 2,400 2,200 2,000 1,800 Mar 08 Dec 08 Sep 07 Dec 07 Sep 08 Mar 09 Dec 09 Sep 09 Mar 10 Sep 10 Mar 11 Dec 10 Jun 07 Jun 08 Jun 09 Jun 10 120 100 80 60 40 20
Exhibit 57: Raw materials /MT (including fuel expenses) have shot up by ~40% during the same time; Freight/MT >20%
150 140 130 120 110 100 90 80 Dec 07 Dec 08 Jun 07 Jun 08
Raw materials
Freight
Dec 09 Dec 10 Mar 11 Jun 11 Jun 09 Jun 10 Dec 10 Sep 10
A large chunk of the operating cost ~70 75% is variable. As shown in the above graphs, variable cost elements have increased over the years thereby pushing the operating costs upwards by ~40% over the last four years. Fuel prices both domestic and international have increased and are expected to remain firm going forward. Additionally, higher crude prices have resulted in increase in domestic fuel price thereby increasing freight cost for the manufacturers. Various critical raw materials gypsum (5% of cement) and fly ash (~25 30% of cement) have been on the rise and cement manufacturers have to absorb these cost pressure. Exhibit 58: Domestic Coal Supply Deficit to continue to Non Power Sector
200 170 140 110 80 50 FY11E FY12E FY13E FY14E FY15E FY10 50 Jan 08 Dec 08 Mar 08 Mar 09 Dec 09 Sep 08 Sep 09 Mar 10 Jun 08 Jun 09 Jun 10 150
Exhibit 59: Surge in International Prices has further raised Manufacturing Cost
Newcastle coal spot/ Austr Index Richards Bay 6000kc fob steam/ S.africa Asia Coal spot Marker Index
Coal Demand
Cement & others
Domestic coal supply
Source: Industry, Karvy Institutional Research
25
16 September, 2011
Ensuing Production Discipline

Production Discipline not a long term substitute to demand growth as a measure to pass on cost pressure
In a scenario where lower demand along with increased capacity addition led to a sharp decline in utilisation levels, the surge in operating cost pressure resulted in the cement manufacturers resorting to production discipline. We have analyzed the merits on a production discipline as a tool to arrest decline in profitability when cost pressure surges while demand growth remains muted. As shown above, a large chunk of the operating costs of cement manufacturer are variable in nature. We have worked out the cost structure of a new 2.5 mn MT cement plant (at operating level and including capital charges) at various capacity utilisation levels. We have detailed below the variable and fixed costs incurred by the manufacturer when operating at 100% capacity utilisation. Exhibit 60: Cost Structure of 2.5 mn MT New Cement Plant
Fixed Costs (FCs) Operating Cost Depreciation Interest Cost Total Fixed Costs (Rs. per MT)
Rs. mn 1500 450 101 1,051
Variable Costs (VCs) Cost of Production Freight & Handling Excise, Sales Tax & Commissions Total Variable Cost
Rs/MT 1,500 700 1,200 3,400
Exhibit 61: Trend in Cost (Rs per MT) at Various Utilization Level
Capacity Utilisation (%) 100 90 80 70 60 50 Operating Variable Costs (A) 2,200 2,200 2,200 2,200 2,200 2,200 Operating Fixed Costs (B) 600 667 750 857 1,000 1,200 Total Operating Cost (A+B) 2,800 2,867 2,950 3,057 3,200 3,400 2.4 2.9 3.6 4.7 6.3 % Rise in operating cost Capital Charges 220 245 276 315 367 441 Total Cost 3,020 3,112 3,226 3,372 3,567 3,841 3.0 3.7 4.5 5.8 7.7 % Rise in total cost Excise, sales tax & Commissions 1,200 1,200 1,200 1,200 1,200 1,200 Breakeven realization / bag 211 216 221 229 238 252 2.2 2.6 3.3 4.3 5.7 % Sales price rise required
As shown in the above exhibit, a 10% reduction in plant utilization level (through supply cut) would increase the plants operating cost per MT by 250 600 bps and increase the breakeven realization growth by 220 570 bps. The cement manufacturers have managed to increase realizations at a higher rate than the cost increase by controlling production during the weak demand growth period as witnessed over the last one year. Average cement price surged to ~Rs. 280 per bag in Mar11. If the production discipline holds on, thereby resulting in cement prices at Rs. 280 per bag, the plant would make a PBT of Rs. 28 per bag (Price of Rs. 280 minus breakeven realization of Rs. 252) and a net margin of 8% even by cutting down its utilisation level down to 50%. While the cement prices in southern region are holding on to ~ Rs. 275 levels, the average capacity utilisation level is likely to remain under 65% in FY11 13E period, which implies the smaller players would be operating at 30 50% utilisation levels, while further cost pressure would drag their profits.
26
16 September, 2011
RoE Analysis during Production Discipline Utilisation Levels to Drag Profitability
Low
As shown in the exhibits below, a new cement plant can manage to make an RoE of 15% at 70% capacity utilisation if the cement prices can remain stable at ~Rs. 262 per bag through the production discipline. Exhibit 62: Analysis of required EBITDA/MT and retail cement prices for a 15% RoE of the same plant (2.5mn MT)
Capacity Utilisation (%) 90% 80% 70% 60% Cement Sales (mn MT) 2.25 2.00 1.75 1.50 Required PAT (Rs mn) 810 810 810 810 Required PAT (Rs/MT) 360 405 463 540 Required PBT (Rs/MT) 514 579 661 771 Interest + Depreciation (Rs/MT) 245 276 315 367 Required EBITDA (Rs/MT) 759 854 976 1,138 Required Realisation (Rs/MT) 3,626 3,804 4,033 4,338 Required Cement price (Rs/bag) 241 250 262 277
(Project cost assumed at US$120/MT, 60% Debt)
Exhibit 63: Required EBITDA/MT and retail cement prices for a 20% RoE of the same plant (2.5mn MT)
Capacity Utilisation (%) 90% 80% 70% 60% Cement Sales (mn MT) 2.25 2.00 1.75 1.50 Required PAT (Rs mn) 1,080 1,080 1,080 1,080 Required PAT (Rs/MT) 480 540 617 720 Required PBT (Rs/MT) 686 771 882 1,029 Interest + Depreciation (Rs/MT) 245 276 315 367 Required EBITDA (Rs/MT) 931 1,047 1,196 1,396 Required Realisation (Rs/MT) 3,797 3,997 4,254 4,596 Required Cement price (Rs/bag) 250 260 273 290
(Project cost assumed at US$120/mt, 60% Debt)
The plant can achieve 20% RoE while operating at 70% capacity utilisation if cement prices hold on to Rs273/bag level. However, demand growth recovery to ~10% levels is necessary to improve RoE on a sustainable basis. We do not expect demand growth to firm up to 10% or more until FY14E. As illustrated in the tables above, if capacity utilisation improves to 80 90% levels led by demand recovery, a 20% RoE can be achieved at retail cement prices of Rs250 260/bag. Exhibit 64: Declining capacity utilisation to suppress profitability further
40 32 24 16 8 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E RoE (%) 0 100 90 80 70 60
OPM (%)
We expect cement industrys utilisation to remain under 75% during FY12 13E. Utilisation in southern region is expected to remain under 65% while we expect the same to remain under 75% in the western region during FY12 13E. Hence, industrys ability to pass on the incremental cost pressure would decrease and we expect operating margins and RoE to remain under pressure going forward.
27
16 September, 2011
Inter Region Movement of Cement is Limited

While prices vary across regions, inter region movement of cement is restricted as large distance transportation is unviable: Cement is generally consumed within 300 500 kms from the plant location as distances larger than that makes it uncompetitive. Hence, price differences would exist amongst various regions without providing an arbitrage opportunity for the producers. Exhibit 65: Cement prices (Rs/bag) vary widely across regions
300 280 260 240 220 200 180 Apr 2010 Jun 2010 Aug 2010 Oct 2010 Dec 2010 Feb 2011 Apr 2011 Jun 2011 Aug 2011 North East Central West South
Exhibit 66: Regional movement of cement is generally restricted to adjoining regions within 300 500kms
Supply from |Demand in In North In East In South In West In Central Total Supply from > Supply Share 3.8 7.7 37.5 23% From N 25.8 0.3 From E 0.0 22.3 0.0 0.0 0.3 22.7 14% From S 0.0 1.3 49.4 7.8 0.2 58.7 36% From W 0.1 0.3 0.5 19.3 0.4 20.7 13% From C 1.6 4.3 0.0 0.4 19.1 25.4 15% Total demand in 27.6 28.6 49.9 31.3 27.6 165.1 100% Demand Share 17% 17% 30% 19% 17% 100% Net Imports/ (Exports)* 36% 21% 18% 34% 8% Captive demand # 94% 78% 99% 62% 69%
Source: CMA, Karvy Institutional Research Notes The data does not include ACC and Ambuja Cements numbers as they do not report sales break up to CMA *Import/(Exports) refer to inter region net movement of cement Jun May 2011 # Captive Demand = Regional production consumed within the region as a percentage of total demand in that region.
In the exhibit above, we note that cement is primarily consumed in the region it is produced or is exported to the towns/cities in the adjoining region. For eg, out of 58.7 mn mt of cement produced in the southern region, 13% was exported to the adjoining western region. There were only marginal exports (~3%) to far off eastern and central regions. Another point to note is that the northern and the southern regions (60% of total production) are net surplus producers while the other three regions witness net inflow of cement from adjoining regions.
Cement price dynamics since the start of the production discipline

In Q3FY11 when the cement demand slumped across India, the southern manufacturers cut down productions by ~15 20% QoQ to reduce the demand supply mismatch. This helped the manufacturers to hike the cement prices by >20% QoQ from the low levels witnessed in the southern region in Q2FY11. The cement prices in Andhra Pradesh and other southern regions in Q2FY11 had dipped to Rs. 130 140 per bag, as the manufacturers pushed volumes despite sluggish demand growth. The production discipline in Q3FY11 helped the southern players to recover their profitability in H2FY11.
28
16 September, 2011
Cement Sector Thematic Exhibit 67: Southern Players could firm up their Prices & Profitability by Cutting Volumes in H2FY11
3,600 Realisation (Rs/mt) LHS Demand QoQ (%) Demand YoY 25 20 15 10 5 (5) (10) (15) Mar 09 Mar 10 Mar 11 Jun 09 Sep 09 Jun 10 Dec 09 Sep 10 Dec 10
Exhibit 68: Weak Demand & Pricing continued to drag Profitability in Q3FY11 of Players in Northern India
3,800 Realisation (Rs/mt) LHS Demand YoY Demand QoQ (%) (%) 20 15 10 5 3,000 (5) (10) 2,600 Mar 09 Sep 09 Dec 09 Mar 10 Sep 10 Mar 11 Jun 11 Dec 10 Jun 09 Jun 10 (15)
3,200
3,400
2,800
2,400
Subsequently, the manufacturers in the northern half of India increased the cement prices since Jan2011. As the cement demand is highest in Jan June period, the manufacturers were able to increase cement prices well above the incremental operating cost pressures. While the EBITDA of the southern players expanded by Rs. 400 600 per MT in Q3FY11, the northern players EBITDA declined by Rs. 100 300 per MT QoQ. During Q4FY11 and Q1FY12, the profitability of all cement manufacturers improved QoQ largely led by production discipline, which helped them to increasing the cement prices above their incremental costs. The larger manufacturers have been able to generate higher profitability through out compared to their smaller peers, as can be seen from the quarterly performance trends over the six quarters. We have plotted the realisation and EBITDA/mt trends of a large capacity producer (ACC, 30mn MT), mid capacity, (JK Lakshmi, 6 mn MT), and a small capacity (Mangalam, 2 mn MT) producers over the last six quarters. Exhibit 69: Net realization trends The large capacity producer has outperformed its smaller peers
4,500 4,000 3,500 3,000 2,500 Mar 10 Jun 10 Sep 10 Dec 10 ACC Mar 11 Jun 11 500 0 Mar 10 Jun 10 Sep 10 Dec 10 ACC Mar 11
Exhibit 70: EBITDA trends The large cap producer has outperformed its smaller peers
1,500 1,000
Mangalam Cement Source: Karvy Institutional Research
JK Lakshmi
Mangalam Cement Source: Karvy Institutional Research
JK Lakshmi
Cement Prices have declined over the last five months albeit at a slower pace
The cement prices have been declining from the peak levels witnessed in Mar11. In our view, the decline can be attributed to seasonal adjustment as well as the interruptions in production discipline. The prices declined by ~17% in the northern and central regions from their peak levels in Mar11, while the prices declined by ~12% and 7%, respectively in the western and eastern regions, and in the southern region the prices corrected by 2%. Despite these
29
16 September, 2011
Cement Sector Thematic corrections, the average cement prices so far in FY12 are higher than the corresponding levels in FY11. The cement demand and prices decline sequentially in Jun Dec period as the construction activity slows down during these monsoon months across India and due to cold weather conditions in northern India. Exhibit 71: Industrys realization trend we expect realization has peaked out in June Quarter
4,000 3,500 3,000 2,500 2,000 Jun 08 Sep 08 Jun 09 Sep 09 Dec 09 Jun 10 Dec 08 Mar 09 Sep 10 Dec 10 Mar 10 Mar 11 Jun 11 20% 10% 0% 10% 20%
Exhibit 72: Subsequently, industrys EBITDA (Rs/mt) should trend downwards from June Quarter levels
1,500 1,200 900 600 300 0 Jun 08 Sep 08 Jun 09 Sep 09 Dec 09 Dec 08 Mar 09 Jun 10 Sep 10 Mar 10 Dec 10 Mar 11 Jun 11 Apr 11 May 11 100% 0% 50% 50%
Net Realisation Source: Karvy Institutional Research
Gr YoY (%) RHS
EBITDA Source: Karvy Institutional Research
Gr YoY (%) RHS
We expect net realization & EBITDA trends (Rs/MT) to decline from June quarter levels going forward, as the cement prices have declined sequentially, while the cost pressure has been on the rise.
Risk to Pricing Power Increases

Increasing share of smaller manufacturers sales at the expense of the eroding share of large manufacturers
The industrys realization growth (despite lower sales growth) so far has been led by the large players who have compromised their market share to stabilize the industrys profitability. This has benefitted a large number of smaller manufacturers, which saw their market share surge as they grew ahead of the market and the large manufacturers. Hence, the disruptions in the production discipline are bound to happen as the larger players try to check continuous decline in their market shares. All India prices have declined from the peak of Rs. 280 per bag in Mar11 to Rs. 245 per bag in Aug11. Exhibit 73: Smaller players (<5 mn MT) utilization levels have increased since Sept10 compared to large capacity manufacturers (>10 mn MT capacity)
110% 100% 90% 80% 70% 60% Jan 10 Feb 10 Mar 10 Dec 10 Sep 10 Jan 11 Feb 11 May 10 Nov 10 Aug 10 Mar 11 Apr 10 Jun 10 Oct 10 Jul 10
>10mn mt Source: CMA, Karvy Institutional Research
5 10mn mt
<5mn mt
30
16 September, 2011
Industrys fragmentation continues led by the increasing share of smaller manufacturers

Increasingly, new cement capacities expected to come up in FY12 13E period are from the smaller players, which would lead to further reduction in market share of the large players. During FY11 13E, the Top 5 manufacturers (UltraTech, ACC, Ambuja, and Jaiprakash Associates & India Cements) are expected to add 18.6mn MT capacity, which constitutes ~26% of incremental new capacities. Even on a regional basis, the dominance of the Top 5 manufacturers is expected to decline across all the five regions going forward. Exhibit 74: Top 5 producers in each region (and pan India) are adding lesser capacities in FY11 13E
60% 42% 40% 20% 0% All India North East Central West South 26% 14% 0% 0% 0 FY82 FY88 FY03 FY10 FY13E 40 20 30 33 54%
Exhibit 75: Market share of Top 5 producers should decline further to ~48% by FY13E
60 56 50 48
Share of Top 5 players Source: Karvy Institutional Research
Market share of Top 5 Players (%) Source: CMA, Karvy Institutional Research
Exhibit 76: Market share of Top 5 producers to decline in all five regions
100% 69% 50% 61% 77% 61% 82% 69% 78% 72% 55% 45%
0% North East FY10 Source: CMA, Karvy Institutional Research Central West FY13E South
These factors should severely impact the cement manufacturers pricing power led by the ensuing production discipline. This implies that cement manufacturers would not be able to fully pass on the incremental cost pressure thereby leading to a decline in operating margins as well profitability in FY13E. As shown in the exhibit below, variation in cement realization growth poses higher risks to earnings & fair value estimates of cement companies under coverage compared to variation in sales volume growth. This implies that risk reward ratio becomes unfavourable when threat to pricing power increases. Exhibit 77: Sensitivity analysis of sales volume & net realization on key parameters (FY13E):
Companies Impact of 1% change in sales volume on their EBITDA ACC ACEM UTCEM SRCM ICEM Source: Karvy Institutional Research (%) 1.2 0.9 0.7 0.9 0.6 RoE (bps) 19 13 12 30 6 Target Price (%) 2.3 1.9 0.9 1.1 1.0 Impact of 1% change in net realization on their EBITDA (%) 5.1 4.3 4.1 3.2 7.0 RoE (bps) 81 63 73 101 64 Target Price (%) 4.8 3.8 4.4 3.8 12.5
31
16 September, 2011
Comparative Companies
Analysis
of
Major
Cement
In the context of the industrys scenario that we discussed above, we analyze below the key cement manufacturers in India based on their competitive positioning on various fundamental parameters. We have ranked them on a scale of one to five where one implies a weak fundamental driver, while five implies a strong fundamental driver. We believe that higher score on these parameters would help the companies to either sustain and/or increase their market share along with their profit margins going forward. These in turn would help the companies in attracting higher relative valuation multiples compared to their peer group. Exhibit 78: Comparative Analysis of Fundamental Strengths of Major Cement Companies in India
Fundamental Drivers Captive power sourcing Fuel linkages Logistical infrastructure support Geographical diversification Revenue diversification Asset Sweating Balance Sheet strength Overall (out of 35) UltraTech 4 3 4 4 2 3 4 24 ACC 4 4 4 4 2 4 3 25 Ambuja Cements 4 3 4 4 2 4 4 25 India Cements 2 2 2 2 2 2 1 13 Shree Cement 5 1 1 2 4 4 3 20 Madras Cements 2 1 1 2 2 2 1 11
Score of 5 implies strong driver, 1 implies weak driver
I. Captive Power Sourcing: Shree Cement is Best placed

The production of cement requires continuous sourcing of power supply for grinding clinker into cements and various auxiliary operations. The Indian cement industry has generally relied on state power supply for their electricity requirements. However, any disruption in power supply can affect the production and profitability. Hence, the cement manufacturers primarily the large ones invested into Captive Power Plants (CPPs) over the last six years in order to reduce their dependence on external grid power. This has not only helped them in streamlining the cement production, but also helped the manufacturers in reducing their electricity bills. Exhibit 79: CPP Capability of Major Cement Manufacturers Shree Cement leads, while India Cements scores the least
100% 80% 60% 40% 20% 0% ACC Ltd Ambuja Cements UltraTech Shree Cement India Cements Madras Cements 265 58 94 350 400 540 600 500 400 300 200 100 0
Captive power sourcing (%) Source: Companies, Karvy Institutional Research
CPP Installed Capacity (MW) RHS
II. Fuel Linkages: ACC benefits from Higher Proportion of Low Cost Domestic Coal
Coal is required for both clinkerisation process and power generation (grinding operation). Thus access to cheap and steady supply becomes a competitive advantage for the cement manufacturers. Though most of the
32
16 September, 2011
Cement Sector Thematic cement manufacturers have been assigned linkage coal, none of them have been able to procure 100% of their requirements through these linkages. ACC has been getting ~50% of its requirements from the linkages, while Ambuja Cements & UltraTech get about one thirds. Shree Cements has been a pet coke user for its cement operation, while India Cements is largely dependent on imported coal. Exhibit 80: Access to low cost domestic linkage coal for the various companies
100% 80% 60% 40% 20% 0% ACC Ltd Ambuja Cements UltraTech Shree Cement India Cements Imports Madras Cements Pet coke
Domestic Linkage
Domestic E auction
Source: Companies, Karvy Institutional research
III. Logistical Infrastructure Support: Top 3 Manufacturers have Strengthened their Infrastructure Continuously
Transportation is one of major cost elements for cement firms. Having access to cheaper means of transportation such as rail and sea modes helps contain freight cost. The larger players have over the last six to seven years invested into railway sidings, railway wagons, port terminals and ships. These infrastructure support also increase the overall efficiency of the supply chain their by boosting the asset sweating for the company. Exhibit 81: Share of Cost efficient Rail Transport has recovered but wagons supply to the cement sector has remained a sore point
100%
50%
0% FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Road Source: CMA, Karvy Institutional Research
Rail
Sea
Exhibit 82: Access to Efficient Means of Transportation (Rail & Sea) Top 3 Producers Enjoy Better Positioning
100% 80% 60% 40% 20% 0% ACC Ltd Ambuja Cements Road Source: Companies, Karvy Institutional Research UltraTech Shree Cement India Cements Sea Madras Cements
Rail
33
16 September, 2011
IV. Geographical Diversification: We prefer Ambuja Cements for its absence in the southern region
Cement being a regional commodity, manufacturers profitability is impacted by regional concentration of sales. Companies with presence in the weak southern market should witness increased margin pressure. Higher capacity utilisation of >85% in the northern and central regions during FY11 13E should result in better pricing power for producers in those regions. Exhibit 83: Geographical Diversification
100% 80% 60% 40% 20% 0% ACC Ltd Ambuja Cements East UltraTech Shree Cement India Cements West Madras Cements South
North
Central
We prefer players with lesser exposure to the southern markets where the demand supply situation is expected to remain fragile during over the next two years. We prefer Ambuja Cements to ACC & UltraTech amongst the pan India players due to its minimal exposure to the southern region. Amongst the regional players, we like Shree Cement to India Cements as the capacity utilisation in the northern region is expected to remain high.
V. Revenue Diversification: Shree Cement & UltraTech Score High

Cement being a commodity is exposed to vagaries of business cyclicality, and thus we prefer the cement entities with diversified revenue stream as against pure play cement firms. Shree Cement has expanded into captive/merchant power sales, which would constitute ~17% of total revenues in FY12 13E. UltraTech generates ~14% of its top line from other business comprising mainly of RMC and white cement. White Cement/ Putty are niche products and hence less volatile. RMC provides diversification benefit as it uses cement as a raw material. Exhibit 84: Revenue Diversification
100% 80% 60% 40% 20% 0% ACC Ltd Ambuja Cements UltraTech Shree Cement India Cements Others Madras Cements
Grey Cement & Clinker Source: Companies, Karvy Institutional Research
34
16 September, 2011
VI. Asset Sweating: ACC Leads the Pack

The Indian cement industry has increased its asset sweating by improving its operational parameters. It improved from 0.6x in FY04 to 1.0x in FY11. The improvement has primarily been led by the large manufacturers benefitting from the economies of scale on their investment in infrastructure support and pan India distribution reach. Exhibit 85: Industrys Asset TO Trend
1.2 0.9 0.6 0.3 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Madras Cements
Sales/Gross Block (x) Industry Source: Karvy Institutional Research
Exhibit 86: Asset Sweating

1.5 1.0 0.5
ACC Ltd
Ambuja Cements Asset Sweating
UltraTech
Shree Cement
India Cements
Madras Cements
Industry 5yr Average
VII. Balance Sheet Strength: Large Players have been able to Finance their Expansions through Internal Accruals
Strong cash flow during the last up cycle helped the cement manufacturers to generate strong cash flows, which in turn led to a reduction in net debt for the industry as well as to fund their capex. The large manufacturers have been able to become net cash flow companies as against their smaller counterparts. Among the regional players, Shree Cement has been able to generate strong cash flow as the Company could capitalize on its timely cement capacity expansions and also from sales of its surplus captive power. Exhibit 87: Large Players have generated higher cash flows thereby funding their capex as well as reducing their debt levels
2.0 1.5 1.0 0.5 ACC Ltd Ambuja Cements CFO/Capex (x) Source: Companies, Karvy Institutional Research UltraTech Shree Cement India Cements Net debt /equity
(0.5)
35
16 September, 2011
Valuation Methodology Used

We Prefer EV/EBITDA over Asset based Valuation
We have used the EV/EBITDA metric to value the cement stocks under coverage. As a commodity, the cement prices and the profitability of the cement manufacturers are expected to remain volatile. We believe this is a comprehensive approach as this multiple captures the impact of a declining profitability (EBITDA/MT, RoE and RoCE) on the asset based valuation metric EV/MT.
We Use Last Down cycle Valuation Multiple

Our analysis of the valuation trends for the last ten years suggests that the large cement companies i.e. ACC & Ambuja Cements have traded at ~8.2x fwd EV/EBITDA during the last down cycle period (FY01 FY04). Since FY05, the cement sector witnessed an up cycle period for the next six years until FY10. This was when manufacturers generated strong cash flows led by the robust demand growth, increasing cost efficiency and high capacity utilisation. We have used the last down cycle average EV/EBITDA multiple as our base to value the cement stocks under our coverage as profitability and return ratio trends during the current down cycle (FY11 14E) are similar to that during the last down cycle . ACC & Ambuja Cements have traded at >8x (1 year forward EV/EBITDA) during last Down cycle Period. Historically, Ambuja Cements has traded at a premium to ACC on Replacement Cost Basis (EV/MT).
Exhibit 88: ACCs EV/EBITDA Trend (1 yr fwd)
13.0 11.0 9.0 7.0 5.0 Oct 00 Oct 01 Oct 02 Oct 03 Jul 00 Jul 01 Jul 02 Jan 01 Jan 03 Jan 02 Jul 03 Apr 00 Apr 01 Apr 02 Apr 03 Jan 04
Exhibit 89: Ambuja Cements EV/MT Trend (1 yr f wd)

13 11 9 7 5 Jan 01 Oct 00 Oct 01 Jan 02 Oct 02 Apr 01 Apr 02 Apr 03 Oct 03 Jan 04 Jan 03 Jul 00 Jul 01 Jul 02 Jul 03
Daily EV/EBITDA Source: Company, Karvy Institutional Research
Median EV/EBITDA
Daily EV/EBITDA
Last Down cycle average
Exhibit 90: ACCs EV/MT Trend (1 yr fwd)

120 100 80 60 40 1 Apr 00
Exhibit 91: Ambuja Cements EV/MT Trend (1 yr fwd)

120 100 80 60 40 Jul 00
1 Apr 01
1 Apr 02
1 Apr 03
1 Apr 04
Jan 01
Jul 01
Jan 02
Jul 02
Jan 03
Jul 03
Jan 04
Daily EV/mt (USD) Source: Company, Karvy Institutional Research
Median EV/mt
Daily EV/mt (USD)
Last Down cycle average
36
CEMENT
September 16, 2011
ACC
Bloomberg: ACC IN Reuters: ACC.BO
SELL
Initiating Coverage
Analyst Contact
Rajesh Kumar Ravi +91 22 22895030 rajesh.ravi@karvy.com Prasun Kumar +91 22 22895028 prasun.kumar@karvy.com
Low Base to Boost Sales Growth in CY11

Pan India presence with strong fundamentals: ACC is Indias oldest and second largest cement company (30nm MT) with pan India presence. ACC has ~353MW of thermal CPP, which meets ~80% of its electricity requirements. The Company also has captive railway sidings and railway wagons, which help it to control its logistics cost. It meets ~50% of its coal requirements through low cost linkage coal. Capacity utilization to remain low, low base to boost cy11 volume growth: ACC added 4 mn MT of cement capacity in CY10. However, it could not ramp up the production in these facilities last year due to various logistics issue. With those logistics issues being sorted out, ACCs utilization is expected to improve marginally in CY11 12E vs. CY10 levels. However, the utilization trend during CY10 12E would be ~10% lower than the previous three years. The low base of CY10 would help volume growth of 13% YoY in CY11E. We expect the sale volume to grow by 4% YoY in CY12E. Revenue CAGR to slow down to 6% in CY10 12E: ACC posted revenue CAGR of 11% in CY06 09 period led by both realization and sales volume growth. The market share of Top 5 producers in all the five regions in India would decline during CY09 CY12E period. This in turn would affect the pricing power of the producers. Hence, we expect net realization growth in CY11 12E period to be lower than the operating cost increases during these two years. Declining profitability & return ratios: While ACCs operating costs are expected to grow by ~5.5% CAGR in CY11 12E period, weak pricing power would not allow the Company to fully pass on these cost pressure to its end consumers. Hence, its operating margins would contract by ~410 bps in CY11 12E period. This in turn should lead to EBITDA and PAT to decline during CY10 12E at 11% and 15% CAGR respectively. Lower profits would result in further decline in ACCs RoE and RoCE. Initiate converge with SELL recommendation: We value ACC at 8.2x its CY12E EBITDA in line with the last down cycle valuations thereby implying a target price of Rs. 952 per share. We initiate coverage of the Company with SELL recommendation on the stock. Exhibit 1: Key Financials (Standalone)
Year to December Net Sales EBITDA EBITDA margin (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) CY08 74,484 19,076 25.6 62.0 25.6 22.4 17.2
9.1
Recommendation
CMP: Target Price: Upside (%) Rs1,064 Rs952 11%
Stock Information
Market Cap. (Rsbn/US$mn) 52 week High/Low (Rs) 3m ADV Beta Sensex Nifty 200/4,446 1,144/915 0.68 16,877 5,076
Rs 283mn/US$5.9mn
Stock Performance (%)

Absolute Rel. to Sensex 1M 7.0 6.8 3M 8.1 15.0 12M YTD 12.2 0.2 25.7 17.9
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Sep 10 115 110 105 100 950 900 Sep 11
Jun 10 Dec 10 Jul 11
May 11
Mar 08 Sep 08 Apr 09
Nov 10
Mar 11
Jan 11
Sensex (LHS)
Source: Capitaline, Karvy Institutional Research
1 Year Forward EV/EBITDA

CY10 79,758 18,124 22.7 59.6 17.9 15.9 17.9
9.1
CY09 81,909 26,440 32.3 85.5 29.4 25.7 12.5

6.3
CY11E 93,393 19,321 20.7 57.0 15.8 14.5 18.7

9.1
CY12E 99,056 18,386 18.6 52.5 13.4 12.4 20.3

9.1
14 12 10 8 6 4 2 0 Oct 04 May 05 Apr 04 Jun 06 Jan 07 Aug 07 Nov 09 Dec 05
Source Company, Karvy Institutional Research
Jul 11
ACC (RHS)
16 September, 2011
ACC
Company Financial Snapshot

Profit & Loss (Standalone)
CY10 Net sales EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT EPS (Rs) DPS (Rs) Profit and Loss Ratios EBIDTA Margin % Adj Net Margin % Valuation Multiples P/E (X) EV/EBIDTA (X) EV/MT (US$) 17.9 9.1 123 18.7 9.1 130 20.3 9.1 124 22.7 14.5 20.7 11.8 18.6 10.2 79,758 18,124 3,927 568 14,615 3,414 11,200 59.6 30.5 CY11E 93,393 19,321 4,463 980 15,299 4,590 10,709 57.0 20.0 CY12E 99,056 18,386 5,035 780 14,289 4,430 9,859 52.5 23.0
Company Background ACC is the oldest cement company in India with an installed cement capacity of 30 mn MT spread across the country. It is the second largest cement company in India next only to UltraTech. Holcim is the major shareholder in the Company with 50.3% stake. ACC originated from amalgamation of 10 small cement companies in 1936. The House of Tata was actively associated with ACC until it sold off its stake to the Ambuja Cement Group in 1999 and subsequently to Holcim. The Company has strong distribution network and pan India presence with equitable regional capacity distribution. It has 12 integrated cement plants, three split grinding units and one clinkerisation unit. ACC has 350MW of thermal CPP capacity (~80% of ACCs power requirement).
Balance Sheet (Standalone)

CY10 Total Assets Net Fixed Assets Current Assets Other Assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE % RoCE % Net Debt/Equity Equity/Total Assets P/BV (X) 17.9 15.9 (0.3) 0.6 3.1 15.8 14.5 (0.3) 0.6 2.8 13.4 12.4 (0.4) 0.6 2.6 112,736 66,452 40,609 5,675 112,736 64,695 5,238 37,464 5,339 CY11E 117,590 63,471 48,444 5,675 117,590 71,006 5,192 36,053 5,339 CY12E 124,416 63,364 53,291 7,761 124,416 75,808 5,145 38,124 5,339
Cash Flow: (Standalone)

CY10 PBT Depreciation Tax Change in Wkg Cap CF from Operations Capex Investments CF from Investing Change in Equity Change in Debt Dividends & others CF from Financing Change in Cash 14,615 3,265 (156) (79) 17,645 (6,573) (2,270) (8,843) 1 (431) (5,035) (5,466) 3,337 (46) (4,488) (4,535) 4,948 (47) (4,398) (4,444) (2,573) (1,482) CY11E 15,299 4,463 (10,684) 1,886 10,965 (1,482) CY12E 14,289 5,035 (4,590) 1,151 15,885 (4,928) (9,086) (14,014)
Shareholding Pattern % (as of June 2011)

Public & others, 19.16
Regional Capacity Distribution

North 19%
Promoters 50.30
South 31%
DII, 15.31 West 13% FII, 15.23

Source: Company, Karvy Institutional Research Source: Company, Karvy Institutional Research
East 24% Central 13%
38
16 September, 2011
ACC
Key Assumptions
ACCs sales volume grew 16% YoY during the first eight months of CY11 and we expect the Company to clock 13% YoY volume growth in CY11E. We expect ACCs net realization to increase by 4% YoY in CY11E and by another 2% in CY12E. However, operating costs should increase at higher rate in CY11 12E led by increases in fuel and freight costs. Exhibit 2: Key Assumptions
CY08 Sales Volume (mn MT) YoY Growth (%) (Per MT) Net avg realization YoY Growth (%) Raw material cost YoY Growth (%) Power and Fuel cost YoY Growth (%) Freight cost YoY Growth (%) Employee cost YoY Growth (%) Other Expenses YoY Growth (%) Opex YoY Growth (%) EBITDA YoY Growth (%)
CY09 21.5 1.8 3,773 7.3 449 5.1 717 (5.4) 491 3.4 171 (13.2) 759 (2.3) 2,587 (1.8) 1,231 36.2
CY10 21.1 (1.7) 3,678 (2.5) 564 25.6 758 5.7 507 3.3 219 27.8 876 15.4 2,923 13.0 859 (30.2)
CY11E 23.8 12.9 3,822 3.9 604 7.1 836 10.3 560 10.4 215 (1.8) 894 2.1 3,109 6.4 811 (5.6)
CY12E 24.8 4.0 3,897 2.0 630 4.3 882 5.5 575 2.7 230 7.0 939 5.0 3,256 4.7 742 (8.5)
21.1 6.1 3,518 (1.9) 427 (2.3) 758 21.2 475 (0.0) 197 11.1 776 (7.3) 2,633 3.2 904 (10.2)
Sensitivity Analysis
Exhibit 3: Sensitivity Table
Impact of 1% increase in following assumptions and estimates Sales volume Realization per MT Fuel cost per MT Freight cost per MT
Source Karvy Institutional Research
Impact on CY12 EBITDA (%) 1.2 5.1 (1.2) (0.9)
Impact on CY12 EPS (%) 1.5 6.5 (1.5) (1.2)
Impact on Valuation (%) 1.1 4.8 (1.1) (0.9)
Impact on RoE (bps) 19 81 (19) (15)
39
16 September, 2011
ACC
Outlook & Valuation

Given the declining capacity utilization for the cement industry as a whole during FY11 13E, we believe that the pricing power of all cement manufacturers would reduce. Hence, we expect manufacturers would not be able to fully pass on the incremental operating cost pressures thereby leading to continued declining trends in operating margins and profitability. However, ACC, along with two other pan India manufacturers UltraTech and Ambuja, would deliver industry leading operating margins and RoEs. Initiate converge with SELL recommendation: We value ACC at 8.2x its CY12E EBITDA in line with the last down cycle valuations thereby implying a target price of Rs. 952 per share. Our valuation implies a replacement cost of US$112 per MT. We initiate coverage with SELL recommendation on the stock. Exhibit 4: One Year Forward EV/ mt
250 200 150 100 50 0 Sep 04 Sep 05 Mar 05 Sep 06 Mar 06 Feb 07 Feb 08 Jan 10 Apr 04 Aug 08 Aug 07 Feb 09 Jan 11 Jul 09 Jul 10 Jul 11
Exhibit 5: One Year Forward EV/EBIDTA

14 12 10 8 6 4 2 0 Mar 05 Mar 06 Jul 09 Jul 10 Sep 04 Sep 05 Sep 06 Feb 07 Feb 08 Feb 09 Jan 10 Aug 08 Aug 07 Apr 04 Jan 11 Jul 10 Jul 11 Jan 11 Jul 11
Exhibit 6: One Year Forward P/E

30 25 20 15 10 5 0 Sep 04 Sep 05 Mar 05 Sep 06 Mar 06 Feb 07 Feb 08 Aug 08 Aug 07 Feb 09 Jul 09 Jul 10 Jan 10 Apr 04 Jan 11 Jul 11
Exhibit 7: One Year Forward P/B

6.0 5.0 4.0 3.0 2.0 1.0 0.0 Sep 04 Mar 05 Sep 05 Sep 06 Mar 06 Feb 07 Feb 08 Feb 09 Aug 08 Aug 07 Apr 04 Jan 10 Jul 09
40
16 September, 2011
ACC
Investment Summary
Nation wide presence with strong fundamental strengths: ACC is Indias oldest and second largest cement company (30nm MT) with pan India presence. Its capacity is spread in all the five regions of India with the southern and western regions accounting for ~45% of its total installed capacity. Operational cost efficiency: ACC has ~353MW of thermal CPP, which meets ~80% of its electricity requirements. The Company also has captive railway sidings and railway wagons, which help to control its logistics cost. It meets ~50% of its coal requirements through low cost linkage coal. Capacity utilization to remain low, low base to boost CY11 volume growth: ACC added 4 mn MT of cement capacity in CY10. However, it could not ramp up production in these facilities last year due to various logistics issue. With those logistics issues being sorted out, ACCs utilization is expected to improve marginally in CY11 12E vs. CY10 levels. However, the utilization trend during CY10 12E would by ~10% lower than the preceding three years. The low base of CY10 should help volume growth of 13% YoY in CY11E. We expect CY12E sale volume to grow by 4% YoY. Exhibit 8: Capacity utilization (%) to decline during CY10 12E v/s the preceding three years
30 24 18 80 12 6 70 60 CY06 CY07 CY08 CY09 CY10 CY11E CY12E Capacity utilisation 100 90
Exhibit 9: Revenue growth to slow down in CY12
100 80 60 40 20 CY11E CY12E CY05 CY06 CY07 CY08 CY09 CY10
34 22 10 (2) (14)
Cement Sales Vol ( Mn MT) Source: Company, Karvy Institutional Research
Revenue (Rs bn) Source: Company, Karvy Institutional Research
Growth YoY (%) RHS
Revenue CAGR to slow down to 6% in CY10 12E: ACC posted revenue CAGR of 11% in CY06 09 period led by both realization and sales volume growth. The market share of Top 5 producers in all the five regions in India would decline in CY09 CY12E (or FY10 12E) period, which in turn would affect the pricing power of the producers. Hence, we expect net realization growth during CY11 12E to be lower which in turn would slow down revenue CAGR to 6% during CY1012E.
41
16 September, 2011
ACC
Exhibit 10: Declining market share of Top 5 producers in all regions to reduce their pricing power
100% 80% 60% 40% 20% 0% North East FY10 Source: Company , Karvy Institutional Research Central West FY13E South
Exhibit 11: Realization growth expected to be lower than cost increases, EBITDA trending downwards
4,000 3,500 3,000 2,500 2,000 CY06 CY07 CY08 CY09 Opex CY10 CY11E CY12E EBITDA (RHS) Rs/mt 1,500 1,200 900 600 300
Realisation
Declining profitability & return ratios: While ACCs operating costs are expected to grow by ~5.5% CAGR in CY11 12E period, we believe that the weak pricing power would not allow the Company to fully pass on these cost pressure to its end consumers. Hence, the operating margins of the Company would contract by ~410 bps in CY11 12E period. This in turn would lead to EBITDA and PAT to decline during CY10 12E at CAGR by 11% and 15%, respectively. Lower profits would result in further decline in ACCs RoE and RoCE, going forward. Exhibit 12: Operating profit CAGR of 11% during CY10 12E v/s +15% during the preceding three years
28 21 14 7 FY04 FY05 CY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E 1400 1200 1000 800 600 400 200 0
Exhibit 13: Both RoE and RoCE spiraling downwards during CY10 12E
42 35 28 21 14 7 0 FY04 FY05 CY05 CY06 CY07 CY08 CY09 RoE (%) CY10 42 35 28 21 14 7 0
EBITDA (Rs bn) Source: Company, Karvy Institutional Research
EBITDA/ mt (Rs) RHS
RoCE (%) Source: Company, Karvy Institutional Research
42
16 September, 2011
ACC Exhibit 14: Karvy vs. Consensus (Standalone)

(Rs mn) Revenue CY11E CY12E EBITDA CY11E CY12E Net Profit CY11E CY12E
Source Bloomberg, Karvy Institutional Research
Karvy 93,393 99,056
Consensus 90,945 103,398
Diff (%) 2.7% 4.2%
19,321 18,386
18,892 21,724
2.3% 15.4%
10,709 9,859
11,285 13,089
5.1% 24.7%
Key Upside Risks

x x Sustaining of the production cut led pricing power may result in higher profitability for the Company. Cooling off crude and coal prices can result in lower cost pressure going forward.
43
16 September, 2011
ACC Exhibit 15: Profit & Loss Statement (Standalone)

Year to December (Rs mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non operational income / Exceptional items Extra ordinates PBT Tax PAT / Net profit reported Adjusted PAT / Net profit % growth EBITDA/MT (Rs)
CY08 74,484 5.4 55,408 19,076 (4.7) 2,942 16,134 400 1,143 489 16,877 5,238 12,128 11,639 (3.4) 904
CY09 81,909 10.0 55,469 26,440 38.6 3,421 23,020 843 767
CY10 79,758 (2.6) 61,634 18,124 (31.5) 3,927 14,198 568 985
CY11E 93,393 17.1 74,072 19,321 6.6 4,463 14,858 980 1,420
CY12E 99,056 6.1 80,670 18,386 (4.8) 5,035 13,351 780 1,717
22,944 6,877 16,067 16,067 38.0 1,231
14,615 3,414 11,200 11,200 (30.3) 859
15,299 4,590 10,709 10,709 (4.4) 811
14,289 4,430 9,859 9,859 (7.9) 742
Exhibit 16: Balance Sheet (Standalone)

Year to December (Rs mn) Cash & equivalents Debtors Inventory Loans & advances Investments Gross Block Net Block CWIP Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders equity Reserves & surpluses Total networth Net working capital Net debt (cash) CY08 14,383 3,102 7,933 5,460 2,250 58,357 34,697 16,029 1,529 85,382 26,604 4,820 4,680 36,105 1,879 47,399 49,277 (10,110) (9,563) CY09 18,759 2,037 7,790 5,161 3,462 68,263 41,583 21,562 1,601 101,954 31,139 5,669 4,984 41,792 1,879 58,283 60,162 (16,151) (13,089) CY10 23,876 1,783 9,150 5,239 3,951 80,770 50,824 15,628 2,285 112,736 37,464 5,238 5,339 48,041 1,880 62,815 64,695 (21,292) (18,638) CY11E 28,824 2,047 10,235 6,059 3,951 96,880 62,471 1,000 3,003 117,590 36,053 5,192 5,339 46,584 1,880 69,127 71,006 (17,713) (23,632) CY12E 33,251 2,171 10,855 6,200 6,037 97,840 58,396 4,968 2,538 124,416 38,124 5,145 5,339 48,608 1,880 73,929 75,808 (18,898) (28,106)
44
16 September, 2011
ACC Exhibit 17: Cash Flow Statement (Standalone)

Year to March (Rs mn) EBIT Other income (expenditure) Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Others Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity Dividend paid Others Cash flow from financing activities Net change in cash Closing cash balance
CY08 16,134 1,143 2,166 400 3,177 268 489 16,624 (13,253) 1,657 (11,595) 1,756 (812) (4,391) 825 (2,621) 2,408 9,842
CY09 23,020 767 3,020 843 3,966 2,702 24,700 (15,440) (7,966) (23,405) 849 19 (4,392) (150) (3,674) (2,379) 7,463
CY10 14,198 985 3,265 568 156 (79) 17,645 (6,573) (2,270) (8,843) (431) 1 (5,035) (5,466) 3,337 10,800
CY11E 14,858 1,420 4,463 980 10,684 1,886 10,965 (1,482)
CY12E 13,351 1,717 5,035 780 4,590 1,151 15,885 (4,928) (9,086) (14,014) (47) (4,398) (4,444) (2,573) 13,175
(1,482) (46) (4,488) (4,535) 4,948 15,748
Exhibit 18: Key Ratios

Year to December (%) EBITDA margin EBIT margin Net profit margin Dividend payout ratio Net debt: equity Working capital turnover Gross block turnover RoCE RoIC RoE
CY08 25.6 23.7 16.0 37.7 (0.2) (7.4) 1.3 22.4 33.1 25.6
CY09 32.3 29.6 20.0 31.4 (0.2) (5.0) 1.3 25.7 37.9 29.4
CY10 22.7 19.7 14.5 59.5 (0.3) (3.7) 1.1 15.9 25.1 17.9
CY11E 20.7 17.9 11.8 41.1 (0.3) (5.5) 1.1 14.5 24.6 15.8
CY12E 18.6 15.6 10.2 51.3 (0.4) (5.3) 1.0 12.4 22.5 13.4
Exhibit 19: Valuation Parameters

Year to December EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) EV/MT(USD)
CY08 62.0 62.0 262.3 17.2 4.1 9.1 2.4 171
CY09 85.5 85.5 320.1 12.5 3.3 6.3 2.1 140
CY10 59.6 59.6 344.2 17.9 3.1 9.1 2.1 123
CY11E 57.0 57.0 377.8 18.7 2.8 9.1 1.9 130
CY12E 52.5 52.5 403.3 20.3 2.6 9.1 1.7 124
45
CEMENT
September 16, 2011
Ambuja Cements
Bloomberg: ACEM IN Reuters: ABUJ.BO
SELL
Initiating Coverage
Analyst Contact
Profit Margins and Return Ratios on a Decline

Ambuja Cements is the third largest cement manufacturer in India having 27 mn MT of cement grinding capacity and 19.6 mn MT of clinker capacity. The Company is amongst the Top 4 manufacturers in the western, eastern regions and northern regions. It does not have any presence in the southern region. Regional Dominance to decline as capacity share of Top 5 producers on the declining trend: In all the four regions where Ambuja Cements operates, the Top 5 manufacturers controlled ~70% and/or more cement capacities by Mar10. However, we believe that over the next three years their market share would decline significantly as the smaller players are expanding at a faster rate. This should reduce pricing power the large manufacturers in a low demand growth scenario during FY12 13E. Hence, we expect Ambuja Cements would not be able to fully pass on the incremental cost pressures in CY11 12E period. Revenue CAGR to slow down to 7% in CY10 12E period: We believe that lower sales off take and realization growth would lead to its revenues CAGR to slow down to 7% in CY10 12E period, as against 13% in the previous two years. Despite cost efficiencies, operating profits to remain flat: Ambuja Cements is one of most cost efficient producers in India with ~77% usage of captive power. The Company also has access to cheaper linkage coal (~ 35% of its requirements). However, with the increase in fuel and freight expenses, we expect operating costs would grow by ~5% YoY in CY11 12E period, while its net realization would increase by ~2% YoY. As this should result in lower EBITDA/MT going forward, we expect Ambuja Cements EBITDA to remain flat in CY11 12E period. Return ratios to decline further: With a flattish operating growth and declining net profits, we expect both RoE and RoCE to continue their downwards during CY11 12E. However, Ambuja should continue to deliver industry leading return ratios. Initiate coverage with SELL recommendation: We value Ambuja Cements at 8.2x its CY12E EBITDA implying a target price of Rs. 127 per share. We initiate coverage on the stock with a SELL recommendation. The target price implies a replacement cost of US$130 per MT. Exhibit 1: Key Financials (Standalone)
Year to December Operating income EBITDA EBITDA margin (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) CY08 62,693 18,126 28.9 7.2 21.2 20.5 21.0 CY09 71,781 19,682 27.4 8.0 20.1 18.3 18.9 CY10 75,015 19,499 26.0 8.2 18.1 17.1 18.5 CY11E 81,374 19,184 23.6 7.2 14.4 13.6 20.8 CY12E 88,050 19,235 21.8 7.0 12.7 12.0 21.6
Recommendation
CMP: Target Price: Upside (%) Rs151 Rs127 16%
Stock Information
Market Cap. (Rsbn/US$mn) 52 week High/Low (Rs) 3m ADV Beta Sensex Nifty 231/4,858 166/111 0.77 16,877 5,076
Rs297mn/ US$6.2mn

1M Absolute Rel. to Sensex 15.2 14.9 3M 14.6 21.5 12M YTD 9.5 23.0 5.5 23.2
Performance
22,000 20,000 18,000 May 11 Nov 10 Mar 11 Sep 10 Sep 11
Jan 11
Sensex (LHS)
Jan 11
Ambuja Cem. (RHS)

14 12 10 8 6 4 2 0 Dec 07 Dec 08 Jul 09 Jan 10 Jul 10 Jul 07 Jul 08 Jul 11
Jul 11
16,000
180 160 140 120 100
16 September, 2011
Ambuja Cements

CY10 Net sales Optng. Exp(Adj for OI.) EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT EPS (Rs) DPS (Rs) Profit and Loss Ratios EBIDTA Margin % Adj Net Margin % Valuation Multiples P/E (X) EV/EBIDTA (X) EV/mt (US$) 75,015 55,517 19,499 3,872 487 16,503 3,983 12,520 8.2 2.6 26.0 16.9 18.5 10.2 176 CY11E 81,374 62,190 19,184 4,581 500 15,830 4,749 11,081 7.2 2.0 23.6 13.8 20.8 10.4 164 CY12E 88,050 68,814 19,235 4,901 350 15,733 5,035 10,698 7.0 2.5 21.8 12.3 21.6 10.0 159
Company Background Ambuja Cements is the third largest cement manufacturer in India with an installed capacity of 27 mn MT. It has one clinkerisation unit in Himachal Pradesh, six integrated cement plants, and nine cement grinding units spread across India (except in the southern region). The Company was incorporated in 1981 as Ambuja Cements Pvt. Ltd. and in 1983 it was rehabilitated into a public limited company Gujarat Ambuja Cements Ltd. Later in 2006, Switzerland based global cement major Holcim acquired management control of the Company by purchasing 14.8% stake and subsequently increased its stake to ~50.4% in 2011. Ambuja Cements has ~400MW of thermal CPP and operates three bulk cement shipping terminals with a fleet of seven cement carriers to facilitate coastal movement of cement within India as well as overseas. Cash Flow (Standalone)
CY10 CY11E 106,916 61,347 44,622 947 106,916 80,809 450 19,193 6,464 14.4 13.6 (0.3) 0.8 2.9 CY12E 114,279 58,495 54,837 947 114,279 87,048 450 20,317 6,464 12.7 12.0 (0.4) 0.8 2.7 PBT Depreciation Tax Change in Wkg Cap CF from Operations Capex Investments CF from Investing Change in Equity Change in Debt Dividends & others CF from Financing Change in Cash CY10 16,768 3,670 308 (571) 20,056 (7,710) 1,011 (6,699) 573 (1,007) (4,248) (4,682) 8,675 CY11E 15,830 4,581 (10,169) (578) 9,664 (343) (10,000) (10,343) (0) (200) (4,323) (4,523) (5,202) (4,014) (4,014) (1,186) CY12E 15,733 4,901 (4,720) (1,036) 14,878 (2,050) (10,000) (12,050) (0) 103,852 65,585 37,118 1,149 103,852 73,296 650 23,942 5,964 18.1 17.1 (0.3) 0.7 3.2

Total Assets Net Fixed Assets Current Assets Other Assets Total Equity & Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE % RoCE % Net Debt/Equity Equity/Total Assets P/BV (X)
Shareholding Pattern (Jun 2011)

Public & others, 11.23 DII, 14.64
Regional Capacity Distribution

Central 4% South 1% Promoters, 50.39 West 34% East 12%
North 49%
FII, 23.74
47
16 September, 2011
Ambuja Cements
Key Assumptions
Sales volume during the first eight months of CY11 has grown by 4.5% YoY. We expect Ambuja Cements sales volume to grow by 4.1% in CY11E and by 6% in CY12E. As we have factored in the impact of declining pricing power, we expect net realization growth may not fully absorb the incremental cost pressure in CY11 12E. Exhibit 2: Key Assumptions
CY08 Sales Volume (mn mt) YoY Growth (%) (Per mt) Net avg realization YoY Growth (%) Raw material + Clinker Tx cost YoY Growth (%) Power and Fuel cost YoY Growth (%) Freight cost YoY Growth (%) Employee cost YoY Growth (%) Other Expenses YoY Growth (%) Opex YoY Growth (%) EBITDA YoY Growth (%)
CY09 18.8 6.9 3,820 7.1 660 54.8 757 0.4 597 2.9 145 (4.0) 614 (1.5) 2,772 9.4 1,047 1.6
CY10 20.3 8.2 3,751 (1.8) 447 (32.2) 849 12.1 629 5.4 172 18.4 687 11.9 2,784 0.4 968 (7.6)
CY11E 21.2 4.1 3,844 2.5 442 (1.0) 947 11.6 667 6.0 185 7.6 696 1.3 2,937 5.5 906 (6.4)
CY12E 22.4 6.0 3,924 2.1 466 5.3 1,006 6.2 694 4.0 190 2.7 711 2.1 3,066 4.4 857 (5.4)
17.6 4.9 3,565 5.5 426 27.5 754 24.0 580 4.9 151 21.6 623 20.1 2,534 18.5 1,031 (16.9)
Impact of 1% increase in following assumptions Sales volume Realization per MT Fuel cost per MT Freight cost per MT
Impact on CY12E EBITDA (%) 0.9 4.3 (1.2) (1.0)
Impact on CY12E EPS (%) 1.1 5.3 (1.4) (1.3)
Impact on RoE (bps) 13.1 62.7 (17.1) (15.1)
48
16 September, 2011
Ambuja Cements
Outlook & Valuation

Given the declining capacity utilisation for the cement industry as a whole in FY11 13E period, the pricing power of all cement manufacturers would reduce. Hence, we expect that the manufacturers would not be able to fully pass on the incremental operating cost pressures thereby leading to continued declining trends in operating margins and profitability. However, we believe that Ambuja Cements, along with UltraTech and ACC, would deliver industry leading operating margins and RoEs. Initiate converge with SELL recommendation: We value Ambuja Cements at 8.2x its CY12 EBITDA. Using the last down cycle average multiple at which ACC & Ambuja Cements traded during FY01 04 period we arrive at a target price of Rs. 127 per share for the stock. We initiate coverage on the stock with SELL recommendation. Our target price implies a replacement cost of US$130/MT. Ambuja Cements has commanded higher asset based valuation compared to its peers i.e. ACC & UltraTech on account of its relatively newer plants and better operational efficiencies. Exhibit 4: One Year Forward EV/MT
300.0 250.0 200.0 150.0 100.0 50.0 0.0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 10 Jul 11 Jul 11

25 20 15 10 5 0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11

6 5 4 3 2 1 0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09
49
16 September, 2011
Ambuja Cements
Investment Summary
Third Largest pan India cement manufacturer: Ambuja Cements is the third largest cement manufacturer in India having 27 mn MT of cement grinding capacity and 19.6 mn MT of clinker capacity. The Company is amongst the Top 4 manufacturers in the western, eastern regions and northern regions. It
does not have any presence in the southern region.
Exhibit 8: Ambuja Cements is among the Top 5 Exhibit 9: Declining market share (%) of Top 5 manufacturers in three of the four regions it operates in producers in each of the regions Ambuja operates in
15.0 10.0 4th 5.0 8th 0.0 North East Central West 40% North Regional Cement Capacity Breakup (mn mt) Source: CMA, Company, Karvy Institutional Research FY10 Source: CMA, Karvy Institutional Research East Central FY13E West 60% 3rd 2nd 100% 80%
Regional dominance to decline as capacity share of Top 5 producers on declining trend: In all the four regions, where Ambuja Cements operates, the Top 5 manufacturers controlled ~70% and/or more cement capacities by Mar10. However, we believe that over the next three years, their market share would decline significantly as the smaller players expand at a faster rate. As we believe that this would reduce the pricing power the large manufacturers in a low demand growth scenario in FY12 13E period, we expect Ambuja Cements would not be able to fully pass on the incremental cost pressures in CY11 12E period. Revenue CAGR to slow down to 7% in CY10 12E period: Lower sales off take and realization growth should lead to its revenues CAGR to slow down to 7% during CY10 12E period as against 13% during the preceding two years. Exhibit 10: Revenue trend
80 60 40 20 FY04 FY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E 70 60 50 40 30 20 10 0
Revenue (Rs bn) Source: Company, Karvy Institutional Research
Growth YoY (%)
Operational cost efficiency: Ambuja Cements has ~400MW of thermal CPP, which suffice ~77% of its power requirements. Additionally, it has access to cheap linkage coal to the tune of ~35% of its total requirements. With the commissioning of its clinker plants in CY10 and subsequent ramp up, the Company is no more dependent on external clinker purchase. With a 19.6 mn
50
16 September, 2011
Ambuja Cements MT of clinker capacity, it can easily produce up to 24 mn MT cement (implying 90% capacity utilization on its current capacity of 27mn MT CC ratio of 1.43). These cost saving measures have helped Ambuja Cements to deliver ~28% OPM (Rs. 1,117 per MT) in H1CY11 and we expect the Company to post higher margins compared to its peers ACC and UltraTech Cement. Exhibit 11: Cost and EBITDA trends (per MT) over the last ten quarters raw materials and power & fuel costs have moderated thereby boosting margins
1,500 1,300 1,100 900 700 500 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Freight Dec 10 Mar 11 Jun 11
EBITDA
RM and P&F
Other Expenses
Despite cost efficiencies, operating profits to remain flat: We expect operating costs to grow by ~5% YoY in CY11 12E period, while its net realization would increase by ~2% YoY. As this would result in lower EBITDA/MT going forward, we expect EBITDA to remain flat in CY11 12E period. Exhibit 12: EBITDA (Rs/MT) trend
1,400 1,200 1,000 800 600 400 200 CY11E CY12E FY04 FY05 CY06 CY07 CY08 CY09 CY10
Exhibit 13: EBITDA declining to cost pressures

28 21 14 7 FY04 FY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E 40 30 20 10 0
EBITDA/ mt (Rs) Source: Company, Karvy Institutional Research
EBITDA (Rs bn) Source: Company, Karvy Institutional Research
OPM (%) RHS
51
16 September, 2011
Ambuja Cements Return ratios to decline further: With a flattish operating growth and declining net profits, we expect both RoE and RoCE to continue their downwards in CY11 12E period. However, we believe that Ambuja Cements would continue to deliver industry leading return ratios. Expecting industrys RoE to contract (from 12% in FY11) to 9% in FY13E, we believe that Ambuja Cements would deliver industry leading higher RoE of 12.7% in CY12E. Exhibit 14: Net profits growth trending downwards
16 14 12 10 8 6 4 2 CY11E CY12E FY04 FY05 CY06 CY07 CY08 CY09 CY10 25 20 15 10 5 0
Exhibit 15: Lower profits dragging down return ratios

30 25 20 15 10 5 FY04 FY05 CY11E CY12E CY12E (0.2) (0.4) (0.6) CY11E CY07 CY08 CY09 CY10 CY06 CY07 CY08 CY09 CY10 RoE (%)
PAT (Rs Bn)
Net Margins (%) RHS
RoCE (%) Source: Company , Karvy Institutional Research
Net cash flow positive company: Ambuja Cements doubled its capacity from 13 mn MT in FY04 to 27 mn MT in FY11 funded through its strong operating cash flows. Increased FCF also helped the Company to turn net cash flow positive in CY10. With liquid cash and cash equivalents of Rs.28 bn in CY10, the Company is well placed to fully finance any future expansion opportunity. Its Management is currently exploring clinker capacity expansion plans in Rajasthan by 2.2 mn MT. Exhibit 16: Ambuja Cements expanded capacity by 11% Exhibit 17: However, Ambuja could turn net cash flow positive backed by strong FCFF CAGR during FY04 11 period
30 24 18 12 6 0 FY04 FY05 CY06 CY07 CY08 CY09 CY10 CY11E CY12E 5,000 0 (5,000) 15,000 10,000
Cement Capacity (mn mt) Source: Company, Karvy Institutional Research
Free Cash Flow Firm (Rs mn) Source: Company, Karvy Institutional Research
Net Debt: Equity (x) RHS
52
16 September, 2011
Ambuja Cements Exhibit 18: Karvy vs. Consensus (Standalone)

(Rs mn) Revenue CY11E CY12E EBIDTA CY11E CY12E Net Profit CY11E CY12E 11,081 10,698 12,654 14,301 12.4% 25.2% 19,184 19,235 20,311 22,914 5.5% 16.1% 81,374 88,050 83,198 93,483 2.2% 5.8% Karvy Consensus Diff (%)
As we have factored in lower sales and realization growth in CY11 12E period to factor in declining pricing power and lower demand growth off take, our earnings estimates are lower than street consensus.
Key Upside Risks

53
16 September, 2011
Ambuja Cements Exhibit 19: Profit & Loss Statement (Standalone)

Year to December (Rs mn) CY08 CY09 CY10 CY11E CY12E
Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Exceptional items Extra ordinates PBT Tax PAT / Net profit reported Adjusted PAT / Net profit % growth EBITDA/MT (Rs)
62,693 10.6 44,567 18,126 (12.9) 2,598 15,528 321 1,407 3,083 16,615 5,676 14,023 10,939 11.3 1,031
71,781 14.5 52,100 19,682 8.6 2,970 16,712 224 1,546 18,033 5,849 12,184 12,184 11.4 1,047
75,015 4.5 55,517 19,499 (0.9) 3,872 15,627 487 1,363 265 16,503 3,983 12,785 12,520 2.8 968
81,374 8.5 62,190 19,184 (1.6) 4,581 14,604 500 1,726 15,830 4,749 11,081 11,081 (11.5) 906
88,050 8.2 68,814 19,235 0.3 4,901 14,334 350 1,749 15,733 5,035 10,698 10,698 (3.5) 857

Year to December (Rs mn) CY08 CY09 CY10 CY11E CY12E
Cash & equivalents Debtors Inventory Loans & advances Investments Gross Block Net Block CWIP Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders equity Reserves & surpluses Total networth Net working capital Net debt (cash)
10,297 2,246 9,387 2,999 1,546 57,069 31,928 19,472 530 78,404 14,738 2,887 4,093 21,718 3,049 53,637 56,686 (106) (7,410)
14,531 1,522 6,832 2,531 1,546 62,241 34,400 27,144 396 88,903 17,411 1,657 5,153 24,221 3,050 61,632 64,682 (6,526) (12,874)
23,247 1,282 9,019 3,406 494 87,788 56,278 9,307 821 103,852 23,942 650 5,964 30,556 3,073 70,223 73,296 (10,236) (22,597)
28,045 1,784 11,147 3,424 494 94,438 58,347 3,000 675 106,916 19,193 450 6,464 26,106 3,073 77,736 80,809 (2,838) (27,595)
36,859 1,930 12,062 3,746 494 98,488 57,495 1,000 693 114,279 20,317 450 6,464 27,231 3,073 83,975 87,048 (2,580) (36,409)
54
16 September, 2011
Ambuja Cements Exhibit 21: Cash Flow Statement (Standalone)

Year to March (Rs mn) EBIT Other income (expenditure) Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Others Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity Dividend paid Others Cash flow from financing activities Net change in cash CY08 15,528 1,407 2,430 321 6,114 (1,936) 3,083 14,078 (17,263) 9,566 22,119 (12,844) (3,946) CY09 16,712 1,546 2,699 224 3,053 4,440 CY10 15,627 1,363 3,670 487 (308) (571) 146 20,056 (7,710) 1,011 9,664 (343) (10,000) 14,878 (2,050) (10,000) CY11E 14,604 1,726 4,581 500 10,169 (578) CY12E 14,334 1,749 4,901 350 4,720 (1,036)
(7,698) (418) 32 (3,902)
(16,790) (1,230) 89 (3,900)
(6,699) (1,007) 573 (4,248)
(10,343) (200) (0) (4,323)
(12,050)
(0) (4,014)
(4,288) 2,093
(5,041) 288
(4,682) 8,675
(4,523) (5,202)
(4,014) (1,186)

Year to December (%)
CY08 28.9 27.2 17.6 35.8 (0.1) 450 1.1 20.5 28.1 21.2
CY09 27.4 25.8 17.2 35.1 (0.2) (11) 1.2 18.3 23.1 20.1
CY10 26.0 23.0 16.9 36.9 (0.3) (7) 1.0 17.1 23.4 18.1
CY11E 23.6 20.3 13.8 32.2 (0.3) (31) 0.9 13.6 20.0 14.4
CY12E 21.8 18.5 12.3 41.7 (0.4) (37) 0.9 12.0 19.0 12.7
EBITDA margin EBIT margin Net profit margin Dividend payout ratio Net debt: equity Working capital turnover Gross block turnover RoCE RoIC RoE

Y/E Dec (Rs mn) EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) EV/MT (USD) CY08 7.2 7.2 37.2
21.0 4.1 11.2 3.3 205
CY09 8.0 8.0 42.5

18.9 3.6 9.7 2.7 192
CY10 8.2 8.2 47.9

18.5 3.2 10.2 2.7 176
CY11E 7.2 7.2 52.8

20.8 2.9 10.4 2.5 164
CY12E 7.0 7.0 56.9

21.6 2.7 10.0 2.2 159
55
CEMENT
September 16, 2011
India Cements
Bloomberg: ICEM IN Reuters: ICMN.BO
HOLD
Initiating Coverage
Analyst Contact
Rajesh Kumar Ravi +91 22 2289 5030 rajesh.ravi@karvy.com
Weak Cement Profitability; IPLs Valuation to Stay
The ensuing production discipline has been most effective in the southern region where India Cements has leading presence. This should help India Prasun Kumar Cements to register 12% YoY net realization growth in FY12E. However, +91 22 2289 5028 lower capacity utilisation (<65% during FY12 13E) in the southern should prasun.kumar@karvy.com reduce producers pricing power thereby moderating net realization growth going forward. Recommendation HOLD Rs73 EBITDA to decline at 8% CAGR in FY11 13E: Lower sales volume off take, CMP: Rs76 moderating realization growth and sustained operating cost pressure should Target Price: result in a negative EBITDA CAGR of 8% during FY11 13E as against a +2% Upside (%) 5% CAGR during the preceding three years. Stock Information Lower profitability to keep RoE & RoCE suppressed: We expect India Market Cap. (Rs bn / US$ mn) 22/474 Cements return ratios to remain under 4% during FY12 13E led by lower 52 week High/Low (Rs) 127/62 profitability. 3m ADV Rs74mn/ US$1.6mn Trinetra Cement to strengthen presence in northern region: India Cements 61% owned subsidiary Trinetra Cement, Rajasthan started production since Oct10 and has been ramping up its production thereafter. During Q1FY12, it generated an EBITDA of Rs.140mn, while incurring Rs.20mn net loss. We believe this should help India Cement expand its distribution outside of the overcapacity southern market.
Beta Sensex Nifty 1.01 16,877 5,076

1M Absolute 2.3 2.1 3M (11.7) (4.8) 12M YTD (33.1) (31.8) (19.7) (14.1)
Ownership of Chennai Super Kings (CSK) to boost Companys brand & Rel. to Sensex valuations: CSK has won the last two successive seasons of Indian Premier League (IPL) and was the runner up in 2008 season and the semi finalists in Performance 2009 season of the four IPL matches played so far. This has enhanced India 22,000 21,000 Cements brand presence across India. Additionally, the franchise valuation 20,000 received a surge when two new teams were added in IPL at ~4 times CSKs 19,000 18,000 valuation. 17,000
16,000
Initiate coverage with HOLD recommendation: We value India Cements standalone cement business at 6x its FY13E EBITDA, Trinetra Cement at US$60 per MT and CSKs franchise right at US$175 mn. We initiate coverage with HOLD recommendation, and a SOTP based target price of Rs. 76 per share. Exhibit 1: Key Financials (Standalone)
Year to March Operating income EBITDA EBITDA (%) EPS (Rs) RoE (%) RoCE (%) EV/EBITDA (x) FY08 30,651 10,974 35.8 24.3 25.1 15.7 2.8 FY09 33,945 9,627 28.4 18.1 14.8 10.0 3.4 FY10 37,213 7,764 20.9 11.0 8.0 6.8 4.5 FY11 34,511 3,840 11.1 2.1 1.6 2.6 9.4 FY12E 37,432 6,009 16.1 3.4 2.5 3.4 6.9 FY13E 40,818 6,036 14.8 2.8 2.1 3.1 6.7
130 120 110 100 90 80 70 60 May 11 Mar 11 Sep 11 Apr 11 Apr 10 Oct 10 Jan 11 Jul 11 Oct 09
Sep 10
Sensex (LHS)
Nov 10
India Cements (RHS)
1 Year Forward EV/EBIDTA

20 15 10 5 0 Apr 05 Apr 08 Apr 06 Apr 07 Apr 09 Oct 05 Oct 06 Oct 07 Oct 08
16 September, 2011
India Cements

FY10 Net sales Optg. Exp(Adj for OI.) EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT EPS (Rs) DPS (Rs) Profit and Loss Ratios EBIDTA Margin % Adj Net Margin % Valuation Multiples P/E (X) EV/EBIDTA (X) EV/MT (US$) 6.6 4.5 74 33.9 9.4 81 21.4 6.9 95 26.3 6.7 87 20.9 8.4 11.1 1.9 16.1 2.8 14.8 2.1 37,213 29,449 7,764 2,331 1,426 4,876 1,770 3,106 11.0 2.2 FY11 34,511 30,670 3,840 2,440 1,417 875 218 658 2.1 1.5 FY12E 37,432 31,423 6,009 2,700 1,845 1,564 521 1,043 3.4 1.0 FY13E 40,818 34,782 6,036 3,023 1,845 1,273 424 849 2.8 1.0
Company Background India Cements with its production capacity of ~14 MTPA is the largest cement manufacturer in Southern regions of India. The Company forayed into northern region with its acquisition of 61% stake in Rajasthanbased IndoZinc. It has a grinding capacity of 1.5 mn MT. After India Cements acquired it, IndoZinc was renamed as Trinetra Cement. India Cements has a promoter holding of 25.4% with promoter Mr. N Srinivasan as Vice Chairman & Managing Director. India Cements acquired 100% franchise rights of the Chennai Super Kings (one of the cricket teams of the Indian Premier League) for US$91mn for 10years since 2008.

FY10 Total Assets Net Fixed Assets Current Assets Other Assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE % RoCE % Net Debt/Equity Equity/Total Assets P/BV (X) 8.0 6.8 0.5 0.5 0.6 1.6 2.6 0.6 0.5 0.6 2.5 3.4 0.5 0.5 0.6 2.1 3.1 0.5 0.5 0.6 76,007 46,215 27,446 2,346 76,007 41,358 21,327 10,422 2,899 FY11 79,566 48,743 29,147 1,676 79,566 40,898 24,561 11,184 2,924 FY12E 78,450 47,948 28,827 1,676 78,450 40,986 23,042 11,347 3,075 FY13E 79,019 45,830 31,513 1,676 79,019 40,881 23,042 11,870 3,226
Cash Flow (Standalone)

FY10 PBT Depreciation Tax Change in Wkg Cap CF from Operations Capex Investments CF from Investing Change in Equity Change in Debt Dividends & others CF from Financing Change in Cash 5,312 2,863 (1,443) (6,680) (551) (1,955) (1,550) (3,523) 2,972 1,447 (661) 3,758 (316) FY11E 899 2,999 (331) (1,697) 1,275 (5,527) 1,537 (4000) 0 3,233 (716) 2,517 (207) (1,519) (358) (1,876) 977 (359) (359) 1,944 (2,500) (1,500) FY12E 1,564 3,295 (590) 1,678 5,353 (2,500) FY13E 1,273 3,618 (273) (219) 3,804 (1,500)
Shareholding pattern (Jun 2011)

Promoters, 25.35
Revenue split by product FY11

Wind Power 0.3% Shipping Freight 1.1% FII, 26.34 Clinker Sales 0.2%
Public & others, 30.67
Cement Sales 98.4%
DII, 17.64
57
16 September, 2011
India Cements
Key Assumptions
We have factored in a 3% sales volume decline in FY12E followed by a 7% increase in FY13E. During Q1FY12, average net realization rose 42% YoY aided by a low base of last year as well by the sustainability of the price discipline. We believe average net realization would increase by 12% YoY in FY12E. We expect operating cost pressure would remain high in FY12E led by rise in fuel and freight expenses. We expect EBITDA/MT to surge by 60% YoY to Rs. 621 in FY12E. During Q1FY12, India Cement posted an EBITDA of Rs. 1,007 per MT and we expect the same to decline during the subsequent three quarters of FY12E. In FY13E, we expect EBITDA to decline by 12% to Rs. 544 per MT. India Cements would benefit from the commissioning of 50 MW of CPP in Tamil Nadu in Q3FY12E and also from cheaper landed coal price from its captive mines in Indonesia.
Exhibit 2: Key Assumptions

Rs in mn) Sales Volume (mn MT) YoY Growth (%) (Per MT) Net avg realization YoY Growth (%) Raw material cost YoY Growth (%) Power and Fuel cost YoY Growth (%) Freight cost YoY Growth (%) Employee cost YoY Growth (%) Other Expenses YoY Growth (%) Opex YoY Growth (%) EBITDA YoY Growth (%)
FY08 9.2 9.6 3,324 24.0 310 9.5 749 14.8 478 19.9 204 68.1 393 11.5 2,134 18.0 1,190 36.4
FY09 9.1 (1.1) 3,722 12.0 392 26.7 978 30.5 509 6.3 217 6.7 571 45.2 2,666 25.0 1,056 (11.3)
FY10 11.0 20.2 3,394 (8.8) 438 11.7 912 (6.7) 567 11.4 228 4.8 541 (5.1) 2,686 0.7 708 (32.9)
FY11 10.0 (9.1) 3,464 2.0 510 16.5 1,024 12.3 683 20.6 254 11.5 607 12.0 3,078 14.6 385 (45.6)
FY12E 9.7 (2.8) 3,867 11.6 551 7.9 1,089 6.4 721 5.6 265 4.3 619 2.0 3,246 5.4 621 61.0
FY13E 10.4 7.0 3,940 1.9 587 6.5 1,075 (1.3) 761 5.5 280 5.7 655 5.8 3,358 3.4 583 (6.1)
Source: Karvy institutional Research
Impact on FY13 EBITDA (%)

0.6
Impact on FY13 EPS (%)

4.0
Impact on Valuation (%)

1.0
Impact on RoE (bps)

5.6
7.0 (2.0) (1.5)
45.3 (12.7) (9.6)
12.5 (3.6) (2.7)
64.2 (18.1) (13.6)
58
16 September, 2011
India Cements
Outlook & Valuation

India Cements has one of the strong beneficiaries in the near term of the ensuing production discipline in the southern region. However, capacity utilisation in the southern region is expected to remain under 65% during FY12 13E. We expect disruption to the ensuing production discipline to negatively impact its pricing power in the weak southern markets. We have valued India Cements standalone cement business at 6x fwd EBITDA (25% discount compared to ACC & Ambuja Cements to factor in lower comparative fundamental strengths). We value its Rajasthan based cement subsidiary Trinetra Cement at ~US$60 per MT in line with valuations enjoyed by other small capacity cement plants in the region. We have used the auction value (~US$350 mn) given to the two new teams which joined the IPL in 2010 as our base to value India Cements owned franchise i.e. CSK. We have used conservative valuation of the best performing team by ascribing a 50% discount to the auction value. Our SOPT valuation implies a target price of Rs. 76 per share. We initiate coverage with a HOLD recommendation. Our target valuation implies a replacement cost of US$60 per MT for the standalone cement business. Exhibit 4: SOTP valuation derives Rs21 per share CSK franchise and Rs2 per share from the Trinetra Cement
SOTP Valuation Target Multiple Stand alone Cement (6x FY13E EBITDA) 1. 2. 3. EV Target EV Standalone Cement Target EV CSK franchise (50% Disc to Latest Deals at US$350mn) Net Debt (Standalone) 36,213 6,300 (19,682) 4,050 (3,000) 630 23,461 76.4 Rs mn
Trinetra Cement 1.5mn MT @ US$60/MT 4. 61% share for ICEM
Net Debt Trinetra Cement
Target Equity Valuation (1+2+3+4) Target Valuation (Rs/share)

59
16 September, 2011
India Cements
Exhibit 5: 1 yr fwd EV/MT (US$) trend

250 200 150 100 50 0 Sep 05 Feb 06 Mar 08 May 07 Nov 09 Dec 06 Apr 05 Sep 10 Feb 11 Oct 07 Jan 09 Jul 06 Aug 08 Apr 10 Jun 09 Jul 11
Exhibit 6: 1 yr fwd EV/EBITDA trend

20 15 10 5 0 May 07 Nov 09 Dec 06 Sep 05 Feb 06 Mar 08 Jan 09 Sep 10 Apr 05 Aug 08 Apr 10 Feb 11 Feb 11 Oct 07 Jun 09 Jul 06 Jul 11 Jul 11
Exhibit 7: 1 yr fwd P/E trend

80 60 40 20 0 May 07 Nov 09 Sep 05 Feb 06 Dec 06 Oct 07 Mar 08 Aug 08 Jun 09 Jan 09 Sep 10 Apr 05 Feb 11 Jul 06 Apr 10 Jul 11 (20)
Exhibit 8: 1 yr fwd P/B trend

5 4 3 2 1 0 May 07 Nov 09 Sep 05 Feb 06 Oct 07 Jan 09 Dec 06 Mar 08 Jun 09 Aug 08 Apr 05 Apr 10 Sep 10 Jul 06
60
16 September, 2011
India Cements
Investment Summary
Strong realization growth in FY12E led by production discipline: We expect India Cements to register 11.6% YoY growth in net realization in FY12E, as the production discipline has been most effective in the southern region, where the Company has leading presence. However, we expect the production discipline to get disrupted going forward, as the utilisation levels in southern region is expect to remain under 65% in FY12 13E period. Hence, we believe that the realization growth would moderate to ~12% in FY12E, as against ~20% growth registered in Q1FY12. Exhibit 9: We expect sales volume to decline in FY12 led Exhibit 10: Net realization to benefit in FY12E from by low demand and production discipline in the region production discipline in vogue
12.0 10.0 8.0 6.0 4.0 FY08 FY09 FY10 FY11 FY12E FY13E Sales Volume (mn mt) 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0) YoY Growth (%) RHS) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 FY08 FY09 FY10 FY11 FY12E FY13E Net Realisation (Rs/mt) 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0) YoY Growth (%) RHS
Cost pressure to reduce from FY13E onwards: India Cements has invested into 100MW of Thermal CPP out of which 50 MW will be commissioned in Oct11 along its Sankaranagar plants in Tamil Nadu. Another 50MW of CPP will get commissioned by Dec12. These initiatives would help reduce India Cements dependence on external grid power supply as well on the diesel generated internal power supply. Additionally, India Cements has invested ~US$20 mn in captive coal mines in Indonesia (estimated reserves 30 mn MT). Coal from the captive blocks should benefit India Cements from FY13E onwards in containing fuel costs, as the Company expects to meet ~50% of its coal requirements from the captive coal blocks in Indonesia. The above measures would positively impact India Cements operating costs going forward. We estimate its power and fuel cost to decline by 1% YoY to Rs. 1075 per MT in FY13E.
61
16 September, 2011
India Cements Exhibit 11: Power & fuel cost pressure to ease off from FY13E
1,200 1,000 800 600 400 FY08 FY09 FY10 FY11 FY12E FY13E 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0)
Power & fuel cost (Rs/mt) Source: Company, Karvy Institutional Research
Opex YoY growth (%) RHS
Lower sales off take & moderating realization growth to slow down revenue CAGR to 3% in FY11 13E: We estimate India Cements revenues to grow at a 3% CAGR in FY11 13E as against 18% in FY08 10. This is primarily led declining sales off take in FY11 12E period as well as by flattish realization growth in FY13E. We have factored in negligible contribution to revenues from other segments Shipping Division ~1% of revenues and Wind power sales 0.3% of revenues. Exhibit 12: Standalone revenues CAGR to slow down to 3% during FY11 13E
4,000 3,000 2,000 10 1,000 0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Avg. Realisations Net Source: Company, Karvy Institutional Research Growth (%) RHS 0 (10) 40 30 20
EBITDA to decline at 8% CAGR in FY11 13E: We believe that lower sales volume off take, moderating realization growth and sustained operating cost pressure would result in EBITDA CAGR of 8% in FY11 13E period, as against a +2% CAGR in the previous three years.
62
16 September, 2011
India Cements Exhibit 14: EBITDA CAGR of 85 in FY11 13E

15,000 10,000 5,000 0 FY08 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E EBITDA (Rs/mt) Source: Company, Karvy Institutional Research EBITDA (Rs Mn) EBITDA margins (%) RHS 40.0 30.0 20.0 500 0 10.0 0.0
Exhibit 13: EBITDA/MT to decline in FY13E

1,500 1,000
Lower profitability to keep RoE & RoCE suppressed: We expect India Cements return ratios to remain under 4% in FY12 13E period led by lower profitability. Exhibit 15: Return ratios (%) to remain subdued with modest recovery in FY12 13E
28 24 20 16 12 8 4 FY08 FY09 FY10 FY11 FY12E FY13E 28 24 20 16 12 8 4
RoE Source: Company, Karvy Institutional Research
RoCE
Balance sheet strength to improve going forward: We estimate India Cements net debt: equity to peak out in FY11 at 0.59x and to decline subsequently to 0.48x in FY13E. Exhibit 16: Strong cash flow to help reduce debt levels going forward 4,000 2,000 0 (2,000) (4,000) (6,000) FCF (Rs bn)
0.60 0.50 FY08 FY09 FY10 FY11 FY12E FY13E 0.40 0.30 0.20 Net D: E (x) RHS
63
16 September, 2011
India Cements Trinetra Cement to Strengthen Presence in Northern Region: India Cements has acquired 60% stake in Rajasthan based IndoZinc, which was subsequently renamed as Trinetra Cement. It has 1.5 mn MT of cement grinding capacity. It is adding 20MW of thermal CPP in H2FY12E. Trinetra started production from Oct10 and has been ramping up its production thereafter. During Q1FY12, this subsidiary generated an EBITDA of Rs. 140 mn and a net loss of Rs. 20 mn. Exhibit 17: Trinetra Cement ramping up its Sales Volume 100 85 70 55 40 25 10 Dec 10 May 11 Jun 11 Jan 11 Feb 11 Nov 10 Mar 11 Apr 11 Jul 11
64
Monthly sales volume ( 000 mt)

IPL Franchise Ownership to Boost India Cements Branding & Valuations: India Cements acquired 100% franchise rights of the CSK (one of the cricket teams of the Indian Premier League) for US$91 mn for 10 years since 2008. Out of the four seasons of the IPL matches played so far, the CSK won the last two seasons and was the runner up 2008 season and semi finalists in 2009 season. Consistent and strong performance of the CSK over the last four years has enhanced India Cements brand presence across India. Indian Premier League popularized the 20 Overs format of One Day cricket and has been a big success in India. Based on the ~US$350 mn valuations of the Pune Warriors (Pune) and Kochi Tuskers (Kerala) franchises, which were auctioned in 2010, we ascribe a value of Rs. 6.3 bn (50% discount to US$350 mn), which implies a valuation of Rs. 21per share.
16 September, 2011
India Cements Exhibit 18: Karvy Vs Consensus

(Rs mn) Revenue FY12E FY13E EBIDTA FY12E FY13E Net Profit FY12E FY13E
Karvy 37,432 40,818
Consensus 39,782 44,545
Diff (%) 6% 8%
6,009 6,036
7,013 8,150
14% 26%
1,043 849
2,094 2,777
50% 69%
Key Risks
Sustaining of the production cut led pricing power may result in higher profitability for the Company. In case the production discipline disruption is steeper than our expectations, net realization and profitability can further correct from their current estimated levels. Cooling off crude and coal prices can result in lower cost pressure going forward. Any delay in commissioning of its CPPs will reduce the positive impact of the power and fuel costs in FY13E. Any delay in mining of its Indonesian coal mines will reduce the positive impact of the power and fuel costs in FY13E.
65
16 September, 2011
India Cements Exhibit 19: Profit & Loss Statement (Standalone)

Y/E March (Rs mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non operational income / Exceptional items Extra ordinates PBT Tax PAT / Net profit reported Adjusted PAT / Net profit % growth EBITDA/MT (Rs) cement FY09 33,945 10.3 24,318 9,627 (12.3) 2,033 7,594 1,121 804 (794) 7,276 2,161 4,321 5,115 (25.4) 1,056 FY10 37,213 9.8 29,449 7,764 (19.4) 2,331 5,433 1,426 870 436 4,876 1,770 3,542 3,106 (39.3) 708 FY11 34,511 (7.3) 30,670 3,840 (50.5) 2,440 1,400 1,417 893 23 875 218 681 658 (78.8) 385 FY12E 37,432 8.8 31,423 6,009 56.5 2,700 3,309 1,845 100 FY13E 40,818 9.1 34,782 6,036 0.4 3,023 3,013 1,845 105
1,564 521 1,043 1,043 58.6 621
1,273 424 849 849 (18.6) 583

Y/E March (Rs mn) Cash & equivalents Debtors Inventory Loans & advances Investments Gross Block Net Block CWIP Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders equity Reserves & surpluses Total networth Net working capital Net debt (cash)
FY09 852 3,540 3,705 13,134 1,590 53,136 38,083 9,040 389 70,332 11,533 19,880 2,741 34,154 2,824 33,354 36,178 8,846 19,028
FY10 1,538 2,534 4,478 18,692 2,140 57,102 39,186 7,029 411 76,007 10,422 21,327 2,899 34,649 3,072 38,286 41,358 15,281 19,789
FY11 439 2,544 4,973 20,986 1,495 59,260 38,345 10,398 386 79,566 11,184 24,561 2,924 38,669 3,072 37,826 40,898 17,320 24,121
FY12E 1,416 2,547 5,603 19,057 1,495 69,658 45,448 2,500 386 78,450 11,347 23,042 3,075 37,464 3,072 37,915 40,986 15,859 21,626
FY13E 3,360 2,779 6,113 19,057 1,495 72,158 44,330 1,500 386 79,019 11,870 23,042 3,226 38,138 3,072 37,809 40,881 16,079 19,682
66
16 September, 2011
India Cements Exhibit 21: Cash Flow Statement (Standalone)

Y/E March (Rs mn) EBIT Other income (expenditure) Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity Dividend paid Cash flow from financing activities Net change in cash Closing cash balance
FY09 7,594 804 2,611 1,121 830 (2,682) (1,393) 4,982 (9,340) (297) (10) (9,647) 1,765 154 (659) 1,260
FY10 5,433 870 2,863 1,426 1,443 (6,680) (166) (551) (1,955) (1,550) (18) (3,523) 1,447 2,972 (661) 3,758
FY11 1,400 893 2,999 1,417 331 (1,697) (572) 1,275 (5,527) 1,537 (9) (4,000) 3,233 0 (716) 2,517
FY12E 3,309 100 3,295 1,845 590 1,678 (595) 5,353 (2,500)
FY13E 3,013 105 3,618 1,845 273 (219) (595) 3,804 (1,500)
(2,500) (1,519) (358) (1,876)
(1,500)
(359) (359)

Y/E March (Rs mn) EBITDA margin EBIT margin Net profit margin Dividend payout ratio Net debt: equity Working capital turnover Gross block turnover RoCE RoIC RoE FY09 28.4 25.0 15.2 12.9 0.5 3.7 0.7 10.0 12.4 14.8 FY10 20.9 17.1 8.4 23.1 0.5 2.4 0.7 6.8 8.0 8.0 FY11 11.1 6.7 1.9 81.7 0.59 1.9 0.6 2.6 3.0 1.6 FY12E 16.1 9.2 2.8 34.4 0.53 2.3 0.6 3.4 3.8 2.5 FY13E 14.8 7.7 2.1 42.3 0.48 2.5 0.6 3.1 3.6 2.1

Y/E March (Rs mn) EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) EV/MT (USD)
FY09 18.1 18.1 104.5 4.0 0.7 3.4 1.0 79
FY10 11.0 11.0 124.5 6.7 0.6 4.5 1.0 74
FY11 2.1 2.1 115.2 34.1 0.6 9.4 1.1 81
FY12E 3.4 3.4 117.4 21.5 0.6 6.9 1.1 95
FY13E 2.8 2.8 118.9 26.4 0.6 6.7 1.0 87
67
CEMENT
September 16, 2011
Shree Cement
Bloomberg: SRCM IN Reuters: SHCM.BO
HOLD
Initiating Coverage
Analyst Contact
Cement Stable; Power Outlook Dim

Shree Cement is the second largest cement producer in the northern region of India after Holcim Group (ACC & Ambuja Cements). The Company has grown its capacity to five fold over the last six years led by strong project execution in setting up its plants and commissioning them well in time. Expect flat EBITDA/MT in FY11 13E period: Shree Cement mostly sells its cement in the northern region, where capacity utilisation is expected to remain at ~90% in FY11 13E period. Hence, we expect manufacturers in this region would be able to mostly pass on their incremental cost pressure (led by fuel and freight costs) thereby helping Shree Cement post flattish EBITDA/MT in FY11 13E period. Weak power outlook has moderated diversification benefits from power business: Power sales should constitute ~20% of revenues in FY13E. Outlook for power sales in Rajasthan has weakened over the last one year. Rajasthan SEB, one of the major buyers of power from companies like Shree Cement is facing financial crunch and this has reflected in lower realization for the power sellers in Rajasthan. Revenue CAGR to slow down to 9% in FY11 13E period: Lower cement sales growth during FY11 13E v/s the preceding three years has impacted revenue CAGR down to 9% v/s 38% during FY08 10. Cement sales growth should be impacted by a decline in demand growth across all regions in India. Further, we expect the upcoming 300MW merchant power plants to operate at 50 60% PLF during FY12 13E due to absence of any long term sales contract. EBITDA CAGR of 5% in FY12 13E period: Return ratios to improve in FY13E: We expect Shree Cements EBITDA to improve marginally during FY12 13 led by 5% cement sales growth and increased contribution from the power sales. We expect RoE to recover to 23% in FY13E led by an improvement in asset turn over and net margins. RoCE of 16% in FY13E should benefit from 10% YoY EBITDA growth in FY13E. Initiate coverage with HOLD recommendation: We initiate coverage with HOLD recommendation on the stock. We have used SOTP valuation to value the cement and power business to arrive at a target price of Rs. 1,786 per share. Exhibit 1: Key Financials
Year to March Operating income EBITDA EBITDA (%) EPS (Rs) RoE (%) RoCE (%) EV/EBITDA (x) FY08 21,251 8,784 41.3 85.9 50.9 18.9
7.0
Recommendation
CMP: Target Price: Upside (%) Rs1,700 Rs1,786 5%
Stock Information
Market Cap. (Rsbn/US$mn) 52 week High/Low (Rs) Shares Outstanding (mn) 3m ADV Beta Sensex Nifty 59/1,316 2,350/1,500 35 0.80 16,877 5,076
Rs61.5mn/US$1.3mn

1M Absolute Rel. to Sensex (0.3) (0.6) 3M (0.7) 6.2 12M YTD (16.3) (15.1) (2.8) 2.6
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Nov 10 Mar 11 Jan 11 May 11 Sep 10 Jul 11 Sep 11 Apr 11 250 230 210 190 170 150
Sensex (LHS)
Shree Cement (RHS
FY09 27,329 9,714 35.5 174.8 64.7 28.1

5.8
FY10 36,509 15,111 41.4 212.3 48.6 24.6

3.3
FY11 35,122 8,856 25.2 74.1 13.5 15.9

6.1
FY12E 39,757 8,945 22.5 57.6 9.9 8.9

6.4
FY13E 47,711 9,847 20.6 146.1 22.9 16.0

5.5

15 10 5 0
Apr 04 Apr 07 Apr 10 Apr 05 Apr 06 Apr 08 Apr 09
16 September, 2011
Shree Cement

Profit & Loss
Net sales Optg. Exp (Adj for OI.) EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT EPS (Rs) DPS (Rs) Profit and Loss Ratios EBIDTA Margin % Adj Net Margin % Valuation Multiples P/E (X) EV/EBIDTA (X) EV/MT (US$)
8.0 3.3 110 22.9 6.1 89 29.5 6.4 95 11.6 5.5 90
Company Background
FY10 36,509 21,398 15,111 5,704 1,291 9,313 1,918 7,395 212.3 13.0 41.4 20.3 FY11 35,122 26,266 8,856 6,758 1,753 1,588 (994) 2,582 74.1 14.0 25.2 7.4 FY12E 39,757 30,813 8,945 6,328 1,652 2,265 260 2,005 57.6 20.0 22.5 5.0 FY13E 47,711 37,863 9,847 3,389 1,610 6,201 1,112 5,089 146.1 25.0 20.6 10.7
Shree Cement is the largest cement producer in Northern India. It is promoted by Kolkata based industrialists Mr. PD Bangur and Mr. BG Bangur with promoter holdings at 64.78%. The Company has two integrated cement plants in Rajasthan. It also has four grinding units three in Rajasthan and one in Uttarakhand. Its total installed capacity stands at 13.4 mn MT. It has thermal CPP of 216MW and a waste heat recovery plant of 46MW capacity. Currently, it has 100MW of surplus that it sells in the spot market. Shree Cement has also ventured into power business with its wholly owned subsidiary Shree Mega Power (SMP), which is setting up 300MW of merchant power plants in Rajasthan out of which 150MW has already been commissioned in Jul11 and the rest 150MW is likely to be commissioned in Oct11. Cash Flow
Balance Sheet
FY10 Total Assets Net Fixed Assets Current Assets Other Assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet Ratios RoE % RoCE % Net Debt/Equity Equity/Total Assets P/BV (X) 48.6 24.6 0.1 0.4
3.2
FY11 45,148 21,949 22,418 781 45,148 19,859 20,079 5,152 58
FY12E 38,730 15,343 22,607 781 38,730 20,515 14,300 3,807 108
FY13E 47,441 15,406 31,254 781 47,441 23,946 19,300 4,037 158 PBT Depreciation Tax Change in Wkg Cap CF from Operations Capex Investments CF from Investing Change in Equity Change in Debt Dividends & others CF from Financing Change in Cash
FY10 8,679 5,699 (1,897) 780 13,260 (11,835) (7,474) (19,309) (0) 6,101 (611) 5,489 (559)
FY11 1,103 6,761 709 (412) 8,161 (11,516) 3,958 (7,558) (0) (983) (572) (1,555) (952)
FY12E 1,732 6,328 (1,000) (2,450) 4,609 278 278 (0) (5,779) (324) (6,103) (1,215)
FY13E 5,562 3,389 (1,562) (1,912) 5,476 (3,453) (3,453) (0) 5,000 (815) 4,185 6,208
44,401 17,194 26,658 549 44,401 18,332 21,062 4,581 425
13.5 15.9 0.2 0.4

3.0
9.9 8.9 0.0 0.5

2.9
22.9 16.0 (0.0) 0.5

2.5
Shareholding Pattern (Jun 2011)
Revenue Split by Product FY11
Public & others, 23.17 DII, 5.82 FII, 6.23 Promoters, 64.78
Power 9% Clinker 5%
Cement 86%
Source: Company
69
16 September, 2011
Shree Cement
Key Assumptions
Cement Sales: We have factored in ~6% cement and clinker sales volume CAGR during FY12 13E. We have factored in net realization to grow by ~3.5% YoY during FY12 13E. Cement manufacturers have been trying to stabilize cement prices to factor in the cost increases, while the demand growth has been weakening. The average cement realization rose 5% YoY in Q1FY12, despite muted volume growth of the cement industry. Going forward this pricing power of the cement producers would decline thereby reducing their ability to pass on fully their operating cost. Captive/ Merchant Power Sales: We have factored in 50% PLF in FY12E and 60% PLF in FY13E. Additionally, we expect EBITDA contribution from the captive and merchant power sales would be lower than earlier street expectations, as we factor in lower realization and increased generation cost during FY12E and FY13E. Shree Cements power sales to be much lower than earlier expectations set by the Company, as its Management has not been able to secure long term contract for the 300MW of merchant power plants. Exhibit 2: Key Assumptions
Rs in mn Cement & Clinker Sales Volume (mn MT) YoY Growth (%) Net avg realization (per MT) YoY Growth (%) Opex (per MT) YoY Growth (%) EBITDA (per MT) YoY Growth (%) Power Sales volume (mn units) YoY Growth (%) Net avg realization YoY Growth (%) EBITDA/unit YoY Growth (%)
FY08 6.6 36.7 3,193 12.8 1,880 12.4 1,330 16.4
FY09 8.4 27.2 3,129 (2.0) 2,088 11.0 1,122 (15.6) 117 6.9 2.4
FY10 10.2 21.9 3,372 7.8 2,031 (2.7) 1,398 24.5 264 125.1 6.7 (2.5) 3.0 25.0
FY11 10.3 0.2 3,114 (7.6) 2,335 15.0 718 (48.6) 621 135.8 5.1 (24.4) 2.4 (20.5)
FY12E 10.9 5.8 3,221 3.4 2,456 5.2 713 (0.7) 1,113 79.1 4.3 (15.3) 1.1 (54.9)
FY13E 11.5 5.6 3,338 3.6 2,566 4.5 707 (0.9) 2,306 107.1 4.1 (4.7) 0.8 (30.0)
Impact of 1% increase in following assumptions and estimates Cement sales volume Power sales volume Cement realization per MT Power realization per unit Fuel cost per MT Freight cost per MT
Impact on FY12 EBITDA (%) 0.9 0.1 3.2 0.9 (1.8) (0.7)
Impact on FY12 EPS (%) 1.5 0.2 5.0 1.3 (2.8) (1.1)
Impact on DCF Valuation (%) 1.1 (0.0) 3.8 0.5 (2.2) (0.8)
Impact on RoE (%) 30 4 101 27 (57) (22)
70
16 September, 2011
Shree Cement
Outlook & Valuation

Shree Cement mostly sells its cement in the northern region, where the capacity utilisation is expected to remain firm at ~90% in FY11 13E period, which we believe would help the Company to mostly pass on the incremental cost pressure thereby maintaining a flat EBITDA/MT growth in FY11 13E period. As the Company has not been able to secure any long term contract for its 300MW of merchant power, the contribution from this segment would remain subdued. Spot power realization in Rajasthan is expected to remain weak, as the weak financial position of Rajasthan State Electricity Board would not permit it to buy power at high prices seen in FY09 11 period. Initiate coverage with HOLD recommendation: Though Shree Cement ranks high on the comparative parameters the stock has low liquidity on the bourses creating an impact cost. We have used SOTP method to value the Company. We value Shree Cements cement business at 6.5x fwd EV/EBITDA (20% discount to the valuations ascribed to the pan India producers ACC & Ambuja Cements). We have valued Shree Cements merchant power business at 5x FY13E EBITDA. Comparable power companies operating in Rajasthan region (JSW Energy, Torrent Power, & Adani Power are trading at 6.2x their FY13E EBITDA. We have applied a 20% discount to valuation multiple of its peer groups to arrive at 5x fwd EBITDA valuation for the power business. Consequently, we initiate coverage on the stock with a HOLD rating with a target price of Rs. 1,786 per share. Exhibit 4: One Year Forward EV/mt
250 200 150 100 50 0 May 07 Nov 09 Sep 05 Feb 06 Dec 06 Mar 08 Jan 09 Sep 10 Apr 05 Aug 08 Apr 10 Feb 11 Oct 07 Jun 09 Jul 06 Jul 11

12.0 10.0 8.0 6.0 4.0 2.0 0.0 Oct 04 Oct 05 Oct 06 Oct 07 Oct 08 Oct 09 Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Oct 10 Apr 11
71
16 September, 2011
Shree Cement
Investment Summary
Largest cement producer in the northern region: Shree Cement is the second largest cement producer in the northern region of India after Holcim Group (ACC & Ambuja Cements). The Company has grown its capacity to five fold over the last six years led by strong project execution in setting up its plants and commissioning them. The Company has also been able to capitalize fully on the strong demand growth period of FY05 10, during which it operated at >90% capacity utilisation. Exhibit 6: Shree Cements cement capacity has grown over 4x over last six years
15 12 9 6 3 FY12E FY13E FY05 FY06 FY07 FY08 FY09 FY10 FY11 0 120 100 80 60 40 20 Shree Cement UltraTech Holcim Group Binani Cement JP Associates 10.0 5.0
Exhibit 7: ...and has become the second largest cement producer after the Holcim Group in northern region
20.0 15.0
Cem Capacity (mn mt) Source: Company, Karvy Institutional Research
Cap utilisation (%) RHS
Capacities (mn mt) of major cement companeis in North Source: Company, Karvy Institutional Research
Expect flat EBITDA/MT in FY11 13E: Shree Cement mostly sells its cement in the northern region, where the capacity utilisation is expected to remain firm at ~90% in FY11 13E period. Hence, we expect the manufacturers in this region would be able to mostly pass on their incremental cost pressure thereby helping Shree Cement post flattish EBITDA/MT in FY11 13E period. Exhibit 8: We expect cement sales volume to grow by ~6% in FY12 13E
12.0 9.0 6.0 3.0 0.0 FY08 FY09 FY10 FY11 FY12E FY13E 40.0 30.0 20.0 10.0 0.0
Exhibit 9: Realization (Rs/MT) growth to aid flattish EBITDA (Rs/MT) growth in FY11 13E
3,400 3,150 2,900 2,650 2,400 FY08 FY09 FY10 FY11 FY12E FY13E 1,600 1,200 800 400 0
Sales Volume (mn mt) Source: Company, Karvy Institutional Research
YoY Growth (%) (RHS)
Net avg realisation Source: Company, Karvy Institutional Research
EBITDA (RHS)
Power sales provide diversification benefits: Shree Cement has been selling its surplus power that it generates (~100MW in FY11). Its subsidiary Shree Mega Power is adding 300MW of merchant thermal power plants in Rajasthan in H2FY12. We believe this would provide diversification benefits to the cement business, which is cyclical in nature. Recently, the Company bagged a six month contract for 225MW of power supply to Rajasthan State Electricity Board (SEB) at a realization of Rs. 4.35 per unit and EBITDA of Re. 1 per unit.
72
16 September, 2011
Shree Cement Exhibit 10: Sales volume to grow but realization and EBITDA (Rs/unit) to decline
2,400 1,800 1,200 600 0 FY09 FY10 FY11 FY12E FY13E 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Exhibit 11: Lower EBITDA/unit has impacted power business contribution to total EBITDA
20 15 10 5
FY09
FY10 % of Sales
FY11
FY12E % of EBITDA
FY13E
Sales (mn units) LHS EBIDTA (per unit) (RHS) Source: Company, Karvy Institutional Research
Realisation (Rs/unit)
Weak power outlook has moderated diversification benefits from power business: Outlook for power sales in Rajasthan has weakened over the last one year. Rajasthan SEB, one of the major buyers of power from companies like Shree Cement is facing financial crunch and this has reflected in lower realization for the power sellers in Rajasthan. Moreover, rise in fuel costs has led to further contraction of EBITDA/unit of power sales. As the Company has not been able to secure any long contract fuel and power sales contract, we have factored in a 50% and 60% PLF in FY12E and FY13E for the 300MW merchant power plants. We expect EBITDA/unit to decline to 65 paisa in FY13E. We believe that lower PLF and EBITDA expectations have impacted the diversification benefits to the total earnings. Revenue CAGR to slow down to 9% in FY11 13E period: Lower cement sales growth in FY11 13E period vs. the preceding three years has impacted FY11 13E revenue CAGR down to 9% vs. 38% in FY08 10 (when Shree Cement expanded its cement capacity and capitalized on strong cement demand CAGR of ~9% in the northern region). The Companys cement sales growth in FY11 13E period would be impacted by a decline in cement demand across all regions in India. Further, we expect the 300MW merchant power plants to operate at 50 60% PLF in FY12 13E period due to absence of any long term sales contract. Exhibit 12: Revenue CAGR to slow down to 9% during FY11 13E v/s 38% during FY08 10 periods.
50,000 40,000 30,000 20,000 10,000 120% 100% 80% 60% 40% 20% 0% 20% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Sales Cement (Rs Mn) Sales Clinker (Rs Mn) Source: Company, Karvy Institutional Research
Sales Power (Rs Mn) Revenue growth (%)
73
16 September, 2011
Shree Cement Declining profitability & moderated return ratios: We expect Shree Cements EBITDA to improve marginally in FY12 13E period led by increased contribution from the power sales. However, taking into consideration the strong profitability of FY10, the Companys EBITDA CAGR of 19% in FY11 13E period is dismally lower than 39% CAGR it registered in FY08 10 period. Shree Cements RoE would recover in FY13E led by an improvement in asset turn over and net margins. In FY13E RoCE would benefit from 10% YoY EBITDA growth in FY13E. Exhibit 13: EBITDA CAGR of 13% in FY11 13E Vs. +39% in FY08 10 period
16,000 12,000 8,000 4,000 50.0 40.0 30.0 20.0 10.0 FY05 FY07 FY09 FY11 FY13E EBITDA (Rs mn) Source: Company, Karvy Institutional Research EBIDTA margin (%)
Exhibit 14: Return ratios to gain recover
in FY13E
65 52 39 26 13 0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
30 24 18 12 6 0
RoE (%) Source: Company, Karvy Institutional Research
RoCE (%) RHS
74
16 September, 2011
Shree Cement Exhibit 15: Karvy Vs Consensus

Karvy
Consensus
Diff (%)
39,757 47,711
42,119 50,486
6% 5%
8,945 9,847
10,499 12,525
15% 21%
2,005 5,089
2,296 4,731
13% 8%
Key Risks
Upside Risks: x x x Higher than estimated demand growth can result in higher realization and sales volume than estimated. Decline in pet coke prices and fuel prices. Higher merchant power rates in the spot markets and/or securing of long term contracts which would in turn increase PLF of its merchant power plants.
Downside Risks: x x x Significant increase in fuel costs from current levels. Lower than estimated off take in the cement and power businesses thereby negatively impacting sales volume and prices. Lower than estimated PLF and realization in the merchant power business.
75
16 September, 2011
Shree Cement Exhibit 16: Profit & Loss Statement

Y/E Mar (Rs in mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non operational income / Extra ordinates PBT Tax PAT / Net profit reported Adjusted PAT / Net profit % growth EBITDA/MT (Rs) cement
FY09 27,329 28.6 17,615 9,714 10.6 2,054 7,660 772 651 (309) 7,539 1,449 5,780 6,089 103.5 1,122
FY10 36,509 33.6 21,398 15,111 55.6 5,704 9,407 1,291 1,197 (634) 9,313 1,918 6,761 7,395 21.4 1,398
FY11 35,122 (3.8) 26,266 8,856 (41.4) 6,758 2,099 1,753 1,243 (485) 1,588 (994) 2,097 2,582 (65.1) 718
FY12E 39,757 13.2 30,813 8,945 1.0 6,328 2,617 1,652 1,300 (533) 2,265 260 1,472 2,005 (22.3) 713
FY13E 47,711 20.0 37,863 9,847 10.1 3,389 6,458 1,610 1,353 (640) 6,201 1,112 4,449 5,089 153.8 707
Exhibit 17: Balance Sheet

Y/E Mar (Rs in mn) Cash & equivalents Debtors Inventory Loans & advances Investments Gross Block Net Block CWIP Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders equity Reserves & surpluses Total networth Net working capital Net debt (cash)
FY09 13,171 583 1,545 3,327 22,559 6,269 4,789 337 30,020 2,801 14,962 157 17,920 348 11,752 12,100 2,654 1,791
FY10 20,086 824 3,581 2,053 29,509 7,520 9,674 662 44,401 4,581 21,062 425 26,068 348 17,984 18,332 1,878 976
FY11 15,176 1,082 4,042 1,893 40,421 11,671 10,278 1,005 45,148 5,152 20,079 58 25,289 348 19,510 19,859 1,865 4,903
FY12E 13,961 1,089 4,357 3,060 48,421 13,343 2,000 921 38,730 3,807 14,300 108 18,215 348 20,167 20,515 4,699 339
FY13E 20,169 1,307 5,229 4,510 49,873 11,406 4,000 820 47,441 4,037 19,300 158 23,495 348 23,597 23,946 7,008 (869)
76
16 September, 2011
Shree Cement Exhibit 18: Cash Flow Statement

Y/E Mar (Rs mn) EBIT Other income (expenditure) Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity Dividend paid Cash flow from financing activities Net change in cash Closing cash balance
FY09 7,660 651 2,017 772 1,644 (1,049) (309) 6,554 (5,295) (2,538) (7,834) 1,655 (0) (326) 1,328 48 4,723
FY10 9,407 1,197 5,699 1,291 1,897 780 (634) 13,260 (11,835) (7,474) (19,309) 6,101 (0) (611) 5,489 (559) 4,164
FY11 2,099 1,243 6,761 1,753 (709) (412) (485) 8,161 (11,516) 3,958 (7,558) (983) (0) (572) (1,555) (952) 3,212
FY12E 2,617 1,300 6,328 1,652 1,000 (2,450) (533) 4,609 278 278 (5,779) (0) (324) (6,103) (1,215) 1,997
FY13E 6,458 1,353 3,389 1,610 1,562 (1,912) (640) 5,476 (3,453) (3,453) 5,000 (0) (815) 4,185 6,208 8,205

Y/E Mar (Rs mn) EBITDA margin EBIT margin Net profit margin Dividend payout ratio Net debt: equity Working capital turnover Gross block turnover RoCE RoIC RoE
FY09 35.5 30.6 22.4 6.7 0.1 9.9 1.2 28.1 57.6 64.7
FY10 41.4 29.1 20.3 7.2 0.1 18.3 1.4 24.6 50.1 48.6
FY11 25.2 9.5 7.4 22.1 0.2 16.8 1.0 15.9 29.4 13.5
FY12E 22.5 9.9 5.0 40.7 0.0 8.2 0.9 8.9 15.1 9.9
FY13E 20.6 16.4 10.7 20.0 (0.0) 6.8 1.0 16.0 29.3 22.9

Y/E Mar (Rs mn) EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) EV/MT (USD)
FY09 174.8 174.8 347.3 9.7 4.9 5.8 2.1 137
FY10 212.3 212.3 526.2 8.0 3.2 3.3 1.4 110
FY11 74.1 74.1 570.0 22.9 3.0 6.1 1.5 89
FY12E 57.6 57.6 588.9 29.5 2.9 6.4 1.4 95
FY13E 146.1 146.1 687.4 11.6 2.5 5.5 1.1 90
77
CEMENT
September 16, 2011
UltraTech Cement
Bloomberg: UTCEM IN Reuters: ULTC.BO
SELL
Initiating Coverage
Analyst Contact
Weakness in Southern & Western Regions to Drag Down Return Ratios

Largest pan India Company with strong comparative advantages UltraTech Cement became Indias largest grey cement manufacturer after the amalgamation of Samruddhi Cements asset w.e.f. 1st July 2010, thereby doubling its installed capacity to 49 mn MT. With the further acquisition of UAE based ETA Star Cement (3 mn mt capacity) in FY11, the Company became the ninth largest cement company in the world. In India, it is amongst the Top 3 manufacturers in all the regions. The Company has ~540MW of thermal CPP which meets ~80% of electricity requirements. It has been a major user of sea transportation on the western coast of India. It is investing ~Rs. 48 bn towards material evacuation and logistic infrastructure, modernization and upgradation activities. We expect these measures to increase UltraTechs operating cost efficiencies going forward. High Exposure in Southern & Western regions to impact realization growth: Over 50% of UltraTechs capacity is located in the southern and western regions, where the price discipline is holding on the most. However, the capacity utilisation in the southern region is expected to decline to 63% in FY11 13E period. Similarly, the capacity utilisation in the adjacent western region would contract to 73% in FY11 13E period. We expect that declining utilisation levels in these regions would severely affect the pricing power of the producers thereby leading to the ongoing price stability in these regions. Earnings Growth to m oderate, Return Ratios on a decline: We expect UltraTech Cements sales volume growth would moderate to ~2% YoY in FY13E despite factoring in ~83% utilisation for UltraTech in FY12 13E. We believe that declining pricing power would reduce UltraTechs ability to fully pass on incremental cost pressure in FY13E. We expect UltraTechs RoE to decline by 690 bps in FY11 13E period. Initiate Coverage with a SELL Recommendation: We value UltraTech at 7.5x its FY13 EBITDA, and we have applied a~10% discount to valuation multiple of 8.2x ascribed to the other pan India cement manufacturers ACC & Ambuja Cements). We estimate this valuation differential would exist over the next one or two years until the various logistical and infrastructural upgradation capex enhances UltraTechs asset turnover in line with that of ACC & Ambuja Cements. We initiate coverage on the stock with SELL recommendation. Our target price implies a replacement cost of US$115/MT. Exhibit 1: Key Financials (Standalone)
Year to March Operating income EBITDA EBITDA (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) FY08 55,707 17,890 32.1 80.9 45.2 23.9 14.2 FY09 64,382 17,592 27.3 78.5 31.0 18.6 14.6 FY10 71,133 20,354 28.6 87.8 26.6 17.3 13.1 FY11 133,559 26,884 20.1 51.4 19.9 13.7 22.3 FY12E 168,044 35,169 20.9 63.7 15.3 11.2 18.0 FY13E 178,809 35,237 19.7 61.7 13.1 10.1 18.6
Recommendation
CMP: Target Price: Upside (%) Rs1,149 Rs972 15%
Stock Information
Market Cap. (Rsbn/US$mn) 52 week High/Low (Rs) 3m ADV Beta Sensex Nifty 314/6,608 1198/883 0.64 16,877 5,076
Rs168mn/US$3.5mn

Absolute Rel. to Sensex 1M 12.7 12.4 3M 11.2 18.1 12M YTD 11.5 6.0 24.9 23.7
Performance
22,000 20,000 18,000 16,000 Nov 10 May 11 Sep 10 Mar 11 Sep 11 Aug 10 Jan 11 Jun 11 Jan 11 Jul 11 1200 1100 1000 900
Sensex (LHS)
UltraTech Cem. (RHS)

12 10 8 6 4 2 0 May 09 Mar 10 Feb 08 Jul 08 Dec 08 Apr 07 Sep 07 Oct 09
16 September, 2011
UltraTech Cement

Net sales
Optg. Exp (Adj. OI.)
EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT EPS (Rs) DPS (Rs) Profit and Loss Ratios EBIDTA Margin % Adj Net Margin % Valuation Multiples P/E (X) EV/EBIDTA (X) EV/MT (US$)
FY10 71,133 50,779 20,354 3,881 1,175 15,882 4,949 10,932 87.8 6.0 28.6 15.5 13.1 15.3 294
FY11 133,559 106,675 26,884 7,603 2,771 17,916 3,820 14,097 51.4 6.0 20.1 10.7 22.3 11.5 134
FY12E 168,044 132,875 35,169 8,859 3,167 24,943 7,483 17,460 63.7 6.0 20.9 10.4 18.0 8.7 133
FY13E 178,809 143,573 35,237 9,909 3,128 24,149 7,245 16,905 61.7 7.0 19.7 9.5 18.6 8.6 132
Company Background UltraTech is Indias largest cement producing company with a production capacity of 49 mn MT. There are a total of 11 integrated cement plants and 11 split grinding units across India. It is also one of the major producers of Ready Mix Concrete and White Cement. It also acquired UAE based ETA Star Cement, a 3 mn MT cement capacity company. UltraTech originated as a 100% subsidiary of L&T, which after a series of transitions was finally acquired by Grasim Industries. In FY11, Grasim transferred the total cement business under UltraTech and hence became a holding company with 60.3% stake in UltraTech. The Company has 540MW of thermal CPP that meets ~80% of UltraTechs power requirement. It also has five captive sea terminals, which facilitate low cost transportation along the west coast ports in India and to its subsidiary in Sri Lanka. Cash Flow (Standalone)

Total Assets Net Fixed Assets Current Assets Other Assets Total Liabilities Networth Debt Current Liabilities Deferred Tax Balance Sheet RoE % RoCE % Net Debt/Equity Equity/Total Assets P/BV (X) FY10 83,668 52,010 30,891 767 83,668 46,087 16,045 12,991 8,545 26.6 17.3 (0.0) 0.6 3.1 FY11 201,562 125,056 72,415 4,091 201,562 106,660 41,446 34,539 18,917 19.9 13.7 0.0 0.5 3.0 FY12E 219,982 135,592 80,000 4,391 219,982 122,197 42,280 36,621 18,884 15.3 11.2 (0.0) 0.6 2.6 FY13E 233,357 148,009 80,957 4,391 233,357 136,857 40,068 37,580 18,852 13.1 10.1 (0.0) 0.6 2.3
FY10 PBT Depreciation Tax Change in Wkg CF from Capex Investments CF from Investing Change in Equity Change in Debt Dividends & others CF from Financing Change in Cash 15,882 3,711 (3,870) (900) 14,823 (2,592) (6,348) (8,940) 0 (5,371) (724) (6,095) (212)
FY11 17,916 34,056 5,351 (1,928) 46,210 (107,101) (20,608) (70,084) 1,498 25,401 (2,359) 24,540 667
FY12E 24,943 8,859 (7,952) 1,608 27,457 (19,395) (1,472) (20,866) (0) 834 (1,911) (1,077) 5,514
FY13E 24,149 9,909 (7,277) (1,162) 25,619 (22,327) (3,000) (25,327) (0) (2,212) (1,924) (4,135) (3,842)
Shareholding pattern (Jun 2011)

Public & others, 15.47 DII, 7.81 Promoters, 63.35
Regional capacity distribution

Central, 11% West, 26%
North, 23%
FII, 13.37 East, 14% South, 26% Source: Company, Karvy Institutional Research
79
16 September, 2011
UltraTech Cement
Key Assumptions
We expect realization growth to moderate in FY13E as producers pricing power decline. The Companys operating costs would remain high during FY12 13E led by increase in fuel and freight expenses. While we expect EBITDA/MT to improve in FY12E, we believe that lower pricing power would result in lower EBITDA/MT and operating margin in FY13E. Exhibit 2: Key Assumptions
Rs. in mn Sales Volume (mn MT) YoY Growth (%) Net avg realization YoY Growth (%) Raw material cost YoY Growth (%) Power and Fuel cost YoY Growth (%) Freight cost YoY Growth (%) Employee cost YoY Growth (%) Other Expenses YoY Growth (%) Opex YoY Growth (%) EBITDA YoY Growth (%)
FY08 17 (3.2) 3,096 10.7 291 (16.0) 697 8.1 539 7.8 93 40.4 482 14.8 2,102 6.3 994 21.2
FY09 18 6.3 3,284 6.1 314 7.9 881 26.5 540 0.2 111 19.2 541 12.1 2,387 13.6 897 (9.7)
FY10 20 11.3 3,259 (0.8) 470 49.7 655 (25.6) 563 4.3 116 4.4 522 (3.5) 2,327 (2.5) 933 3.9
FY11 35 4.2 3,409 4.6 476 1.2 797 21.6 653 16.0 170 46.8 626 20.0 2,722 17.0 686 (26.4)
FY12E 43 4.4 3,574 4.9 507 6.5 866 8.6 685 5.0 180 5.8 588 (6.2) 2,826 3.8 748 9.0
FY13E 43 1.5 3,727 4.3 547 7.9 935 8.0 720 5.0 190 5.6 600 2.1 2,993 5.9 734 (1.8)
Exhibit 3: Sensitivity Table Impact of 1% increase in following assumptions
Impact on FY13 EBITDA (%) 0.7 4.1 (1.3) (1.1)
Impact on FY13 EPS (%) 1.0 6.0 (1.9) (1.6)
Impact on RoE (BPS) 11.6 72.7 (22.7) (19.5)
80
16 September, 2011
UltraTech Cement
Outlook & Valuation

Given the declining capacity utilisation for the cement industry as a whole during FY11 13E, the pricing power of all cement manufacturers is expected to decline. Hence, we believe that the manufacturers would not be able to pass on the incremental operating cost fully thereby leading to continued declining trends in operating margins and profitability. However, UltraTech, along with two other pan India manufacturers ACC & Ambuja Cements would deliver industry leading operating margins and RoEs. Initiate Converge with SELL Recommendation: We value UltraTech at 7.5x its FY13 EBITDA. We have applied ~10% discount to valuation multiple of 8.2x ascribed to the other pan India cement manufacturers i.e. ACC & Ambuja Cements. We estimate this valuation differential would exist over the next one or two years until the various logistical and infrastructural upgradation capex enhances UltraTechs asset turnover in line with that of ACC & Ambuja Cements. We initiate coverage with a one year target price of Rs. 972 per share with SELL recommendation. Our target price implies a replacement cost of US$115 per MT. Exhibit 5: One Year Forward EV/EBIDTA
12.0 10.0 8.0 6.0 4.0 2.0 0.0 May 07 Nov 09 Feb 06 Oct 07 Mar 08 Feb 11 Feb 11 Jul 06 Sep 05 Jan 09 Aug 08 Dec 06 Jun 09 Apr 05 Feb 06 Mar 08 May 07 Nov 09 Sep 05 Dec 06 Sep 10 Feb 11 Oct 07 Jan 09 Apr 05 Aug 08 Apr 10 Jun 09 Jul 11 Apr 10 Jul 06 Sep 10 Jul 11 Jul 11
Exhibit 4: One Year Forward EV/MT

250.0 200.0 150.0 100.0 50.0 0.0

25.0 20.0 15.0 10.0 5.0 0.0 Nov 09 Dec 06 Sep 05 Feb 06 Oct 07 May 07 Mar 08 Sep 10 Aug 08 Feb 11 Jul 06 Jan 09 Jul 11 Jun 09 Apr 05 Apr 10

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 May 07 Nov 09 Dec 06 Sep 05 Feb 06 Oct 07 Mar 08 Aug 08 Apr 05 Apr 10 Sep 10 Jul 06 Jan 09 Jun 09
81
16 September, 2011
UltraTech Cement
Investment Summary
Largest pan India cement company: UltraTech became Indias largest grey cement manufacturer after the amalgamation of Samruddhi Cements asset with effect from 1st July 2010, thereby doubling its installed capacity to 49 mn MT. With the acquisition of UAE based ETA Star Cement in FY11 UltraTech became the ninth largest cement company in the world. In India, it is present in all the five regions and is amongst the Top 3 manufacturers. Exhibit 8: UltraTechs capacities are spread across all five regions in India Exhibit 9: UltraTech is among the top 4 manufacturers in all the regions, leadership position in western region 4
West, 26% (Rank)
Central, 11%
3
North, 23%
2
East, 14% South, 26% Source: Company, Karvy Institutional Research
1 North East Central West South
Source: CMA , Karvy Institutional Research
Captive power & logistics infrastructure provide comparative advantages: UltraTech has ~540MW of thermal CPP that meets ~80% of its electricity requirements. The Company has been a major user of cement and clinker transportation through sea route on the western coast of India, which has helped the Company to control its overall logistics cost as sea route is the cheapest way of transportation. UltraTech has also investing ~Rs. 11 bn towards material evacuation and logistic infrastructure. Another Rs. 37 bn is being invested in plant modernization and upgradation activities. We believe that these measures would lead to faster turnaround during cement sales and add to operational efficiencies. High exposure in southern & western regions to impact realization growth: More than 50% of UltraTechs capacity is situated in the southern and western regions, where the price discipline is holding on the most. However, capacity utilisation in the southern region is expected to decline 63% in FY11 13E period, as against 86% in FY08 11 period. Similarly, capacity utilisation in the adjacent western region would contract by 17% points to 73% in FY11 13E period compared to FY08 10 period. We expect declining utilisation levels in these regions to severely impact producers pricing power in these two regions thereby leading to the ongoing price stability in these regions.
82
16 September, 2011
UltraTech Cement Exhibit 10: Capacity utilisation declining in the western region led by higher capacity addition
25 20 15 10 5 FY08 FY09 FY10 FY11 FY12E FY13E
Capacity Utilisation (%) RHS Consumption Growth (%) Capacity Growth (%)
Exhibit 11: Southern region is worst hit as utilisation level to drop to ~63% during FY11 13
30 25 20 15 10 5 (5) FY08 FY09 FY10 FY11 FY12E FY13E 100 90 80 70 60 50
100 90 80 70 60 50
Capaity Utilisation (%) RHS Consumption Growth (%)
Capacity Growth (%)
Source: CMA , Karvy Institutional Research
Earnings growth to moderate, return ratios on a decline: We expect UltraTechs sales volume growth to moderate to ~2% YoY in FY13E despite factoring in ~83% utilisation for the Company in FY12 13E. We believe that declining pricing power would reduce UltraTechs ability to pass on incremental cost pressure fully in FY13E. Exhibit 12: Sales volume growth to moderate in FY13E Exhibit 13: UltraTechs realization, opex and EBITDA trends (Rs/mt)
4,000 3,500 3,000 2,500 2,000 FY08 FY09 FY10 FY11 Opex FY12E FY13E EBITDA (RHS) 1,600 1,200 800 400 0
50 40 30
15.0 10.0 5.0
20 10 0 FY08 FY09 FY10 FY11 FY12E FY13E Sales Volume (mn mt) Source: Company, Karvy Institutional Research 0.0 (5.0) YoY Growth (%) RHS
Net avg realisation
We expect UltraTechs RoE to decline by 690bps and RoCE by 360bps during FY11 13E. Exhibit 14: UltraTechs operating margins to remain flat during FY11 13E, impacting EBITDA growth
40 30 20 10 35 30 25 20 15 10 5 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Exhibit 15: Subsequently, return ratios to continue to trend downwards

60 50 40 30 20 10 0 FY12E FY13E FY06 FY07 FY08 FY09 FY10 FY11 0 20 40 60
EBITDA (Rs bn)
EBITDA Margin (%) RHS
RoCE (%) Source: CMA, Karvy Institutional Research
RoE (%)
83
16 September, 2011
UltraTech Cement Revenue diversification from other value added cement products: UltraTech sells white cement, putty and Ready Mix Concrete (RMC) which form ~14% of its total sales. White cement and putty are premium products and command stable pricing. Similarly, RMC business uses grey cement as its input component. Hence, these three segments provide diversification benefits. Internal accruals can fund ongoing capex: UltraTech has a total capex of Rs. 110 bn in FY12 13E period. These include Rs. 52 bn towards 4.8 mn cement plant in Raipur, (Chhattisgarh), 4.4 mn MT plant in Malkhed (Karnataka) and ~120MW of thermal CPP and waste heat recovery plants. With an expected CFO of Rs. 53 bn in FY12 13E period and a current cash balance of Rs. 36 bn, most of the capex can be met through internal accruals. We expect UltraTech become net cash flow positive in FY12E. Exhibit 16: Expected to become net cash flow positive in FY12E
0.6 0.4 0.2
FY08 (0.2)
FY09
FY10
FY11
FY12E
FY13E
Nebt D:E Source: Company, Karvy Institutional Research
84
16 September, 2011
UltraTech Cement Exhibit 17: Karvy Vs Consensus (Standalone)

Karvy
Consensus
Diff (%)
168,044 178,809
172,207 193,132
2% 7%
35,169 35,237 17,460 16,905
37,551 42,269 19,056 21,897
6% 17% 8% 23%
Key Upside Risks

85
16 September, 2011
UltraTech Cement Exhibit 18: Profit & Loss Statement (Standalone)

Y/E March (Rs mn) Operating income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non operational income / Exceptional items Extra ordinates PBT Tax PAT / Net profit reported Adjusted PAT / Net profit % growth EBITDA/MT (Rs)
FY09 64,382 15.6 46,790 17,592 (1.7) 3,230 14,362 1,255 507
FY10 71,133 10.5 50,779 20,354 15.7 3,881 16,473 1,175 584
FY11 133,559 87.8 106,675 26,884 32.1 7,603 19,281 2,771 1,407
FY12E 168,044 25.8 132,875 35,169 30.8 8,859 26,310 3,167 1,800
FY13E 178,809 6.4 143,573 35,237 0.2 9,909 25,327 3,128 1,950
13,614 3,844 9,770 9,770 (3.0) 897
15,882 4,949 10,932 10,932 11.9 933
17,916 3,820 14,097 14,097 28.9 686
24,943 7,483 17,460 17,460 23.9 748
24,149 7,245 16,905 16,905 (3.2) 734

Y/E March (Rs mn) Cash & equivalents Debtors Inventory Loans & advances Investments Gross Block Net Block CWIP Miscellaneous Total assets Current liabilities & provisions Debt Other liabilities Total liabilities Shareholders equity Reserves & surpluses Total networth Net working capital Net debt (cash)
FY09 10,940 1,939 6,920 3,816 453 74,010 46,357 6,773 167 77,365 12,531 21,416 7,397 41,344 1,245 34,776 36,021 144 10,477
FY10 17,004 2,158 8,217 3,511 529 80,781 49,417 2,594 238 83,668 12,991 16,045 8,545 37,581 1,245 44,842 46,087 896 (959)
FY11 36,276 6,023 19,565 10,539 2,475 179,423 114,003 11,053 1,628 201,562 34,539 41,446 18,917 94,902 2,740 103,920 106,660 1,588 5,170
FY12E 42,962 5,064 23,020 8,938 2,775 199,923 125,644 9,948 1,631 219,982 36,621 42,280 18,884 97,785 2,740 119,457 122,197 401 (682)
FY13E 42,120 5,389 24,494 8,938 2,775 222,548 138,359 9,649 1,632 233,357 37,580 40,068 18,852 96,500 2,740 134,117 136,857 1,242 (2,051)
86
16 September, 2011
UltraTech Cement Exhibit 20: Cash Flow Statement (Standalone)

Y/E March (Rs mn) EBIT Other income (expenditure) Depreciation Interest Tax (Incr) / decr in net working capital Others Cash flow from operating activities (Incr) / decr in capital expenditure (Incr) / decr in investments Others Cash flow from investing activities Incr / (decr) in borrowings Issuance of equity Dividend paid Others Cash flow from financing activities Net change in cash Closing cash balance
FY09 14,362 507 2,932 1,255 1,994 (947) 13,605 (8,226) (8,639) (16,865) 4,011 0 (724) 3,288 29 1,035
FY10 16,473 584 3,711 1,175 3,870 (900) 14,823 (2,592) (6,348) (8,940) (5,371) 0 (724) (6,095) (212) 824
FY11 19,281 1,407 34,056 2,771 (5,351) (1,928) (9,184) 46,210 (107,101) (20,608) 57,625 (70,084) 25,401 1,498 (864) (1,495) 24,540 667 1,491
FY12E 26,310 1,800 8,859 3,167 7,952 1,608 27,457 (19,395) (1,472) (20,866) 834 (0) (1,911) (1,077) 5,514 7,005
FY13E 25,327 1,950 9,909 3,128 7,277 (1,162) 25,619 (22,327 (3,000) (25,327 (2,212) (0) (1,924) (4,135) (3,842) 3,163

Y/E March EBITDA margin EBIT margin Net profit margin Dividend payout ratio Net debt: equity Working capital turnover Gross block turnover RoCE RoIC RoE
FY09 27.3 23.3 15.3 7.5 0.3 443 1.0 18.6 21.3 31.0
FY10 28.6 24.2 15.5 8.0 (0.0) 79 0.9 17.3 22.1 26.6
FY11 20.1 15.7 10.7 13.6 0.0 83 1.0 13.7 18.1 19.9
FY12E 20.9 16.8 10.4 11.0 (0.0) 401 0.9 11.2 15.0 15.3
FY13E 19.7 15.3 9.5 13.3 (0.0) 141 0.8 10.1 13.4 13.1

Y/E March EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) EV/mt (USD)
FY09 78.5 78.5 289.3 14.6 4.0 18.1 5.0 316
FY10 87.8 87.8 370.2 13.1 3.1 15.3 4.4 294
FY11 51.4 51.4 389.2 22.3 3.0 11.5 2.3 134
FY12E 63.7 63.7 445.9 18.0 2.6 8.7 1.8 133
FY13E 61.7 61.7 499.4 18.6 2.3 8.6 1.7 132
87
16 September, 2011
UltraTech Cement
Institutional Equities Team

Rangachari Murlikrishnan Shridhar Iyer K. Anant Rao Uday Raval INSTITUTIONAL RESEARCH Analysts Amit K. Ahire Bhuvan Yadav Divyah Ahooja Jagadishwar Pasunoori Madhavi Arora Manoj Kumar Manish Naushil Shah Nishith Sanghvi Paresh Jain Parikshit Kandpal Prasun Kumar Raghuram Kuchi Rahul Sharma Rahul Singh Rajesh Kumar Ravi Rupesh Sankhe Sameer Pardikar Vinay Nair Yogesh Nagaonkar INSTITUTIONAL SALES Dinesh Bajaj Dipesh Jain Priyanka Ahuja R. Sriram Shabbir Dahodwala Dipesh Upadhyay Parag Shah Sriram Jagdish PRODUCTION Asim Kumar Mohapatra Vishal Randive Vijayalaxmi Moolya Editor Database Production 022 22895019 022 22895017 022 22895027 asim.mohapatra@karvy.com vishal.randive@karvy.com vijayalaxmi.m@karvy.com Sales Sales Sales Sales Sales (USA) Sales Trader Sales Trader Sales Trader 022 22895012 022 22895015 022 22895016 022 22895013 212 2674334 022 61844362 022 61844364 022 61844366 dinesh.bajaj@karvy.com dipesh.jain@karvy.com priyanka.ahuja@karvy.com sriram.rangarajan@karvy.com shabbir@karvy.com dipesh.upadhyay@karvy.com parag.shah@karvy.com sriram.jagdish@karvy.com Industry / Sector Telecom & Media MidCap Auto & Auto Ancillaries MidCap Economy Derivatives Research Technology Pharmaceuticals BFSI Infra / Real Estate Cement & Logistics MidCap Pharmaceuticals MidCap Cement & Logistics Power Telecom, Media and Oil & Gas Oil & Gas Auto & Auto Ancillaries Desk Phone 022 22895150 040 23312454 022 22895143 040 44857912 022 22895145 022 22895078 022 22895034 022 22895026 022 22895025 022 22895018 022 22895028 040 23312454 022 22895021 040 23312454 022 22895030 022 22895022 022 22895024 022 22895029 022 22895020 Email ID amit.ahire@karvy.com bhuvan.yadav@karvy.com divyah.ahooja@karvy.com jagadishwar.p@karvy.com madhavi.arora@karvy.com manojkumar.m@karvy.com naushil.shah@karvy.com nishith.s@karvy.com paresh.jain@karvy.com parikshit.kandpal@karvy.com prasun.kumar@karvy.com raghuram.kuchi@karvy.com rahul.sharma@karvy.com rahulsingh@karvy.com rajesh.ravi@karvy.com rupesh.sankhe@karvy.com sameer.pardikar@karvy.com vinaynair@karvy.com yogesh.nagaonkar@karvy.com Head Institutional Equities Head Institutional Sales Head Sales Trading & Derivatives Karvy Inc. USA (022) 22895007 (022) 22895160 (022) 61844303 (212) 2674334 muralikrishnan@karvy.com shridhar.iyer@karvy.com k.anantrao@karvy.com udayr@karvy.com
INSTITUTIONAL SALES TRADING & DEALING
88
16 September, 2011
UltraTech Cement
Stock Rating
BUY HOLD SELL : : :
Absolute Returns
>15% 5 15% <5%
For further enquiries please contact:
research@karvy.com Tel: +91 22 22895000 Disclosures Appendix
Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities.
Karvy Stock Broking Limited

Institutional Equities 2nd Floor, Regent Chambers, Nariman Point Mumbai 400 021.
Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad 500 034. Karvy Stock Broking Research is also available on: Bloomberg KRVY <GO>, Thomson Publisher & Reuters.
89

Cement Sector Analysis Report Karvy

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Cement Sector Analysis Report Karvy

Caricato da

Copyright:

Formati disponibili

16 September 2011

INSTITUTIONAL EQUITIES INDIA RESEARCH

Rajesh Kumar Ravi

Faltering Demand, Declining Pricing Power

INSTITUTIONAL EQUITIES INDIA RESEARCH

Thematic Production Discipline to Wane Off; Profitability to Decline

ACC (ACC IN)

Ambuja Cements (ACEM IN)

India Cements (ICEM IN)

Shree Cements (SRCM IN)

UltraTech Cement (UTCEM IN)

1,149 972 15 1,188/890 136

200.1 230.2 22.3 59.2 314.9

SELL SELL HOLD HOLD SELL

859 968 385 718 686

811 906 621 713 748

742 857 583 707 734

15.9 17.1 2.6 15.9 13.7

14.5 13.6 3.4 8.9 11.2

12.4 12.0 3.1 16.0 10.1

9.1 10.2 9.4 6.1 11.5

9.1 10.4 6.9 6.4 8.7

9.1 10.0 6.7 5.5 8.6

123 176 81 89 134

130 164 95 95 133

124 159 87 90 132

Source: Karvy Institutional Research

* FY11, FY12E, FY13E refers to their CY10, CY11E, CY12E financials

Cement Sector Thematic

Cement Majors Have Outperformed the Market.. 5

Demand Supply Dynamics.10

Cost Pricing Dynamics .25

Comparative Analysis of Major Cement Companies32

Cement Sector Thematic

Production Discipline Unlikely to Sustain

Initiate Coverage on Five Companies

Valuation Summary of Five Stocks

Cement Sector Thematic

Cement Majors have Outperformed the Market

Mkt cap (Rs bn) 315 232 201 149 60 27 25 23 24 12

2 yr CAGR 18 21 15 (8) 6 (8) (5) (5) 21 11

3 yr CAGR 20 28 14 (7) 4 (0) 13 (11) 17 42

(Rs) 1,149 151 1,070 70 1,715 288 319 74 101 62

Source: Companies, Karvy Institutional Research

Score of 5 implies strong driver, 1 implies weak driver

Expect Stock Prices to Decline Going Forward; Sector Outlook Negative

Capacity Utilisation (%) RHS Source: CMA, Karvy Institutional Research

Exhibit 5: Relative Valuations & Target Multiples

Source: Company, Karvy Institutional Research

* FY11, FY12E, FY13E refers to their CY10, CY11E, CY12E financials

Key Upside Risks

Summary of Companies Covered in the Report

Cement Sector Thematic

India Cements: We initiate coverage with HOLD recommendation with

Shree Cements: We initiate coverage on the stock with HOLD

UltraTech Cement: We initiate coverage on UltraTech with a SELL

Source: Companies, Karvy Institutional research

Cement Sector Thematic

Sensitivity Analysis of the Five Companies

Exhibit 8: Impact of 1% increase in the following parameters on EPS (%)

Source: Karvy Institutional Research

Source: Karvy Institutional Research

Exhibit 9: Impact of 1% increase in the following parameters on RoE (bps)