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A PROJECT REPORT ON
CEMENT SECTOR OVERVIEW(WITH SPECIAL FOCUS ON VALUATION OF ACC Ltd.)
Submitted By
Kashyap Desai
MMS IV FinanceRoll No 13
Batch 2003-2005
Project Guide
Prof. Ranjani
In partial fulfillment of the requirements for the degree of
MASTERS OF MANAGEMENT STUDIES
K.J. SOMAIYA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH
UNIVERSITY OF MUMBAI
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CERTIFICATE
This is to certify that the project entitled Cement Sector Overview (with special focus on
valuation of ACC Ltd.) is submitted in March 2005 to K.J. Somaiya Institute of
Management Studies and Research, Mumbai, by Mr. Kashyap Desai bearing Roll No. 13
in partial fulfillment of the requirements for the award of the degree of Masters of
Management Studies (M.M.S) affiliated to the University of Mumbai for the batch 2003-
2005.
Prof. Ranjani Prof. P.V. Narasimham
(Project Guide) (Director General)
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ACKNOLEDGEMENTS
Firstly, I would like to thank Prof. Ranjani for giving me such an interesting and learning
project. I would also like to thank her for her valuable guidance and help throughout the
project.
I would also like to thank my friends who have helped me in my project work.
Last, but not the least, I would like to thank the library staff of my college for all their
patience and helping me find the required materials and books.
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EXECUTIVE SUMMARY
In 1824, Joseph Aspdin, a bricklayer and mason in Leeds, England, took out a patent on
hydraulic cement that he called Portland cement because its color resembled the stone
quarried on the Isle of Portland off the British coast. Aspdin's method involved the
careful proportioning of limestone and clay, pulverizing them, and burning the mixture
into clinker, which was then ground into finished cement. Portland cement today, as in
Aspdin's day, is a predetermined and carefully proportioned chemical combination of
calcium, silicon, iron, and aluminum.
Cement is the most widely used building material on this planet. Everything from roads
to buildings, sewer systems to dams rely on cement as the key ingredient. If steel is the
edifice that builds an economy, cement is the key that supports this edifice. The
consumption of cement per capita directly indicates how fast infrastructure within a
country is coming up. Over the years, developing countries such as China and India have
seen massive increases in production capacity but the consumption has not been very
encouraging. But with these Asian giants now clocking 8% GDP growth, the global
cement scenario is about to see some vibrant activity.
India is the second largest producer of cement in the world. The cement sector in India is
highly fragmented with more than 50 plants accounting for the 110 million tons of
cement that is produced every year. The major players in the sector are ACC, GACL,
Grasim Industries, Ultratech Cemco and India Cements.
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Chapter Title Page No.
1 HISTORY OF CEMENT 1
2 GLOBAL CEMENT MARKETS 2
Introduction 2
Main Cement Markets 4
3 CHINA & CEMENT 6
Building Market 6
Cement Market 7
Market Breakdown 9
Exports, Imports & Tariffs 13
The Future 13
4 UNITED STATES & CEMENT 14
Overview 14
Slow & Steady 17
Cement Intensities 17
Home Prices 18
Construction 19
5 DOMESTIC CEMENT INDUSTRY 20
Demand Growth 20
Export Demand 22
Supply Situation 23
Domestic Prices 24
Huge Opportunity 25
Roads: Growth Momentum 26
6 ASSOCIATED CEMENT Cos. Ltd. 27
Investment Highlights 27
Pan-India Presence 27
Operating Leverage 28
Strong Market Share 29
Volume Growth 30
Modernization Efforts 31
Investment Concerns 33
Valuations 34
Financial Summary 38
7 HOLCIM: THE INDIA CONNECTIO 42
Second Largest Producer 42
In Asia-Pacific 43
Largest Country Presence 44
Sales 45
The Challenge 46
Keys Steps in Acquisition of ACC 47
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APPENDIX 49
BIBLIOGRAPHY 51
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HISTORY OF CEMENT
Ever since civilizations first started to build, we've sought a material that would bind
stones into a solid, formed mass. The Assyrians and Babylonians used clay for this
purpose, and the Egyptians advanced to the discovery of lime and gypsum mortar as a
binding agent for building such structures as the Pyramids. The Greeks made further
improvements and finally the Romans developed a cement that produced structures of
remarkable durability. Most of the building foundations in the Roman Forum were
constructed of a form of concrete, placed in some locations to a depth of 12 feet. The
great Roman baths built about 27 B.C., the Coliseum, and the huge Basilica of
Constantine are examples of early Roman architecture in which cement mortar was used.
Roman Formula. This process produced a cement capable of hardening under water.
During the Middle Ages this art was lost and it was not until the scientific spirit of
inquiry revived that we rediscovered the secret of hydraulic cement -- cement that will
harden under water. Repeated structural failure of the Eddystone Lighthouse off the coast
of Cornwall, England, led John Smeaton, a British engineer, to conduct experiments with
mortars in both fresh and salt water. In 1756, these tests led to the discovery that cement
made from limestone containing a considerable proportion of clay would harden under
water. Making use of this discovery, he rebuilt the Eddystone Lighthouse in 1759. It
stood for 126 years before replacement was necessary. Before Portland cement was
discovered and for some years after its discovery, large quantities of natural cement were
used. Natural cement was produced by burning a naturally occurring mixture of lime and
clay. Because the ingredients of natural cement were mixed by nature, its properties
varied as widely as the natural resources from which it was made.
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GLOBAL CEMENT MARKETS
With the economic prospects looking more positive since late 2003, there is a likely-hood
that the construction sector would continue the growth it has observed since the end of
2001. Even while there was a slowdown in the global economy in 2001, the global
construction activity has not shown significant signs of slowdown. But with the recent
economic recovery being observed in various parts of the world and particularly in USA
which has led to the talk of implementing a tighter monetary policy has led to the
investors being apprehensive of the future of the construction sector given its close
linkage with the prevailing interest rate. The fact that there has not been any significant
slowdown in the construction activity despite the slowdown in the global economy raises
the fear that with the current economic recovery the potential upside for the global
cement market could be restrictive.
Cement demand growthRegion Volume(2002) 2003% 2004% 2005E% 2006E% 2007E%
Western Europe 197 2.8 0 0.2 0.3 0.1
Eastern Europe 85 7.7 -0.7 2.1 2.8 3.1
North America 118 0.2 2.9 1.8 1.4 0.9
Latin America 115 1.4 -2.5 -0.8 -0.5 0.1
Middle East & South Asia 233 5.5 4.7 6.6 7.1 6.8
China 567 0.6 6.7 5.9 5.8 5.2
Japan 70 -1.1 -0.7 -1.1 -0.8 -0.9
Asia Pacific 154 8 1.5 1.4 1.9 1.2
Oceania 9 3.5 -9.6 0.8 1.1 0.9
Africa 82 2.3 4.9 5.9 6.1 5.9
WORLD 1630 2.6 2.7 3.1 3.3 2.9
The world cement demand growth is depicted in the above table. Overall for the last
couple of years US market has been resilient, while in Europe due to the economic
downturn the infrastructure works have not really picked up. At the same time with
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strong population growth and prevailing high oil prices, the Middle East & South Asia
have seen good growth and their economies seem to be relatively insulated from the
happenings in the world economy. Most of the international research houses project a
fairly positive outlook for the construction and cement industry for the year 2005. The
global cement demand is expected to grow at a slightly better rate of 3.1% in 2005
compared to last years estimated 2.7%. Taking into account the inter-regional import-
export flows, nearly 111 million tons of cement was consumed in countries other than
where they originated. Cement plants are the most saturated in North America, which
takes in 28 million tons of cement produced around the world per year. Most of the
global players are pursuing large scale modernization and de-bottlenecking programmes
to extend their capacities. The greatest numbers of idle plants lie in the former Soviet
Bloc countries. Continental isolation of this region limits its export capacity and also its
contribution is not substantial to the world commerce.
Asia Pacific region has the low capacity utilization rates (76%). It is partially sustained
by a substantial flow of exports which was virtually non-existent several years ago. The
bulk of these exports were created by multinationals those since 1998 have integrated
their Asian acquisitions into their trading networks. The other regions have satisfactory
capacity utilization rates. African countries import a substantial proportion of their
cement requirements as they lack limestone in most parts of the region.
Between now and 2007, it is projected that the production capacity of the world would
increase at a modest 5.5%, while the world demand is projected to grow at twice that rate,
resulting in an advance of 13.5% over the period. The overall capacity utilization rate is
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also expected to gain six percentage points to reach 89% between now and 2007.
Capacity utilization rates should increase everywhere, except in North America.
MAIN CEMENT MARKETS
North America: The Canadian and the American markets, despite a slight recent decline,
should continue to operate at full capacity. The nearly 26% increase in the production
capacity in the region should be absorbed by persistently brisk growth in demand (2.1%
annually) and a 20% reduction in the imports. With nearly 22 million tons to be imported
per year, the region should continue to consume a significant portion of the worlds
surplus production and therefore, it is expected that cement prices would remain at their
current levels.
Western Europe and Japan: The utilization rate of the European and the Japanese
producers are expected to remain high because of the withdrawal of capacity there.
Because of their policy of regularly closing down excess capacity, the decline in cement
demand, of roughly 0.5% to 1.0% per year, should have no meaningful impact on the
profitability levels. Therefore, it is expected that the profitability of European and
Japanese producers should remain high and they should continue to generate substantial
surplus free cash flow.
Middle East, the Indian sub-continent and Africa: The main markets in which capacity
expansion programmes are currently taking place include the Egypt, Bangladesh, India
and Iran. The utilization rates in these countries are expected to remain high because of
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the steady increase in local demands. Egypt, which is the second largest importer (5.2
million tons) in the world is expected to achieve a balance between supply and demand in
2004-05. At the same time the overall growth in demand in Africa should open other
outlets for exporters.
Asia Pacific: Sharp increase in the capacity utilization rates in Asia Pacific is expected to
provide a strong boost to the local players profitability levels, while the production
capacity is to remain unchanged between now and 2005. As per the recent Deutsche
Bank research dated April 2002, since the financial crisis, all plans to extend capacity
have been cancelled and the debt levels of the local players have been left with no room
for further development investment. In the meantime, demand has picked up again,
suggesting that manufacturers could be back to full production capacity by the year 2005.
Achieving the above would mean the manufacturers have to maintain the exports to other
regions. Better coverage of fixed costs would enable the cement companies to improve
their operating margins, as long as the local prices hold firm.
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CHINA AND CEMENT
Hand in hand with the construction boom fed by a supersonic 8% economic expansion,
the Chinese cement market is healthily galloping away at reaching new heights. As is
usually the case in China, the top end of the market is plagued by a lack of high-quality
products (rotary kiln cement) but it is only these high-quality products that are allowed
to be used in the myriads of star-scrapers that are being erected on the mainland each
year, opening vistas for foreign companies wanting to nab their share of the Chinese
market. But potential investors beware, as many an obstacle lies ahead.
BUILDING MARKET
During the next 5 years, China will see 1 billion square meters of new real estate built on
its turf each year, with an estimated 1.6 billion square meters needing renovation, feeding
Chinas ever-morphing construction sector, the 3rd largest in the country after industrial
manufacturing and agriculture.
To date an excess of 40 billion RMB of foreign capital has been pumped into domestic
real estate development, with Hong Kong investors specializing in the development itself
(for example making up more than 70% of the $9 billion in investments in Beijing since
1992) and Western companies bent on providing architectural design support (30% of
residential housing has been designed by European and American companies).
And the journey continues, as Beijing sets forth with injecting fiscal stimuli into
infrastructure projects across the nation to keep the economy chugging along at above 7%
growth this year.
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CEMENT MARKET
The story of the cement market resembles that of practically any other market on the
Chinese mainland: low-quality but low-price products, churned out by the myriads of
little township enterprises scattered across the nation - fed by cheap labor in excess
flooding the market, resulting in chronic oversupply and environmental mayhem on
account of the low technical efficiency of the equipment involved the basic overkill
story. But on the top end of the market, things are bubbling away. With the government
increasingly picky about which products to use for its infrastructure projects, higher
quality cement will be in high demand in the future.
That was the nutshell, now comes the nut and the numbers: At the onset of economic
reforms in 1978, cement output on the Chinese mainland was 65.24 million tons. Barely
7 years later China overtook the lead to become the largest producer of cement on the
planet. And in 2001, 652 million tons were churned out according to the China Statistical
Yearbook. Growth over the years appears to have fluctuated drastically, largely
dependent on the overall health of the economy. During the Asian Financial crisis, when
real estate development and construction on the mainland was hardly hit, output growth
stagnated. Overall GDP during this time also hit a low of below 5%. The 1989-90
property bubble bust also saw cement output growth evaporate in its entirety.
According to the United States Geological Survey, Chinese cement output was 576
million tons in 2000, taking up more than a third of the global market (36%). By contrast,
the United States, India, and Japan together take up less than 20% of the global pie.
As for the future, widespread sector-intern restructuring is planned, with low-grade
cement producers slowly being phased out of the market and high-grade producers taking
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their place. For future considerations, it is interesting to note that the central government
is pumping large wads of bucks into infrastructure, which currently accounts for about
40% of cement demand. Also interesting is the fact that China uses cement (instead of
asphalt) in road construction. With this in mind, the future networking of Chinas
transportation routes (especially roads) in the wake of the oncoming logistical challenges
faced by the huge country will surely offer some room for growth in the cement industry.
Ready-mix concrete manufacturers in China will be the strongest market for cement,
climbing at an annual pace of 12.9% to reach 194 million metric tons in 2008. Growth
will be driven by the government's 2004 ban on onsite concrete production, enacted to
help reduce environmental damage from onsite cement operations and improve the
overall quality of concrete used in construction.
Demand for cement used in non-building construction increased nearly 10% annually
between 1993 and 2003, benefiting from growth in government-funded infrastructure
projects such as Three Gorges. Cement demand in non-building projects is projected to
rise 7.3% annually through 2008.
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MARKET BREAKDOWN
In 1999, Beijing announced plans to close thousands of the 8,000 odd existing cement
plants on the mainland, weeding out the small ones and those relying on backward
technology. Closures have affected only those plants producing low-quality #325 and
lower grade cements, those having vertical kiln diameters smaller than 2.2 meters and/or
produce less than 30,000 tons per annum, as well as those using wet process kilns.
To get an idea of what kind of impact this will have, consider the following numbers: half
of the 8,000 plants operating in 2001 had annual capacity of less than 30,000 tons; at the
same time, vertical kilns accounted for 75% of production; and in 2000, 30% of Chinese
output was made up by #325 and lower-grade cements. The WBCSD report puts the loss
of production due to closures at roughly 100 million tons each year.
At the same time the closures send ripples through the countrys productive base, a shift
will take place towards new techniques and the production of higher-grade cements. In
2000, #425 cements made up 60% of output, whereas 10% went out to high-grade #525
cement. Both kinds will see an increase in output with the #325 phase out. The future will
see higher-grade market share increase, which relies on energy-efficient dry rotary kiln
and pre-calcinatory kiln technology, much of which is imported from abroad. China is
expected to be the worlds largest market for cement machinery at least until 2010.
Beijing plans to increase the countrys pre-disintegration kiln cement production capacity
to 60 million tons by 2006, requiring an investment of 30 billion RMB, according to the
Hong Kong Trade Development Council (TDCTrade).
It is expected that demand for higher-grade #425 and #525 cements which was
estimated at about 170 million tons in 2002 will reach 250 million tons by 2007. Given
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the fact that total cement output in China was gauged by the WBCSD report to hit 660
million tons by 2005 - a figure nearly reached in 2001 according to official statistics.
From the environmental point of view, Chinas technology shift can only be encouraged.
Cement production is very energy-intensive, with energy eating up roughly 40% of
production costs. With newer production technology, it is estimated that 15 million tons
of coal can be saved each year, thereby reducing carbon dioxide emissions by about 30
million tons, sulfur dioxide by 250,000 tons, and solid waste and dust emissions by over
5 million tons each year. Prior to the phasing out efforts, cement plants made up over
40% of total industrial particulate and about 8% of carbon dioxide emissions in the
country.
With respect to geographical production breakdown across the country, it is important to
understand that cement is a bulk commodity and transportation costs of the finished
product (cement) as well as its inputs (coal for energy, and limestone as a product input)
are significant given the overburdened and hitherto feebly networked national
transportation system. Not surprisingly, cement production tracks well against population
density. There is, however, some degree of concentration in the ship-fed coastal regions
Players
On the Dragons market, only a few dozen companies have an annual productive capacity
exceeding 1 million tons. The 4,600+ companies with sales exceeding 5 million RMB in
2001 averaged an annual output of 130,000 tons - merely 15% of the productive capacity
of most foreign firms.
Most large players on the mainland are all domestically funded firms. According to the
China Markets Yearbook, the largest one with respect to assets and revenue is by far the
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Beijing Jinyu Group. The company employed 11,000 and had total assets of nearly 6
billion RMB ($825 million) in 2003, raking in revenue of 1.6 billion RMB and earning a
profit of about 50 million RMB ranking it 14th in country along profit lines. With
respect to profits, the two largest winners are the Tangshan Jidong Cement Co. (140
million RMB in profits and 1 billion RMB in sales) and the Anhui Ningguo Cement
Factory (126 million RMB in profits with 569 million RMB in sales).
Foreign investments are playing an increasingly important role in shaping up the Chinese
market. In 1998, there were 287 foreign-invested enterprises in China, accounting for
about 3% of all cement producers and 15% of national output.
The largest foreign-funded player is the Taiwan-funded Chiahsin Jingyang Cement Co.
ranking 8th nationally in terms of profits (67 million RMB), with 2.4 billion RMB in
assets raking in 530 million RMB in revenue in 2003. Chiahsin was one of the earliest
overseas investors on the mainland crossing the straits in 1995. By 2003, annual output
had reached 2.56 million tons, and 2004 output is expected to have reached 4.8 million
tons.
Another large Taiwanese producer, Taiwan Asia Cement Company, set up operations on
the mainland in 1997 via a 95% controlling stake in Yadong Cement Works in Jiangxi.
According to TDCTrade, the company is rapidly expanding and hopes beef up output
capacity to 3.6 million tons in the near future and to 15.75 million tons within the next
tens years via 5 further cement works and 10 powder grinding plants.
Hong Kongs Ruian Group has been investing heavily in the Chongqing area over the
past years, with output of Ruian Construction in Chongqing having reached 3.5 million
tons. If all expansion plans go over well, the company will be churning out 6.5 million
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tons annually via its Chongqing operations and its new plant in Guizhou, slated to be
finished within the end of 2005.
Largest Western players in the field are the French Lafarge Group (sinking $400 million
into 12 joint ventures which churn out more than 2 million tons annually) and Swiss
Holderbank, which has invested in China by means of a controlling stake in a
Singoporean cement company. Via its Asian ventures, Holderbank has a production
capacity of 1.7 million tons and rakes in yearly revenues of roughly 500 million RMB.
The companys products have been used in many key infrastructure projects, such as the
Shanghai Nanpu Bridge, the Yangpu Bridge, the Shanghai-Nanjing Expressway, and the
Jiangyin Bridge across the Yangtse River, reports TDCTrade. Moreover, a Holderbank
subsidiary owns roughly a quarter of the shares of the Huaxin Cement Co. (Chinas 6th
largest producer by revenue), which - together with the Gezhouba Cement Company
supplies almost all the cement for Chinas ambitious Three Gorges Project.
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EXPORTS, IMPORTS, TARIFFS
China is the worlds 2nd largest cement exporter, accounting for about 17% of total
global cement trade. Note that 5.5 million tons were exported in 2003, compared with
imports of only 200,000 tons. According to the China Statistical Yearbook, 6.05 million
tons of cement were exported in 2000 (worth $190 million), growing to 6.21 million tons
in 2001 (worth $196 million).
WTO shouldnt have much of an impact on the cement industry, as tariffs on cement
rotary kilns dropped only from 12% to 10% last year and are not due to fall any further.
Tariffs on limestone imports will remain intact with WTO. However, China already has
more than 1,200 limestone mines feeding its cement market, with proved reserves of
more than 50 billion tons the largest reserves being very close to Chinas main inland
transportation vein, the Yangtze River.
THE FUTURE
Demand for cement in China is expected to advance 5.4% annually and exceed 1 billion
metric tons in 2008, driven by slowing but healthy growth in construction expenditures.
Cement consumed in China will amount to 44% of global demand, and China will remain
the world's largest national consumer of cement by a large margin.
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UNITED STATES AND CEMENT
At the start of 2004, some believed the construction industry's smooth sailing outlook
for the coming years was too good to be true. Their caution was apparently warranted.
Higher oil prices will slow overall economic activity in 2005, delaying a recovery in
nonresidential and public construction. In addition, while a continuation of relatively low
mortgage rates will prolong the boom in residential construction, inflation will run
stronger, consumer spending will be partially compromised, job gains will be smaller,
and sentiment in both the consumer and business areas will be more sedated.
In retrospect, 2004 represented a year of transition for the U.S. construction market,
according to Ed Sullivan, the chairman of Portland Cement Association in his latest
economic forecast. The strengthening economy and an increase in interest rates have set
the stage for a recovery in public and nonresidential activity. The wildcard in PCA's
forecast is oil prices.
For 2005, PCA believes construction spending will reach an inflation-adjusted level of
$745 billion, or 2.9% growth compared to $724 billion in 2004. Given that the
construction markets have been performing at near-historical peaks, these growth rates
are impressive. Through 2008, nonresidential and public spending is expected to assume
the mantel of growth leadership, as residential activity will step down to become the
growth laggard while maintaining historically strong levels.
The composition of construction activity during the 2005-08 period would be much
different than the composition of construction activity during the 2001-04 period. Until
2004, the economy had been characterized by weak economic conditions, staggering job
losses, and extremely low interest rates. These conditions led to declines in capacity
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utilization, an increase in vacancy rates, reduced state revenue collections, mammoth
state deficits, and favorable mortgage rates. These mortgage rates resulted in residential
construction as the growth leader in construction led by single-family builds.
Economic weakness and the corresponding run-up in industrial and office vacancy rates
resulted in enormous declines in nonresidential activity.
In retrospect, 2004 represented a year of transition for the U.S. construction market. It
was a year that state deficits, utilization rates, and vacancy rates stabilized and began the
healing process, setting the stage for public and nonresidential recoveries in 2005. 2004
also served to set the conditions for rising mortgage rates to materialize this year.
Tight cement supply conditions now prevail in portions of 35 states. However, not all
portions of each state are characterized by tight supplies. Where cement is in short
supply, the reasons are typically twofold: cement demand due largely to strong residential
building activity, and limited availability of ships to transport imported cement. PCA
forecasts Portland cement consumption of 112 million metric tons in 2004, a 4.4% gain
from 2003. Gains of 2.9% and 2.1% are forecast for 2005 and 2006, respectively.
Of course, when Sullivan assembled his summer forecast, a scenario was presented where
an easement in shortage conditions could potentially be achieved in 2004's fourth quarter,
assuming mortgage rates rose. In the current forecast, PCA has lowered the projected
near-term path of mortgage rates, suggesting that the vibrant single-family housing sector
will show more strength that previously expected at least through the first quarter of
2005.
Supply conditions hold the key to determining growth in the United States cement market
for 2004 and beyond. Domestic production has been stretched to its limits and inventory
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levels have been squeezed tight. Further increase from domestic operations is limited.
According to PCA estimates of capacity expansions, operating rate and inventory
assumptions, domestic supply is expected to increase by 2.3% in 2004, followed by 1.8%
and 1.7% in 2005 and 2006, respectively. These estimates reflect operating rates in
excess of 98% and, therefore, may contain modest downside risks.
Overall, PCA expects public cement demand to grow 3.8% in 2005 and 4.1% in 2006.
But this relatively optimistic outlook is tempered by supply conditions. Through the
2005-08 period, powder producers have announced plans to add roughly 11 million tons
of capacity. Total U.S. cement supply is expected to grow 4.5% in 2004 and 3.0% in
2005.
Beyond 2005, PCA has incorporated a higher TEA-21 reauthorization funding level.
PCA's previous TEA amount assumption reflected an average of the Bush administration,
Senate and House proposals, translating into a $280 billion bill beginning in FY2005. But
with the administration's apparent willingness to support a higher level of highway
funding, PCA raised its estimated level to $299 billion.
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SLOW & STEADY
According to most economic analysts, 2005 would be the beginning of an economic
recovery that would continue and strengthen through 2007, despite increasing interest
rates and sluggish job growth. It was forecasted that the next two years would not only
provide an increasingly stronger economy, but also a positive upswing for several sectors
of the building industry, including industrial, public and other nonresidential construction
markets.
The housing volume, which is one of the key driving forces in the economy, should
stabilize over the next year as opposed to the remarkable growth seen in the past two
years. A positive outlook for single-family starts currently at an all-time high and a
sustained growth rate for multifamily housing, especially condominiums are now
experiencing construction growth despite the current high vacancy rate. The current
phenomenal national homeownership rate should continue to grow steady, but possibly
slower, pace and will most definitely reach 70% by the end of the decade.
CEMENT INTENSITIES
The favorable outlook for construction activity is expected to coincide with an ongoing
increase in cement intensities, adding to overall cement demand strength. Aside from
industry-wide promotional efforts, several other factors will shape the level of cement
intensities in the near term.
First, business cycles impact nonresidential cement intensities. During cyclical
downturns, investors tend to be less committed to building large nonresidential products,
thereby reducing the cement intensity per billion dollars of construction. Investor
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retraction of the larger projects is tied to lower expected ROIs. During this period, small
projects, with lower cement intensities, tend to account for a larger share of the
nonresidential construction arena (almost 72%). As the economy recovers, the higher
expected ROIs materialize yielding a return to larger-scale projects and a recovery in
cement intensities.
A second component factored into any forecast is the improving price competitiveness of
concrete versus steel building products. Steel mill prices have increased 43.3% during the
past year. Tied to scrap shortages largely induced by a dramatic increase in demand from
China as the country undergoes a massive construction effort as it prepares for the 2008
Olympic games, these elevated steel prices are not expected to be reversed anytime soon.
As a result of the run-up in steel prices, the relative price of concrete products to steel
mill products has been cut roughly 50% of the relative price that existed in 2002. Given
enough time lag, this will lead to a substitution of cement for steel in some construction
projects. This switch is expected to be linked to smaller-sized projects with a bit more
design flexibility and a higher sensitivity to cost changes. This phenomenon will
encompass not only nonresidential activity but also public sector intensities as well.
HOME PRICES
According to Portland Cement Association estimates, if the current relative prices
between concrete and steel is sustained for a full year, nonresidential and public cement
intensities will improve adding as much as 1.5 million metric tons to nonresidential
cement demand and another 600,000 metric tons to public cement demand. Despite
implications that arose from a July 2004 National Association of Homebuilders (NAHB)
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survey, cement shortages or tight supply conditions and the resulting price hike of
concrete represent only a small portion of overall material cost increases for single-
family homes. The NAHB survey estimated that the cost of materials per new home had
gone up $5,000 to $7,000, as compared to 2003.
During the time period of 2003, concrete prices had increased 4.6%. Other building
materials including lumber, steel, gypsum, copper tubing and plastic plumbing
products all recorded double-digit annual increases compared to year-ago levels. In
fact, lumber price escalation accounts for more than half of NAHB's estimated building
material cost increase. Sullivan adds that concrete costs represent slightly more than 4.0%
of estimated overall home construction costs and less than 2.5% of the $274,000 price of
a new home as gauged by the Bureau of Census.
CONSTRUCTION
The Associated General Contractors of America (AGC) commented on the value of
construction put in place, which soared in December to an eleventh consecutive record
$1.03 trillion at a seasonally adjusted annual rate, as reported in February by the Census
Bureau. The preliminary full-year total for 2004 was $998 billion, a 9.0% increase for
2003. These numbers mark a real turnaround for nonresidential construction and show
good acceleration at. After falling for three years, private nonresidential construction
would up 4% higher than in the previous year, with December's total a solid 6 percent
higher than in December 2003. Public construction was 3% higher for the full year and
9% ahead in December.
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DOMESTIC CEMENT INDUSTRY
DEMAND GROWTH
In FY04 the Indian GDP grew by 8%, but cement growth of only 5% was below
expectation. It is normally observed that cement grows at a multiple of 1.5x GDP
growths. The subdued growth could be attributed to factors like slowdown in public
expenditure in infrastructure, as the government was in an election mode. Above normal
monsoons resulted in a virtual slowdown in construction activity during the monsoon
months from June-September 2004. The slowdown was partially, also due to the high
base of the previous year, where cement industry grew by 8% against a GDP growth of
5%. In FY05 though cement demand trends have been good in most markets. Overall
demand for the period April 2004 - January 2005 has grown by 7.5% Y-o-Y. We estimate
that domestic demand growth for the full year is expected to be 6.5% Y-o-Y in FY05 and
about 7% Y-o-Y in FY06. Housing demand continues to be strong due to low interest
rates, affordable real estate and easy availability of finance. Infrastructure creation has
slowed a little in the past few months, particularly in projects like the Golden
Quadrilateral highway project, but is expected to accelerate in the coming months along
with other infrastructure projects.
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Monthly cement dispatches and prices
Cement price cycles caused by oversupply
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EXPORT DEMAND
In the last four years, cement exports have remained quite high at around 3 to 3.5 million
tonnes per annum. This year is no exception, and based on current trends, exports from
India could touch around 4 million tonnes in FY05, a growth of 19% Y-o-Y. Clinker
exports on the other hand have grown quite rapidly from 1.8 million tonnes in FY02 to
5.6 million tonnes in FY04. Based on the current run-rate, clinker exports should grow by
4% Y-o-Y to 5.9 million tonnes in FY05. The additional piece of good news is that
export prices have substantially improved in FY05. Average cement export prices are
around 33% higher Y-o-Y at US$40/tonne, whereas clinker export prices are around 40%
higher Y-o-Y at around US$28/tonne. India's key export markets are Nepal, Sri Lanka,
Bangladesh and the Middle East, which is experiencing an oil price driven construction
boom.
Cement & Clinker exports a rising trend
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SUPPLY SITUATION
Past boom periods for cement have been cut short due to rapid supply creation by a host
of producers. This time around, although producers are now announcing new capacities,
they are still few and far between. Our analysis shows that about 6 million tonnes of new
capacity will be created in FY05 and about 8-9 million tonnes in FY06. Most o f the
capacity creation has bee n announce d by larger producers. As Indias demand is
growing by around 9-10 million tonnes every year and is estimated to reach about 121
million tpa in FY05, some amount of new capacity is required.
Supply is picking up
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DOMESTICS PRICES
Cement prices across the country recovered from January 2004 onwards and the price
momentum is sustaining even today. We believe that pricing momentum was due to
improved demand conditions in certain pockets like Gujarat, Uttar Pradesh and
Rajasthan, which led to an appreciable price increase in these parts. Apart from this, in a
number of regions, producers resorted to controlled dispatches in order to regulate supply
and maintain prices; this was mostly viewed in the Southern parts. However, lack of
demand growth at the end of FY04 put the price sustainability in question.
In FY05, the combination of the above (strong demand & slow supply creation), has spelt
good news for prices. Average prices have been particularly strong on a Y-o-Y basis in
northern and western India during the April 2004 to January 2005 period. Prices have
been quite steady in east India, and in south India, prices have begun to rise in recent
weeks. Overall, we expect prices to rise gradually in almost all markets in the coming
months.
Average Cement Prices (per 50kg bag)
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HUGE OPPORTUNITY
The infrastructure sector covers transportation, communication, electricity and other
services such as water supply and sanitation and solid waste management. The lack of
adequate infrastructure has not only constrained the countrys economic growth but also
entailed significant costs in terms of welfare loss. The Government of India (GoI) has
realized that high gross domestic product (GDP) growth (8% projected in the 10th five-
year plan) is not possible without improving the countrys infrastructure. Accordingly, it
has given a clear thrust to infrastructure development in its recent budgets. The 2004-05
budget also clearly accords high priority to infrastructure investments. After the brisk
implementation of highway projects, the government has started emphasizing other core
sectors such as power. We expect infrastructure investments to increase significantly in
the coming years, which will translate into strong order flows for construction companies.
In line with its commitment to boost infrastructure-spending, the government has also
explored various routes to facilitate investments. According to industry estimates, the
investment outlay for infrastructure will be close to Rs 3919 billion during 10th plan. The
segment-wise break-up of this outlay is given below.
SectorInvestment
(Rs. Bn)
Cement&Construction
Component
Airports 129 42%
Ports 169 50%
Hydel Power 278 70%
Railways 606 42%Roads 859 100%
Tourism 29 55%
Urban Infrastructure 1849 60%
Total 3919 66%
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ROADS: GROWTH MOMENTUM TO ACCELERATE
Roads carry 85% of the passenger traffic and 70% of the freight traffic in the country.
While highways account for only 2% of the entire road network, they account for around
40% of the traffic. The government has taken a series of steps to set the stage for a
quantum leap in Indias road system. These combine new institutional arrangements,
adopting international standards in highway engineering, and a self-financing revenue
model comprising tolls and a cess on fuel. Already, this segment has been a huge growth
trigger for construction companies as the government has made considerable progress in
implementing its plan to construct 13,146 km of national highway at a cost of Rs 540
billion (1999 estimate), 356 km of roads connecting the countrys ports, and 777 km of
other important roads.
Golden
Quadrilateral
NS-EW
Corridor
Port
ConnectivityOthers
Total by
NHAI
Total Length 5846 7300 356 777 14279
Already 4-laned 3038 638 69 194 3939
Under Implementation (kms) 2808 425 229 121 3583
Contracts under Implementation 76 21 6 3 106Balance Length (kms) --- 6211 58 462 6731
In the last four years, the government has implemented the Golden Quadrilateral project
as per schedule. The self-financing revenue model has ensured the smooth funding and
timely execution of this and other road projects. With 6731 km of road projects still to be
awarded, we expect orders inflows to accelerate, going forward. The road sector is likely
to attract the second-highest investment of close to Rs 859 billion in the 10th Plan (2002-
07). Moreover, the cement & construction component in investments in this sector is the
highest (close to 100%), resulting is the largest flows to construction companies.
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ASSOCIATED CEMENT COMPANIES LTD.
INVESTMENT HIGHLIGHTS
ACC is India's largest cement company with an all India presence. Its key focus in the
last few years has been to cut costs and modernize its assets. Holcim's expertise should
help trim costs further. It is also expanding capacity at a low cost. All this will hold it in
good stead with a buoyant outlook ahead for the cement sector. The recent share price
performance has been driven by Holcims open offer and rumours that there could be a
competing bid.
A PAN-INDIA PRESENCE
ACC's plants are well distributed all over India, which gives it an advantage over most
other cement companies which do not have adequate diversification and can be
negatively impacted by adverse regional trends. For example, although prices and
demand have been quite strong in other regions during April-December 2004, the south
had been a laggard for most of the year. Several south-based companies reported losses
during 3Q FY05, whereas ACC despite a southern presence posted a 241% jump in 3Q
FY05 net profit at Rs536 million. The good news is that prices in South India have also
begun to pick up since early 2005.
ACCs top markets (in million tonnes)
State Demand in
Apr-Dec 04
% Y-o-Y
change
Demand
in FY04
% Y-o-Y
change
ACC
sales
Market
Share(% )
Uttar Pradesh 10.51 7.0 13.40 5.2 2.39 17.8
Maharashtra 11.17 5.1 14.69 3.7 2.17 14.7
Karnataka 5.57 -8.9 8.23 2.5 1.80 21.8
Punjab 3.99 -0.5 5.40 2.8 1.68 31.1
West Bengal 4.38 6.6 5.78 12.0 1.02 17.6
Kerala 4.46 4.5 5.82 30.4 0.92 15.8
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Another way to look at ACC's markets is to see in which states it sells most of its cement.
The figures below show that ACC sells 66% of its cement in 6 states which are well
distributed geographically. These states are amongst the ten largest cement consuming
states in India with highest potential for robust growth.
State-wise sales (FY04)
Kerala
6% West Bengal
7%
Punjab11%
Karnataka
12%
Maharashtra
14%
Uttar Pradesh
16%
Others
34%
OPERATING LEVERAGE IN BETTER PRICING ENVIRONMENT
Cement prices have been quite strong this year and we believe the outlook for cement
prices is promising. We expect cement prices to rise in the coming months based on the
assumption that the current supply creation is inadequate to meet the robust growth in
demand. For ACC it is estimated that average cement prices will rise by 8.5% in FY05
and 7.0% in FY06.
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STRONG MARKET SHARE HELPS IN ROBUST PRICING
ACC has a strong presence in several markets. Its own market share is around 18% in
markets such as Uttar Pradesh and Bihar, 22% in Karnataka and 31% in Punjab. It has a
close relationship with GACL, which owns 14% of ACC. This relationship should
continue because even after Holcim acquires management control in ACC (assuming the
open offer is successful), GACL will continue to be the part owner of ACC at least for
the next 2-3 years. The combined market share with GACL is even stronger - 57% in
Punjab, 85% in Himachal Pradesh and around 33% in Maharashtra and West Bengal.
Less fragmented markets help in keeping prices robust, and also make it easier for prices
to rise upwards.
Presence in Key Markets
State
Consumption
(FY04) ACC(% ) GACL(% ) Total(% )
Maharashtra 14.69 14.7 19.1 33.8
Uttar Pradesh 13.40 17.8 3.6 21.4
Karnataka 8.23 21.8 0.0 21.8
Kerala 5.82 15.8 0.1 15.9
West Bengal 5.78 17.6 14.8 32.4
Madhya Pradesh 5.57 10.9 4.7 15.6Punjab 5.40 39.1 25.7 64.8
Bihar 3.13 18.9 0.0 18.9
Himachal Pradesh 1.38 41.6 43.6 85.2
Uttaranchal 1.36 27.1 10.8 37.9
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VOLUME GROWTH AT LOW CAPEX
In addition to better prices it is also expected that there would be volume growth of 8.5%
and 9% in FY06 and FY07 respectively to contribute to a 37% EPS growth in FY06 and
23% in FY07. However, it is possible for ACC to surpass this volume growth if domestic
demand growth is stronger than estimated.
ACC is currently expanding its facilities at two locations which are expected to be
completed by April 2005. At its northern plant in Gagal (in Himachal Pradesh) it is
expanding cement grinding capacity by 1 million t.p.a. at a cost of Rs700 million. This
plant already has a freight advantage to markets where prices are quite robust. ACC also
gets attractive tax benefits for this plant.
Additionally, capacity is being enhanced by around 1 million t.p.a at its only remaining
wet process plant in Chaibasa in eastern India. The Rs2.9 billion capex also involves
setting up of a 15 MW captive power plant, which along with better economies of scale
will mean lower production costs at this plant. Upon completion of both plants, ACC's
consolidated capacity will rise by 11% to almost 20.2 million t.p.a. by April 2005.
In the medium-term, ACC is also planning to de-bottleneck its capacity by 0.9 million
t.p.a at Lakheri in north India. The capex of Rs2.6 billion also includes a 25 MW power
plant and is expected to be completed in mid-2006. The new capacities are being set up at
a low capex of approximately US$50/tonne.
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MODERNIZATION EFFORTS
In the three-year period from FY02 to FY04, ACC's capacity remained steady at 16
million tonnes and its focus was on cost cutting and restructuring. The benefits of this are
now flowing through as can be seen in the below which shows average cement prices and
ACC's quarterly PBT. Until FY01, sharp reduction in cement prices in some quarters
resulted in losses by ACC at the PBT level. However, since then, even though cement
prices have declined (as in mid-2002 and 2003), ACC managed to report quarterly profits
at the PBT level. The graphs below give several examples of ACC's great progress in
cutting costs. By FY04, ACC reduced its power consumption by 13% (to 89 kWh per
tonne of cement) and coal consumption by 10% (to 775 kcal per kg of clinker) over a six-
year period. These figures are in line with the best in India. It has reduced its manpower
by 30% during the same period to 9,115 with a substantial improvement in labour
productivity.
Another focus area is captive power. ACC already has 65 MW of diesel generating
capacity and 155 MW of coal-based capacity. It recently got court approval to buy back a
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75 MW plant from Tata Power (at Rs2.4 billion), thus taking its total coal-based capacity
to 230 MW. All its current expansions include some amount of in-house coal-based
power, which will help ACC cut costs in the coming years as it reduces its dependence on
grid power. ACC should be able to benefit further once Holcim acquires management
control of ACC. Holcim believes it can add value to ACC in areas such as use of
alternative fuels, alternative raw materials and for improving plant fitness. Holcim has
reiterated that it will focus on ACC's core cement business and plans to exit non-core
investments such as Everest Industries, a producer of fibre cement products, in which
ACC has a 76% stake.
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INVESTMENT CONCERNS
A key reason for the buoyancy in Indian stock prices has been substantial inflows by
Foreign Institutional Investors (FIIs). In ACC's case the foreign investment level for
shareholding of 24% has been reached. There can be no fur ther buying of the ACC stock
by FIIs unless they can get RBI permission. This could slow down further stock price
appreciation, unless the limit is increased. However, there is a possibility that once
Holcim takes control of ACC they could raise the FII limit.
In our view the current cement outlook is quite robust. Prices are expected to rise in a
scenario of inadequate supply creation and demand growth of 7-8%. However, a sudden
slowdown in domestic demand (due to a poor monsoon for instance) or lower exports,
could mean increased supplies of cement in the domestic markets and lead to price
weakness. ACC, which is relatively more sensitive to rising cement prices, would also
suffer a relatively greater adverse impact in a scenario of falling prices.
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In its public announcement to the shareholders of ACC, Holcim has stated that it has
entered into various agreements with the objective of taking management control of ACC
through Ambuja Cement India Ltd (ACIL). The acquisition of shares in ACC would be
completed only if the composite FIPB approval is received. The agreement provides that
if the said FIPB approval is not received by 30 April 2005, all agreements would stand
terminated, unless extended by Holcim or GACL. In case the Holcim acquisition does not
come through it could be a short-term negative for the company.
VALUATIONS
ACC's relatively lower efficiency in the past has resulted in wide swings in its
profitability and sometimes resulted in a loss. As a result there have been times when
using PE as an indicator to buy ACC would not have been useful as the best time to buy
the stock would be before the industry recovers and when it appears expensive on a P/E
basis. Hence, we have examined ACC on other valuation parameters, although
EV/EBITDA is our preferred metric. Even though the easy money in ACC has been
made, we believe that a more efficient ACC, with expanding volumes and the best market
mix, will show an upside from current levels, particularly in a scenario of rising cement
prices.
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EV/EBITDA OFFERS UPSIDE
According to most analysts, EV/EBITDA is the best valuation parameter to get a
perspective on ACC's valuation. It is better than P/E, because in the last 10 years, since
April 1995, ACC has made losses or minimal profits on three occasions. The swings in
profitability have been because of ACC's relatively lower efficiencies in the past. Also as
an older company it has benefited less than some of its peers from sales tax incentives. Its
increased focus on cement also meant it could not rely on diversified businesses to rescue
it at times when the cement outlook was poor.
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EV/EBITDA & EBITDA MARGINS
The chart below shows the relationship of ACCs rolling 1-year forward EV/EBITDA
and its EBITDA margin. EV/EBITDA has tended to move in line with ACCs EBITDA
margin. In the period until March 2000, ACCs EV/EBITDA ranged from around 14x to
25x. With an improvement in its efficiency since April 2000, EV/EBITDA has settled in
a range of 8x to 15x, which gives a mean 10.5x for the period April 2000 Jan 2005.
For ACC, EV/EBITDA is a better valuation tool than P/E.
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AVERAGE EV/EBITDA OVER THE PAST 10 YEARS HAS BEEN 13.4X
ACC's average EV/EBITDA over the past ten years, which encompasses two cement
cycles, has been 13.4x. More recent trends (since FY01) give a mean of 10.5x. At the
current price of Rs363, it trades at 9.5x for FY06E. We expect valuations to trend up
based on ACC's improving efficiencies, and the improving cement industry outlook. At
our target price of Rs450, ACC's EV/EBITDA would be 11.4x for FY06E and 9.2x for
FY07E. ACCs P/E in the last four years has been quite volatile ranging between 10x to
more than 25x. More recently it has settled between 10x and 17x. On our target price of
Rs450, ACC would trade at a consolidated P/E of 17x for FY06E.
Rolling 1-year forward PCF should keep rising to reach close to its mean of 14x. At the
target price of Rs450, PCF would be 12.7x.
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Financial Summary: Profit & Loss Statement (Rs. MN)
Particulars FY04 FY05E FY06E FY07E
Cement Cpacity (mn tpa) 16.1 16.7 18.7 19.6Cement Sales (mn tonnes) 14.4 15.4 16.7 18.2
Rs/tonne 1890 2050 2194 2325
% growth 4.6 8.5 7.0 6.0
Cement-sales 27263 31551 36635 42321
Other Sales 5582 7231 8094 8851
Total Sales 32845 38782 44730 51172
Net Sales 32733 38766 44713 51154
Purchaseof cement 1843 2311 2600 2700
Raw Materials 4861 5851 7091 8622
Power&Fuel 7441 7833 9026 10226Freight 5381 5825 6632 7653
Other Costs 9373 10327 11050 11966
Total Expenditure 28899 32146 36398 41166
EBITDA 3834 6620 8315 9988
Other Income 1505 800 900 900
Depriciation 1769 1917 2061 2244
Interest 929 934 889 829
PBT 2642 4569 6264 7815
Tax 536 1416 1942 2501
Tax Rate 20.3 31 31 32PAT 2105 3153 4322 5314
Extraordinary Items -103 180 0 0
Reported PAT 2002 3333 4322 5314
EPS 11.8 17.4 23.9 29.4
CFPS 21.8 28 35.3 41.8
Dividend 800 1326 1632 1836
Payout(%) 38.0 42.0 37.7 34.5
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Financial Summary: Balance Sheet (Rs. MN)
Particulars FY04 FY05E FY06E FY07E
Share Capital 1779 1808 1808 1808
Reserves & Surplus 11409 13938 16629 20107
Net Worth 13188 15746 18437 21915
Secured Loans 10401 8401 6901 4901
Unsecured Loans 3771 3771 3771 3771
Total Debt 14173 12173 10673 8673
Deferred Tax Liability 2752 3346 3973 4754
Total Liabilities 30113 31265 33082 35342
Gross Block 37898 41452 45302 48892Less: Depreciation -14141 -16058 -18119 -20363
Net Block 23756 25394 27183 28529
WIP 965 1000 1000 1000
Fixed Assets 24721 26394 28183 29529
Investment 3757 3757 3757 3757
Inventories 3780 4262 4639 5253
Sundry Debtors 1824 1913 2083 2383
Cash & Bank 395 648 1108 1956
Loans & Advances 4131 4050 4250 4450
Total Current Assets 10130 10873 12080 14042
Sundry Creditors 5327 5734 6406 7051
Provision / Others 3169 4026 4532 4936Total Current
Liabilities 8495 9759 10938 11986
Net Current Assets 1635 1114 1142 2056
Total Assets 30113 31265 33082 35342
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Cash Flow Statement (Rs. MN)
Particulars FY04 FY05E FY06E FY07E
PBIT3,571
5,503
7,153
8,644
Add: Depreciation1,769
1,917
2,061
2,244
Changes in working capital(15
3)24
812
5(26
9)
Tax Paid(16
1)(82
2)(1,316)
(1,719)
Cash Flow from
Operations
5,02
5
6,84
6
8,02
4
8,89
9
Change in Fixed Assets
(2,26
5)
(3,59
0)
(3,85
0)
(3,59
0)
Change in Investments(2,480)
- - -
Cash Flow from
Investments
(4,74
5)
(3,59
0)
(3,85
0)
(3,59
0)
Change in Equity Capital1,585
551 -
(2,000)
Change in Borrowings(50
4)(2,000)
(1,500)
(1,632)
Dividend Paid(48
2)(80
0)(1,326)
(829)
Interest Paid (929) (934) (889) -
Others9
718
0 -(4,461)
Cash Flow from Financing
(23
4)
(3,00
3)
3,71
5
84
9
Net Change in Cash
4
7
25
3
45
9
1,10
8
Opening Balance
34
8
39
5
64
8
1,10
8
Closing Balance
39
5
64
8
1,10
8
1,95
6
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Key Ratios
Particulars FY04 FY05E FY06E FY07E
Growth(%)Cement volumes sales 8.4 6.7 8.5 9.0
Total Sales 14.7 18.4 15.3 14.4
EBITDA 30.8 72.7 25.6 20.1
EPS 67.6 47.4 37.1 22.9
Valuation (x)
P/E 31.2 21.2 15.5 12.6
P/CF 17.0 13.2 10.6 8.8
EV/EBITDA 16.0 12.3 9.6 7.8
Profitability (%)
EBITDA Margin 11.7 17.1 18.6 19.5
NPM 6.4 8.1 9.7 10.4
RONW 18.0 21.8 25.3 26.3
ROCE 12.4 17.9 22.2 25.3
Turnover (days)
Inventory 60 59 58 57
Debtor 20 18 17 17
Financial (x)
Debt Equity Ratio 1.1 0.8 0.6 0.4
Interest cover 3.8 5.9 8.0 10.4
EBITDA/Interest 4.1 7.1 9.4 12.0
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HOLCIM: THE INDIA CONNECTION
India has long been a focus market for the global cement majors. Despite strong efforts to
increase their presence in the last five to six years, they have a limited presence in the
Indian markets. Only two global majors have a presence in India with a total domestic
market share of around 5%. Lafarge has a capacity of 5 million t.p.a (3.2% market share)
and Italcementi has a capacity 3.4 million tpa (2% market share). Assuming Holcim is
successful in gaining control of ACC, the market share of global majors in India will rise
to around 19%. Holcim's presence in ACC should bring about further focus in ACC on its
core business and also further cost cutting. Holcim's deep pockets should make ACC
more aggressive in its expansion and acquisition plans. Additionally, the presence of a
strong global major would mean more stable cement prices in markets where Holcim has
a presence, particularly as it would already have invested around US$800 million in
India. Holcim is one of the largest cement traders in the world and could help ACC to
hike its export revenues.
SECOND LARGEST PRODUCER WORLD-WIDE
Holcim is the second largest cement producer in the world, its turnover for 2003 was
about US$9.4 billion and current market capitalization is around US$12 billion. The
group holds majority and minority interests in more than 70 countries in all continents.
To put it in perspective Holcim's total capacity of 145 million tpa, even before getting
management control over ACC/ACEL, is higher than Indias total expected consumption
of 121 million tpa in FY05E.
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HOLCIM IN ASIA-PACIFIC
Holcim has a presence in 10 countries in the Asia-Pacific region, with sales of 29.3
million tonnes and an average market share of 24% in those countries. Its capacity in the
region is 36 million tpa and after considering its merger with ACC and ACEL, the total
capacity would be 56 million tonnes, i.e. an increase of about 56% in its pre-merger
capacity in the Asia-Pacific region. Holcim continues to be positive on Asia-Pacific on
the back of increased house building and construction activity, with major projects being
triggered - such as construction of several bridges in Bangladesh and Malaysia, and the
expansion of airports in Bangkok and Jakarta.
Cement Consumption in Asia-Pacific CountriesCountry Comsumption
Azerbaijan 1.6
Sri Lanka 3.0
Bangladesh 6.5
Thailand 23.5
Malaysia 14.7
Indonesia 27.2
Vietnam 23.0Phillipines 12.6
Australia 8.0
New Zealand 1.1
HOLCIM key figures for Asia-Pacific (US$ mn)Particulars 2002 2003 %change
Capacity (mn tpa) 35.5 36.0 1.4
Net Sales 1236 1417 14.7
Operating Profit 118 159 35.6
Personnel 13078 12118 -7.3
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HOLCIMS LARGEST COUNTRY PRESENCE IS INDIA
The acquisition of ACC (18.2 million tpa) and ACEL (2 million tpa) will add 20.2
million tpa to Holcim's present total capacity of 145.2 million tpa. Holcims largest
country presence in cement will now be in India, larger than its 16.7 million tpa of
capacity in US, held through Holcim (US) Inc, a 100% subsidiary of Holcim.
HOLCIM: Region-wise breakdownRegion Capacity (post merger) %
Europe 44.0 26.6
North America 21.3 12.9
Latin America 31.0 18.7
Africa 12.9 7.8
Asia Pacific 56.2 34.0
Total 165.4 100
HOLCIMs cement capacity in its largest markets
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SALES THE CONTRASTING PICTURE
Asia-Pacific accounts for Holcims highest capacity of 44.9 million tpa (28%) but due to
low capacity utilization (52%) of Holcims plants in the region, and small share of
aggregates in its total sales, Asia-Pacific accounts for only 14% of total Holcim group
sales. On the other hand, although Europe has a low capacity utilization of 60%, it
accounts for the maximum sales contribution of about 34% (including aggregates).
Holcim: Sales Breakdown before ACC acquisition
EBITDA margins in Holcims key markets
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INDIA: HOLCIM READY TO MEET THE CHALLENGE
ACC has a very high level of capacity utilization (89%) as compared with Holcim's other
subsidiaries. But the EBITDA margin for ACC is about 15.5% (for 9M FY05), which is
much lower than Holcim's overall EBITDA margin of 26%. Holcim's management has
stated that they are committed to improve the EBITDA margin by using alternative fuels
and raw materials. Holcim is satisfied with the current management and the current
modern facilities of ACC. In the past, Holcim had successfully implemented the use of
alternative fuels and raw materials at Philippines by implementing moulding compounds
as an alternative raw material and thus expanded the range of quality cement. In
Thailand, Holcims affiliate, Siam City Cement has improved its distribution and ability
to service customers by selling cement directly to customers using its Web sales system.
Capacity Utilization in Various Markets
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Holcim Overall sales compared with competitors
KEY STEPS IN HOLCIM ACQUIRING CONTROL OF ACC
Step one: Holcim to acquire a 40% stake in ACIL
Holcim will pay Rs8.97 billion (US$204 million) to acquire a 40% stake in Ambuja
Cement India Ltd (ACIL) from affiliates of American International Group (AIG) and
GIC Infrastructure Pte Ltd. ACIL is the holding company which currently holds 13.8% in
Associated Cement Cos (ACC) and 94.1% in Ambuja Cement Eastern Ltd (ACEL).
Step two: Holcim to raise its stake in ACIL to 67%
Holcim will invest a further Rs26.4 billion (US$605 million) in ACIL. Of this, Rs18.3
billion (US$420 million) will come in as equity and raise Holcim's stake in ACIL's
expanded equity capital to 67%. Holcim will invest a further Rs8.1 billion (US$185
million) as 6% preference capital in ACIL. Under the terms of the agreement with
GACL, Holcim will then have management control of ACIL and the right to nominate a
majority of directors on its board as well as its CEO.
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Step three: ACIL makes open offers for ACC and ACEL
ACIL will then make two open offers. The first is an open offer for 36.9% of ACC,
which if fully subscribed will take ACIL's stake in ACC to 50.01%, giving Holcim
management control of ACC. Even if fewer shareholders participate in the Open Offer,
Holcim is expected to get management control of ACC by virtue of ACIL (which already
owns 13.8%) being the largest shareholder. In the event of ACIL acquiring control of
ACC, two thirds of the ACIL directors on ACC's board would be proposed by Holcim,
and the balance one-third by GACL. The second Open Offer will be to acquire the
minority 5.9% stake in ACEL and take ACIL's holding in that company to 100% from
the current level of 94.1%. Holcim will then have management control over 22.2 million
tpa of capacity or about 14% of India's market share.
Step four: GACL exits from ACIL
GACL, which will hold 33% of the post expanded equity share capital of ACIL, has a put
option to sell all or part of the 33% shares held by it to Holcim on or after 30 June 2005.
Partial puts or calls can only be in increments of 11% or more of the shares held by
GACL in ACIL. In case GACL does not put all the shares then Holcim has the right to
call the remaining shares anytime on or after 1 January 2008. This will result in a likely
inflow of about Rs13 billion to GACL based on current valuations of Rs47/share of
ACIL. Based on press statements given by GACL's management it is unlikely to exercise
its put option in the near future. Delaying the exercise of the put option would help add
value to the shares due to the buoyant outlook for the cement industry and because ACC
and ACEL are likely to expand capacity in the next few years.
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APPENDIX
MONTHLY DOMESTIC PRODUCTION FIGURES
MONTH Volume % MONTH Volume % MONTH Volume
Apr-97 5543440 -16.7 Apr-00 8040000 -0.9 Apr-03 9050000
May-97 7056410 18.7 May-00 8540000 5.3 May-03 10590000
Jun-97 6429300 11.8 Jun-00 8840000 8.1 Jun-03 10160000
Jul-97 5761380 -3.4 Jul-00 7870000 6.8 Jul-03 9370000
Aug-97 5531780 -3.3 Aug-00 6750000 -1.9 Aug-03 8690000
Sep-97 5579600 14.0 Sep-00 6940000 3.9 Sep-03 8850000
Oct-97 6431140 23.2 Oct-00 7820000 14.2 Oct-03 9340000
Nov-97 6245360 17.9 Nov-00 7690000 1.9 Nov-03 9100000
Dec-97 6481990 17.4 Dec-00 7110000 -11.8 Dec-03 10060000
Jan-98 6943360 10.7 Jan-01 7380000 -13.6 Jan-04 10220000
Feb-98 6657080 10.3 Feb-01 7210000 -11.3 Feb-04 10330000 Mar-98 7807630 7.3 Mar-01 9180000 -3.7 Mar-04 11250000
Apr-98 6273280 13.2 Apr-01 8480000 5.5 Apr-04 10640000
May-98 6997740 -0.8 May-01 9000000 5.4 May-04 10450000
Jun-98 6610580 2.8 Jun-01 8960000 1.4 Jun-04 9800000
Jul-98 6107530 6.0 Jul-01 7360000 -6.5 Jul-04 10270000
Aug-98 5870230 6.1 Aug-01 7380000 9.3 Aug-04 8860000
Sep-98 6300000 -2.0 Sep-01 8280000 19.3 Sep-04 9840000
Oct-98 6201130 -3.6 Oct-01 8330000 6.5 Oct-04 10750000
Nov-98 6437070 3.1 Nov-01 8340000 8.5 Nov-04 10260000
Dec-98 7358480 13.5 Dec-01 8230000 15.8 Dec-04 10930000 Jan-99 7421140 6.9 Jan-02 8770000 18.8
Feb-99 7424440 11.5 Feb-02 8880000 23.2
Mar-99 8737470 11.9 Mar-02 10350000 12.7
Apr-99 8110000 29.3 Apr-02 9420000 11.1
May-99 8110000 15.9 May-02 9860000 9.6
Jun-99 8180000 23.7 Jun-02 9310000 3.9
Jul-99 7370000 20.7 Jul-02 9130000 24.0
Aug-99 6680000 17.2 Aug-02 8280000 12.2
Sep-99 6680000 6.0 Sep-02 8280000 0.2
Oct-99 6850000 10.5 Oct-02 8870000 6.5
Nov-99 7550000 17.3 Nov-02 8820000 5.8
Dec-99 8060000 9.5 Dec-02 9590000 16.5
Jan-00 8540000 15.1 Jan-03 9560000 9.0
Feb-00 8130000 9.5 Feb-03 9320000 5.0
Mar-00 9530000 9.1 Mar-03 10880000 5.1
REGION-WISE DISPATCH FIGURES
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Month
Northern
Region
Eastern
Region
Southern
Region
Western
Region
Central
Region
4-Dec 2,220,260 1,574,890 3,124,160 2,291,640 1,725,400
4-Nov 2,124,550 1,591,300 2,857,510 1,996,280 1,694,170
4-Oct 2,303,920 1,913,250 3,891,760 2,411,420 2,083,500
4-Sep 2,178,970 1,333,060 3,081,170 1,720,450 1,505,340
4-Aug 1,957,840 1,239,340 2,753,050 1,332,340 1,571,610
4-Jul 23,14,650 14,54,860 30,79,660 17,14,810 16,60,640
4-Jun 22,53,190 14,86,160 27,40,340 16,65,840 16,10,800
4-May 21,62,430 16,76,640 30,22,300 19,21,430 16,24,810
4-Apr 22,79,670 17,56,720 29,25,700 20,38,330 16,04,110
4-Mar 23,65,310 17,71,580 35,72,540 18,51,220 17,23,000
4-Feb 22,29,690 16,00,350 29,87,750 19,67,200 15,41,760
4-Jan 22,11,880 15,05,840 29,57,040 20,61,840 14,87,800
4-Dec 20,76,340 13,72,400 30,22,700 21,00,540 14,85,660
BIBLIOGRAPHY
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Journals & Magazines
A Brochure Cement from India (CMA India)
Indian Cement Industry at a Glance (CMA India)
News Articles and Press Releases
Cement Shortage (Portland Cement Association dated 9 Feb 2005)
International Builders Show 2005 (PCA dated 10 Jan 2005)
Vibrant M&A Activity in India (Economic Times dated 26 Jan 2005)
Company Annual Reports and Releases
ACC
Holcim
Websites
www.cement.org (Portland Cement Association)
www.cmaindia.org (Cement Manufacturers of India)
www.acclimited.com (Associated Cement Co. Ltd)
www.holcim.com (Holcim)
www.holnam.com (Holcim USA)
www.economictimes.com (The Economic Times)
http://www.cement.org/http://www.cmaindia.org/http://www.acclimited.com/http://www.holcim.com/http://www.holnam.com/http://www.economictimes.com/http://www.cement.org/http://www.cmaindia.org/http://www.acclimited.com/http://www.holcim.com/http://www.holnam.com/http://www.economictimes.com/