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Please refer to important disclosures at the end of this report  1

 

Healthy performance on the volume front: During 3QFY2012, our cement

universe posted reasonably healthy 8.1% yoy growth in volumes, much better

than 3.9% dispatches growth reported in 1HFY2012. Volume growth in

3QFY2012 was led by strong pick-up in demand across regions, with the western

region posting the highest 25.0% yoy growth. The southern region, which had

been posting a decline in demand over the past six quarters, showed signs of

revival with 3.2% yoy growth, aided by cooling of Telangana agitation. Demand

in the western region was boosted by improved offtake from government-

sponsored projects, infrastructure and individual housing segments. Madras

Cements, predominantly a south-based player, was the top performer in the

universe, registering 19.1% yoy volume growth. Ambuja Cements was the top

performer amongst large players, reporting 10.8% yoy growth.

Strong performance on the realization front negates cost pressure: Power and fuel

cost for the universe rose by 10.7% yoy due to twin effects of higher coal prices

(both domestic and imports) and cheaper INR vs. USD. Freight costs were also

higher by 12.5% yoy due to the increase in diesel costs and surcharge levied by 

railways. However, growth in cement realization was too strong to offset cost

pressures. OPM of the cement universe rose by healthy 267bp yoy to 21.6%, with

all companies under our coverage barring Ambuja Cements posting OPM

expansion in the range of 100bp to 1,350bp on a yoy basis. JK Lakshmi posted

the highest expansion in OPM of 1,352bp yoy to 21.4%. Cement realization,

which had remained strong in the past one year due to producer discipline, was

aided by pick-up in demand. Our cement universe posted 18.4% yoy higher

realization during the quarter; on a sequential basis, realization was higher by 7.5%.

Outlook and valuation: Going ahead, the rate of capacity addition is set to

moderate, with only 31mtpa of capacity expected to be added over FY2012-13E,

much lower than 55mtpa added over FY2010-11. However, demand slowdown

has become a bigger concern with FY2012E demand growth expected to be

~5%. Thus all-India utilization in FY2012 is expected to be 72.4%. In our view,

the cement sector’s valuations in terms of EV/sales and EV/tonne are trading

ahead of the cycle when compared to utilization levels and are almost 40% moreexpensive than historical valuations during periods of similar utilization levels.

Hence, we maintain our Neutral view on the sector. That said, we maintain our

Buy recommendation on JK Lakshmi Cement due to its attractive valuations, as it

is trading at EV/tonne of US$28 on FY2013E capacity.

V Srinivasan

022-39357800 Ext: 6831

v.srinivasan@angelbroking.com

Sourabh Taparia

022-39357800 Ext 6872

sourabh.taparia@angelbroking.com

Cement Sector

Robust performance

Result Review | 3QFY2012

February 22, 2012

Exhibit 1: Relative valuation

CMP Target Sales (` cr) OPM (%) PAT (` cr) EV/EBITDA (x) EV/tonne (US $) Reco Upside

Company (`) (`) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E (%)

UltraTech 1,480 - 18,228 20,033 21.7 21.7 2,037 2,267 10.3 9.0 159 154 Neutral -

  ACC* 1,325 - 9,660 10,874 20.3 20.6 1,325 1,311 11.6 10.0 140 139 Neutral -

  Ambuja Cements* 165 - 8,603 9,777 23.4 24.0 1,229 1,422 11.3 9.6 158 157 Neutral -

Shree Cement 2,691 - 4,497 5,383 25.3 26.1 237 421 7.5 5.5 104 82 Neutral -

India Cements 100 - 4,079 4,318 19.3 18.6 298 301 5.4 5.3 56 55 Neutral -

Madras Cements 140 - 3,165 3,327 30.3 28.2 377 379 6.2 5.7 63 55 Neutral -

JK Lakshmi Cement 62 79 1,629 1,868 18.5 20.4 123 149 3.8 2.6 34 28 Buy 27 

 Source: Com an , An el Research, Note: * December endin com anies, EV/tonne ad usted for CPP

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 3QFY2012 Results Review | Cement

February 22, 2012  2

Universe reports 28.9% top-line growth in 3QFY2012

Exhibit 1: 3QFY2012 revenue growth strong on a yoy basis...

 Source: Company, Angel Research, Note: The red horizontal line represents the average for our

coverage universe; Shree Cement’s cement business posted revenue growth of 44.9%

Exhibit 2: ...due to a sharp yoy increase in realization

 Source: Company, Angel Research

Exhibit 3: ...and healthy yoy growth in dispatches

 Source: Company, Angel Research

23.127.8 30.2

61.4

20.4

28.0

39.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

UltraTech ACC Ambuja

Cements

Shree

Cement

India

Cements

Madras

Cements

JK Lakshmi

Cement

(%)

16.4

20.317.5

33.2

16.2

8.6

26.3

0.0

5.0

10.0

15.020.0

25.0

30.0

35.0

40.0

Ultra TechCement

 ACC AmbujaCements

ShreeCement

IndiaCements

MadrasCements

JK LakshmiCements

(%)

5.7 6.3

10.8

8.8

6.9

19.1

12.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

UltraTech ACC AmbujaCements ShreeCement IndiaCements MadrasCements JK LakshmiCement

(%)

Revenue growth was the highest for

  players with capacities in North India,

  primarily because of strong yoy

realization growth in the northern and

western regions –  the main markets for

these players

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February 22, 2012  3

Exhibit 4: Realization per tonne growth on a qoq basis

 Source: Company, Angel Research

Operating costs per tonne of the universe rose by 9.9% yoy 

Exhibit 5: Power and fuel cost per tonne increased on a yoy basis

 Source: Company, Angel Research

Exhibit 6: Freight cost per tonne also witnessed a yoy increase

 Source: Company, Angel Research

6.0

11.3 11.8 11.4

0.7

(2.4)

15.0

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Ultra TechCement

 ACC AmbujaCements

ShreeCement

IndiaCements

MadrasCements

JK LakshmiCements

(%)

18.1

21.7

(4.6)

10.8

7.4

(0.2) (8.5)

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

Ultra TechCement

 ACC AmbujaCements

ShreeCement

IndiaCements

MadrasCements

JK LakshmiCements

(%)

9.1

18.3

12.2

21.1

5.1

15.6

8.4

0.0

5.0

10.0

15.0

20.0

25.0

Ultra Tech

Cement

 ACC Ambuja

Cements

Shree

Cement

India

Cements

Madras

Cements

JK Lakshmi

Cements

(%)

  South-based players witnessed a qoq

decline in realization because 3Q is the

monsoon season for major part of  southern India

Both imported as well as domestic coal

costs were higher on a yoy basis. Power

tariffs were also higher on a yoy basis.

However, for JK Lakshmi Cement,

 power and fuel costs per tonne declined

because of improvement in usage

efficiency

Higher petroleum products cost andhigher railway freight charges played

the spoiler here

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 3QFY2012 Results Review | Cement

February 22, 2012  4

 

Operating margin improved albeit costs surged

Exhibit 7: EBITDA margin improvement on a yoy basis...

 Source: Company, Angel Research

284

101(63)

697

443

243

1,352

(200)

0

200

400

600

800

1,000

1,200

1,400

1,600

UltraTech ACC AmbujaCements

ShreeCement

IndiaCements

MadrasCements

JK LakshmiCement

(bp)Resultantly, all players barring north-

based players faced margin pressure.

Northern players witnessed a huge

increase in margins on account of a

  sharp yoy increase in realization

coupled with cost savings due to usage

efficiency (particularly for JK Lakshmi

Cement power consumption per tonne

of cement declined from 80 to 77) 

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 3QFY2012 Results Review | Cement

February 22, 2012  5

 Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.com

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 Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so.

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Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to thelatest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may haveinvestment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Analyst ownership Angel and its Group companies Angel and its Group companies' Broking relationship

of the stock ownership of the stock Directors ownership of the stock with company covered

  ACC No No No

  Ambuja No No No

India Cements No No No No

J K Lakshmi No No No No

Madras Cements No No No No

Shree Cements No No No No

UltraTech No No No No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors 

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 3QFY2012 Results Review | Cement

February 22, 2012  6

 

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai - 400 093. Tel: (022) 39357800

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Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angelbroking.com

  Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angelbroking.com

Shailesh Kanani Infrastructure shailesh.kanani@angelbroking.com

Bhavesh Chauhan Metals & Mining bhaveshu.chauhan@angelbroking.com

Sharan Lillaney Mid-cap sharanb.lillaney@angelbroking.com

  V Srinivasan Research Associate (Cement, Power) v.srinivasan@angelbroking.com

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  Varun Varma Research Associate (Banking) varun.varma@angelbroking.com

Sourabh Taparia Research Associate (Cement, Power) Sourabh.taparia@angelbroking.com

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