013 KashyapDesai Cement Sector Overview

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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

` 27


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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

` 37


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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)


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)


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


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/

013 KashyapDesai Cement Sector Overview

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