2011 September ICICI Sec Cement Sector

8/3/2019 2011 September ICICI Sec Cement Sector

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Please refer to important disclosures at the end of this report

Cement sector

Foundation for the next up-cycleReason for report: Theme report

Equity ResearchSeptember 13, 2011

BSE Sensex: 16502

Top picks

Ambuja Cement

UltraTech Cement

Krupal Maniar, [email protected] 22 6637 7254

Varun [email protected] 22 6637 7180

We believe the next 12 months would lay the foundation for the next up-cycle inthe Indian cement sector. Pricing power would revert, as utilisation is expected tobottom out at ~74% in FY12E and then gradually increase to 78% by FY14E. Ourdemand-supply analysis factors ~8% CAGR in effective supply and demand overFY11-14E (versus 17% CAGR in effective supply and 8% CAGR in demand overFY08-11). Utilisation is unlikely to fall below 74% over FY12-14E even if oneassumes ~6% CAGR in demand, implying that the worst for the sector could bebehind. We re-iterate our anti-consensus positive stance on cement stocks inspite of their ~20% YoY outperformance. We believe that the earnings couldsurprise and the sector could re-rate with the revival of pricing power. Our FY12-13E EBITDA / EPS are 3-16% ahead of consensus and we expect upgrades inconsensus estimates. We prefer pure-play cement companies with minimum

exposure to South and maximum pricing leverage. Ambuja Cements (ACEM) withno presence in South and UltraTech Cement (UTCL) with ~25% exposure to Southand enjoying maximum pricing leverage are our top picks.

Demand likely to improve given: i) low base effect of FY11 / H1FY12; ii) betterrural housing demand; iii) forthcoming elections in few large states / the Centre overCY12-14E and iv) gradual pick-up in Government infrastructure spend. Historically,cement demand has grown ~1.2x real GDP growth except as recent as in FY11 /H1FY12. With Indias GDP still expected to maintain growth of +7-7.5% (factoring inslowdown from 8.5-9% growth), cement demand growth of +8-9% (which is alsohistorical long-term average) over FY12-14E seems achievable.

Pace of supply to decelerate. Around 93mnte capacity got added over FY10-11.However, lesser 50mnte are expected over FY12-14E. North and West regions

would witness only 6mnte and 3mnte effective incremental supply over FY12-14Eresulting in700-800bps uptick in utilisation.

Pricing power to revert as utilisations bottom out in FY12E. Utilisation in Southis likely to remain at ~60% over FY12-14E. Hence, cement companies in Southwould be compelled to maintain production cuts and pricing discipline. We expectprices to inch up in rest of the regions (maximum uptick in North and West) onimproved utilisation over FY12-14E. While we factor in ~5% CAGR in averagecement realisations over FY12-14E, we build in 50-100bps increase in FY12-13EEBITDA margins, which would be achieved merely by increased cost efficiencies.

Companies better placed with strong balance sheet, healthy cashflow generationand higher regional concentration, leading to better pricing discipline. Top 5companies enjoy ~69-86% market share in their respective regions excluding South.

Key risks are lower demand, fragile pricing in South and regulatory intervention.

P/E (x) EV/EBITDA (x) P/B (x)Company

Mcap(US$bn)

RecoCMP(Rs)

TP(Rs) FY12E FY13E FY12E FY13E FY12E FY13E

ACC* 4.1 BUY 1,030 1,160 16.6 13.9 8.7 6.9 2.8 2.5

Ambuja* 4.7 BUY 145 162 16.6 14.4 9.4 7.9 2.7 2.4

Grasim 4.2 BUY 2,166 2,750 8.1 7.3 4.0 3.5 1.2 1.1

UltraTech 6.4 BUY 1,100 1,235 14.1 12.0 7.9 6.9 2.4 2.0

Jaiprakash^ 2.9 BUY 65 80 17.5 14.9 9.9 8.9 1.4 1.2

Shree 1.2 BUY 1,562 2,000 20.6 12.2 5.3 4.5 2.5 2.1

* December year ending CY11E and CY12E; Standalone

INDIA


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Cement sector, September 13, 2011 ICICI Securities

2

TABLE OF CONTENTS

Investment rationale........................................................................................................3Pace of supply to decelerate ..........................................................................................3

Capacity utilisation to bottom at ~74% in FY12E............................................................3Pricing power would return by H2FY13E........................................................................5Cement remains a regional play .....................................................................................7

Demand to regain strength ...........................................................................................12Likely reversion to historical correlation with GDP........................................................12Elections in few large states .........................................................................................13Housing still remains the largest demand contributor...................................................14Gradual pick-up in Government infrastructure spend ...................................................16

Better placed than earlier down-cycle.........................................................................20High degree of concentration in most regions ..............................................................20Companies focusing on absolute higher EBITDA.........................................................21

Eye on consolidation in the industry...........................................................................23Key risks .........................................................................................................................24Valuation: Sector likely to get re-rated........................................................................25

Sensitivity analysis ........................................................................................................27Annexure 1: Capacity addition Schedule.................................................................29Annexure 2: Regional capacity additions ...................................................................31Annexure 3: Index of Tables and Charts.....................................................................32

CompaniesACC ................................................................................................................................. 33

Ambuja Cements (ACEM) ............................................................................................... 37

Grasim ............................................................................................................................. 43

Jaiprakash Associates (JPA) ........................................................................................... 49

Shree Cement ................................................................................................................. 53

UltraTech Cement (UTCL) .............................................................................................. 59

Prices and Sensex as on September 12, 11


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3

Investment rationale

Pace of supply to decelerateWe expect the pace of capacity addition to come down over FY12-14E. Where FY10

and FY11 witnessed capacity addition of ~93mnte, this is expected to drop to 50mnte

in FY12-14E. Though many companies are gearing up for their next phase of

expansion (with most expected to announce their plans over the next six-nine

months), the proposed capacities are not expected to be commissioned before

FY15E. Our demand-supply analysis factors in ~8% CAGR in both effective supply

and demand over FY12-14E (versus 17% CAGR in effective supply and 8% CAGR in

demand over FY08-11).

Capacity utilisation to bottom at ~74% in FY12E

We continue to believe that supply would be staggered over the longer period,

whereas demand is expected to revive, thereby lowering the quantum of oversupply.

Surplus effective capacity is expected to peak in FY12E. All-India effective utilisation

in FY12E is likely to bottom out at ~74% and then gradually increase to ~78% by

FY14E. None of the top 10 cements companies (except Jaiprakash Associates),

constituting more than 2/3rd of the industry capacity, would be adding any capacitiy

over the next two years.

Table 1: Cement supply / demand industry outlook

(mnte)FY10 FY11 FY12E FY13E FY14E

Year-end installed capacity 270 305 320 342 355Actual- effective capacity 239 275 306 325 346Domestic consumption 198 209 222 242 264Export (cement + clinker) 5.3 5.3 4.5 4.9 5.4Domestic consumption + exports 203 214 227 247 269Surplus / (Deficit) 36 62 79 78 77% surplus - wrt effective capacity 15 22 26 24 22

Capacity utilisations 85.0 77.7 74.1 76.0 77.7Average price 247 244 260 273 286Change in average price (%) 2.8 (1.2) 6.4 5.0 5.0Capacity growth (%) 17.5 15.3 11.1 6.3 6.5Domestic growth (%) 11.1 5.5 6.5 9.0 9.0Domestic + exports growth (%) 10.2 5.4 6.0 9.0 9.0

Source: I-Sec Research

Chart 1: Utilisation to bottom out in FY12

60%

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Utilisation

Bottoming

Source: CMA, I-Sec Research


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While we factor in ~5% CAGR in average cement realisations over FY12-14E, we

build in a conservative 50-100bps increase in FY12-13E EBITDA margins, which

would be achieved merely by increased cost efficiencies

Table 2: EBITDA margins in narrow range

EBITDA (%)Company FY10 FY11 FY12E FY13E

ACC 29.0 19.5 19.6 20.1ACEM 26.4 24.7 24.7 24.9Grasim 29.0 22.0 22.1 22.5UTCL 28.0 20.7 23.1 23.7JPA 26.0 22.3 25.3 25.4Shree 41.3 25.2 24.6 25.1


Utilisations excluding South would be in excess of 82% in FY12E and would increase

to 87% in FY14E, resulting in substantial return of pricing power in those regions.

Table 3: Utilisation ex-South to improve by ~500bps over FY12-14E

All India excluding South FY10 FY11E FY12E FY13E FY14EEffective Capacity 153 176 197 208 223

Despatches including exports 139 150 162 178 194Utilisation (%) 90.8 85.4 82.4 85.4 87.1YoY change (%) 14.3 7.8 8.3 9.4 9.1Surplus 14 26 35 30 29


Even if demand grows at a CAGR of ~6%, pan-India utilisation is unlikely to fall below

~74% over FY12-14E, implying that the worst for the sector could be behind.

Table 4: Utilisation sensitivity assuming ~6% demand CAGR over FY12-14E

FY10 FY11 FY12E FY13E FY14EYear-end installed capacity 270 305 320 342 355Actual- effective capacity 239 275 306 325 346Domestic consumption 198 209 222 237 252Export (cement + clinker) 5.3 5.3 4.5 4.9 5.4

Domestic consumption + exports 203 214 227 241 257Surplus / (Deficit) 36 62 79 84 89% surplus - wrt effective capacity 15 22 26 26 26Capacity utilisations 85.0 77.7 74.1 74.3 74.3Average price 247 244 260 273 286Change in average price (%) 2.8 (1.2) 6.4 5.0 5.0Capacity growth (%) 17.5 15.3 11.1 6.3 6.5Domestic growth (%) 11.1 5.5 6.5 6.5 6.5Domestic + exports growth (%) 10.2 5.4 6.0 6.5 6.6



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Pricing power would return by H2FY13E

Cement prices are expected to inch up in H2FY12 as construction activities resume

after monsoon and festive season. We are factoring in an average price increase of 6-

7% in FY12E, which is same as average trailing 12-month price increase YoY till date.

The prices are expected to remain in a narrow band during H1FY13 and the real

pricing power would revert by H2FY13E. We believe that the next 12 months wouldlay the foundation for the next up-cycle. We factor in an average price CAGR of ~5%

over FY13-14E, which we believe to be conservative. We do not expect average

utilisation to fall below 74% in FY12E.

Chart 2: Utilisation versus cement prices

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North and West regions would witness only 6mnte and 3mnte effective incrementalsupply over FY12-14E resulting in700-800bps uptick in utilisation. Utilisation in South

is likely to remain at ~60% over FY12-14E. Hence, cement companies in South wouldbe compelled to maintain production cuts and pricing discipline. We expect prices toinch up in rest of the regions (maximum uptick in North and West) on improvedutilisation over FY12-14E. Central and East regions would continue to operate at90%+ and 85%+ utilisation.

Table 5: Region-wise realisation growth

(%)North East South West Central All India

FY09 3.4 2.7 7.7 1.8 0.2 3.8FY10 6.8 7.9 (7.3) (2.5) 13.4 2.8FY11 1.8 (1.6) (0.3) 0.0 (5.0) (1.2)FY12E 0.9 1.0 11.3 11.7 3.0 6.3


Table 6: Company-wise realisation growth

(%)ACC ACEM UTCL* JPA Shree

FY09 3.8 4.3 9.0 18.9 (2.4)FY10 6.8 6.5 (0.6) 10.2 8.2FY11 (2.6) (2.5) 12.3 (10.2) (7.6)FY12E 7.4 9.0 10.3 7.0 8.0FY13E 4.5 5.5 5.0 5.0 5.0

*Merger with Samruddhi Cement assumed w.e.f 1st

April2010Source: I-Sec Research


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Chart 3: Cement price chart Region-wise

North Price movement East Price movement

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Cement remains a regional play

Pricing discipline continues in South; North and West to see

maximum uptick in utilisation

Utilisation in South is likely to remain at sub-60% levels over FY12-14E even after

factoring in the gradual recovery in demand. South would continue to remain anoverhang, with surplus share of the region inching above 60% of the total domestic

surplus. This increase in overcapacity share has been led by decline in cement

growth in Andhra Pradesh (kudos to Telangana issue) and lackadaisical attitude of

the state governments of the region towards infrastructure or housing projects. Hence,

cement companies in the region would be compelled to maintain production cuts and

pricing discipline.

At all-India level, the surplus is expected to come down to 22.0% in FY14E from

25.7% in FY12E due to improvements in utilisations across regions led by North and

West. Hence, we expect prices to inch up in North and West, as utilisation improves

over FY12-14E.

Table 7: South contributing >60% in the total oversupply

Surplus capacity (mnte) FY10 FY11 FY12E FY13E FY14ENorth 5.7 14.0 16.3 13.0 11.9Central 0.3 1.4 3.5 4.0 4.4East 4.7 5.3 5.6 5.8 6.3South 23.8 37.9 46.7 49.8 50.2West 1.5 2.9 6.8 5.2 3.6All -India 36.0 61.5 79.0 77.7 76.5

Surplus as a % of total oversupply FY10 FY11 FY12E FY13E FY14ENorth 15.7 22.7 20.6 16.7 15.5Central 0.8 2.3 4.5 5.1 5.8East 13.1 8.6 7.1 7.4 8.3South 66.1 61.7 59.2 64.1 65.6

West 4.2 4.7 8.6 6.7 4.8India 100.0 100.0 100.0 100.0 100.0Source: I-Sec Research

Table 8: Break-up of capacities region-wise for key companies

(% of capacity)

UltraTech ACC Ambuja JPANorth 22.9 19.8 33.5 17.1Central 11.5 15.2 5.6 48.0East 13.5 20.0 15.2 16.5South 25.8 31.5 - -West 26.3 13.5 45.7 18.4



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Region-wise analysis

North to see ~700bps improvement in utilisation over FY12-14E

Table 9: North to see ~700bps improvement in utilisation over FY12-14E

North FY10 FY11 FY12E FY13E FY14EEffective capacity 52.3 62.5 68.9 70.6 74.7Production 46.6 48.5 52.6 57.6 62.8

Utilisation (%) 89.2 77.6 76.4 81.6 84.1Despatches 46.6 48.5 52.6 57.6 62.8YoY change (%) 13.4 4.0 8.5 9.5 9.0


Key demand drivers

Semi-urban and rural housing projects especially in Punjab and Haryana

Urban infrastructure projects in cities like Chandigarh and Delhi

Several hydro power projects in Himachal Pradesh

Several road projects

Table 10: Key capacity additions in North regionRegion Company CoD FY11 FY12E FY13E FY14ENorth Birla Corp - Rajasthan Oct-10 0.9North Birla Corp - Rajasthan Dec-12 1.2North India Cements Mahi, Rajasthan Dec-10 1.3North Jaiprakash -Baga (HP) Sep-11 2.0North JK Cement Mar-14 3.5North Lafarge - HP Sep-12 2.0North Shree Cements - Jaipur, Rajasthan Mar-11 1.5North Wonder cement Sep-12 2.5Total 5.7 - 5.7 3.5

Source: CMA, -Sec Research

Central Utilisation to remain in >90% range

Table 11: Central Utilisation to remain in >90% range

Central FY10 FY11 FY12E FY13E FY14EEffective capacity 29.8 33.8 38.9 42.7 46.7Production 29.5 32.4 35.4 38.7 42.2Utilisation (%) 99.0 95.8 90.9 90.7 90.5Despatches 29.5 32.4 35.4 38.7 42.2YoY change (%) 14.7 9.8 9.3 9.6 9.0


Key demand drivers

Rural and low-cost housing

Rural infrastructure projects including roads

Several hydro power projects in Uttar Pradesh


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Table 12: Key capacity additions in Central region

Region Company CoD FY11 FY12E FY13E FY14Central Birla Corp - MP Oct-10 0.9Central Heidelberg Jun-12 1.0Central Heidelberg Dec-12 1.9Central Jaiprakash - Sidhi, Chunar, Dalla Sep-09 1.0Central Jaiprakash - Sikandrabad Jun-11 1.0Central Jaiprakash - Dalla Dec-11 2.5

Central KJS Cement Sep-12 2.3Central Prism Cements Sep-10 3.6Total 5.5 3.5 5.2


East Utilisation to remain in 85%+ range

Table 13: East Utilisation to remain in 85%+ range

East FY10 FY11 FY12E FY13E FY14EEffective capacity 34.0 37.7 41.3 44.9 48.9Production 29.2 32.4 35.7 39.1 42.6Utilisation (%) 86.1 85.9 86.3 87.1 87.0Despatches 29.2 32.4 35.7 39.1 42.6YoY change (%) 12.4 11.0 10.0 9.5 9.0


Key demand drivers

Semi-urban and rural housing projects especially in Bihar and Paschim Banga

(West Bengal)

Various Industrial projects being implemented in Chhattisgarh, Jharkhand and

Orissa

Several roads and power projects

Table 14: Key capacity additions in East region

Region Company CoD FY11 FY12E FY13E FY14EEast Ambuja - Bhatapara Jun-11 1.1East Birla Corp - West Bengal Dec-12 0.6East Jaiprakash- SAIL JV Bhilai Apr-11 2.2East Jaiprakash- SAIL JV Bokaro Jun-11 2.1East JK Lakshmi Cement -Durg Dec-12 2.7East Lafarge - Jharkhand Dec-11 1.0East Others Mar-11 1.0East Others Mar-12 1.0East Ultratech - Raipur, Chhatisgarh Sep-14 4.8Total 3.2 5.2 3.3 4.8


West to see ~700bps improvement in utilisation over FY12-14E

Table 15: West to see ~700bps improvement in utilisation over FY12-14E

West FY10 FY11 FY12E FY13E FY14EEffective capacity 37.2 41.6 47.7 49.8 52.3

Production 30.4 33.4 36.4 39.7 43.3Utilisation (%) 81.7 80.4 76.3 79.7 82.8Despatches 30.4 33.4 36.4 39.7 43.3YoY change (%) 6.8 10.0 9.0 9.0 9.0



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Key demand drivers

Urban housing in key cities like Pune, Ahmedabad and Mumbai

Urban infrastructure projects, roads and metro rail

Commercial real estate / construction in key cities like Pune, Ahmedabad and

Mumbai

Table 16: Key capacity additions in West region

Region Company CoD FY11 FY12E FY13E FY14EWest ACC - Chanda Mar-11 3.0West Ambuja - Maratha Jun-11 0.9West ABG Cements Dec-12 3.0West Jaiprakash- GACL SP-2 Kutch Mar-11 1.2West Jaiprakash -Wanakbori 2 Mar-11 1.2Total 5.4 0.9 3.0 -


South utilisation to remain in ~60% range

Table 17: South utilisation to remain in ~60% range

South FY10 FY11 FY12E FY13E FY14EEffective capacity 87.7 101.8 110.9 119.1 125.7Production 63.9 63.9 64.2 69.3 75.6Utilisation (%) 72.9 62.7 57.9 58.2 60.1Despatches 63.9 63.9 64.2 69.3 75.6YoY change (%) 6.9 - 0.5 8.0 9.0


Key demand drivers

Low-cost housing schemes like Indira Awas Yojna

Roads, irrigation and urban infrastructure projects by government

Urban housing especially in Bengaluru

Table 18: Key capacity additions in South regionRegion Company CoD FY11 FY12E FY13E FY14ESouth ACC - Wadi Nov-10 3.0South Bhavya Cement Nov-10 1.0South Chettinad - Karikalli Mar-11 2.3South Jayajyothi Jun-10 1.0South Jaiprakash - Balaji Mar-12 3.5South JSW Sep-12 2.0South KCP Cements Dec-10 1.0South My Home Indus Nov-10 1.3South Madras Cement Mar-11 1.3South Madras Cement Sep-11 2.0South NCL - Nalgonda Nov-10 1.0South Raghuram Cement (Bharathi) Dec-10 2.0South Sagar-Vicat Cement Dec-12 2.5South Ultratech - Gulbarga, Karnataka Sep-14 4.4

South Zuari (Italicementi) Nov-10 1.5Total 15.4 5.5 4.5 4.4Source: CMA, -Sec Research


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Inter-regional dynamics

Historically, inter-regional movement of cement has been from South to West and that

within North, Central and East. And we expect this trend to continue.

Though inter-regional movement could increase due to substantial price differential, it

would not have meaningful impact on regional prices. We do not expect sizeable

movement from extended South to extended North and vice-versa on followingcounts:

It being uneconomical due to freight expenses

Lack of proper dealer network / channel distribution

Lack of brand recognition (localisation of brands)

Lack of adequate infrastructure i.e. shortage of wagons, improper road condition

Higher consolidation


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Demand to regain strength

Cement demand in FY11 grew at a lower ~5.5% pace hit by: a) low demand from

South due to political issues and b) slowdown in infrastructure spend by the

Government. The analysis of region-wise demand trend shows that in FY11, growth in

East, Central and West was strong at 8-11% whereas that in North was reasonable at

~4% owing to high base effect (13.5% growth in FY10). And that the hit came fromSouth (1/3rd of the industry), which remained almost flat YoY due to political turmoil in

Andhra Pradesh (which de-grew 14% in FY11). In Q1FY12 also, the cement demand

remained subdued at ~1-1.5% on similar grounds. However, despatch growth in

July11 and Aug11 was ~9% and ~6% YoY respectively owing to low base effect of

FY11.

We believe that the demand will improve given: i) low base effect of FY11; ii) better

rural housing demand; iii) forthcoming elections in few large states / centre over next

two-three years and iv) gradual pick-up in Government infrastructure spend. Though

housing continues to be the main driver, constituting +60% of overall cement demand,

the positive demand delta is expected to come from significant increase in

infrastructure spending. Given the policy thrust by the Government, the share of

infrastructure in cement demand would go up to 25%+ in FY12-16E from ~20% in

FY07-11.Our recent interaction with cement companies and other channel checks

shows that over the next three to five years, the industry could post low double digit

growth as medium-to-long term structural demand drivers still remain intact.

Likely reversion to historical correlation with GDP

Cement demand shares a strong correlation with economic growth directly as well

as indirectly. Directly, because infrastructure investment and construction activity, the

main drivers of cement demand, are the key components of gross domestic product

(GDP). Indirectly, because housing (both rural and urban), again a key determinantfor cement demand, depends on agricultural productivity and income levels, which in

turn are the key components of GDP. Historically, Cement-to-GDP ratio has remained

~1.2x except in FY11. With Indias GDP expected to maintain growth of +7-7.5%,

cement demand growth of +8-9% seems achievable during the next two-three years.

Chart 4: GDP versus cement demand growth

(4)

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Cement consumption grow th GDP grow th

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


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Elections in few large states

Demand for cement picks up during the election time, as incumbent Government tries

to meet some of the infrastructure-related commitments. Over the next two to three

years, besides general election at the Centre, many of the key cement consuming

states like Uttar Pradesh, Gujarat, Punjab, Madhya Pradesh, Maharashtra and

Rajasthan are scheduled for elections. And this would spur demand for cement. Bihar,which went for assembly elections in FY11, posted a 42% YoY consumption growth

during FY10 and a 14% growth during FY11. Similarly, West Bengal, which went for

hustings in May11, posted 24% YoY consumption growth in FY10 and 18% growth in

FY11.

Table 19: Forthcoming elections in few large states

Year State2012 Uttar Pradesh, Gujarat, Punjab, Uttrakhand2013 Chhattisgarh, Madhya Pradesh, Delhi, Rajasthan, J&K, Karnataka,2014 Centre, Haryana, Maharashtra, Andhra Pradesh, Orissa,

Source: Election Commission of India, I-Sec Research

Table 20: Cement demand growth (%)State Last election 1 year prior to election (%) 2 years prior to election (%)WB 2011 18 24Bihar 2011 14 42AP 2009 13 13Rajasthan 2008 16 9Gujarat 2007 13 16


Bihar and Gujarat are the recent examples of how strong political leadership and

better policy implementation could lead to a solid overall growth of a state. The policy

thrust on infrastructure and housing in these states has resulted in a strong demand

for cement.

Bihar has witnessed a flush of FDI in both residential and commercial real estate.Where growth in tier II towns of the state are supported by residential projects, that in

Patna, the capital, is propelled by commercial development the planned software IT

parks. The commercial real estate in Patna has already been overtaken by mall and

multiplex culture, which is now being taken to the next level old shopping hubs are

being re-designed and turned into new-age shopping malls and supermarkets. This

has led to an all-round growth in the state. This phase of investment in Bihar has

come after a period of standstill in and around 05. Around election time, Bihar

witnessed a splurge in real estate investment (08-09), which is getting manifested

now.

Among all states, Gujarat has seen the maximum number of PPP projects focused on

infrastructure across housing, roads, bridges, ports and developing SEZs. In the pastfive years, the state governments outlay for urban development has increased

tenfold. In the real estate sector, which includes development by private builders as

well as PPP projects by the government, Gujarat has the second largest number of

projects among all states. We expect the state to continue this momentum and remain

undeterred in following the policies that support infrastructure and housing demand,

and hence demand for cement.


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Housing still remains the largest demand contributor

Housing has been the largest contributor (+60%) to cement demand. According to

various industry sources, rural and urban housing stock is expected to grow at a

faster pace of 2.3% and 2.6% CAGR respectively over 10-15 vis--vis 08-10.

Chart 5: Rural housing stock to grow at a higher CAGR over 10-15

74

86

96103

121

201

179174

161145

70

90

110

130

150

170

190

210

2001 2005 2008 2010 2015

mnunits

Housing Stock Habitable Stock

2.7% CA GR2.5% CA GR

1.6% CAGR

2.3% CA GR

Source: Industry Sources, I-Sec Research

Good monsoon to propel rural housing demand

A good monsoon has a strong bearing on construction activity especially rural

housing, which forms a significant part of overall housing. Water availability as well as

good agricultural productivity and the resultant improved incomes of rural households

after a good monsoon lead to improved cement demand in rural India. Rural housing

also benefits from various Government programmes and schemes. The inclusive

growth agenda (a broader policy envisioning development of all sections of Indian

society), loan waiver scheme, employment generating programmes such as NationalRural Employment Guarantee Scheme (NREGS), rural housing initiatives like Indira

Awas Yojana (IAY) and infrastructure development schemes such as Pradhan Mantri

Gram Sadak Yojana (PMGSY) and Bharat Nirman would boost rural housing both

through increased rural incomes and improved rural infrastructure.

Chart 6: Urban housing stock also to grow at a higher CAGR over 10-15

3942

4650

58

82

7270

6459

30

40

50

60

70

80

90

2001 2005 2008 2010 2015

mnunits

Housing Stock Habitable Stock

2.2% CA GR

2.9% CA GR

1.9% CAGR

2.6% CA GR

Source: Industry Sources, I-Sec Research


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15

In urban areas, project launches by realty players, both regional as well as pan-India

(Unitech and DLF), has led to significant increase in housing launches especially in

metros like NCR (Noida taking the lead), Mumbai (Navi Mumbai airport leading to

increased development) and Bengaluru (led by growth in IT/ITeS). Project launches /

sales volume by top 5 urban builders has almost doubled in the last two years. These

projects with construction horizon ranging from 3-5 years are expected to fuel cement

demand. Further, in FY12, we expect another 40mnte worth of project launches bythe top 5 urban builders.

Chart 7: High number of project launches in FY10-11

2

4

6

8

10

12

14

16

18

20

FY09 FY10 FY11 FY12E

mnsqft

DLF Unitech Sobha HDIL JPA

25mn sqf t

49mn sqf t

40mn sqft35mn sqf t

Source: Industry sources, I-Sec Research

Chart 8: Credit growth in housing sector increasing consistently

400,000

450,000

500,000

550,000

600,000

650,000

700,000

750,000

800,000

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

(Rsmn

)

ICICI Bank

HDFC Upsw ing in home

loans disbursement

Source: Company data, I-Sec Research

Credit growth in housing sector has also been increasing consistently. HDFCs

housing loan has grown at a CQGR of ~4.5% for the past eight quarters. The benefit

of such credit growth will be staggered over the construction horizon of real estate

and will therefore flow in over the next 3-4 years, thereby benefiting cement demand.

While housing loan growth could be impacted given the recent interest rate hikes,

most of the top banks are confident of 18-20% growth in housing loan in FY12E.


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16

Gradual pick-up in Government infrastructure spend

Sharp increase in infrastructure spending expected in XII FYP

Policy thrust on improving the infrastructure across the country and the consequent

investment in roads and highways through programmes such as National Highways

Development Project (NHDP) and Bharat Nirmanis expected to push up the share of

infrastructure spending as a percentage of GDP from 6.0% in FY08 to 10.7% in

FY17E (~10% average during the XII Five-Year Plan). And this spurt in infrastructure

spending is expected to fuel cement demand over the next decade and increase the

share of infrastructure in cement demand from ~20% in FY07-11 to 25%+ in FY12-

16E.

Chart 9: Infrastructure spending during XI FYP and XII FYP

10,3959,180

8,0957,127

6,1945,283

4,6014,0283,5923,038

10.710.39.99.59.08.48.1

7.26.56.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY14E

FY15E

FY16E

FY17E

(Rs

bn

)

0

2

4

6

8

10

12

14

(%)

Infrastructure investment Infrastructure investment as % of GDP (RHS)

XI FYP XII FYP

Source: Ministry of Finance, Planning Commission, I-Sec Research

Significant slowdown in road infrastructure impacted FY11 growthFY11 disappointed with just 5-6% growth in cement demand. Roads, which form a

significant (one-third) portion of overall cement demand from infrastructure, remained

under strain, especially those under NHDP. NHDP Phase 1-6 saw muted growth

given the poor implementations during FY11.

Chart 10: NHDP implementations under strain in FY11

-

200

400

600

800

1,000

1,2001,400

1,600

1,800

FY09 FY10 FY11

(km

)

Phase II-4/6 laning, SEW corridor Phase I-GQ, NSEW, Ports

Phase III-Upgradation, 4/6 laning Phase V-6 laning of GQ

poor

performance

in FY11

Source: Industry sources, I-Sec Research


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17

In FY10, where NHDP met 85% of its implementation targets, in FY11, it could meet

only 55% of its targets. This is lower than even ~60-65% targets it met in FY08 and

FY09. The drop in FY11 is further exacerbated by the fact that the target for FY11

was 21% lower than that for FY10.

As against our expectation of 65% achievement of road targets in FY11, actual

achievement came in at 55%, which could have led to lower than expected cementdemand in FY11.

Chart 11: NHDP targets (85% achievement in FY10) Chart 12: NHDP targets (55% achievement inFY11)

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Phase I Phase II Phase III Phase IV

(km

)

2009-10 Target

2009-10 Achievement

-

200

400

600

800

1,000

1,200

1,400

Phase I Phase II Phase III Phase IV

(km

)

2010-11 Target

2010-11 Achievement*

Source: Ministry of Road, Transport and Highways (MoRTH) *annualisedSource: MoRTH, I-Sec Research

Only NHDP Phase-I&II have shown traction over years. Special Accelerated Road

Development Programme for North Eastern Region (SARDP-NE), Left Wing Extremist

(LWE) and other special programmes are relatively new additions to road projects.

Table 21: Projects under NHDP

Programme DetailsLength

kmCompletion

%Incomplete

km

Cement to beconsumed

(mn te)NHDP-I & II Balance work of GQ and EW-

NS corridors14,145 87 1,827 4

NHDP-III 4-laning 12,109 16 10,141 20NHDP-IV 2-laning 20,000 - 20,000 40NHDP-V 6-laning of selected stretches 6,500 7 6,057 12NHDP-VI Development of expressways 1,000 - 1,000 2NHDP-VII Ring roads, bypasses,

service roads etc.700 - 700 1

SARDP-NE Special Accelerated RoadDevpt Prog. - North East 10,141 - 10,141 20

LWE Areas Left-Wing Extremism Areas 5,477 - 5,477 11SpecialProgramme

Minimum 2-lane 6,700 - 6,700 13

Total 76,772 19 62,043 124*Cement demand, assuming 25% of roads made of concrete and 500kms requiring 1mnte cementSource: NHAI, Committee on Infrastructure, I-Sec Research


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18

Gradual pick-up likely soon

Given the fact that overall completion level of projects stands at just 19%, we expect

implementations to ramp up. Therefore, roads are likely to contribute meaningfully to

overall growth in cement in the near to medium term. For FY12, National Highways

Authority of India (NHAI) has set a steep target of awarding ~8,000km of projects

under NHDP between Apr11 and Jan12.

Table 22: Projects to be awarded during FY12 Initial yearly plan

Monthto be awarded

(km)Projects

(#)Estimated cost

(Rs bn)Cement requirement

(mnte)April11 481 4 55.3 3.3May11 570 5 46.6 2.8June11 756 5 82.8 4.9July11 1,269 7 109.8 6.5August11 1,357 12 49.5 2.9September11 928 7 66.2 3.9October11 1,373 8 31.1 1.9November11 905 7 91.0 5.4December11 135 3 14.2 0.8January12 220 1 23.1 1.4Total 7,994 59 569.4 33.9

*Cement demand, assuming 25% of roads made of concreteSource: NHAI, I-Sec Research

In aggregate, Rs488bn worth of expenditure is targeted in FY12 for various phases of

NHDP, which will help generate 29mnte of cement demand over the year. In FY11,

the expenditure achievement was 80% of the total targeted expenditure and that was

skewed across programmes. Even if we assume similar target achievement in FY12,

NHDP programme will help generate 23mnte of cement demand in FY12 as against

16mnte in FY11.

Table 23: Expenditure target for NHDP and SARDP-NE

NHDP PhaseFY11 (target)

(Rsbn)FY11 (actual)

(Rsbn)FY12 (target)

(Rsbn)Cement

requirement (mnte)I 6.21 16.4 8.5 0.5II 75.41 98.9 37.1 2.2III 150.97 103.4 274.7 16.4IV 13.23 0.0 56.7 3.4V 84.32 49.0 91.0 5.4VI 9.72 - - -VII 1.15 - 4.6 0.3SARDP-NE 4 7.9 15.2 0.9Total 345.0 275.7 487.7 29.0

*Cement demand, assuming 25% of roads made of concreteSource: Government of India, I-Sec Research

In addition to aforementioned projects under NHDP, additional projects will be

awarded to speed up the pace of road development in India. The good news on this

front is the thrust on SARDP-NE the programme has been languishing for a couple

of years now despite all sanctions being in place.

These additional projects to be awarded will add another 2,000km to the total target

awards and another 3-4mnte to the total cement demand in the near term.


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19

Table 24: Additional projects to be awarded during FY12

No NH No Project Name State Length (km) NHDP Phase1 1A Ramban-Banihal Jammu & Kashmir 36 II2 1A Udhampur-Ramban Jammu & Kashmir 40 II3 31&31D Ghoshpukur-Salsalabari West Bengal 163 II4 12 Bhopal-Jabalpur Madhya Pradesh 290 III5 65 Ambala-Kaithal Haryana 86 III6 22 Parwanoo-Solan Himachal Pradesh 41 III

7 233 Ghagra Bridge-Varanasi Uttar Pradesh 177 IV8 69 Obedulganj-Betul Madhya Pradesh 108 IV9 231 Raibareilly-Jaunpur Uttar Pradesh 169 IV10 231 Lucknow - Raibareilly Uttar Pradesh 70 IV11 24B Padhi-Dahod Rajasthan 86 IV12 113 Jhalawar-Rajasthan/Madhya Rajasthan 62 IV13 12 Karauli-Dhaulpur Rajasthan 72 IV14 11B Ambedkar Nagar-Raibareilly Uttar Pradesh 150 IV15 232 Raibareilly-Banda Uttar Pradesh 140 IV16 232A Unnao-Lalganj Uttar Pradesh 68 IV17 65 Rajasthan Border-Fatehpur Rajasthan 135 IV18 37 Demow-Dibrugarh Assam 46 SARDP-NE19 37 Numaligarh-Jorhat Assam 51 SARDP-NE20 37 Jorhat-Demow Assam 82 SARDP-NE

Total 2,072Source: NHAI, I-Sec Research

Commercial construction

Commercial construction includes construction of malls, multiplexes, office space,

hotels and hospitals. As real estate / housing sector picks pace, we expect demand in

commercial / office space to also pick up. Demand for office space is largely driven by

the IT / ITES industry, which comprises 75-80% of commercial demand. Besides,

SEZs will aid the investments made in the industrial sector directly and / or indirectly

through development in and around these zones.


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20

Better placed than earlier down-cycle

Most of the cement companies made bumper profits over FY05-08 and generated

huge operating cashflow. Hence in FY11-14E, they are financially stronger vis--vis

that in the earlier down-cycle (FY00-04).

For cement companies, FY11-14E is better than FY00-04 on account of:

Better profitability EBITDA margins at ~23-25% (FY11-14E) compared to ~13%

(FY00-04)

Low gearing of 0.5x (FY11-14E) compared with ~2.5x (FY00-04)

Strong balance sheet and free cashflow generation

Improved working capital cycle of 10 days from ~35 days

Better efficiency (higher share of captive power plant) and cost control

Higher consolidation (top five companies control ~55% compared to 48% and top

ten players control 72% compared to 66% in FY01)

The companies are even geared up for the next expansion phase, indicating that the

demand-supply mismatch, if any, would not result in disrupting the prices.

High degree of concentration in most regions

High concentration and cost escalations may result in better pricing

disciplineThe cement industry is highly concentrated: top ten companies constitute three-fourth

of the industry; the top five enjoy ~55% market share; top two cement groups (Holcim

and Aditya Birla Group) enjoy ~38% market share and the next five companies have a

combined market share of ~27%.

Even our region-wise analysis points toward high degree of consolidation in most

markets, except South which is fragmented.

Table 25: Consolidation Region-wise market share of top 5 companies

Region Market share (%)North 69Central 86East 78West 73South 52


Table 26: Top 5 companies region-wise

North East Central West South

CompanyCapacityshare (%)





Shree 20 Lafarge 18 Jaypee 34 UTCL 26 India Cements 12UTCL 17 UTCL 18 UTCL 15 ACEM 25 UTCL 12ACEM 14 ACC 16 Prism 15 Jaypee 10 Madras Cem. 11Binani 9 OCL India 15 ACC 12 ACC 8 ACC 9ACC 9 ACEM 11 Century Text. 10 Mehta Grp. 6 Dalmia 8Total 69 Total 78 Total 86 Total 73 Total 52Source: CMA, I-Sec Research


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21

Companies focusing on absolute higher EBITDA

Costs have escalated ~10% YoY and we continue to believe that in order to protect

their margins, the companies would hike cement prices and pass on cost escalations.

Input costs for the industry has gone up over the past one year: International coal

prices are up ~30% YoY; domestic linkage coal prices have been hiked by 30% fromMarch11 and pet coke prices have increased ~25-30%. Overall, average cost of sale

has increased by ~10% to Rs150-155/bag over the period. We believe that major

quantum of cost escalations (domestic / imported coal price increase, diesel / freight

cost rise) for the sector is behind.

We believe companies are focusing on absolute higher EBITDA as they maintain

pricing discipline in South and push volumes in other regions.

Table 27: Current coal mix

(%)

Company Linkage coal e-auctions Imports

Petcoke /

alternative fuelACC 60 20 10 10ACEM 50 5 25 10UTCL 40 10 32 18

Source: Company data

Chart 13: International coal price movement Chart 14: Baltic dry freight index

55

65

75

85

95

105

115

125

135

Sep-0

9

Oc

t-09

Dec-0

9

Fe

b-1

0

Apr-

10

Jun-1

0

Aug-1

0

Oc

t-10

Dec-1

0

Fe

b-1

1

Apr-

11

Jun-1

1

Aug-1

1

(US$

per

te)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jan-04

Aug-04

Mar-05

Oct-05

May-06

Dec-06

Jul-07

Feb-08

Sep-08

Apr-09

Nov-09

Jun-10

Jan-11

Aug-11

(Balticdry

freightindex)

Source: Bloomberg

Table 28: Freight mix

(%) Rail Road SeaACC 50 50 -

ACEM 30 60 10UTCL 36 60 4



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22

Companies have become more cost efficient and financially stronger

Our analysis indicates that the top three cement companies combined would generate

Rs135bn in operating cashflow over FY12E-13E. Further, the companies have started

setting up captive power plants (CPPs) to reduce their dependence on expensive /

irregular external power supply. Most of the cement companies under I-Sec coverage

are sourcing ~80% of their power requirement from CPPs. Still further, the companies

are also planning to split grinding units located closer to key markets / fly ash sourcesto reduce their freight costs. They are building necessary logistic infrastructure to

rationalise freight costs. Besides, they are rationalising their G&A costs and trying to

benefit from scale of operations.

Table 29: Cement companies are financially stronger and more efficient

(Rs mn) FY10 FY11 FY12E FY13EACEMNet sales 70,769 73,902 86,285 99,204EBITDA 18,669 18,236 21,902 25,699Recurring net income 11,592 12,000 14,151 16,748Operating cashfllow 15,411 17,310 17,043 20,165Free cashfllow 7,095 10,071 10,096 8,788

ACCNet sales 84,796 82,587 99,601 114,308EBITDA 24,623 16,117 19,526 22,994Recurring net income 15,638 10,023 11,651 13,907Operating cashfllow 17,940 16,345 16,516 18,751Free cashfllow 6,243 8,745 11,119 12,822

GrasimNet sales 199,334 212,690 243,833 268,639EBITDA 57,867 46,831 53,127 59,392Recurring net income 27,342 20,436 23,581 25,708Operating cashflow 33,924 36,586 36,826 42,397Free cashflow 40,179 820 (644) (1,483)

UTCLNet sales 70,497 154,715 179,742 204,217EBITDA 19,711 31,988 38,223 45,867

Recurring net income 10,932 16,690 19,500 23,855Operating cashfllow 14,809 25,554 26,510 33,729Free cashfllow 11,075 8,453 (990) (1,208)

Shree CementNet Sales 36,321 35,119 43,993 51,059EBITDA 15,010 8,857 10,899 12,656Recurring net income 7,828 2,027 3,071 4,761Operating cashfllow 13,223 4,859 8,710 10,285Free cashfllow 1,013 (3,184) (1,396) 616

JPANet sales 100,889 129,665 142,116 150,470EBITDA 26,249 28,887 35,314 38,284Recurring net income 8,940 7,403 11,209 9,277Operating cashfllow 10,623 10,682 15,272 14,025Free cashfllow (52,370) (30,847) (15,252) (3,762)



23/67


23

Eye on consolidation in the industry

We believe that with pan-India utilisation currently at sub-75% levels, many of the

smaller cement companies, especially those in South (where utilisation tends to be at

sub-60% levels), may not be able to pull through. While pricing discipline in South has

helped these companies to survive as of now, the fact that the region could remain at

sub-60% utilisation over the next 2-3 years has made many companies re-calibratetheir growth plans. Our interaction with larger companies / experts indicate that

valuation expectations from seller side has been coming down and are now in the

range of US$150-160/te (30% premium to average replacement cost) compared to

earlier expectation of US$180-200/te. Few of the companies which could be up for

sale includes: Andhra cements, Penna Cements, Murli Agro, Gujarat Sidhee,

Saurashtra Cements and Star Cement a popular brand of Cement Manufacturing

Company and a 70.5% subsidiary of Century Plyboards.

Table 30: Possible M&A opportunities

Company Region Capacity (mnte)Andhra Cement South 1.4

Penna Cement South 6.5Murli Agro West 2.0Gujarat Sidhee West 2.0Saurashtra Cement West 2.5Star Cement East 1.1Madras Cement Kolaghat East 1.0



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Key risks

Adverse demand-supply mismatch

In case large number of capacities gets commissioned ahead of schedule, a condition

of oversupply could result and this could put pressure on pricing in FY12-13E.

Further, any significant slowdown in project implementation in either or both housingand infrastructure sectors (the key demand drivers for cement) could hit the demand

estimates.

Increased pricing pressure

Sector performance to a large extent depends upon pricing movement. We have

factored in a 5-6% increase in average realisation through FY12-13E. Lower-than-

expected increase would pose a downside risk to our estimates.

Input cost pressure

Historically, cement companies have been able to pass on the rise in input costs to

end-consumers. However, in a scenario of oversupply, the companies may not be

able to do so. Hence, substantial increase in international coal price, domestic coal

price and crude oil can pose a downside risk to our estimates.

Governmental intervention

The Government has been coming up with regulations for the sector from time to time

from placing ban on exports, to increasing duty, to imposing different duty structure

for different level of cement prices. Any such regulation / intervention could hit growth

and pose a downside risk to our estimates. Further, impending order by the

Competition Commission of India (CCI) could also impact cement companies

adversely.

Hike in interest rates

Any further hike in interest rates could hit demand in the housing sector, which in turn,

would impact demand for cement.


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Valuation: Sector likely to get re-rated

We believe that the next 12 months are going to lay the foundation for the next up-

cycle in the cement industry. All-India utilisation would bottom out at ~74% in FY12E

and then inch up to 78% over the next three years. Hence, we expect the valuation to

move to a higher range of mid-cycle valuation.

Table 31: Valuations of cement companies worldwide

Year Mkt. P/E (x) EV/EBITDA (x) Price/Ssales (x)Company End Cap FY12 FY13 FY12 FY13 FY12 FY13EUROPEHolcim 12/2010 24,665 18.7 15.4 8.5 7.4 1.0 0.9Lafarge 12/2010 17,964 16.0 12.6 8.0 7.2 0.8 0.7Buzzi Unicem 12/2010 2,167 30.8 15.6 7.4 6.4 0.5 0.5Italcementi 12/2010 1,972 16.9 12.8 4.6 4.3 0.3 0.3Ciments Francais 12/2010 3,526 10.9 10.6 4.7 4.4 0.6 0.6Titan Cement 12/2010 1,781 21.7 15.6 6.7 7.3 1.1 1.0Vicat 12/2010 3,751 12.2 10.2 6.1 6.8 1.2 1.1Heidelberg Cement 12/2010 2,096 13.5 10.7 8.1 7.0 0.7 0.6Average 17.6 12.9 6.8 6.3 0.8 0.7

ASIAHolcim Indonesia 12/2010 1,920 17.5 14.6 10.0 8.5 2.3 2.1Lafarge Malayan 12/2010 2,117 18.7 15.0 13.3 10.2 2.5 2.3Anhui Conch Cement 12/2010 16,055 8.0 6.6 11.3 5.7 2.0 1.7Indocement 12/2010 6,538 15.4 13.1 11.9 9.4 4.3 3.8Siam Cement 12/2010 13,572 12.1 10.4 13.4 9.1 1.1 1.0Tangshan Jidong 12/2010 4,349 12.6 9.2 15.5 8.7 1.7 1.3Average 14.0 11.5 12.6 8.6 2.3 2.0

AUSTRALIABoral Ltd. 06/2011 3,440 15.7 11.6 7.4 6.1 0.6 0.5James Hardie 03/2011 2,758 22.6 16.8 11.0 11.0 2.3 2.0Average 19.1 14.2 9.2 8.5 1.4 1.3

Source: Bloomberg, I-Sec Research

Table 32: Ev/te of leading international players more than replacement costs

EV/te (US$) FY10 FY11Lafarge 200 169Cemex 276 277Cimpor Cimentos 242 186Holcim 183 174


Replacement cost inching to US$120-140/te for a greenfield expansion owing torising cost of land, limestone mining rights, captive power and logistic infrastructure.Many of the cement stocks are trading at / below their replacement costs.

We have taken ACEMs EV/EBITDA as base, as it has been more stable vis--vis

peers across different cycles. ACEMs average EV/EBITDA over the past ten years

(02-11) and the past 15 years (1996-2011) has been ~8.5x.

We believe that the valuations should also factor in OCF generation capacity,

operating margins and RoCEs. The top three cement companies would generate

Rs135bn in operating cashflow cumulatively over FY12E-13E. Similarly, we expect a

healthy EBITDA margin of 23-25% in FY12E-13E for all the companies under I-Sec

cement universe. RoCEs of ACC, ACEM, Grasim and Shree Cement are in the range

of 17-18%.


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26

Table 33: Key parameters for valuations

OCF (Rs mn) FCF (Rs mn) EBITDA (%)Rec. Net Inc.Margin (%) ROE (%) ROCE (%)

Company FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13EACC 16,516 18,751 11,119 12,822 19.6 20.1 11.3 11.8 17.7 19.0 16.5 17.7ACEM 16,070 18,426 8,919 8,918 24.7 24.9 15.2 15.3 17.2 17.6 16.4 16.9

Grasim 37,822 41,519 (291) (4,804) 22.1 22.5 9.6 9.7 16.0 15.6 17.4 17.8

UTCL 29,450 33,954 1,188 (1,408) 23.1 23.7 12.1 12.6 18.5 18.3 12.9 13.3

JPA 11,983 14,025 (14,241) (3,762) 25.3 25.4 5.5 5.8 8.1 8.7 7.4 7.9

Shree 8,589 10,301 73 (112) 24.6 25.1 6.0 8.8 12.6 18.5 12.2 15.7Source: I-Sec Research

For ACEM, we expect the highest EBITDA margin in CY11 and CY12 vis--vis peers

under our coverage. Further, it is a zero-debt company with strong FCF and has

demonstrated consistent performance over time. Hence, we assign a higher multiple

to value ACEM vis--vis peers. We value ACEM at one-year forward EV/EBITDA of

8.5x (in line with ACEMs average EV/EBITDA over the past ten years ([02-11] and

the past 15 years [1996-2011] of ~8.5x).

Chart 15: ACEMs EV/E premium to UTCL and ACC

(40)

(20)

0

20

40

60

80

100

Mar-

06

Jul-

06

Oct-

06

Feb-

07

May-

07

Sep-07

Dec-

07

Mar-

08

Jul-

08

Oct-

08

Feb-

09

May-

09

Aug-09

Dec-

09

Mar-

10

Jul-

10

Oct-

10

Jan-

11

May-

11

Aug-11

(%)

Ultratech ACC

Source: I-Sec Research, Bloomberg

We assign 7.7x EV/E which is ~10% discount to ACEMs target multiple to value ACC

/ UTCL owing to lower margin / exposure to South (where pricing could be volatile).

Given the robust demand, shorter period of demand-supply mismatch, higher degree

of consolidation in various regions and relatively stable price environment, we believe,

cement stocks would outperform in the long term. We believe that cement is a

structurally strong domestic growth story and any dip should be used as opportunity to

enter the sector.

Table 34: Valuation summaryP/E (x) EV/EBITDA (x) P/B (x)

Company RecoCMP(Rs)

TP(Rs) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

ACC* BUY 1,030 1,160 19.3 16.6 13.9 11.0 8.7 6.9 3.1 2.8 2.5ACEM* BUY 145 162 18.5 16.6 14.4 11.2 9.4 7.9 3.0 2.7 2.4Grasim BUY 2,166 2,750 9.7 8.1 7.3 4.6 4.0 3.5 1.4 1.2 1.1UTCL BUY 1,100 1,235 18.4 14.1 12.0 10.2 7.9 6.9 2.9 2.4 2.0JPA^ BUY 65 80 18.7 17.5 14.9 11.4 9.9 8.9 1.5 1.4 1.2Shree BUY 1,562 2,000 26.9 20.6 12.2 6.5 5.3 4.5 2.7 2.5 2.1

* December year ending; StandaloneSource: I-Sec Research


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Table 35: Stock price outperformance

Absolute (%) Relative to Sensex (%)Company Reco

Price(Rs) QoQ YoY YTD QoQ YoY YTD

ACC Buy 1,030 2.6 4.0 (4.2) 13.6 21.1 19.0ACEM Buy 145 5.6 3.8 1.0 16.9 20.9 25.6Grasim Buy 2,166 (9.8) (23.3) (22.7) (0.1) (10.7) (4.0)UTCL Buy 1,100 6.6 4.2 1.5 18.0 21.3 26.1JPA Buy 65 (22.8) (46.9) (38.6) (14.6) (38.2) (23.7)

Shree Buy 1,562 (2.2) 0.6 (7.6) 8.3 17.0 14.9Source: Bloomberg, I-Sec Research

Sensitivity analysis

Table 36: Sensitivity analysis (% change) on CY11/FY12E EPS

Grasim ACEM UTCL ACC

1% change in realisation from base assumption 2.8 4.2 4.0 3.71% change in raw material cost from base assumption 1 1.2 0.6 0.71% change in power and fuel cost from base assumption 0.7 0.8 0.9 0.71% change in freight cost from base assumption 0.5 0.6 0.8 0.5


Table 37: Key operating assumptions I-Sec cement universeFY10 FY11 FY12E FY13E

Realisation/te (Rs)ACC 3,968 3,864 4,207 4,401ACEM 3,766 3,672 4,002 4,223UTCL 3,489 3,903 4,323 4,540JPA 4,010 3,601 3,853 4,046Shree 3,372 3,114 3,363 3,498

EBITDA/te (Rs)ACC 1,152 754 825 885ACEM 993 906 990 1,052UTCL 976 795 1,000 1,076JPA 1,254 878 877 922Shree 1,356 755 853 905

Volumes (mnte)ACC 21.4 21.4 23.7 26.0ACEM 18.8 20.1 21.1 22.9UTCL- cement and clinker* 20.2 39.5 41.0 44.1JPA 10.9 15.6 17.3 19.1Shree 10.2 10.3 10.9 11.9

Utilisation (%)ACC 81.7 78.9 77.4 84.9ACEM 85.6 80.5 78.3 84.9UTCL 76.4 78.0 77.2 83.4JPA 57.0 67.7 75.0 83.0Shree 89.3 85.1 81.0 88.0

*Merger with Samruddhi Cement assumed w.e.f April 1, 10Source: Company data, I-Sec Research


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Table 38: Our estimates ahead of consensus

Sales EBITDA PATFY12E FY13E FY12E FY13E FY12E FY13E

ACCConsensus estimates 95,320 107,656 19,079 22,047 11,328 13,256I-Sec estimates 99,601 114,308 19,526 22,994 11,651 13,907Variation (%) 4.5 6.2 2.3 4.3 2.9 4.9

ACEMConsensus estimates 83,031 93,422 20,834 23,325 12,632 14,467I-Sec estimates 84,588 96,838 20,923 24,129 13,326 15,382Variation (%) 1.9 3.7 0.4 3.4 5.5 6.3

GrasimConsensus estimates 228,477 250,838 47,989 60,218 23,116 24,274I-Sec estimates 247,712 274,071 54,854 61,796 24,636 27,389Variation (%) 8.4 9.3 14.3 2.6 6.6 12.8

UTCLConsensus estimates 172,207 193,132 37,551 42,269 19,056 21,897I-Sec estimates 177,067 200,020 40,967 47,412 21,704 25,470Variation (%) 2.8 3.6 9.1 12.2 13.9 16.3

JPAConsensus estimates 145,519 168,059 35,732 40,172 8,957 11,896

I-Sec estimates 135,507 150,470 34,336 38,284 7,920 9,277Variation (%) (6.9) (10.5) (3.9) (4.7) (11.6) (22.0)

Shree CementConsensus estimates 42,161 50,516 10,499 12,525 2,304 4,750I-Sec estimates 43,064 49,813 10,601 12,492 2,640 4,450Variation (%) 2.1 (1.4) 1.0 (0.3) 14.5 (6.3)



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Annexure 1: Capacity addition Schedule

(mnte)

Installed Capacity

Company CoD Region FY10 FY11 FY12E FY13E FY14E

ACC - Bargarh Mar-10 East 1.1

ACC - Thondebhavi, Bengaluru Nov-10 South 1.6

ACC - Kudithini, Bellary Nov-10 South 1.1ACC - Wadi Nov-10 South 0.3

ACC - Chanda Mar-11 West 3.0

Ambuja - Darlaghat,HP Apr-09 North 0.2

Ambuja - Kodinar, Gujarat Apr-09 West 1.5

Ambuja - Surat, Gujarat Apr-09 West 2.1

Ambuja - Dadri Feb-10 Central 1.5

Ambuja - Nalagarh Mar-10 North 1.5

Ambuja - Maratha Jun-11 West 0.9

Ambuja - Bhatapara Jun-11 East 1.1

ABG Cements Dec-12 West 3.0

Binani Cements Dec-09 North 0.3

Birla Corp - MP Oct-10 Central 0.9

Birla Corp - Rajasthan Oct-10 North 0.9

Birla Corp - Rajasthan Dec-12 North 1.2Birla Corp - West Bengal Dec-12 East 0.6

Bhavya Cement Nov-10 South 1.0

Chettinad Apr-09 South 1.0

Chettinad - Karur Jan-10 South 0.6

Chettinad - Karikalli Jan-10 South 0.2

Chettinad - Ariyalur Jan-10 South 2.6

Chettinad - Karikalli Mar-11 South 2.3

Dalmia - Ariyalur Jun-09 South 2.5

Grasim - Shambhupura Jun-09 North 1.6

Grasim - Aligarh Central Sep-09 Central 1.3

Grasim - Kotputli Mar-10 North 3.1

India Cements Apr-09 South 2.2

India Cements Apr-09 West 1.1

India Cements Mahi, Rajasthan Dec-10 North 1.3Jayajyothi Jun-10 South 1.0

Jaiprakash - Sidhi, Chunar, Dalla Sep-09 Central 1.6 1.0

Jaiprakash - GACL SP-1 Kutch Sep-09 West 1.2

Jaiprakash -Wanakbori 1 Jan-10 West 1.2

Jaiprakash- Roorke Jan-10 North 1.2

Jaiprakash -Baga (HP) Sep-11 North 2.0

Jaiprakash -Bagheri (HP) Mar-10 North 1.8

Jaiprakash- SAIL JV Bhilai Apr-11 East 2.2

Jaiprakash- GACL SP-2 Kutch Mar-11 West 1.2

Jaiprakash -Wanakbori 2 Mar-11 West 1.2

Jaiprakash - Sikandrabad Jun-11 Central 1.0

Jaiprakash - Dalla Dec-11 Central 2.5

Jaiprakash- SAIL JV Bokaro Jun-11 East 2.1

Jaiprakash - Balaji Mar-12 South 3.5

JK Cement Sep-09 South 1.3

JK Cement Sep-09 South 1.7

JK Cement Mar-14 North 3.5

JK Lakshmi Cement Aug-09 North 0.8

JK Lakshmi Cement -Durg Dec-12 East 2.7

JSW Sep-12 South 2.0

KCP Cements Dec-10 South 1.0

KJS Cement Sep-12 Central 2.3

Kesoram - vasavadatta Aug-09 South 1.7

Lafarge - Jharkhand Dec-11 East 1.0

Lafarge - HP Sep-12 North 2.0

My Home Indus Nov-10 South 1.3


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Installed Capacity

Company CoD Region FY10 FY11 FY12E FY13E FY14E

Heidelberg Cement Jun-12 Central 1.0

Heidelberg Cement Dec-12 Central 1.9

Madras Cement Jul-09 South 0.6

Madras Cement Sep-09 South 0.6

Madras Cement - Kolaghat Feb-10 East 1.0

Madras Cement Mar-11 South 1.3

Madras Cement Sep-11 South 2.0

Murali Agro Mar-10 West 3.0

NCL - Nalgonda Nov-10 South 1.0

OCL Rajgangpur Apr-09 East 2.2

OCL India - Kapilas Apr-09 East 0.5

Orient Cement - Devapur Mar-10 South 0.6

Orient Cement - Jalgaon Mar-10 West 1.0

Others Mar-11 East 1.0

Others Mar-12 East 1.0

Prism Cements Sep-10 Central 3.6

Raghuram Cement (Bharathi) Dec-09 South 2.5

Raghuram Cement (Bharathi) Dec-10 South 2.0

Sagar-Vicat Cement Dec-12 South 2.5

Shree Cements - Suratgarh, Rajasthan Mar-10 North 1.2

Shree Cements - Roorkee, Uttrakhand Mar-10 North 1.8Shree Cements - Jaipur, Rajasthan Mar-11 North 1.5

Shriram cements Apr-09 North 0.2

Ultratech Sep-08 South

Ultratech Mar-09 South

Ultratech May-09 South 1.2

Ultratech - Raipur, Chhatisgarh Sep-14 East 4.8

Ultratech - Gulbarga, Karnataka Sep-14 South 4.4

Vasvadatta cements Apr-08 South

Wonder cement Sep-12 North 2.5

Zuari (Italicementi) Nov-10 South 1.5

Total 195.65 53.0 35.1 15.1 21.7 12.7Source: CMA, I-Sec Research


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Annexure 2: Regional capacity additions

FY11E FY12E FY13E FY14E FY11E FY12E FY13E FY14E

Incremental capacity (mnte) Incremental effective capacity (mnte)

Region

North 5.7 - 5.7 3.5 10.2 6.4 1.7 4.1

Central 5.5 3.5 5.2 - 4.0 5.1 3.8 4.0

East 3.2 5.2 3.3 4.8 3.8 3.6 3.5 4.1

West 5.4 0.9 3.0 - 4.4 6.2 2.1 2.4

South 15.4 5.5 4.5 4.4 14.1 9.1 8.1 6.7

Total 35.1 15.1 21.7 12.7 36.5 30.4 19.2 21.2

Capacity additions (%) Incremental capacity additions (%)

North 16.1 - 26.3 27.6 27.9 21.2 8.7 19.2

Central 15.5 23.2 24.0 - 11.0 16.8 19.7 18.7

East 9.1 34.4 15.2 37.8 10.4 11.8 18.3 19.2

West 15.4 6.0 13.8 - 12.0 20.2 11.0 11.5

South 43.9 36.4 20.7 34.6 38.7 30.0 42.3 31.3

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Source: CMA, I-Sec Research


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Annexure 3: Index of Tables and ChartsTablesTable 1: Cement supply / demand industry outlook .............................................................3Table 2: EBITDA margins in narrow range...........................................................................4Table 3: Utilisation ex-South to improve by ~500bps over FY12-14E..................................4Table 4: Utilisation sensitivity assuming ~6% demand CAGR over FY12-14E....................4Table 5: Region-wise realisation growth...............................................................................5Table 6: Company-wise realisation growth...........................................................................5Table 7: South contributing >60% in the total oversupply ....................................................7Table 8: Break-up of capacities region-wise for key companies ..........................................7Table 9: North to see ~700bps improvement in utilisation over FY12-14E ..........................8Table 10: Key capacity additions in North region .................................................................8Table 11: Central Utilisation to remain in >90% range ......................................................8Table 12: Key capacity additions in Central region ..............................................................9Table 13: East Utilisation to remain in 85%+ range...........................................................9Table 14: Key capacity additions in East region ...................................................................9Table 15: West to see ~700bps improvement in utilisation over FY12-14E.........................9Table 16: Key capacity additions in West region ................................................................10Table 17: South utilisation to remain in ~60% range .......................................................10Table 18: Key capacity additions in South region...............................................................10

Table 19: Forthcoming elections in few large states ..........................................................13Table 20: Cement demand growth (%)...............................................................................13Table 21: Projects under NHDP .........................................................................................17Table 22: Projects to be awarded during FY12 Initial yearly plan ...................................18Table 23: Expenditure target for NHDP and SARDP-NE ...................................................18Table 24: Additional projects to be awarded during FY12..................................................19Table 25: Consolidation Region-wise market share of top 5 companies ........................20Table 26: Top 5 companies region-wise.............................................................................20Table 27: Current coal mix..................................................................................................21Table 28: Freight mix ..........................................................................................................21Table 29: Cement companies are financially stronger and more efficient..........................22Table 30: Possible M&A opportunities................................................................................23Table 31: Valuations of cement companies worldwide.......................................................25Table 32: Ev/te of leading international players more than replacement costs ..................25Table 33: Key parameters for valuations ............................................................................26Table 34: Valuation summary .............................................................................................26Table 35: Stock price outperformance................................................................................27Table 36: Sensitivity analysis (% change) on CY11/FY12E EPS.......................................27Table 37: Key operating assumptions I-Sec cement universe ........................................27Table 38: Our estimates ahead of consensus ....................................................................28ChartsChart 1: Utilisation to bottom out in FY12 .............................................................................3Chart 2: Utilisation versus cement prices .............................................................................5Chart 3: Cement price chart Region-wise..........................................................................6Chart 4: GDP versus cement demand growth....................................................................12Chart 5: Rural housing stock to grow at a higher CAGR over 10-15 .................................14Chart 6: Urban housing stock also to grow at a higher CAGR over 10-15 ........................14Chart 7: High number of project launches in FY10-11 .......................................................15Chart 8: Credit growth in housing sector increasing consistently .......................................15Chart 9: Infrastructure spending during XI FYP and XII FYP .............................................16Chart 10: NHDP implementations under strain in FY11 .....................................................16Chart 11: NHDP targets (85% achievement in FY10) ........................................................17Chart 12: NHDP targets (55% achievement in FY11) ........................................................17Chart 13: International coal price movement ......................................................................21Chart 14: Baltic dry freight index.........................................................................................21Chart 15: ACEMs EV/E premium to UTCL and ACC.........................................................26


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Market Cap Rs194bn/US$4.1bn Year to Dec 2009 2010 2011E 2012EReuters/Bloomberg ACC.BO/ACC IN Revenue (Rs mn) 84,796 82,587 99,601 114,308

Shares Outstanding (mn) 188 Net Income (Rs mn) 15,638 10,023 11,651 13,907

52-week Range (Rs) 1,129/938 EPS (Rs) 83.2 53.3 62.0 74.0

Free Float (%) 49.7 % Chg YoY 47.9 (35.9) 16.2 19.4

FII (%) 15.2 P/E (x) 12.4 19.3 16.6 13.9

Daily Volume (US$'000) 6,152 CEPS (Rs) 103.1 76.1 89.3 105.4

Absolute Return 3m (%) 2.6 EV/E (x) 7.5 11.0 8.7 6.9

Absolute Return 12m (%) 4.0 Dividend Yield 2.2 3.0 2.4 2.4

Sensex Return 3m (%) (9.7) RoCE (%) 26.1 14.9 16.5 17.7

Sensex Return 12m (%) (14.1) RoE (%) 29.3 16.5 17.7 19.0

ACC BUY Maintained

Market share gain Rs1,030

Reason for report: Company update


BSE Sensex: 16502

Cement

Target price Rs1,160

Shareholding patternDec10

Mar11

Jun11

Promoters 48.2 49.3 50.3Institutionalinvestors 31.5 30.4 30.4

MFs and UTI 0.7 1.3 1.4Insurance Cos. 15.3 14.2 13.8FIIs 15.5 14.9 15.2

Others 20.3 20.3 19.3Source: NSE

Price chart

900

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Sep-11

(Rs.)

Krupal Maniar, [email protected] 22 6637 7254

Varun [email protected] 22 6637 7180

ACC posted a volume growth of 11.4% in H1CY11 versus the industry growth of~3%, improving the companys market share from 9.7% to 11%. This was on theback of tapping new markets in South (Karnataka and Kerala) and East. Thecompany is also focusing on improving its operating efficiencies throughincreased use of CPPs and alternative fuels, higher domestic coal linkages andSG&A rationalisation. Pan-India presence, better market mix, strong brand equity(ACC is the oldest cement brand) and higher rural penetration would help thecompany boost its realisations. We expect revenue, EBITDA and EPS CAGR of~18% over CY11-12E. Valuations at US$120/te (near replacement cost) and CY12EEV/E of 6.9x are attractive in our view. Maintain BUY with a target price of Rs1,160(7.7x March13 EV/E). Merger with ACEM can provide additional upside triggers.

Volume growth continues to remain higher than peers. The benefits of rampingup of 3mnte Wadi plant commissioned in Sept10 and 3mnte Chanda plantcommissioned in March11 are already accruing, as reflected in the companysindustry-leading volume growth in H1CY11 (11.4% over H1CY10).

Next phase of expansion likely to be announced by end CY11. ACC is likely toannounce ~5mnte new capacities in East, which are expected to be operationalpost CY13E. The company has a net cash of Rs18bn and is expected to generateFCF of ~Rs18bn over H2CY11-CY12E.

Better cost efficiencies to contain margin erosion. ACC with 351MW CPPwould be able to increase its CPP consumption to ~85% from 78% at present. Thecompany imports only 10% of its coal requirement, whereas it has linkages for 60-

65% the biggest cost advantage among peers. Besides, increased use ofalternative fuels and industrial wastes would lead to substantial savings. RMC willlikely turn around by 12.ACC is expected to have significant coal cost advantage inthe long term through in-sourcing of coal from mines (currently being developedthrough JVs with the state Governments of Madhya Pradesh and West Bengal),which will get operational over the next 3-4 years.

Maintain BUY with a target price of Rs1,160. We maintain our volume growthassumption of 12% and 9% for CY11E and CY12E respectively owing to ramping upof new capacities. We reckon in higher average realisations (+7% in CY11E, whichwould be 2% lower than Q2CY11 realisations, then growing 4.5% in CY12E). Wealso factor in ~20-21% EBITDA margins for CY11-12E.

INDIA


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ACC, September 13, 2011 ICICI Securities

32

Table 1: Historic quarterly per-tonne analysis

(Rs/te)Q2CY10 Q3CY10 Q4CY10 Q1CY11 Q2CY11

Cement realisations including RMC 4,112 3,642 3,945 4,150 4,282Growth % (YoY) (1.0) (15.3) 0.2 3.4 4.1Raw material with stock adj 690 850 694 827 672Staff costs 218 263 298 198 219Power & Fuel costs 752 754 857 783 965

Outward freight 511 466 674 557 586Other expenditure 895 967 901 878 916Total cost 3,066 3,300 3,424 3,244 3,358EBITDA 1,046 342 521 906 923


Table 2: Performance trend and assumptions

CY07 CY08 CY09 CY10 CY11E CY12ECapacity (000te) 22,409 22,629 26,169 27,083 30,583 30,583Production (000te) 19,921 20,836 21,369 21,375 23,675 25,975Capacity utilisation (%) 88.9 92.1 81.7 78.9 77.4 84.9Sales (000te) 19,498 20,702 21,273 20,984 23,675 25,975Growth (%) 6.2 6.2 2.8 (1.4) 12.8 9.7Realisation (Rs/te) 3,406 3,534 3,773 3,676 3,947 4,118Growth (%) 13.6 3.8 6.8 (2.6) 7.4 4.3


Table 3: Per-tonne estimate analysis

(Rs/te) CY07 CY08 CY09 CY10 CY11E CY12ENet realisation including RMC 3,517 3,705 3,968 3,864 4,207 4,401Raw material consumed 453 554 593 723 762 782Power & Fuel costs 600 774 726 753 914 985Freight costs 474 479 511 527 574 597Other expenses 1,028 1,101 985 1,107 1,133 1,151

Total operating expenses 2,555 2,907 2,816 3,110 3,382 3,515

EBITDA 962 798 1,152 754 825 885Source: Company data, I-Sec Research

Table 4: Sensitivity analysis (% change) on CY12 EPS

1% change in realisations from base assumption 3.71% change in raw material costs from base assumption 0.71% change in power and fuel cost from base assumption 0.71% change in freight cost from base assumption 0.5



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Chart 1: Key financials Chart 2: RoCE and RoE

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Valuations attractive; maintain BUY

At the current market price, ACC is valued at CY11E and CY12E P/E of 16.6x and

13.9x and EV/E of 8.7x and 6.9x respectively. On EV/te, the company is valued at

US$120, which we believe is attractive for the industry leader, given its pan-India

diversified presence, strong cashflow generation and healthy return ratios far

exceeding the cost of capital. We maintain BUY on ACC with a target price of Rs1,160

(7.7x March13E EV/E).

Table 5: Valuations based on CY12E

Target EV/EBITDA (x) 7.7Target EV (Rs mn) 182,369Net debt/(cash) (Rs mn) (35,004)Target value (Rs mn) 217,373No. of shares (mn) 188.0Target price per share (Rs) 1,160



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Chart 5: Rolling P/E bands

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Financial summary (consolidated)Table 6: Profit and Loss statement

(Rs mn, year ending December 31)CY09 CY10 CY11E CY12E

Operating Income (Sales) 84,796 82,587 99,601 114,308Operating Expenses 60,173 66,471 80,075 91,314EBITDA 24,623 16,117 19,526 22,994

% margin 29.0 19.5 19.6 20.1Depreciation & Amortisation 3,731 4,277 5,127 5,903Gross Interest 844 579 1,054 1,051Other Income 2,427 2,961 3,068 3,491Recurring PBT 22,506 14,257 16,456 19,587Add: Extraordinaries - 753 - -Less: Taxes 6,868 4,234 4,805 5,680

- Current tax 6,742 4,206 4,772 5,680- Deferred tax 126 28 33 -

Less: Minority Interest - - - -Net Income (Reported) 15,638 10,776 11,651 13,907Recurring Net Income 15,638 10,023 11,651 13,907


Table 7: Balance sheet

(Rs mn, year ending December 31)

CY09 CY10 CY11E CY12EAssetsTotal Current Assets 23,302 27,631 35,528 46,018of which Cash & cashequivalents

18,962 24,420 33,454 44,682

Current Liab. & Prov. 32,653 38,674 44,993 50,936Net Current Assets (9,351) (11,044) (9,465) (4,918)Investments of which 11,921 14,068 19,494 22,342

Strategic/Group 503 503 503 503Marketable 11,418 13,565 18,991 21,839

Net Fixed Assets* 43,784 53,066 54,938 55,035of which

Intangibles 1,313 1,468 1,468 1,468Capital Work-in-Progress 21,575 15,642 13,295 14,625Total Assets 67,929 71,732 78,262 87,084

LiabilitiesBorrowings 5,669 5,240 5,240 5,240Deferred Tax Liability 3,546 3,668 4,035 4,438Minority Interest 2 3 3 3Equity Share Capital 1,879 1,880 1,880 1,880Face value per share (Rs) 10 10 10 10

Reserves & Surplus* 56,819 60,928 67,082 75,491Less: Misc. Exp # 10 7 5 4Net Worth 58,689 62,800 68,956 77,366Total Liabilities 67,929 71,732 78,262 87,084* excluding revaluation reserves; #. - not written-offSource: Company data, I-Sec Research

Table 10: Quarterly trend

(Rs mn, year ending December 31)

Sep-10 Dec-10 Mar-11 Jun-11

Net sales 17,592 20,923 25,562 25,390% growth (YoY) (15.3) 2.1 14.1 17.2Recurring EBITDA 1,651 2,762 5,581 5,475Margin (%) 9.4 13.2 21.8 21.6Other income 818.2 929.4 693.8 773.0Extraordinaries Inc / (Loss) 0 753 - -Recurring Net Income 863 1,736 3,502 3,281Source: Company data

Table 8: Cashflow statement

(Rs mn, year ending December 31)CY09 CY10 CY11E CY12E

Operating Cash flow 17,940 16,345 16,516 18,751Working Capital changes 4,317 (601) (115) 1,400Capital Commitments (16,013) (6,998) (5,282) (7,330)

Net Operating FCF 6,243 8,745 11,119 12,822Investing Activities (4,283) 815 (2,358) 643Issue of Share Capital 1 0 - -Buyback of shares - - - -Inc(Dec) in Borrowings 849 (430) - -Dividend paid (5,057) (6,707) (5,497) (5,497)Extraordinary Items - 753 - -Chg. in Cash & Bank (2,371) 3,312 3,607 8,380Source: Company data, I-Sec Research

Table 9: Key ratios

(Year ending December 31)CY09 CY10E CY11E CY12E

Per Share Data (Rs)EPS(Basic) 83.2 57.3 62.0 74.0Diluted Recurring EPS 83.2 53.3 62.0 74.0

Di luted Recurring CEPS 103.1 76.1 89.3 105.4Dividend per share 23.0 30.5 25.0 25.0Book Value 312.3 334.1 366.9 411.6Growth Ratios (% YoY)Operating Income 9.8 (2.6) 20.6 14.8EBITDA 48.1 (34.5) 21.2 17.8Recurring Net Income 47.9 (35.9) 16.2 19.4Diluted Recurring EPS 47.9 (35.9) 16.2 19.4Diluted Recurring CEPS 40.6 (26.2) 17.3 18.1Valuation Ratios (x)P/E 12.4 19.3 16.6 13.9P/CEPS 10.0 13.5 11.5 9.8P/BV 3.3 3.1 2.8 2.5EV / EBITDA 7.5 11.0 8.7 6.9EV / te (US$) 151 143 120 113EV / Operating Income 2.2 2.2 1.7 1.4EV / Operating FCF 8.3 11.3 10.3 7.9Operating Ratios (%)Raw Material / Sales 15.0 18.7 18.1 17.8SG&A / Sales 5.0 5.7 5.5 5.5Other Income / PBT 10.8 20.8 18.6 17.8Effective Tax Rate 30.5 26.9 29.2 29.0NWC / Total Assets (0.2) (0.3) (0.3) (0.3)Inventory (x) 5.6 5.8 5.7 5.6Receivables (days) 13 10 10 11Payable (days) 99 91 84 91D/E Ratio (x) 0.2 0.1 0.1 0.1Profitability Ratios (%)Rec. Net Income Margins 17.9 11.7 11.3 11.8

RoCE 26.1 14.9 16.5 17.7RoNW 29.3 16.5 17.7 19.0Dividend Payout 27.6 57.2 40.3 33.8



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Ambuja Cements BUY Maintained

Believe in the best Rs145Reason for report: Company update


BSE Sensex: 16502

Cement

Target price Rs162

Shareholding patternDec10

Mar11

Jun11

Promoters 46.2 46.2 50.4Institutionalinvestors 42.4 41.7 38.3

MFs and UTI 1.5 1.5 1.8Insurance Cos. 13.2 13.0 12.8FIIs 27.7 27.2 23.7

Others 11.4 1

2011 September ICICI Sec Cement Sector

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