Corporate Finance 2013www.bdoindia.co.in

INDIAN CEMENT SECTORAn Update from BDO India Corporate Finance

QUICK FACTS:• Indiaisthe2ndlargestintheworldintermsofcement

productionbehindChina.

• Installedcapacityof330milliontonnes(MT).

• Over139largecementplantsand365minicementplantsareoperatinginIndia.

• CementconsumptionpercapitainIndiaisapproximately136kgandisoneofthelowestintheworld(Worldaverage508kg).

INDUSTRY STRUCTURE:• Morethan46playersintheindustrywithmajorplayersbeing

UltratechCementLtd.,ACCLimited,AmbujaCementsandJaypeeCements.

• Industryremainsconcentratedwithtopfiveplayerscontrollingalmost60%ofthetotalinstalledcapacity.

• Overallindustryissubdividedintodomesticregionsincludingnorth,south,west,eastandthecentralregion.

• Excesscapacityinthesouthernregionowingtotheabundantavailabilityoflimestone.Over23milliontonnesofcementcapacityhascomeonstreamduringlasttwoyears.

REGIONAL PLAY:

MARKET SHARE:

11%

10%

18%5%

8%

5%

43%

Source: Company investor presentation

ACC

Ambuja

Ultatech

India Cements

Jaypee Cements

Shree Cements

Others

45%

40% 40% 40%

38%

34%

36%

38%

40%

42%

44%

46%

2007-08 2008-09 2009-10 2010-11 2011-12

Market share of top 3 players

Source: Macquarie research, March 2012

Cement Industry

Rajasthan, Punjab, Haryana & NCR

West Bengal, Chhattisgarh, Orissa & Jharkhand

Tamil Nadu, Andhra Pradesh & Karnataka

Uttar Pradesh & Madhya Pradesh

Maharashtra & Gujarat

North

South

West

Central

East

POLICY AND REGULATORY INITIATIVES BY GOVERNMENT OF INDIA Key highlights of Union Budget 2013 - big push for infrastructure

• The12thPlanprojectsaninvestmentofUSD1trillionorINR55,000billionininfrastructure,ofwhichtheprivatesectorwillshare47%.

• InfrastructureDebtFunds(IDF)tobeencouraged.Thesefundswillraiseresourcesand,throughtake-outfinance,creditenhancementandotherinnovativemeans,providelong-termlow-costdebtforinfrastructureprojects.

• FourIDFshavealreadybeenregisteredwithSEBIandtwoofthemwerelaunchedinFebruary,2013.

• IndiaInfrastructureFinanceCorporationLtd.inpartnershipwiththeAsianDevelopmentBank,willoffercreditenhancementtoinfrastructurecompanies.

• Infrastructuretax-freebondofINR500billiontobeallowedinFY13-14.

• GovernmentwouldseekfundsofmultilateralagenciessuchastheAsian Development BankandtheWorld Bank to build roadsinnortheasternIndia,linkingtheregionwithneighboringMyanmar.

• CorpusofRuralInfrastructureDevelopmentFund(RIDF)operatedbyNABARDtoberaisedtoINR200billion.

• INR50billiontobeprovidedtoNABARDtofinanceconstructionforwarehousing.

• 3,000kmsofroadprojectsinGujarat,MadhyaPradesh,Maharashtra,RajasthanandUttarPradeshwillbeawardedinthefirstsixmonthsofFY13-14.

• RegulatoryAuthoritytoremovebottlenecksinroadsectortobeconstituted.

• Governmentwouldpushforbuildingofnewportsandindustrialcorridors.

• PPPpolicyframeworkwithCoalIndiaLimitedasoneofthepartnersunderconsiderationinordertoincreasetheproductionofcoalforsupplytopowerproducersandotherconsumers.

• Hikeinimportdutyoncoalto4%vs.currentrateof1%-anegativeforcompanieslargelydependentonimportedcoal.

• AdditionaldeductionofinterestuptoINR0.1millionforapersontakingfirsthomeloanuptoINR2.5millionduringperiod

1.4.2013to31.3.2014-astimulusforcementsector.

NATIONAL COUNCIL FOR CEMENT AND BUILDING MATERIALS (NCB) • TheDepartmentofIndustrialPolicyandPromotion(DIPP)

whichoverseesthedevelopmentofcementindustriesinIndia,hasestablishedtheNationalCouncilforCementandBuildingMaterials(NCB).

• NCBisanapexbodydedicatedtocontinuousresearch,technologydevelopmentandtransfer,educationandindustrial

servicesforthecementandbuildingmaterialindustries.

Development Council for cement industry• TheDevelopmentCouncilforcementindustrywasestablished

undertheIndustriesDevelopmentandRegulationAct.

• ItaimstodevelopandpromotethecementindustryinIndiabyfundingprojectsrelatedtoincreasingproductivityviacostreduction,optimizingtheutilityofrawmaterials,standardizationofmethodsandqualitycontrols,environmentalimprovementandmodernization.

Cement Manufacturers ‘Association (CMA) - a bridge between the Indian cement industry and the Government• Establishedin1961,CMAistheapexbodyofcement

manufacturersinIndia.

• Hasboththeprivateandpublicsectorcementcompaniesasits

members.

Competition Commission of India (CCI)• EstablishedbytheCentralGovernmentwitheffectfrom14th

October2003

• Duty:Toeliminatepracticeshavingadverseeffectoncompetition,topromoteandsustaincompetition,toprotecttheinterestsofconsumersandensurefreedomoftradeinthemarketsofIndia.

• CCIkeepsaclosecheckontheactivitiesofIndiancementmanufacturers.

IMPACT OF UNION BUDGET :Budget 2013: No changes proposed despite industry’s expectation of reduction in excise duty!

Budget 2012:• Excisedutyrationalisedforpackagedcement

• RSPbasedvaluationprescribedforPortlandcement(inpackagedform)with30%abatement.

• Standardrateincreasedto12%.

Summary of rate changes

Items Excise duty rate movement(%)

Basic Duty From To

Packagedcementmanufacturedinaminicementplant

whereretailsalepricedoesnotexceedINR190per50kilogrambagorwherepertonneRSPdoesnotexceedINR3,800

whereretailsalepriceexceedsINR190per50kilogrambagorwherepertonneRSPexceedsINR3,800

10%

10%+INR30per tonne

6%+INR120per tonne

6%+INR120per tonne

Packagedcementmanufacturedotherthaninamini-cementplantwhereretailsalepricedoesnotexceedINR190per50kilogrambagorwherepertonneRSPdoesnotexceedINR3,800whereretailsalepriceexceedsINR190per50kilogrambagorwherepertonneRSPexceedsINR3,800

10%+INR80per tonne

10%+INR160per tonne

12%+INR120 per tonne

12%+INR120 per tonne

Cement,notclearedinpackagedform

10% 12%

Cementclinker10%+INR200

per tonne12%

TREND IN FDI INFLOWS:

28,305

4,396

12,934

20,457

10,039

-

5,000

10,000

15,000

20,000

25,000

30,000

2010-11 2011-122009-102008-092007-08

Amou

nt in

INR

milli

on

FDI Inflows

Source: Department of Industrial Policy and Promotion

• TotalFDIinflowsincementandgypsumsectorduringtheperiodfromSeptember2008toSeptember2012remainedINR76,131million(USD1,686million).

• Duringtheperiod2007-09,therehasbeenasharpdeclineofFDIInvestmentsinthissector,becauseoftheglobaleconomicslowdown.FDIinvestmentsfellsharplyby84%in2008-09ascomparedto2007-08.

• ThegrowthoftheIndiaeconomyhasslowedinrecenttimesonaccountoftherisinginflation,highinterestrates,highpricesofcommoditiesandfuels.Generallythegrowthprospectsofthecementsectorarecloselylinkedtothegrowthoftheoveralleconomyandtherealestate&constructionsectorinparticular.

• Economicgrowthwasalsoimpactedbecauseofslowdowninthemanufacturingactivitiesbecauseofcreditcrunchinthesystem.ReserveBankofIndia(RBI)hikedkeylendingratesaimedatcurbingtheinflationarypressures,whichresultedinslowdownintherealestatesectorandimpactedtheinfrastructureandconstructionprojects.

GLOBAL DEMAND:

Demand for cement (million tonnes)

2005 2012 % increase

NorthAmerica 170 200 2.9

WestEurope 208 236 2.2 AsiaPacific 1,500 1,900 5.2

Otherregions 405 500 4.7 Total world demand 2,283 2,836 4.7

Source: Philippe Lasserre- Globalisation Cement Industry

Led by a growth in the emerging markets

Overall capacity addition was impacted by a global meltdown in 2008 and the current macroeconomic uncertainties

IMPACT OF PENALTY IMPOSED BY CCI

• CompetitionCommissionofIndia(CCI)videitsorderdated21June2012found11cementcompaniesguiltyofviolationoftheprovisionsofCompetitionAct,2002whichdealswithanti-competitiveagreementsincludingcartels.

• Followingthis,CCIimposedpenaltyon11cementmanufacturersincludingACCLimited,AmbujaCementsLimited,UltratechCementLimited,GrasimCement(nowmergedwithUltratechCementLimited),TheIndiaCementsLimited,MadrasCementsLimited,CenturyTextilesandIndustriesLimited,BinaniCementLimited,LafargeIndiaPrivateLimitedandJaypeeCement.

• PerCCIorder,thesecompanieshavetopayapenaltyof50%oftheirprofitsfortheFY09-10(from20thMay2009onwards)andFY10-11withthetotalamountofpenaltiesaggregatingtoapproximatelyINR6,300crores.Thecementmanufacturershavetodepositthisamountwithinaperiodof90days.

• Further,CCIhasalsoimposedafineofINR73lakhsontheindustryassociation-CMAandhaveaskedittodisassociateitselffromcollectingwholesaleandretailpricesdatathroughmembercompanies,andalsofromcirculatingdetailsoncementproductionanddispatchestoitsmembers.

• PostCCIorder,theindustryplayerswillfinditdifficulttomaintainproductiondisciplineastheywillbeunderthescannerofCCIandthismayalsoimpactthepricingdynamicsoftheindustry,particularlyinSouthernIndiawhichhaswitnessedsignificantincreaseincapacitiesinthelastthreeyears.

KEY GLOBAL PLAYERS:

KeyGlobalplayers Particulars

LafargeWorldleaderinbuildingmaterial•Operatesin76countriesin4majorsegments–cement,aggregates,roofingandgypsum•Hasinvestedheavilyinemergingcountriesinthepastfewyears•

Holcim

Oneoftheworld’sleadingsupplierofcement,aggregatesandreadymixconcrete•Groupholdsmajorityandminorityinterestsinvariouscompaniesinmorethan70countriesandemploysmore•than90,000peopleHolcimhasastrongpresenceinIndia•

Heidelberg OriginatedinGermany,theGroupisconcentratedoncementproduction•

Cemex OriginatedinMexico,itisthethirdlargestcementcompanyintheworld•CurrentlypresentinAmerica,EuropeandAsia,thoughnotinIndiaorChina•

• Downturninworldeconomyhasadverselyimpactedthecementindustryworldwide• Inordertoovercomedepresseddemand,cementcompanieswouldneedtofocusonreducingcosts• Overthelast5years,cementmanufacturershaveshiftedfrommanufacturingOPCtoPPCbecauseofbettermargins,more

demandfromtheendusersandlessdependenceonuseoflimestoneasarawmaterial

CAPACITY UTILISATION:

• SubdueddemandandsignificantcapacityadditionshaveputsignificantpressureoncapacityutilisationofthecementindustrywithpanIndiacapacityutilisationdecliningtoaround73%inFY10-11.

• Southernregionwitnessedthehighestcapacityadditions(largelyduetoitshighestshareofcement-gradelimestonereserves)andexperiencedthesteepestdeclineinutilisationlevels.

• Theexistingsurpluscapacityhasforcedthecompaniestogoslowoncapacityexpansion.InFY11-12,theindustryhasaddedapproximately10MTofgrindingcapacityascomparedto20MTinFY11and50MTinFY10.

CEMENT PRODUCTION GROWTH:

• Dualadverseimpactofriseininflationalongwithcontractioningrowthhasaffectedtheinfrastructureprojectsacrossthecountry.

• Thishasbeenfurthercompoundedbyissuespertainingtolandacquisition;delaysinsecuringtherequisiteapprovalsandproblemsinachievingfinancialclosureaswellassector-specificissuessuchasfuelsecurityforpowerprojectsanddelaysinawardingcontractsinroadprojects.

• LackofstableleadershipinsomePSUsandcorruption-relatedinvestigationsresultedinaslowdowningovernmentspendingonprojects,andconsequentlyoncementdemand.

• PerICRA,long-termdemandforcementwouldbesupportedbyincreasingdemandforresidentialandcommercialspace,hugeinvestmentsplannedintheinfrastructuresectorandgovernmentexpenditureundervariousschemessuchasNationalRuralEmploymentGuarantee,JawaharlalNehruNationalUrbanRenewalMissionandIndiraAawasYojana

• Cementdemandbeinghighlycorrelatedwiththeeconomicaldevelopmentandhavingmentionedtheabovecriticalissues,investmentsintheprojectsappearstobeabitcritical

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

0

50

100

150

200

250

300

350

400

2011-12E2010-112009-10 2012-13E 2013-14E2008-09

Cement capacity

In M

etri

c to

nnes

Cement production Cement capacity utilisation

Source: Macquarie research

8.6

11.1

9.7

8.1 7.8

10.5

4.8

6.4

0

2

4

6

8

10

12

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Source: Companies data

Gro

wth

rate

KEY CHALLENGES AND RISKS

RAW MATERIAL COST:• Risinginputcostsofkeyrawmaterialoff-latehasbecomea

criticalissueimpactingtheprofitabilityofcementindustry.

• Risingdomesticcoalpricesandnon-availabilityoflowcostlinkagecoalhasincreasedthepowerandfuelcostforcementmanufacturers

• Asperindustryresearchreports,rawmaterialsaccountfor10%oftotalcostsandhavegrownataCAGRofc.25%duringlastsevenyears.Keyrawmaterialscompriselimestone(c.10%ofrawmaterial),gypsum(35%)andadditiveslikeflyash(55%)

• Off-late,thecementcompaniesdependingonimportedcoalhaveseensomeeasingincostpressuresduetodeclineinpriceofimportedcoal.However,thebenefitofdecliningpriceshasbeenoffsetbyrupeedepreciationtosomeextent

• TransportationcostisasignificantcostdrivingtheprofitsinthisindustryandthesamehasalsoincreasedduetoanincreaseinthesurchargeandcessbyIndianRailwaysinOct2011andincreaseinfreightratesforsomecommoditiesinMar2012.Recenthikeinrailwayfaresandpotentialincreaseindieselpricesisfurtheraddingtocostoftransport

• Recentlyannouncedhikeindieselpriceswillfurtherescalatethecostofproductionforcementcompanies

• Mostofthecostriseshavebeenstructuralandmayrequiresubstantialchangeslikecaptivecoalminesetc

• RisingcostshavehelpedanimprovementinthepricedisciplineastheIndustryhasbeenabletopassonthecostincreasestothecustomers

• Goingforward,withseasonalweakeningindemandduringQ2FY12,companiesarelikelytofinditdifficulttoraisepricestopassonthecosts

DIESEL PRICE DRIVING THE INCREASE:• Thecostsoflimestoneandgypsumaredirectlyorindirectly

co-relatedwithdieselusedforbothexcavationandtransportation.Withanexpectedriseindieselprice,anupwardmovementisexpectedinthepricesofkeyrawmaterials

SCARCITY IN AVAILABILITY OF FLY ASH:• Establishmentofnewpowerplantsatcoalminepitheadornear

aportbycompanieshascreatedscarcityofflyashnearthecementconsumptioncentre.ThisinturnhasmadeflyashtocostaroundINR400-500/tonnewhichonceusedtobefreeofcost

HIGHER BLENDING AND CAPTIVE GENERATION A CHECK ON RISING FUEL AND ENERGY COSTS• Increasinguseofflyashandcaptivepowergenerationhas

helpedcompaniestomitigatetheimpactofrisingfuelandenergycosts.ACChasincreaseditscaptivepowergenerationfromc.33%inFY04toc.72%inFY11.Alsotheblendingratiohasbeenincreasedfrom1.36xinFY04to1.52xinCY11

1.21

1.28

1.361.38

1.42 1.42 1.43

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

FY2004 FY2006 FY2008 FY 2010 FY 2012 FY2013E FY2014E

Conversionfactor

Theblendingratioisexpectedtoremainstablegiventhecurrentmacroeconomicuncertainties

VALUATION ASPECTS IN THE CEMENT SECTOR: • Oneofthemethodsforvaluingcompaniesinthecementsectorisbyusingcomparablecompanymultiplesmethodi.e.EV/Netsales,

EV/EBITDA&P/E.However,thereisanadditionalparameterwhichneedstobeanalyzedwhilevaluingacompanyengagedincementmanufacturing

• EV/tonne-It’sacommonpracticetoperformvaluationofcementcompaniesbydividingtheirenterprisevaluebytheirannualproductioncapacityinmilliontons

• Pereconomictimesarticledated17October2012,largecementmanufacturerslikeACC,AmbujaCementsandUltratecharetradingatanenterprisevalue(EV)pertonneofover$170.Thisishigherthanthereplacementcostofacementplantataround$160pertonne.Ontheotherhand,mid-sizedcementplantsonanaveragetradeata40-50%discounttothevaluationsoftheirlargerpeers.InSeptember,DalmiaCementacquiredMeghalayabasedAdhunikCementforINR5600million.Ithadacapacityof1.5mt.ThedealwasvaluedatUSD120pertonne

• InJulythisyear,AdityaBirlagroupmadeanoffertobuyoutJaiprakashAssociatescementplantsinGujaratandAndhraPradesh.Talksbetweenthetwofellthroughduetodifferencesovervaluation.JaiprakashAssociateswaskeenonapriceofUSD190pertonnewhiletheKumarMangalamBirla-controlledgroupwasnotwillingtopaymorethanUSD115-120pertonne.InOctoberthisyear,AdityaBirlagroupmadeanotherofferofuptoUSD130pertonne,butBirla’sdidnotpursuethedealduetoupsideinvaluation

VALUATION MULTIPLES

Source: Company published consolidated financials as available on its website. Share prices as on 28 Dec 2012 taken from bseindia.com. Market cap as on 28 Dec 2012.

* ValuationmultiplesarebasedonTTM(Trailingtwelvemonths)financialnumbersasavailableforthecompanies

RECENTLY CONCLUDED DEAL MULTIPLES

Company (Consolidated basis)

Market cap (INR million)

EV/Net sales

EV/EBITDA P/E

ACC* 264,505 2.93 11.28 40.52

AmbujaCements

309,457 3.39 13.15 25.06

UltraTech 539,515 3.05 12.85 22.45

GrasimIndustries*

288,382 1.35 5.45 15.91

IndiaCements 27,216 0.97 4.63 10.02

JKLakshmiCement

19,104 1.59 6.97 18.26

DalmiaBharatEnterprisesLtd.

14,334 1.30 5.25 11.79

MadrasCement* 59,350 2.00 6.90 23.19

Year Deal Type Target Firm

Acquirer name

Target EV/Sales (TTM)

TargetEV/EBIT (TTM)

EV/Tonne

Aug2012

Acquisition ShriDigvijayCementCo. Limited

CamargoCorrea SA,HejoassuAdministracaoLtda

0.29 13.84 n/a

Nov2011

Acquisition AndhraCementCo.Ltd.

JaypeeDevelopmentCorpLtd

9.83 n/a USD115per tonne*

Dec2011

Acquisition AmbujaCementsLtd.

Holcim Ltd 2.47 13.63 n/a

Sept2010

Acquisition MangalamCementLtd.

MangalamTimberProductsLtd

0.55 4.81 n/a

KEY PLAYERS METRICS:

Source: Company annual reports and BDO analysis

Source: Bloomberg

*http://realtydose.blogspot.in/2011/11/jaiprakash-cements-acquisition-of.html

Company(Consolidated

basis)

EnterpriseValue(INRmillion)

Productioncapacity-

Milliontonnes

EV/tonne(USD)

ACC 253,037 28.7 160.9

AmbujaCements 289,423 27.4 192.9

UltraTech 586,442 85.0 125.9

GrasimIndustries 365,393 52.3 127.4

IndiaCements 44,748 15.6 52.5

DUE DILIGENCE ASPECTSAREA KEY ISSUES APPROACH Businessoverview

Capacity/sizeMarketshareGeographicalspreadofmanufacturingcapacitiesProductpricing

ManufacturingfacilitiesareconcentratedinselectclustersacrossIndiaclosetolimestonebelts.PricingisregionspecificandmaynotalwaysmoveinsyncwithotherregionsFragmentationresultsinintensecompetitionamongsttheplayers,whichbringspricesandrealisationsunderpressureCapacity utilisation assumes great importance in the cement industry asfixed costs are high. Optimum utilisationof capacities has a direct impact onprofitabilitySince cement is a bulky commodity, themarketshareenjoyedbyaparticularentity(region specific) also influences the pricingpower

Analyse installed capacity, capacityutilisationandplannedcapacityadditions,andcomparethesamewithotherplayersintheregionAnalyseratioofblendedcementUnderstandthepricingarrangementswithotherplayersExamine the order pipeline and identifypotentialgapsReadagreementswithallexistingcustomersandascertainthepricingstrategyadopted

DemandforcementWhat is the current demand-supplyscenario?Whatchangesareexpected?How is the product branded andpositionedinthemarket?

The performance of cementmanufacturersis driven by the prevailing demand-supplyscenarioandisbothvolatileandcyclicalTheimageandpositioning(priceorpremiumquality)isalsoadeterminantfordemandforindividualcementmanufacturers

Analysetheregionaldemand-supplyscenarioandgap,ifanyAnalysecapacityadditionsinthenearfutureofalltheplayersintheregionAnalysedemanddriverssuchashousing,infrastructureintheregionComparetheforecasteddemand&supplyandquantifygap,ifany

CartelisationIsthereactiveparticipationinthecartel?Has the target been adverselyimpactedbythecartel?Isthetargetexposedtoregulatoryaction?

Many cement companies reduced prices toavoid stockbuildupand tokeep theplantoperating,forcingotherstofollowsuit

Inquireofanylegalclaims/notices,etc.receivedby thecompany inconnectionwith cartelisation, and company’sresponseandthelegalopinionssoughtAssesstheliabilitythatmayariseAnalyse whether the company hasbenefitedfromtheagreementwithothercementcompanies

Proximity to marketsHow much of the production issoldlocally?What is the average distancecovered?

Proximitytomarketshasasignificantimpacton margins, as freight costs account forapproximately16-20%oftotalcosts.Certaincement manufacturers who have access tocoastlines and ports effectively use watertransport as a cheaper alternative, thusenhancingmarginsManufacturers tend to sell cement at thenearestmarketfirstandsellindistantmarketsonly if additional realisation is greaterthan freight costs incurred. This results insignificantregionalpricevariationsRegional price variations have a directimpactonsalesrealisation. Regionswherecement manufacturers are clustered mayhave an adverse demand supply scenariowhich drives down prices. Regional pricesarealsodependentontheeffectiveworkingof the ‘cartel’ formed by major cementmanufacturers

Analyse share of local markets servedandaveragedistancecoveredAnalysesaleswithinaradiusof200km.ComparethesamewithotherplayersintheregionAssess arrangements with transportersandlogisticsmanagementAnalysepricesofdieselandrailfare.Understand the effective utilisation ofthe jetty (if available) and the regionstargeted Understandthefacilitiesandequipmentatthevariousports(outsidetheportoforiginforpackingbulkcement)

AREA KEY ISSUES APPROACH Procurement of raw materialHowfaristhelimestonemine?What is the arrangement for flyash,slag,gypsum,etc?WhatisthearrangementforcoalIs captive power generatingcapabilitiesestablished?

Limestone is the key input for themanufactureofcement.Thebulkynatureoflimestone renders transportation over longdistancesunviableProximity and access (viz. mining rights)of a cement manufacturing unit to qualitylimestone deposits is essential. Absenceof suchproximitywould result inveryhightransportation costs that could adverselyaffect margins and viability of themanufacturingfacilityLong term mining rights are essential forviabilityofacementplant.Further,adequateresidualusablelimestonedepositsavailable(limestone required annually multiplied byresiduallifeoftheplant)intheminesisalsoveryessentialCoal forms another key raw material incement manufacture, in the clinkerisationprocess.Furthercoalmayalsoberequiredin captive power plants (another criticalinputforcementmanufacture)Coal is largely government controlled withrestrictionsonthequantitytobepurchasedbyindividualmanufacturersaswellaspricefixations (quotas). Further, domesticallyprocured coal is often not of the desiredquality and transportation bottlenecksaboundProcurement of requisite quality of coal atcompetitivepricesisakeydeterminantoftheprofitabilityofacementplant,ascoalformsapproximately 26% of the manufacturingcostSomecompaniesattempttoblendlocalwithimportedcoalwhileotherschoosetoimporttheirentirecoalrequirements.Localcoalishigh onash content andoftenonmoistureas well adversely impacting averageconsumptionandfuelcostPower is another critical input for anycementplant.Availabilityofuninterruptedpowersupplyatareasonablerateisessentialfortheeconomicviabilityofacementplant.Power tariffs are usually very high andcontrolledbytheGovernmentInvestmentsmadeindieselgeneratingsetsinthepast(1997-2000)didnotprovidealongtermsolutiontocementmanufacturerswiththepriceofdieselincreasingtwofoldAsaresult,mostlargecementmanufacturershavesetuptheirowncaptivepowerplants,incurring high capital expenditure. Somecompanieshaveinvestedinmerchantpowergenerating companies set up close to theirmanufacturing facilities to ensure powersupply and limit investments in powergeneratingfacilities

Understand distances from limestoneminesandfacilitiesfortransportationoflimestonetotheplantAnalyse supply arrangements for coal,furnaceoilandotherinputsAssess the supply source in respect ofreliability,quality,longevityandcosts.Analyse feasibility of import of coal/clinkerasalternatives

Analysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionAssesspossibility of reduction inpowercosts through enhanced productivity/alternativesourcingofpower/alternativefuelsRead shareholders agreements / jointventure agreements for investmentsmadeinpowergeneratingfacilities

AREA KEY ISSUES APPROACH Control over operating costsWhat is the dependence on thegovernment for provision ofcriticalinputssuchaspower,coal,limestone,etc?

Mostofthekeyrawmaterialssuchascoal,powerandlimestoneareundergovernmentcontrol. Thus, price negotiation is notpossiblebeyondapointThus, cement manufacturers can do verylittle to reduce operating costs beyond apoint, and hence have to concentrate onimproving margins through higher pricerealisation, and higher productivity (betterinput-outputratio)Companieshaveresortedtoblending(flyashorslag)andsettingupcaptivepowerplantsforcontrollingcoststoalimitedextentTransportationcosts,ofboth rawmaterialsandfinishedproductsarehigh.Transportationcostsaredependentlargelyontheproximityoftheplanttorawmaterialsandmarkets

Analyselocations/distancesoflimestoneminesAnalyse share of captively generatedpowerandcostingforthesameAnalysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionReview locations and distances ofthermal power plants and steel plantsfor availability of fly ash and slag,respectively

Precarious financial positionWhatisthenetworth?Whatisthedebttoequityratioofthecompany?Hasthedebtbeenrestructured?Has there been a referencemade to/scheme of arrangementsanctioned by the Board for Industrial and FinancialRestructuring(BIFR)?

ManycompanieshadcomeunderthepurviewoftheBIFRandwerebeingforcedtoacceptdifficulttermsandconditionsonrestructuringorfaceatakeoverofmanagementHowever,withanincreaseincementpricesinthelast2years,manyofthesecompaniesare now operating under the restructuringschemesofBIFR

AnalysenetworthpositionUnderstand key terms and conditionsof the restructuring arrangement tounderstandrestrictivecovenants

Fixed assetsHas the company capitalised itsassetsasperIndianGAAP?Has it tested the assets forimpairment?

The company may have capitalised coststhat are not allowed to be capitalised asper Indian GAAP. This could lead to lowerexpenses charged to the income statementaswell as a possibility of non-allowabilityof such expenses while calculating taxdepreciationThereispossibilityofnon-utilisationoffullcapacity.TestingofassetsforimpairmentisanimportantaspectinsuchcasesOwnership of assets could be with theCompanyorGroupcompaniesCompanymighthavegiven/takenassetsonleaseDumpers/ vehicles used to transportlimestone from the mines to the primarycrusher have significantly higher wear andtearcomparedtonormalvehicles/dumpers.Depreciation on such assets needs to bechecked

Analyselocations/distancesoflimestoneminesAnalyse share of captively generatedpowerandcostingforthesameAnalysethepowerscenariointheregiontoassesswhetheritisapowersurplus/shortageregionReview locations and distances ofthermal power plants and steel plantsfor availability of fly ash and slag,respectively

InventoriesAre the inventories properlyvalued?Are there any slow/non-movinginventories?

Cementplantsplanproductioninsuchawaythat minimal finished goods (bagged) andworkinprogress(clinker) is instockduringmonsoonsGiven the volatility in cement prices andthe frequent price changes announced bymanufacturers, it is important that costof finished goods are compared to marketprice (mark to market) to assess need forprovisioningCement plants in India are forced to stockcertaincritical sparesduetotheir locationin remotepartsof India.Highvalue spareswhichmay not be used for long periods oftimealsohaveashelflifeandmayneedtobe replaced TheinventoryvaluationpoliciesmaynotbeinlinewithIndianGAAPThere may have been a change in theinventoryvaluationpoliciesTheremaybeslow/nonemovinginventories.Provisions may be required to write thesedowntotheirnetrealisablevalue

Checkforanyclinkerorfinishedcementin stock that has been affected by themonsoonsCheck assessment of high value spareslyingunutilised,andprovisioningdoneinrespectthereofAnalyse the age of the inventory andenquire into any non-salable/obsoleteinventory. Comment on impact onprovisioningforinventoryComment on the inventory valuationpolicyofthecompanyPerform a technical due diligence toassessqualityofsparesinstock

RECENT M&A TRANSACTIONS:

Year Target Name Acquirer Name

Deal Value (INR Millions)

Percentage acquired (%) Remarks

Dec2012

CalcomCementIndiaLtd.

DalmiaCementBharatLimited

2,380 50%DalmiaCementacquiredupto50%stakeinAssambasedCalcomCementIndia,whichhasa0.99mmtpaclinkerisationunitand1.72mmtpacementgrindingunitinAssam.

Jan 2012

CalcomCementIndiaLtd.

DalmiaCementBharatLimited

772 26% DalmiaCementincreaseditsstakeinCalcomCementIndiaLtd.byadding26%tothealreadyowned50%stake.

Sept2012

AdhunikCementLimited

DalmiaCementBharatLimited

5600 100% AdhunikCement,aJVbetweenAdhunikGroupandMSPgrouphadinvestedINR7,000millionforsettingup1.5milliontonecementplantinlimestone-richJaintiahillsofMeghalaya.

July2012

GotanLimeStoneKhanijUdyogPvt.Ltd.

UltratechCement N/A 100%

UltratechCementisapartoftheUSD24.5billiondiversifiedIndianconglomerateAdityaBirlaGroup.Thecompanyalongwithitssubsidiarieshasanannualcapacityof52milliontonneofcementmanufacturing.

Nov2011

SmallTilesPvt.Ltd.

PrismCement N/A 50% H&RJohnson(India)adivisionofPrismCementsLtdacquired50%stakein

SmallTilesPvt.Ltd.,supplierofglazedtiles.

Nov2011

AndhraCementsLtd.

JaypeeDevelopmentCorporation Ltd.

5,837 N/AGPGoenkaGroupenteredintoadealwithJaypeeGroup’ssubsidiaryJaypeeDevelopmentCorporationLtd.tosellacontrollingstakeinAndhraCementsLtd.

Dec2011

AmbujaCementsLtd. HolcimLtd. N/A >50%

HolcimacquiredmanagementcontrolofAmbujaCementLtd.(ACL)in2006anditheldalittleover46percentequityinthecompanybeforethisacquisition.HolcimhasincreaseditsstakeinACLbyaround4%toover50%throughopenmarkettransactions.ACL’spresentcapacityisabout25milliontoneswithfiveintegratedcementplantsandeightgrindingunitsinIndia.

Feb 2011

BirlaCementIndustriesLtd.

RainCommoditiesLtd.

N/A 100%

RainCommoditieshasacquiredBirlaCementandIndustriesfromYashBirlaGroup.RainCommodities,togetherwithitssubsidiaries,isengagedinthemanufactureandsaleofcementinIndiaandInternationally.Thecompanymarketscementunderthe“PriyaCement”BrandInAndhraPradesh,KarnatakaandTamilNadu.

Source: Bloomberg and dealcurry.com

OUR REECENT ENGAGEMENTS

ValuationofBusiness

Grasim Industries ltd

ValuationonFixedAssets

Grasim Industries ltd

OpiniononValuation

Grasim Industries ltd

Creating/VettingofBusinessplan

Ambey Laboratories PvtLtd

ABOUT BDOStrongpersonalrelationshipsthroughoutthenetworkfacilitatecross-bordertransactions.

Aregularflowoftrans-nationalworkandcommunications.

BDOInternationalwasfoundedinEuropein1963.

BDOGlobalcoordinationB.V.basedinBrussles.

ABOUT BDO INDIABDOIndia(formerlyknownasHaribhaktiConsulting)istheIndianMemberFirmofBDOworldwide.

Weofferacomprehensiverangeofadvisoryservicesencompassing

• CorporateFinanceAdvisory

• RiskAdvisory

• Tax&RegulatoryServices

• GlobalKnowledgeServices

OUR TEAM

Lata More NationalHead,CorporateFinanceAdvisoryServicesValuations Direct:+912266729710 Email:lata.more@bdoindia.co.in

Kirti Shah Partner,CorporateFinanceAdvisoryServices PEandM&AAdvisory Direct:+912266729713 Email:kirti.shah@bdoindia.co.in

Disclaimer:Thispublicationhasbeencarefullyprepared,butithasbeenwritteningeneraltermsandshouldbeseenasbroadguidanceonly.Thepublicationcannotbereliedupontocoverspecificsituationsandyoushouldnotact,orrefrainfromacting,upontheinformationcontainedthereinwithoutobtainingspecificprofessionaladvice.PleasecontactBDOConsultingPvt.Ltd.todiscussthesemattersinthecontextofyourparticularcircumstances.BDOConsultingPvt.Ltd.,itspartners,employeesandagentsdonotacceptorassumeanyliabilityordutyofcareforanylossarisingfromanyactiontakenornottakenbyanyoneinrelianceontheinformationinthispublicationorforanydecisionbasedonit.

BDOConsultingPrivateLimited,aprivatelimitedcompanyincorporatedinIndia,isamemberofBDOInternationalLimited,aUKcompanylimitedbyguarantee,andformspartoftheinternationalBDOnetworkofindependentmemberfirms.BDOisthebrandnamefortheBDOnetworkandforeachoftheBDOMemberFirms.

K. Ramkumar Partner,CorporateFinanceAdvisoryServices PEandM&AAdvisory Direct:+914444544143 Email:k.ramkumar@bdoindia.co.in

Rajendra Chitale Partner,CorporateFinanceAdvisoryServices DueDiligence Direct:+912266729772 Email:rajendra.chitale@bdoindia.co.in

Vijaydeep Singh Partner,CorporateFinanceAdvisoryServices Valuations&DueDiligence Direct:+911147119926 Email:vijaydeep.singh@bdoindia.co.in

CONTACT US

Registered Office:42,FreePressHouse,215,NarimanPoint, Mumbai-400021. Tel:+91(22)61326999Fax:+91(22)22856237 Website:www.bdoindia.co.in

Ahmedabad] 703,VenusAtlantis,100FtRoad,CorporateRoadPrahladNagar,Ahmedabad-380015. Tel:+91(79)40320441/40320442

Bengaluru (Bangalore) No.45,1stFloor,2ndMain,SankeyRoad,(AboveIndianBank)LowerPalaceOrchards,Bengaluru-560003. Tel:+91(80)64542545/64542546

Chennai (Madras) 5B,ABlock,5thFloor,MenaKampalaArcade,NewNo.18&20,OldNo.113/114,TheyagarayaRoad,T.Nagar,Chennai–600017. Tel:+91(44)42132024/45544143Fax:+91(44)43546876

Coimbatore ShreeShanmugappriya,2ndFloor,454,PonnaiyanStreet,CrosscutRoad,Gandhipuram,Coimbatore–641012. Tel:+91(422)2237793/2238793Fax:+91(422)2233793

Hyderabad RajaPushpaHouse,3rdfloor,PlotNo.34,SiliconValley,Madhapur,Hyderabad–500081. Tel:+91(40)42007771/0Fax:+91(40)42007772

Jaipur ManishMansion,PlotNo.247, 1stFloor,FrontierColony,NearPunjabNationalBank,AdarshNagar,RajaPark,Jaipur-302004. Tel:+91(141)2604743

Kolkata (Calcutta) GeetanjaliApartments,Suite7G,7thFloor,8B,MiddletonStreet,Kolkata-700071. Tel:+91(33)32016298/22298936Fax:+91(33)22264140

Mumbai (Bombay) 701Leela,BusinessPark,Andheri-KurlaRoad,Andheri(E),Mumbai-400059. Tel:+91(22)66729999Fax:+91(22)66729777

New Delhi 3rdFloor,52-B,OkhlaIndustrialEstate,NewDelhi-110020. Tel:+91(11)47119999Fax:+91(11)47119998

Pune C-10,GodrejEternia,OldMumbai-PuneHighway,Wakdewadi,Pune-411005. Tel:+91(020)67299500/501Fax:+91(020)67299555