Initiating Cement Industry - Thematic - Myirisbreport.myiris.com/GEPLCAP1/INDCEMEN_20120315.pdf ·...

Equity | India | Cement

Cement Industry - Thematic

Concrete road ahead.. March 15, 2012

Analyst Manohar Annappanavar

+91-22- 6614 2696 [email protected] GEPL Capital Research 1

Initiating Coverage

Regional Spread of capacity (In mn MT)

South38.7%

North21.7%

West14.4%

East12.1%

Central13.0%

Consumption pattern

Housing, 64%

Industrial, 6%

Infrastructure

, 17%

Commercial

and

Institutional,

13%

All India Prod., Cap. Utilisation trends

195.1

237.2

264.7

288.3

309.9

190

210

230

250

270

290

310

330

FY08 FY09 FY10 FY11 As on

Dec'11

mn

MT

Trends in capacity utilisation

90.3%

80.4%78.4%

75.5%

83.3%81.4%

86.4%

81.1%

78.6%77.3% 75.9%

73.7%

74.4%

0

50

100

150

200

250

300

350

400

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

65%

70%

75%

80%

85%

90%

95%

Cap (mn MT) Produciton (mn MT) Capacity Utilization (%)

Slowing pace of capacity addition to improve utilisation going ahead

Given the slowing pace of capacity additions we expect the installed capacity to grow at 6.7% CAGR across India in FY11-15E. At the same time in view of a) peaking of interest rates b) US$1 tn investment over next five year plan c) expectation of increase in infrastructure spending as a percentage of GDP, and d) improvement in demand from housing segment, we expect the consumption of cement to grow at a CAGR 8.8% in FY11-FY15E. Hence we expect the capacity utilisation on an all India basis to reach 75.9% in FY13E and 78.4% in FY14E.

Pricing discipline in South to stay intact There has been a strong display of maturity by cement manufacturers in the recent past in South. As a result of this, the companies have not only been able to raise cement prices but also maintain prices near all time highs over the last one and half years. With the demand expected to improve on account of a) relatively stable political environment, b) recent CII partnership summit indicating a huge investment of `6.5 tn investment proposals, c) announcement of new projects by some of the real estate developers, d) significant improvement seen in long pending dues to contractors, and e) lastly with no major capacities by the existing and established player of South expected to hit the market in the short to medium term, we believe the pricing discipline would stay intact.

Peaking of interest rates to trigger demand from industrial segment. RBI has put a pause to the rising repo rate in the monetary policy held on December 16, 2011 indicating peaking of interest rates. Given the declining trend of IIP, six core industry data and GDP makes a case for interest rate reversal. However, oil prices and inflation still remain above the comfort zone of RBI, hence we expect the RBI might soften interest rates only in the next monetary policy in Apr12. Also the time required for decline in interest rates is shorter when compared to time required for rise in interest rates. Softening of interest rates would be a big positive for the sector, thereby positively impacting the credit off take from both housing and industrial segment.

US$1 tn investment in five year plan might trigger next bout of demand

GoI had envisaged to make US$1 tn over next five year plan starting Apr12. The GoIs estimates were done assuming a GDP growth rate of 9% in the base year FY12E. However considering the recent trends in GDP, in order to make an estimated investment of US$1 tn, GoI has to increase the share of investment in infrastructure as percentage of GDP from 9.88% by at least 203bps. Hence, there is a very high possibility that the share of investment as a percentage of GDP might increase. This is expected to trigger a bout of demand for cement from the infrastructure segment.

Valuation and views In view of the a) slowing pace of capacity addition, b) increasing trends of both utilisation and realisation, c) strong production discipline in South d) peaking of interest rates, e) increasing trends in operating margins, f) increasing trend in sourcing of power by companies from Captive Power Plant compared to last up cycle, and g) US$ 1tn over next five year plan expected to trigger much needed demand from infrastructure segment, we anticipate the sector to get re-rated upwards, taking the valuations of cement stocks above its valuations in the last up cycle. Hence, we initiate a coverage on Madras Cements Ltd with BUY recommendation and with a one year price target of `191.1, India Cements Ltd with a BUY recommendation and with a one year price target of `134.5, Ambuja Cements ltd with a BUY recommendation and with a one year price target of `201.1 per share and Ultratech Cement Ltd with a NEUTRAL recommendation and a one year price target of `1,595 per share.


Cement Industry - Thematic March 15, 2012

GEPL Capital Research | Initiating Coverage 2

Overview of the Cement Industry The Indian cement industry with a total installed capacity of 288.3 mtpa (FY11) and 309.9 mtpa (FY12E) is the second largest cement producer in the world after China, surpassing developed nations like the USA and Japan. However, compared to Chinese cement capacity of 2,020 mtpa (CY11), Indias cement capacity is far below China.

Industry fragmentation Top seven cement companies with a total installed capacity of 173.7 mtpa control around 56.1% of the overall capacity. There has been a consolidation in the industry over the past few years. However, the Herfindahl-Hirschman Index, a commonly used measure of market concentration indicates that, cement industry remains to be mostly fragmented with 641 HHI index. Ultratech with 48.75 mtpa of cement capacity is the largest cement maker in India.

Regional spread of cement companies

The Southern region of India with a total installed capacity of 120.1 mtpa (38.7% of total Indias cement capacity) dominates the cement space, followed by North with 67.3 mtpa (21.7% of total Indias cement capacity). Meanwhile, the Western region has a total capacity of 44.7 (14.4% of total Indias cement capacity), Central India has a total capacity of 40.2 mtpa (13.0% of total Indias cement capacity) and Eastern India has a total installed capacity of 37.6 mtpa (12.1% of total Indias cement capacity).

Region wise capacity breakup

120.1

67.3

44.7 40.2 37.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

South North West Central East

mtp

a

Source: Company data, GEPL Capital Research




India Cement dominates THE Southern region with 10.8% market share and Ultratech with a market share of 10.5% followed by Madras Cement, ACC, Dalmia and Chettinad cement with a market share ranging between 7.1% - 9.6%.

Shree Cement dominates Northern region with a 20.1% market share, followed by Ultratech & Ambuja with 16.6% and 13.2% respectively.

Region wise presence of cement companies

Top ten cement companies in South

13.0 12.611.5

9.79.0 8.5

7.8 7.3 7.05.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Indi

a C

emen

ts

Ult

rate

ch

Mad

ras

Cem

ent

AC

C

Dal

mia

Cem

ent

Che

ttin

ad C

emen

t

Penn

a C

emen

t

Keso

ram

My

Hom

e

Zuar

i Cem

ent

mtp

a


Top ten cement companies in North

13.5

11.1

8.9

6.3 6.2 5.94.9 4.3

2.5 2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Shre

e ce

men

t

Ult

rate

ch

Am

buja

Cem

ent

Bina

ni

Jayp

ee C

emen

t

AC

C

JK C

emen

t

JK L

aksh

mi

Birl

a C

orp

Man

gala

m C

emen

t

mtp

a





Ultratech dominates the Western region with overall market share of 28.6% & Ambuja with 25.3%.

Jaypee dominates Central India with a market share of 29.8%, followed by Ultratech, Prism and ACC with 18.6%, 13.9% and 11.2% respectively.

Lafarge dominates in East with a 17.4% market share, followed by OCL (14.2%), ACC (13.5%), Ultratech (12.5%), Ambuja (14.1%) and Jaypee (11.4%).

Top ten cement companies in West

12.811.3

4.84.0

2.6 2.0 1.9 1.5 1.2 1.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Ult

rate

ch

Am

buja

Cem

ent

Jayp

ee C

emen

t

AC

C

Sang

hi

Ori

ent

Cem

ent

Cen

tury

Cem

ent

Saur

asht

ra

Guj

arat

h Si

dhee

Cem

ent

Indi

a C

emen

ts

mtp

a


Top ten cement companies in Central

12.0

7.5

5.64.5

3.8 3.8

1.5 1.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jayp

ee C

emen

t

Ult

rate

ch

Pris

m C

emen

t

AC

C

Cen

tury

Cem

ent

Birl

a C

orp

Hei

delb

erg

Am

buja

Cem

ent

mtp

a


Top ten cement companies in East

6.5

5.4 5.3 5.14.7

4.3

2.3 2.1

1.00.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Lafa

rge

Ocl

Indi

a

Am

buja

Cem

ent

AC

C

Ult

rate

ch

Jayp

ee C

emen

t

Birl

a C

orp

Cen

tury

Cem

ent

Mad

ras

Cem

ent

Burn

pur

Cem

ent

Ltd

mtp

a





Consumption Pattern

Historically housing has been the pillar of cement consumption in India constituting 64% of the total consumption, followed by infrastructure (17%), Commercial & Institutional (13%) and rest by Industrial segment (6%).

Consumption Pattern

Housing, 64

Industrial, 6

Infrastructure

, 17

Commercial

and

Institutional,

13

Source: Task force report on Indian Cement Industry, GEPL Capital Research

Demand Drivers Primary demand drivers of cement in India include

Prevailing Interest rate scenario Income levels Urbanisation Government spending on infrastructure and Overall economic growth




Slowing capacity addition pace to ease Utilisation pressure

In anticipation of the strong demand, cement companies across the country had announced expansion plans. As a result of this, the industry had seen a total addition of 114.8 mtpa over last 3-4 years witnessing a CAGR of 13% in FY08- 9MFY12.

However, over the recent past the pace of addition has slowed down. In FY09 industry saw a total addition of 42.1 mtpa, 27.5 mtpa in FY10, 23.6 mtpa in FY11 and around 21.5 mtpa in FY12(till Dec11).

All India cement capacity

195.1

237.2

264.7

288.3

309.9

190

210

230

250

270

290

310

330

FY08 FY09 FY10 FY11 As on

Dec'11

mtp

a


Also on the supply side, there has not been much progress on the 26.5 mtpa announced earlier in Andhra Pradesh (AP). Given the long gestation period for setting up of capacity, we dont see this capacity hitting the market any time soon thereby positively impacting the demand supply scenario. Further on an all India basis we expect a net addition of 24.8 mtpa over next 15 months taking the overall installed capacity of cement to around 334.6 mtpa by FY13E.

Capacity additions over next 15 months

Sr No Companies Dec-11 FY12E FY13E Total Additions CAGR Growth (%)

1 North 67.3 67.8 69.3 2.1 2.4

2 West 44.7 44.7 49.6 4.9 8.7

3 East 37.6 37.6 41.1 3.5 7.4

4 Central 40.2 40.2 42.7 2.5 4.9

5 South 120.1 130. 131.9 11.8 7.8

Total Installed Capacity 309.9 320.3 334.6 24.8 6.3

Net additions 10.5 14.3

Y-o-Y Growth in Capacity 3.4% 4.5% Source: Company data, GEPL Capital Research

Given the slowing pace of capacity additions we expect the installed capacity to grow at 6.7% CAGR across India in FY11-15E. At the same time in view of a) peaking of interest rates b) US$1 tn investment over next five year plan c) expectation of increase in infrastructure spending as a percentage of GDP, and d) improvement in demand from housing segment, we expect the consumption of cement to grow at a CAGR 8.8% in FY11-FY15E. Hence we expect the capacity utilisation on an all India basis to reach 75.9% in FY13E and 78.4% in FY14E.




Trends in capacity, production and utilisation: FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

Cap (mn MT) 150.5 157.1 164.7 171.1 178.9 195.1 237.2 264.7 288.3 314.6 334.6 354.2 374.3

Production (mn MT) 116.4 123.5 133.6 147.8 161.6 162.6 193.0 199.9 214.5 231.9 254.1 277.7 300.8

Capacity Utilisation (%) 77.3 78.6 81.1 86.4 90.3 83.3 81.4 75.5 74.4 73.7 75.9 78.4 80.4


Installed Capacity, Production and utilisation

90.3

80.478.475.5

83.3 81.486.4

81.178.6

77.3 75.9

73.774.4

0

50

100

150

200

250

300

350

400

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

mtp

a

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

%

Capacity Produciton Capacity Utilization


Details of cluster wise expansion in AP with little Progress Nalagonda Yerranguntla Kurnool Tandur Total

ACC - 1 - - 1

Aryabhatta - 2 - 2

Chettinad - 1 - - 1

Choramandal 1.5 - - - 1.5

Emami 2 - - - 2

Krishnagiri - - 2 - 2

Reliance - - 6 - 6

Sanghi Industries 2 - - - 2

Sarvashakti 2 - - - 2

Shree Cement - - 2 - 2

Sitharam - - 1 - 1

Trishul - 1 - - 1

Vidyagiri - - 2 - 2

Vishwambara 1 - - - 1

Total 8.5 3 15 26.5





Region wise demand supply scenario North India: Utilisation levels might continue to remain strong Northern region has posted a healthy growth of 11.2% CAGR in FY08-11. However, the region had exhibited a growth of mere 5.3% in FY11, lowest in the last four years owing to slower demand from the infrastructure segment and industrial segment.

Recently, there has been a strong pickup of demand in North, showing a growth of 15.6% in Q3FY12 and 10.1% for 9MFY12. This was primarily on account of strong demand in major states (Punjab and Rajasthan) of North, which grew by 15% and 9.8% Y-o-Y respectively for the first six months of FY12.

In view of a) peaking of interest rates, b) with FY13E being first year of five year plan, and c) with start of work on the Delhi Mumbai Industrial Corridor, we expect the demand to grow at a 9.9% CAGR in FY11-15E. At the same time with no major capacity to hit the market, we expect the capacity to witness a CAGR of 3.9% in FY11-15E. Hence, we believe the utilisation to reach to 81.0% in FY12E, 86.4% in FY13E.

Trends in Capacity, Production and Utilisation

0

10

20

30

40

50

60

70

80

90

FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

mtp

a

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

%

Installed capacity Consumption Capacity utilisation %


Company wise capacity expansion Sr No Companies Rajasthan HP Uttarakhand Haryana Punjab FY11 FY12E FY13E FY14E FY15E

1 Shree cement 11.7 - 1.8 0.0 - 13.5 - - - -

2 Ultratech 8.1 - - 1.3 1.7 11.1 - - - -

3 Ambuja Cement 1.8 3.1 1.0 - 3.0 8.9 - - - -

4 Binani 6.3 - - - - 6.3 - - - -

5 ACC 1.5 4.4 - - - 5.9 - - - -

6 JK Cement 4.9 - - - - 4.9 - - 2.2 1.8

7 Jaypee Cement 0.0 3.5 1.2 1.5 - 6.2 - - - -

8 JK Lakshmi 4.3 - - - - 4.3 0.6 - - -

9 Birla Corp 2.5 - - - - 2.5 - 1.5 - -

10 Mangalam Cement 2.0 - - - - 2.0 - - - -

11 India Cements 1.5 - - - - 1.5 - - - -

12 Shriram Cement 0.2 - - - - 0.2 - - - -

13 Lafarge India - - - - - 0.0 - 1.6 - -

14 Wonder Cement - - - - - 0.0 - - 3.0 -

Total 44.7 11.0 4.0 2.8 4.7 67.2 0.5 3.1 5.2 1.8

0.7 0.2 0.1 0.0 0.1 - - - - -

Installed Capacity - - - - - 67.2 67.8 70.9 76.1 77.9





Central India: Demand to improve; Suupply to come at a slower pace The Central region had posted 5.6% CAGR in FY08-11.There has been a strong pickup in demand in Centre, showing a growth of 11.5% in Q3FY12 and 7.6% for 9MFY12.

In view of a) peaking of interest rates, b) with FY13E being first year of next five year plan, c) demand from industrial segment also to improve in Central India, and d) with start of work on Delhi Mumbai Industrial Corridor, we expect the demand to witness a 7.2% CAGR in FY11-15E.

At the same time with no major capacity to hit the market, we expect the capacity to witness a CAGR of 6.1% in FY11-15E. As a result of this, we expect the utilisation levels to improve to 86.7% in FY13E.


0

5

10

15

20

25

30

35

40

45

50


mtp

a

75.0

80.0

85.0

90.0

95.0

100.0

%



Company wise capacity expansion Sl No Companies MP UP FY11 FY12E FY13E FY14E FY15E

1 Jaypee Cement 7.4 4.6 12.0 - 2.5 - -

2 Prism Cement 5.6 5.6 - - - -

3 Ultratech 4.9 2.6 7.5 - - - -

4 ACC 2.2 2.3 4.5 - - - -

5 Century Cement 3.8 - 3.8 - - - -

6 Birla Corp 3.8 - 3.8 - - - -

7 Heidelberg 1.5 - 1.5 - - - 1.5

8 Ambuja Cement 1.5 - 1.5 - - - -

9 KJS Cement - - - - - - 2.3

Total 30.7 9.5 40.2 0.0 2.5 0.0 3.8

Installed Capacity - - 40.2 40.2 42.7 42.7 46.5





Western India: Demand to improve; Supply to come at a slower pace Western region has posted 1.8% CAGR in FY08-11. However, there has been a strong pickup in demand in the West, showing a growth of 23.7% in Q3FY12 and 16.6% for 9MFY12.

Western Indias demand is predominantly driven by growth in industrial and infrastructure segment. Hence with peaking of interest rates, and start of work on the Delhi Mumbai Industrial Corridor, we expect the demand to witness a 11.2% CAGR in FY11-15E. At the same time with no major capex on the anvil, we expect the capacity to show a 7.8% CAGR in FY11-15E; Hence, we expect the utilisation levels reach 80.8% in FY13E.


0

10

20

30

40

50

60


mtp

a

68.0

70.0

72.0

74.0

76.0

78.0

80.0

82.0

84.0

86.0

%



Company wise capacity expansion Sr No Companies Maharashtra Gujarat FY11 FY12E FY13E FY14E FY15E

1 Ultratech 5.8 7.0 12.8 - - - 0.0

2 Ambuja Cement 4.6 6.7 11.3 - - -

3 Jaypee Cement - 4.8 4.8 - 2.4 - -

4 Sanghi - 2.6 2.6 - - - -

5 Orient Cement 2.0 2.0 - - - -

6 JK Lakshmi - 0.5 0.5 - - - -

7 ACC 4.0 4.0 - - - -

8 Saurashtra - 1.5 1.5 - - - -

9 Gujarath Sidhee Cement - 1.2 1.2 - - - -

10 Binani Cement - - - 2.5 - -

11 Century Cement 1.9 - 1.9 - - 2.5 -

12 India Cements 1.1 - 1.1 - - - -

13 Heidelberg 1.0 - 1.0 - - - -

14 ABG Cement - - - - - 3.5

Total 20.4 24.3 44.7 0.0 4.9 2.5 3.5

% of capacity 0.5 0.5 - - - - -

Installed Capacity - - 44.7 44.7 49.6 52.1 55.6





Eastern India: Demand to improve The Eastern region has posted a healthy 9.8% CAGR in FY08-11. The demand in East showed a marginal growth of 2.3% in Q3FY12 and 3.2% for 9MFY12. In view of a) peaking of interest rates, b) FY13E being first year of next five year plan, and c) the large potential for hydro electric generation in the North Eastern states, we expect the demand to witness a 8% CAGR in FY11-15E. At the same time with no major capacity to hit the market the capacity is expected to see a CAGR of 6.3% in FY11-15E. Hence, we believe the utilisation levels should improve to 96.6% in FY13E.


0

10

20

30

40

50

60


mtp

a

70.0

75.0

80.0

85.0

90.0

95.0

100.0

%



Company wise capacity expansion

Sl No Companies Bihar Chattisgarh W Bengal Assam Orissa Jharkhand FY11 FY12E FY13E FY14E

1 Ultratech - 2.5 1.2 - 1.0 0.0 4.7 - - 4.8

2 Lafarge - 2.1 1.0 - 3.4 6.5 - - -

3 ACC - 1.6 0.5 - 1.2 1.8 5.1 - - -

4 Ocl India - - - - 5.4 0.0 5.4 - - -

5 Ambuja Cement - 2.8 2.5 - - 0.0 5.3 - - -

6 Jaypee Cement - 2.2 - - - 2.1 4.3 - - -

7 Century Cement - 2.1 - - - 0.0 2.1 - 1.5 -

8 Birla Corp - - 2.3 - - 0.0 2.3 - 1.5 -

9 Barak Valley Cement - - - 0.2 - 0.0 0.2 - - -

10 JK Lakshmi - - - - - 0.0 0.0 - - -

11 Burnpur Cement Ltd - - 0.6 - - 0.0 0.6 - - -

12 Madras Cement - - 1.0 - - 0.0 1.0 - - -

13 Shiva - - - 0.1 0.0 0.1 - 0.5

Total 0.0 13.3 9.1 0.2 7.5 7.3 37.6 0.0 3.0 4.8

0.0 0.4 0.2 0.0 0.2 0.2 - - - -

Installed Capacity - - - - - - 37.6 37.6 40.6 45.4 Source: Company data, GEPL Capital Research




Southern Region: Demand to improve and ease pressure on oversupply situation The demand remained in the negative territory for the Southern region as a whole, mainly on account of sharp decline of 19% in demand for the first six months of FY12 in AP. However, there has been a strong pick up in demand for cement during Nov-Dec11, with states like Kerala showing a growth of 15%, Tamil Nadu showing a growth of 12%,, Karnataka exhibiting a growth of 8% and Andhra Pradesh, which had been the lagard in South has shown a growth of 12%.

In view of a) peaking of interest rates, b) progress observed in payment of dues to the contractors, and c) with FY13E being first year of next five year plan, we expect the demand to grow at a 7.5% CAGR in FY11-15E.

At the same time, we expect the capacity to grow at a CAGR of 9.1% on name plate basis, however looking at the production discipline and lower utilisation, considering the net additions; we expect the net capacity addition to happen at a CAGR of 6.0%. As a result of this we expect the utilisation levels to improve to 67.8% in FY13E and to go beyond 70% by FY15E.


0

20

40

60

80

100

120

140

160

FY11 FY12E FY13E FY14E FY15E

mtp

a

63.0

64.0

65.0

66.0

67.0

68.0

69.0

70.0

71.0

72.0

73.0

%

Installed Capcity Consumption Capacity utilisation





Company wise capacity expansion Sl No Companies TN AP KAR Kerala Goa FY11 FY12E FY13E FY14E FY15E CAGR

1 India Cements 5.9 7.1 - - - 13.0 - - - - -

2 Ultratech 7.6 3.7 0.3 - - 12.6 - - - - -

3 ACC 2.5 5.6 4.5 - - 9.7 - - - - -

4 Dalmia Cement 1.2 - 8.5 - - 9.0 - - - - -

5 Chettinad Cement 6.5 2.5 - - - 8.5 - - - 2.5 -

6 Kesoram 8.5 - - - - 7.3 - - - - -

7 Penna Cement - 1.5 5.8 - - 7.8 - - - - -

8 Zuari Cement - 7.8 - - - 5.7 - - - - -

9 Jaypee Cement - 5.7 - - - 0.0 3.5 - -

10 My Home - - - - - 7.0 - - - - -

11 JK Cement - 7.0 - - - 3.0 - - - - -

12 Deccan Cement - - 3.0 - - 1.8 - - - - -

13 KCP - 1.8 - - - 1.5 - - - - -

14 Keerthi Industries - 1.5 - - - 0.6 - - - - -

15 NCL - 0.6 - - - 2.0 - - - - -

16 Orient Cement - 2.0 - - - 3.0 - - - - -

17 Panyam Cement - 3.0 - - - 0.6 - - - - -

18 Prism Cement - 0.6 - - - 0.0 - - - 4.8

19 Rain Commodities - - - - - 2.9 - - -

20 Sagar Cement - 2.9 - - - 2.4 - 2.5 - -

21 JSW Steel - 2.7 - - - 0.6 4.2 - - -

22 Andhra Cement - - 0.6 - - 1.8 - - 1.4

23 Bheema Cement - 1.8 - - - 0.1 - - - - -

24 Anjani Portland Cement - 0.9 - - - 0.5 - - - - -

25 Heidelberg Cement - 1.2 - - - 0.6 - - - - -

26 BMM Ispat - - 0.6 - - 0.0 1.2 - - - -

27 Lalitha Cement - - - - - 0.0 1.0 - - - -

Total 24.5 52.5 22.3 0.0 0.0 101.7 7.7 0.0 3.9 7.3 -

Installed Capacity - - - - - 101.7 109.4 109.4 113.3 120.6 4.4%





Pricing discipline in South to stay intact

Cement capacity in South witnessed a CAGR of 28.5% in FY08-FY10, while the consumption saw a CAGR of 12%. The slower growth in consumption was mainly on account of lacklusture demand from both housing and infrastructure investment by the government, as a result of which utilisation levels declined. The lower demand and surplus capacity forced companies to sell cement below the variable cost with prices touching as low as `130-143 per bag during Aug-Sep10.

Consequent to this companies reduced their capacity utilisation by ~40%, which has helped companies not only to rise cement prices to as high as `250-280 per bag but also to maintain the same over the last one and half years, thereby helping companies recover the losses they made in CY10.

The consumption for the H1FY12 de-grew by 4.12% Y-o-Y with Tamil Nadu (TN) and Kerala showing a flat growth. AP continued to slide showing a decline of 19% Y-o-Y. The negative growth was mainly on account of low demand from both private and bulk consumers. This had further reduced the utilisation levels close to around 60% for the region as a whole.

On the contrary to the negative growth in despatches for the first half, there has been a strong recovery in Nov-Dec11. Despatches for Nov-Dec11 grew by 18% in TN, 15% in Kerala, 12% in AP and 8% in Karnataka on a Y-o-Y basis. We expect the despatches to remain strong during Q4FY12E & Q1FY13E.

Reasons for strong demand pick up in coming months

Relatively stable political environment

Recent CII partnership summit indicating a huge investment of `6.5 tn investment proposals

Signs of recovery seen in other major cities in AP, except Hyderabad where demand for housing is yet to take shape

Announcement of New projects by some of the real estate developers like PEBL venture with L&T, Mahindra life space announcing 200 mn sq ft worth `2.5 bn and many more in pipeline

Good business environment in real estate which had slowed down in the recent past has started showing some signs of improvement

Significant improvement seen in long pending dues to contractors

Lastly no major capacities by the existing and established player of South expected to hit the market in the short to medium term




Peaking of interest rates to trigger demand from industrial segment

The interest rates are on the rise since Apr09, with repo increasing from 4.75 % in Apr09 to 8.5% in Oct11 an increase of 375bps over the last 33 months. A Similar increase was observed during Oct05- Jul08, where the repo rate had risen from 6.25% to 9.0%, showing an increase of 275bps over 34 months.

RBI has now put a pause to the rising repo rate in the monetary policy held on December 16, 2011, indicating signs of peaking of interest rates. Given the declining trend of IIP, core industry and GDP makes a case for interest rates reversal. However oil prices and inflation still remain above the comfort zone of RBI, hence we expect the RBI to soften interest rates in the next monetary policy in Apr12.

It can also be observed that the time required for decline in interest rates is less compared to time required for rise in interest rates. Softening of interest rates would be a big positive for the sector. Hence we believe this to have positive impact on the credit off take from both housing and industrial segment thereby positively impacting the interest sensitive segments such as Cement, Steel (Longs) and Auto.

Trends in Repo rates

8.258.50

9.00

7.77

6.25

6.00

7.507.25

6.756.50

6.25

5.755.50

5.255.00

4.75

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

26-O

ct-0

5

26-D

ec-0

5

26-F

eb-0

626

-Apr

-06

26-J

un-0

6

26-A

ug-0

6

26-O

ct-0

6

26-D

ec-0

6

26-F

eb-0

726

-Apr

-07

26-J

un-0

7

26-A

ug-0

7

26-O

ct-0

7

26-D

ec-0

7

26-F

eb-0

826

-Apr

-08

26-J

un-0

8

26-A

ug-0

8

26-O

ct-0

8

26-D

ec-0

8

26-F

eb-0

926

-Apr

-09

26-J

un-0

9

26-A

ug-0

9

26-O

ct-0

9

26-D

ec-0

9

26-F

eb-1

026

-Apr

-10

26-J

un-1

0

26-A

ug-1

0

26-O

ct-1

0

26-D

ec-1

0

26-F

eb-1

126

-Apr

-11

26-J

un-1

1

26-A

ug-1

1

26-O

ct-1

1

26-D

ec-1

1

%

Source: Bloomberg, GEPL Capital Research




GDP and Cement Consumption trends Cement is a cyclical commodity and has a high correlation with GDP. Average growth in cement consumption on an annualized basis to GDP has been around 1.2xGDP (CY05-10).

Lately ,Cement consumption to GDP has declined to 1.1x in FY11 from 1.30x in FY09 and 1.36x in FY10, indicating decoupling of cement with GDP as the major chunk of demand for cement has been from the housing sector (64% of total), especially from the rural housing and partly from industrial segment (6% of total).

The demand from the other important segment such as Infrastructure (17% of total) and commercial segment (13% of total) has been low as evident from decline in incremental Gross Domestic Capital Formation (GDCF) in FY11(refer table one). The average incremental GDCF over CY06-08 stood at `1.61 tn as against an average of `0.87 tn during last three years (refer table 1).

Incremental GDCF for H1FY12 stood at `0.27 tn as against `0.76 tn in H1FY11

FY06 FY07 FY08 FY09 FY10 FY11

Cement Consumption/GDP 1.2 1.1 1.1 1.3 1.4 1.1

Source: Review of the economy 2010/11 in Feb 2011, Bloomberg, GEPL Capital Research

However, FY13 being the first year of XIIth five year plan (CY12-17E), we expect the demand from non-housing sector to show some revival thereby improving the Cement to GDP multiplier from current levels.

Table A: Gross Domestic Capital Formation

(In tn `) FY05 FY06 FY07 FY08 FY09 FY10 FY11

Gross Domestic Capital Formation 9.3 10.7 12.3 14.1 14.5 15.7 16.8

Incremental GDCF 1.4 1.5 1.9 0.4 1.2 1.1

Y-o-Y growth (%) 15.3 14.3 15.2 2.6 8.1 6.9


On the contrary to Q2 being a slack season for cement, the cement consumption to GDP multiplier has shown an improvement sequentially. This was mainly on account of better performance by cement as against a de-growth in GDP (refer table A). The Cement consumption to GDP rose sequentially from a low of 1.01x in Q2FY12 vs 0.73x in Q1FY12 (refer table B).

The cement consumption to GDP Multiplier on a Y-o-Y basis rose to 1.01x in Q2FY12 vs 0.55x in Q2FY12 (refer table C), showing some signs of recovery in demand for cement. However, the multiplier still remains lower compared to an average of 1.23x in Q2 of last six years.

Table B: Q-o-Q performance Q1FY12 Q2FY12 Change bps

GDP 7.7% 6.90% (80)

Cement 5.6% 7.0% 136

Multiplier 0.73 1.01 Source: Bloomberg, GEPL Capital Research

Table C: Y-o-Y performance Q2FY07 Q2FY08 Q2FY09 Q2FY10 Q2FY11 Q2FY12

Cement/GDP Multiplier 1.10 1.41 1.00 1.42 0.55 1.01

GDP (%) 10.1 9.4% 7.5 8.6 8.9 6.90

Cement Consumption (%) 11.1 13.3 7.5 12.2 4.9 7.0 Source: Bloomberg, GEPL Capital Research




US$1 tn investment in five year plan might trigger next bout of demand

GoI during its X and XI five year plan had estimated to make an investment of around US$ 200.9 bn and US$492.5 bn respectively. Looking at the growing need for infrastructure, the government had estimated to make an investment of over US$1 tn, assuming GDP to grow at 9% and infrastructure investment as a percentage of GDP at an average of 9.88% over the XII plan.

Estimated investments for XII five year plan FY12 FY13 FY14 FY15 FY16 FY17 Total

GDP at market 63,142.7 68,825.5 75,019.8 81,771.6 89,131.0 97,152.8 411,900.6

prices(`tn)

Rate of growth of GDP (%) 9.0 9.0 9.0 9.0 9.0 9.0 9.0

Infra. investment % of GDP 8.4 9.0 9.5 9.9 10.3 10.7 10.0

Infrastructure investment 5,283.2 6,194.3 7,126.9 8,095.4 9,180.5 10,395.3 40,992.4

prices(`tn)

Infrastructure investment 132.1 154.9 178.2 202.4 229.5 259.9 1,024.8

(US $ bn) @ `40/$

Source: Report on investment in Infrastructure- Sept 10

However, in view of the recent trends in GDP, estimation of 9% does not seem practical. Making the necessary changes to the GDP growth rates, in order to make an estimated investment of US$1 tn, the government has to increase the share of investment in infrastructure as a percentage of GDP from 9.88% by at least 203bps. Hence there is a very high possibility that the share of investment as a percentage of GDP would increase, thereby leaving a head room for increase in share of consumption of infrastructure as a percentage of overall consumption. Accordingly, we expect the infrastructure share in demand to rise to over 20% from the current 17% and also consumption of cement to GDP multiplier to reach 1.4x.

Estimated investments for XII five year plan (our estimates)

FY12 FY13 FY14 FY15 FY16 FY17 Total

GDP at market 63,142.7 67,878.3 73,308.6 79,539.8 86,698.4 94,501.3 401,926.5

prices(`tn)

Rate of growth of GDP (%) 7.0 7.5 8.0 8.5 9.0 9.0 9.0

Infra. investment % of GDP 10.4 11.0 11.5 11.9 12.3 12.7 12.0

Infrastructure investment 6,569.6 7,489.9 8,455.7 9,492.6 10,693.7 12,034.1 48,166.1

(`tn)

Infrastructure investment 139.8 159.4 179.9 202.0 227.5 256.0 1,024.8

(US $ bn) @ `47/$

Source: Report on investment in Infrastructure, GEPL Capital research




Encouraging data on Project implementation under Public private partnership

The data as on July 31, 2011, indicates that currently 212 projects are under implementation spanning across all segments of infrastructure (roads, ports, railways and airports) amounting to `1.41 tn with 74.94% of it being under construction stage. This is expected to benefit firstly the large cement players with Pan Indian presence, secondly the large players in respective regions and finally the mid-sized companies over the tenure of the construction period.

Project implementation under Public private partnership

Particulars of PPP Total Cost of Investment (`bn) % of Total

Completed 10 0.7

Bidding 5 0.4

Construction 1,058 74.9

Operational 2 0.2

Under operation 177 12.6

Under Implementation 159 11.3

Total 1,412 100.0

Delhi-Mumbai Industrial Corridor (mega infra-structure project of USD 90 bn) to benefit players in North, Central and Western India.

Delhi-Mumbai Industrial Corridor is a mega infra-structure project of US$90 bn with the financial and technical aids from Japan, covering an overall length of 1483 Km between the political capital and the business capital of India, i.e. Delhi and Mumbai.

A MOU was signed in Dec06 between Vice Minister, Ministry of Economy, Trade and Industry (METI) of Government of Japan and Secretary, Department of Industrial Policy & Promotion (DIPP). A Final Project Concept was presented to both the Prime Ministers during Premier Abes visit to India in Aug07.




Finally, GoI has announced establishing of the Multi-modal High Axle Load Dedicated Freight Corridor (DFC) between Delhi and Mumbai, covering an overall length of 1483 km and passing through the six states - UP, NCR of Delhi, Haryana, Rajasthan, Gujarat and Maharashtra, with end terminals at Dadri in the National Capital Region of Delhi and Jawaharlal Nehru Port near Mumbai. Distribution of length of the corridor indicates that Rajasthan (39%) and Gujarat (38%) together constitute 77% of the total length of the alignment of freight corridor, followed by Haryana and Maharashtra 10% each and Uttar Pradesh and National Capital Region of Delhi 1.5 % of total length each. This Dedicated Freight Corridor envisages a high-speed connectivity for High Axle Load Wagons (25 ton) of Double Stacked Container Trains supported by high power locomotives. The Delhi - Mumbai leg of the Golden Quadrilateral National Highway also runs almost parallel to the Freight Corridor.

This would be a big positive for the cement sector, as this will help rise demand from industrial and infrastructure segment which currently accounts for 6% and 17% of the overall consumption in India respectively.

Demand to remain strong across regions even in Q1FY13E unlike last year

Historically, the demand for cement peaks during Dec- Mar period owing to pick up in demand from all segments, with little regional variation.

All India cement consumption

15.76 15.76

17.79

16.35 16.27 16.27

15.85

15.29

14.56

15.21

17.61

18.01

16.61

19.51

17.9817.73

17.11

16.62

15.67 15.67

17.87

17.22

15.57

14.92

19.65

12.50

13.50

14.50

15.50

16.50

17.50

18.50

19.50

20.50

21.50

Jan

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

mtp

a

2008 2009 2010 2011


Unlike last year this year we expect the consumption to improve during the first quarter of FY13E. Some of the arguments for our belief are.

All round pick up in demand from Industrial, retail, infrastructure and commercial segment Start of constructional activities owing to conducive weather conditions for construction. (mainly

housing, which constitutes the major chunk of demand)

FY13E being the first year of XII five year plan we expect the demand to pick up Lastly, GoI may unveil its plans for making of concrete road, which it is planning since the last

two five year plans. Though actual implementation might take time, this will be a big positive for the sector as it would provide the lacking visibility on the cement demand. As per the earlier draft concrete road might require to make 60,000 km of concrete roads, assuming 1,000 MT of cement per km of concrete road would require at least 60 mn MT.




Key concerns

Increase in Input costs:

Upward revision in government levies on key input costs may adversely affect our projections.

Royalty on Lime stones Import duty on Gypsum, Imported Coal and Petcoke Increase in Diesel prices Excise duty Value added tax Upward revision in classification of finished products and key raw materials by Indian Railways. Royalty on Limestone

45

63 63

35

40

45

50

55

60

65

FY10 FY11 FY12

Rs

/ to

n

w.e.f 13.08.2009

Royalty on lime stone has been revised with effect from August 8,2009 from `45 per MT - `63 per MT

and `one per bag extra.

On an average 1.3-1.5 MT of lime stone is required per MT of clinker; however quantity of lime stone

per MT of cement depends on the extent of production of blended cement such as PPC or PSC. Any

upward revision in royalty on lime stone, which accounts for 33% of total cost of lime stone mining

(second largest cost after excavation & transportation charge 46%), might have a negative impact on

the cost of lime stone in making cement.

Cost structure of Limestone

Excavation and

Transportation,

57.3

Machinery

Repairs and

Maintenance,

1.0

Stores

Consumption,

19.5

Royalties and

Cess Charges,

40.4

Others, 0.0Salaries and

Wages, 5.0





Changes in VAT

Value added tax is applicable on the intrastate (within) sales of cement; the VAT on cement varies in the range of 12.5%-15% depending on the state. There has been a several revision during last couple of years (Refer Table). Cement being more of regional commodity any upward revision in the VAT might have negative impact on the companies.

Trends in VAT

FY10 FY11 FY12

West Bengal w.e.f 15-11-2010 12.50% 13.50% 13.50%

Orissa w.e.f 1-4-2011 12.50% 13.50%

Karnataka w.e.f 1-4-2011 13.50% 14.00%

Jharkhand w.e.f 7-5-2011 12.50% 14.00%

Andhra Pradesh w.e.f 15-1-2010 12.50% 14.50% 14.50%

Source: Government publications, GEPL Capital Research

Value added Tax

12.5

13.5

12.5

13.5

14.0

12.5

14.0

14.5

13.5

12.5

14.5

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

FY10 FY11 FY12

%

WB w.e.f October 15, 2010 Orissa w.e.f April 1, 2011

Kar w.e.f April 1, 2011 Jharkhand w.e.f May 7, 2011

AP w.e.f January 15, 2010

Source: Government publication, GEPL Capital Research

Changes in MAT

Similarly there have been several revisions in the MAT, any upward revision in MAT might have negative impact on cement companies.

Trends in MAT

10.0

15.0

18.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY10 FY11 FY12

%

Source: Government publications, GEPL Capital Research




Revision in excise Sr No For other than Mini Cement Plant Existing Excise New Excise Duty

1 Retail Sale price `190 per Bag 10% of Retail Sale Price* 10% Ad Valorem+`160PMT*

3 All goods other than those cleared in packaged form 10% or `290 PMT whichever is higher* 10% Advalorem*

*3% of secondary and higher secondary cess extra. Government publications, GEPL Capital Research

Excise duty for trade sales was revised during Feb11 budget from earlier 10% on maximum retail price (cess @3% extra) vs new ED of 10% on basic plus `160 PMT (Cess @ 3% extra). Whereas direct sales was revised to ED of 10% on basic plus `160 PMT (Cess @ 3% extra) from 10.3% or `298.7, whichever is higher.

Any upward revision in excise duty might have negative impact on consumption of cement, thereby negatively impacting the revenue of cement companies.

Sharp increase in BDI Sharp rise in baltic dry Index coupled with rupee depreciation might have a negative impact on the freight cost of imported coal.

Trends in Baltic Dry Index

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Jan-

09

Feb-

09

Mar

-09

Apr-

09

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

BDIY





Increase in coal prices

Sharp pick up in coal prices coupled with weakening rupee to impact the cost of imported coal thereby impacting the cost of production and negatively impacting the margins.

In view of uninterrupted and good quality coal, cement companies with access to nearest port mostly import coal from international markets such as Indonesia or Australia. Considering 80% of product mix to be a blended cement and approximate addition of around 25% of fly ash, the fuel costs for making one ton of cement at current costs works out to be `32.4 per bag assuming no blending whereas assuming 80% of blended cement the cost of fuels works out to be 25.2 per bag.

Considering 55% of imported coal any increase of coal prices by 5% would give rise to around `0.7 per bag assuming domestic coal price to remain constant. At the same time any increase of 5% in domestic coal price would give rise to cost of fuel for making cement to rise by `0.5 per bag. Hence, any sharp increase in cost of coal might have a negative impact on cost of coal in making cement.

Coal cost calculation and impact of coal price on cement.

OPC PPC

Addition of Fly ash 0% 25%

Clinker % 90.0% 65.0%

Share of PPC & OPC 20% 80.0%

Std Kcal/ Unit of Cement 750

Domestic Imported

Kcal/Kg 3700 5500

Share of Domestic and Imported 40% 60.0%

Cost/ MT 3811 5067

Increase in Cost 0% 0%

Wtd Average Kcal 4780

Wtd Average Cost 4565

Cost per Kg 4.56

Cost per Unit of Cement 644.58

Cost of coal per Bag @ Nil blending 32.2

Cement Produced (MT) 1

OPC 0.18 Clinker Required

PPC 0.52

OPC 135 Kcal Required

PPC 390

Total 525

Coal Required kg/MT 501.3

Coal Cost per Bag @ 80% PPC 25.1


Accordingly, the cost of fuel constituting ~18% of the variable costs and power cost constituting around 10% of the variable costs. Any sharp increase in coal costs would have a significant negative impact on our assumption.


UltraTech Cement Ltd.

Volume, ReaIisation & Scale of operation to drive growth March 15, 2012

NEUTRAL



Initiating Coverage

CMP (`) Target (`)

1,499.60 1,595

Potential Upside Absolute Rating

6.4% NEUTRAL

Market Info (as on 14th March, 2012)

BSE Sensex 17919

Nifty S&P 5464

Stock Detail

BSE Group A

BSE Code 532538

NSE Code ULTRACEMCO

Bloomberg Code UTCEM IN

Market Cap (`bn) 410.98

Free Float (%) 40%

52wk Hi/Lo 1517 / 916

Avg. Daily Volume (NSE) 131067

Face Value / Div. per share (`) 10.00 / 6.00

Shares Outstanding (mn) 274.0

Shareholding Pattern Promoters FIIs DII Others

63.35 16.10 6.38 14.17

Financial Snapshot (`mn)

Y/E Mar FY10 FY11 FY12E FY13E

Net Sales 71,751 136,912 186,657 220,663

EBITDA 19,839 25,705 44,945 56,818

PAT 10,952 13,674 19,668 25,463

EPS 88.0 49.9 71.8 92.9

ROE (%) 26.7 17.9 17.0 18.7

ROCE (%) 19.7 15.2 13.9 14.1

P/E 13.1 22.7 20.2 15.6

EV/EBITDA 8.0 13.6 10.2 8.5 Share Price Performance

70

80

90

100

110

120

130

140

150

160

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

UltraTech Cement BSE SENSEX

Rel. Perf. 1Mth 3 Mths 6Mths 1Yr

UCL (%) 6.8 30.4 36.0 45.9

SENSEX (%) 0.4 12.8 7.2 (2.8)


Investment Rationale

Recent merger to aid UCL in the next up cycle of cement Post the merger of Grasims cement business (Samridhi Cement) with Ultratech Cement Ltd (UCL), UCL is the largest cement maker by capacity in India. UCL currently operates 11 integrated cement plants and 11 grinding units with a total installed capacity of 48.75 mtpa almost 2.11x its 23.1 mtpa prior to merger. The merger has not only helped UCL to strengthen its market positions across all regions but also has given UCL an access to northern market, where it had no presence prior to merger; Thus making it a pan India player. We believe this should help UCL in the next up cycle, as it gives UCL better economies of scale as compared to previous up cycle of cement.

Increased shift towards captive sourcing of power to insulate UCL from tariff rise There has been a significant shift in the ratio of power being sourced from a captive power plant (CPP) currently as against that in the last up cycle (CY07-08). UCL currently sources around 78.5% of its entire power requirement from its CPP as against mere 22% in CY07-08. With cost of purchased power being 44% costlier than the cost of power from CPP (as per FY11 annual report), we believe the increased shift towards CPP to aid UCL insulating itself from sharp rise in power tarrariffs and also ensure uninterrupted power supply.

Industrial preference over midsized players; Western region presence to benefit in long run

Our channel check indicates that UCL along with other two large cement majors are the preferred brands by most of the industrial user segment, owing to its better performance and low cost of concrete. We expect a) interest cycle expected to reverse, b) demand from industrial segment in West to increase, and c) UCLs large exposure in the West to help UCL in next up cycle.

Improving utilisation of UCL across other regions and pricing discipline in South

With no major capacity expected to hit the market in the near term, we expect the capacity utilisation of UCL to improve from current levels. Also we anticipate the pricing discipline in South to remain intact thereby helping cement companies operating in South. With UCLs market share of 10.5% by capacity in south (second largest), we believe UCL should benefit on account of strong pricing discipline.

Capacity expansion to fuel growth during next up cycle UCL is progressing on its schedule to expand its capacity at Chhattisgarh and Karnataka by 4.8 mtpa and 4.4 mtpa respectively and expects to complete the same by Mar13. With commissioning of its new capacity, we expect the sales volume to see a growth of 9.7% Y-o-Y in FY14E and 4.8% Y-o-Y FY15E. Given no major capacity expansion to hit the market we expect the average realisation to improve over next two to three years, there by helping UCL to improve both top line as well as bottom line.

Valuation and views

In view of the a) significant improvement in sourcing of power from CPP as compared to its last up cycle of cement, b) better economies of scale post merger, c) access to northern market as well as strengthening of its market position all across other regions compared to last up cycle, d) preference given to UCL by large industrial consumers, and e) slowing pace of new capacity additions across other regions and strong pricing discipline in south should positively impact both the utilization as well as realisation going ahead, thereby benefiting UCL in next up cycle. Hence, we believe UCL deserves a better valuation compared to its last up cycle. Accordingly we initiate coverage on UCL with NEUTRAL rating and with one year price target of `1,595 per share based on both EV/MT and EV/EBIDTA on a differential weight age.


UltraTech Cement Ltd. March 15, 2012

GEPL Capital Research| Initiating Coverage 25

Investment Rationale Recent merger to aid UCL in the next up cycle of cement

Ultratech Cement Ltd. (UCL) is the largest cement maker by capacity in India post the merger of Grasims cement business (Samridhi Cement). UCL currently operates 11 integrated cement plants and 11 grinding units with a total installed capacity of 48.75 mtpa. It also operates one white cement plant with 0.56 mtpa.

Apart from this, UCL also operates one clinkerisation unit at UAE and two grinding units, one in Bahrain and one in Bangladesh with a total installed capacity of 3 mtpa outside India.

With an intention to focus on cement, the company had merged all its cement business in to single entity in a phased manner. In the first phase the cement business of Grasim was de-merged in to a separate entity Samriddhi Cement. In the second phase the same has been merged with UCL.

UCLs current total grey cement capacity post merger stands at 2.11x as against 23.1 mtpa prior to merger. This has given UCL better economies of scale as well as strengthened its market position across other region (Refer table below). We believe this should help UCL in the next up cycle of cement.

Details of capacities post merger and prior to merger

Before Merger After Merger

Capacity (mtpa) Capacity (mtpa) % Total Increase in Capacity (%)

North 0 11.1 22.9 NM

South 8.0 12.6 25.8 57.5

East 2.2 4.7 9.6 113.6

West 11.0 12.8 26.3 16.4

Central 1.9 7.5 15.4 294.7

Total 23.1 48.7 100.0 111.0 Source: Company data, GEPL Capital Research




Plant wise details UCL in India

Sl No Location State UoM Capacity in mtpa % Of Total

1 Jafrabad Gujrat Mtpa 0.5 1.0

2 Magdalla Gujrat Mtpa 0.7 1.4

3 Rajula Gujrat Mtpa 5.8 11.9

4 Awarpur Maharashtra Mtpa 3.6 7.4

5 Ratnagiri Maharashtra Mtpa 0.4 0.8

6 Hotgi Maharashtra Mtpa 1.8 3.7

West 12.8 26.3

7 Tadipatri Andhra Pradesh Mtpa 5.6 11.5

8 Ginigera Karnataka Mtpa 1.3 2.7

9 Malked Karnataka Mtpa 3.2 6.6

10 Arakkonam Tamil Nadu Mtpa 1.1 2.3

11 Reddipalyam Tamil Nadu Mtpa 1.4 2.9

South 12.6 25.8

12 Raipur CTG Mtpa 2.5 5.1

13 Rajbandh West Bangal Mtpa 1.2 2.5

14 Arda Orissa Mtpa 1.0 2.1

East 4.7 9.6

15 Panipat Haryana Mtpa 1.3 2.7

16 Bhatinda Punjab Mtpa 1.7 3.6

17 Shambupura Rajasthan Mtpa 5.0 10.3

18 Kotputli Rajasthan Mtpa 3.1 6.4

North 11.1 22.9

19 Hirmi Madhya Pradesh Mtpa 1.9 3.9

20 Jawad Road Madhya Pradesh Mtpa 3.0 6.2

21 Dadri Uttar Pradesh Mtpa 1.3 2.7

22 Koli Uttar Pradesh Mtpa 1.3 2.7

Central 7.5 15.4

48.7 100.0





Increased shift towards captive sourcing of power to insulate UCL from tariff rise

There has been a sea of change in the ratio of CPP from what the company had during the last up cycle of the cement (FY07-08) as compared to its current position.

During FY07, the quantity of purchased power was as high as 60.1% and power from CPP stood at mere 21.9%, the cost per unit of power stood at `4.79/Unit and `1.4/Unit for Purchased and Captive Power respectively. In FY11 CPPs share as a percentage of its total power requirement increased to 78.5% and share of Purchased power stood at 19% with rates per unit at `5.35 and `3.71 respectively.

With power cost being a major input cost and also given the fact that the cost of purchased power being 44% (as per FY11annual report) dearer than cost of power from CPP for UCL, we believe the shift to CPP would help UCL in insulating itself from the sharp rise in power tariffs and also give UCL an access to un-interrupted power supply.

Details of power sourcing

FY07 FY11

Qty Rate % Share Qty Rate % Share

Electricity Purchased 847,582,016 4.79 60.1 543,606,016 5.35 19.0

Electricity Generated (Steam Turbine) 309,571,008 1.40 21.9 2,251,368,960 3.71 78.5


Currently, the companys total installed capacity of CPP stands at 600MW. It plans to expand its CPP by 25MW and waste heat recovery plant by 45MW, which is expected to get commissioned by Mar13.

UCL currently has a linkage to domestic supplies to the tune of 35%, 15% of coal requirement is through e-Auction and balance around 50% is imported.




UCL sells around 1/3rd of volumes to the trade and 2/3rd to the non trade segment and gets 22% of its revenue from western India

Industrial preference over midsized players; Western region presence to benefit in long run

UCL sells around 1/3rd of volumes to the trade and 2/3rd to the non-trade segment. UCL gets 32% of its revenue from North and Central India put together, 22% of the revenue from Southern India, ~18% from Eastern India and the balance 22% from Western India.

Our channel check indicates that UCL along with other two large cement majors are the preferred brands by most of the industrial user segment owing to its better performance and low cost of concrete. UCL is currently the largest cement maker in West with a total market share by capacity of 28.6%.

As Western India (primarily Mumbai) is mostly dominated by bulk consumer of cement, we expect any indication of interest rate reversal to spur demand from this segment, and thereby benefiting large players like UCL, Ambuja Cement Ltd and ACC.

With government envisaged to make an investment of US$1 tn in next five year plan, also with Delhi-Mumbai corridor expected to start soon, we believe it should benefit the major players operating in North, Centre and West.




Improving utilisation of UCL across other regions and pricing discipline in South

On anticipation of strong demand, cement companies across the country had announced expansion plans. As a result of this industry had seen a total addition of 114.8 mtpa over last 3-4 years witnessing a CAGR of 13% in FY08- 9MFY12.

However, over the recent past the pace of addition has slowed down. In FY09 industry saw a total addition of 42.1 mtpa, 27.5 mtpa in FY10, 23.6 mtpa in FY11 and around 21.5 mtpa in FY12 (till Dec11).

Also on the supply side, there has not been much progress on the 26.5 mtpa announced earlier in Andhra Pradesh (AP). Given the long gestation period for setting up of capacity, we dont see this capacity hitting the market any time soon thereby positively impacting the demand supply scenario. Further on an all India basis we expect a net addition of 24.8 mtpa over next 15 months taking the overall installed capacity of cement to around 334.6 mtpa by FY13E.

Given the slowing pace of capacity additions, we expect the installed capacity on an all India basis to witness a CAGR 6.7% in FY11-15E. At the same time in view of a) peaking of interest rates b) US$ 1tn investment over next five year plan c) expectation of increase in infrastructure spending as a percentage of GDP, and d) improvement in demand from housing segment, we expect the consumption of cement to witness a CAGR 8.8% in FY11-FY15E. Hence, we expect the capacity utilisation on an all India basis to reach 75.9% in FY13E and 78.4% in FY14E.

Trends in Capacity additions

Company FY08 FY09 FY10 FY11 As on Dec.11

All India Cement Capacity (mn MT) 195.1 237.2 264.7 288.3 309.9

Capacity additions(in mn MT) 42.1 27.5 23.6 21.5

Total Additions in mn MT 45.2


Production discipline to remain intact, to help maintain high prices Cement capacity in South since FY09, has seen a CAGR 28.5% in FY08-FY10, the consumption has seen a CAGR of 12%. The slower growth in consumption was mainly on account of lackluster demand from both housing and infrastructure investment by the government, as a result of which the utilisation levels declined. The lower demand and surplus capacity forced companies to sell cement below the variable cost with prices touching as low as `130-143 per bag during Aug-Sep10.

Consequent to this companies reduced their capacity utilisation by ~40%, which has helped companies not only to raise cement prices to as high as `250-280 per bag but also to maintain the prices over the last one and half years, thereby helping companies recover the losses they made in CY10.

With lack lusture consumption from both private as well as government projects, the consumption for the H1FY12 de-grew by 4.12% Y-o-Y with Andhra Pradesh (AP) showing a sharp decline of 19% Y-o-Y.

There has been a signs of recovery seen in South, TN showing a growth of 18% Y-o-Y growth for Nov-Dec11 period, Kerala showing a growth of 15% Y-o-Y, AP which had been the laggard showing a growth of 12% Y-o-Y and lastly Karnataka also exhibiting a strong growth of 8% Y-o-Y. With Q4 & Q1 being the strong quarter for Southern cement companies, we expect the despatches to remain strong during Q4FY12E & Q1FY13E.




Reasons for demand pick up in coming months

Relatively stable political environment

Recent CII partnership summit indicating a huge investment of `6.5 tn investment proposals

Signs of recovery seen in other major cities in AP, except Hyderabad where demand for housing is yet to take shape

Announcement of New projects by some of the real estate developers like PEBL venture with L&T, Mahindra life space announcing 200 mn sq ft worth `2.5 bn and many more in

pipeline

Good business environment in real estate which had slowed down in the recent past has started showing some signs of improvement

Significant improvement seen in long pending dues to contractors

UCLs market share by capacity at 10.5% second largest in south and the strong pricing discipline should aid UCL significantly.




commencement of production at both the units by March 2013, we expect the sales volume to see a growth of 9.7% Y-o-Y in FY14E and 4.8% Volume growth in FY15E

Capacity expansion to fuel growth during next up cycle

UCL has planned a capital expenditure of `110 bn over the next two years for a) brown field expansion of its cement capacities at Chhattisgarh and Karnataka by 4.8 mtpa and 4.4 mtpa respectively, involving an investment of `51.5 bn, commencing by Mar13 b) enhancing thermal power capacities by 25Mw and waste heat recovery plant capacity by 45MW at a total estimated costs of `6.8 bn, and c) development of infrastructure, ready mix concrete and modernization and up gradation.

With commencement of production at both the units by Mar13, we expect the sales volume to see a growth of 9.7% Y-o-Y in FY14E and 4.8% Y-o-Y in FY15E. Given no major capacity expansion to hit the market we expect the average realisation to improve over next two to three years, thereby positively impacting UCLs top line as well as bottom line going forward.

Trends in capacity, utilization and sales volume

Installed Capacity Capacity

Utilised (%) Sales

Quantity `/Bag (Net) Net Sales

FY15 57.8 83.0 47.9 254.7 244,140

FY14 57.8 79.2 45.8 244.7 223,873

FY13 48.8 85.5 41.7 225.4 188,012

FY12 48.8 81.9 39.9 205.9 164,456

FY11 48.8 67.5 33.2 164.5 109,330

FY10 23.1 76.4 17.8 171.0 60,746

FY09 21.9 72.4 15.8 170.7 53,960

FY08 18.2 82.8 15.0 161.1 48,401

FY07 17.0 86.1 15.2 147.0 44,591

FY06 17.0 78.4 14.2 108.6 30,913

FY05 15.5 78.2 12.5 89.9 22,505

FY04 15.5 76.1 14.9 90.6 26,932 *the data are not strictly comparable to figures in earlier years.





Financial Overview

Revenue to record 23.6% CAGR over FY11-FY14E

We expect UCL to report a robust 23.6% CAGR in revenue, to `258.6 bn in FY11-14E driven by increase in a) 9.2% CAGR in FY13-14E volumes and b) 13.9% CAGR in FY13-14E blended realisation. Slower growth of capacity additions across the industry coupled with strong overall growth in demand from all segment especially the infrastructure and industrial segment to aid growth going forward.

Net Sales

136.9

186.7220.7

258.690.8

36.3

17.218.2

0.0

50.0

100.0

150.0

200.0

250.0

300.0

FY11 FY12E FY13E FY14E

Rs b

n

0.0

20.0

40.0

60.0

80.0

100.0

%

Net Sales Y-o-Y growth

`


Trends in capacity, utilization and sales volume

Installed Capacity Capacity

Utilised (%) Sales

Quantity `/Bag (Net) Net Sales

FY15 57.8 83.0 47.9 254.7 244,140

FY14 57.8 79.2 45.8 244.7 223,873

FY13 48.8 85.5 41.7 225.4 188,012

FY12 48.8 81.9 39.9 205.9 164,456

FY11 48.8 67.5 33.2 164.5 109,330

FY10 23.1 76.4 17.8 171.0 60,746

FY09 21.9 72.4 15.8 170.7 53,960

FY08 18.2 82.8 15.0 161.1 48,401

FY07 17.0 86.1 15.2 147.0 44,591

FY06 17.0 78.4 14.2 108.6 30,913

FY05 15.5 78.2 12.5 89.9 22,505

FY04 15.5 76.1 14.9 90.6 26,932 *the data are not strictly comparable to figures in earlier years.





EBIDTA margin to grow to 869bps to 27.5% in FY14E

The average EBIDTA margin on a standalone basis for the first nine months stood at an average of 22.2%. With Q4 generally being a stronger quarter and given the strong pricing trends, we expect the margin to improve further from this level.

Trends in EBIDTA and EBIDTA Margin

19.8 25.7

44.956.8

27.525.724.1

18.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0


Rs b

n

0.0

5.0

10.0

15.0

20.0

25.0

30.0

%

EBITDA EBITDA Margin (%)

`


In view of a) strong pricing trends b) improving utilization trends which should spread its fixed costs, and c) increased share of CPP, we expect the EBIDTA margins to reach 25.7% in FY13E.

Net profit to record a CAGR of 35.8% in FY11-14E on higher realisation We expect higher realisation and growing volumes to result in net profit witnessing a 35.8% CAGR in FY11-14E to `34.2 bn.

Trends in Net profit and Net profit Margin

13.719.7

25.534.2

10.0 10.511.5

13.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


Rs b

n

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

%

Net Profit Net Profit Margin

`





Key Risks

Break in the pricing discipline Company derives 20% of its revenue from the southern part of India. However given the large surplus in the region and low pick up in demand, the utilization has been very low. As a result of conscious decision by the manufacturers to keep low utilization, the company has been able to maintain healthy cement prices in the region. Any discrepancy in the pricing discipline with entry of new players and sudden increase in utilizations to take advantage of high price might have a negative impact our earnings estimates.

Sharp rise in coal prices coupled with sharp depreciation to affect power and fuel costs of the company and impact our assumptions Owing to uncertainties with regards to supply, quality and prices of domestic coal manufacturers have shifted to imported coal. Hence, any sharp increase in imported thermal coal might affect our estimation and in turn our valuation.




Valuation

In view of the a) significant improvement in sourcing of power from CPP as compared to its last up cycle of cement, b) better economies of scale post merger, c) access to northern market as well as strengthening of its market position all across other regions compared to last up cycle, d) preference given to UCL by large industrial consumers, and e) slowing pace of new capacity additions across other regions and strong pricing discipline in south should positively impact both the utilization as well as realisation going ahead, thereby benefiting UCL in next up cycle. Hence, we believe UCL deserves a better valuation compared to its last up cycle. Accordingly we initiate coverage on UCL with NEUTRAL rating and with one year price target of `1,595 per share based on both EV/MT and EV/EBIDTA on a differential weight age.

Valuation on EV/EBIDTA The stock has been trading in the band of 7-7.5x one year-forward EV/EBITDA . However during the last up cycle UCL was trading in the range of 8.5-9.0x touching ~9.25x. Given the significant improvement in key parameters such as larger share of CPP, access to key growth areas like northern markets, better economies of scale and lastly expected pickup in with slowing pace of capacity additions, we expect the stock to trade at the highs of its last up cycle at 9.25x one year forward EV/EBITDA. Accordingly the target price works out to be `1,605 per share with a potential upside of 20% from CMP.

Trends in EV/EBIDTA

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Apr-

06

Jul-

06

Oct

-06

Jan-

07

Apr-

07

Jul-

07

Oct

-07

Jan-

08

Apr-

08

Jul-

08

Oct

-08

Jan-

09

Apr-

09

Jul-

09

Oct

-09

Jan-

10

Apr-

10

Jul-

10

Oct

-10

Jan-

11

Apr-

11

Jul-

11

Oct

-11

Jan-

12

Apr-

12Price 6.0x 7.0x 7.5x 8.5x 9.0x

`

Source: Company Data, GEPL Capital Research




Valuation on EV per MT Over last two years EV/ MT has been in the range of US$116-203. At the current market price the stock is trading at US$195/MT at its two years high and at a 4% discount to its all time high of US$203/MT.

Given strong pricing trend, economies of scale and expected improvement in investment cycle both by GOI and private players, we expect UCL to trade above its all time high. Accordingly considering US$203/MT, the one year target price works out to be `1,557 per share.

EV/MT

30.0

50.0

70.0

90.0

110.0

130.0

150.0

170.0

190.0

210.0

230.0

20-O

ct-0

6

20-J

an-0

7

20-A

pr-0

7

20-J

ul-0

7

20-O

ct-0

7

20-J

an-0

8

20-A

pr-0

8

20-J

ul-0

8

20-O

ct-0

8

20-J

an-0

9

20-A

pr-0

9

20-J

ul-0

9

20-O

ct-0

9

20-J

an-1

0

20-A

pr-1

0

20-J

ul-1

0

20-O

ct-1

0

20-J

an-1

1

20-A

pr-1

1

20-J

ul-1

1

20-O

ct-1

1

20-J

an-1

2

EV (

US$

)/M

T

US$195/MT

US$116/MT

US$203/MT


Target price based on both EV/EBIDTA and EV/MT on differential weight age.

Owing to the low EBIDTA margins of the company compared to the margins during the last up cycle we have considered a weight of 80% to EV/EBIDTA instead of 100% and 20% to EV/MT. Accordingly, we derive our one year target price to be `1,595 per share with a potential upside of 6.4%

Valuation Methods Weight age Target price EV/EBIDTA 80% 1,605

EV/MT 20% 1,557

Target Price 1,595

Current Market Price 1,499 Potential Upside 6.4%





Company Background

Part of Aditya birla group, UCL currently operates 11 integrated cement plants and 11 grinding units with a total installed capacity of 48.75 mtpa. From July10 Grasims cement business has been merged with UCL, giving it an access to northern India and also strengthening its market position all across other regions.

Sl No Location State UoM Capacity in mtpa % Of Total

1 Jafrabad Gujrat Mtpa 0.5 1.0

2 Magdalla Gujrat Mtpa 0.7 1.4

3 Rajula Gujrat Mtpa 5.8 11.9

4 Awarpur Maharashtra Mtpa 3.6 7.4

5 Ratnagiri Maharashtra Mtpa 0.4 0.8

6 Hotgi Maharashtra Mtpa 1.8 3.7

West 12.8 26.3

7 Tadipatri Andhra Pradesh Mtpa 5.6 11.5

8 Ginigera Karnataka Mtpa 1.3 2.7

9 Malked Karnataka Mtpa 3.2 6.6

10 Arakkonam Tamil Nadu Mtpa 1.1 2.3

11 Reddipalyam Tamil Nadu Mtpa 1.4 2.9

South 12.6 25.8

12 Raipur CTG Mtpa 2.5 5.1

13 Rajbandh West Bangal Mtpa 1.2 2.5

14 Arda Orissa Mtpa 1.0 2.1

East 4.7 9.6

15 Panipat Haryana Mtpa 1.3 2.7

16 Bhatinda Punjab Mtpa 1.7 3.6

17 Shambupura Rajasthan Mtpa 5.0 10.3

18 Kotputli Rajasthan Mtpa 3.1 6.4

North 11.1 22.9

19 Hirmi Madhya Pradesh Mtpa 1.9 3.9

20 Jawad Road Madhya Pradesh Mtpa 3.0 6.2

21 Dadri Uttar Pradesh Mtpa 1.3 2.7

22 Koli Uttar Pradesh Mtpa 1.3 2.7

Central 7.5 15.4

48.7 100.0 Source: Company Data, GEPL Capital Research

Grey cement contributes around 84.7% of the overall sales of the company followed by RMC Putty and white cement which constitutes over 2% of the total revenue. With no big ticket expansion expected to hit the market, we expect the utilization levels of the company to improve with a minor decline in FY14E owing to commissioning of its 9.2 mtpa capacity.




Income Statement Y/E Mar (`mn) FY09 FY10 FY11 FY12E FY13E

Total net revenues 65,636 71,751 136,912 186,657 220,663

COGS 31,828 32,700 67,854 69,996 81,094

Gross Profit 33,808 39,051 69,058 116,661 139,569

Employee Cost 2,209 2,568 6,990 9,996 11,995

Advertising Expenses 13,755 16,153 35,399 44,507 51,478

Other Expenditure 689 491 964 17,213 19,278

EBITDA 17,156 19,839 25,705 44,945 56,818

EBITDA Margin (%) 26.1 27.6 18.8 24.1 25.7

Depreciation 3,244 3,897 8,130 11,899 13,759

Other Income 1,023 1,213 2,896 0 0

Interest (Net) 1,256 1,178 2,995 5,345 7,195

PBT 13,678 15,978 17,476 27,701 35,864

PBT Margin (%) 20.8 22.3 12.8 14.8 16.3

Tax 3,882 5,010 3,866 8,033 10,400

Minority Interest 16 16 (63) 0 0

Adjusted PAT 9,781 10,952 13,674 19,668 25,463

Extraordinary /exceptional 0 0 0 0 0

Reported PAT 9,781 10,952 13,674 19,668 25,463

Balance Sheet Y/E Mar (`mn) FY09 FY10 FY11 FY12E FY13E Equity capital 1,245 1,245 2,740 2,740 2,740 Reserves & Surplus 34,759 44,842 103,920 121,629 145,182 Preference Capital 0 0 0 0 0 Net worth 36,004 46,087 106,660 124,370 147,922 Minority interest 0 0 0 0 0 Deffed tax liability (7,229) (8,307) (17,301) (17,301) (17,301) Total debt 21,416 16,045 41,446 65,446 94,446 Total Liabilities & Equity 57,421 62,132 148,106 189,816 242,368 Net block 46,357 49,417 114,003 127,103 148,344 Capital WIP 6,773 2,594 11,053 31,053 56,053 Total fixed assets 53,130 52,011 125,056 158,156 204,397 Investments 10,348 16,696 37,303 37,303 37,303 Goodwill 0 0 0 0 0 Current Assets 13,720 14,724 37,587 38,274 49,600 Inventories 6,920 8,217 19,565 18,921 21,764 Debtors 1,939 2,158 6,023 5,421 6,469 Cash & bank 1,045 837 1,448 3,704 8,671 Loans & advances 3,816 3,511 10,539 10,228 12,696 Other Current Assets 0 0 12 0 0 Current Liab. & Prov. 12,548 12,991 34,539 26,618 31,632 Creditors 7,394 6,815 16,782 15,025 17,372 Other liabilities 3,832 4,566 12,022 1,648 1,949 Provisions 1,322 1,610 5,735 9,944 12,311 Net Working capital 1,172 1,733 3,048 11,656 17,968 Net DTL (7,229) (8,307) (17,301) (17,301) (17,301) Total Assets 57,421 62,132 148,106 189,816 242,368

Key Ratio Y/E Mar (`mn) FY09 FY10 FY11 FY12E FY13E

Per Share Ratios Fully diluted E P S 78.6 88.0 49.9 71.8 92.9 Book Value 1.9 3.1 2.9 3.2 2.7 Dividend per share 0.0 6.0 6.0 6.0 6.0 per share FCFO 9.9 11.3 7.7 11.2 16.4 Valuation Ratio P/E 7.0 13.1 22.7 20.2 15.6 P/BV 1.9 3.1 2.9 3.2 2.7 EV/EBITDA 5.2 8.0 13.6 10.2 8.5 EV/Sales 1.4 2.2 2.6 2.5 2.2 Price/ FCFO per share 55.4 102.2 146.6 129.9 88.1 Growth Ratios Sales Growth 16.7 9.3 90.8 36.3 18.2 EBITDA Growth (1.1) 15.6 29.6 74.9 26.4 Net Profit Growth (3.2) 12.0 24.8 43.8 29.5 EPS Growth (3.2) 12.0 (43.3) 43.8 29.5 Common size Ratios Gross Margin 0.0 0.0 0.0 0.0 0.0 EBITDA Margin 26.1 27.6 18.8 24.1 25.7 PAT Margin 14.9 15.3 10.0 10.5 11.5 Employee Cost 3.4 3.6 5.1 5.0 4.4 S&G Expenses 79.0 77.5 74.1 76.2 76.7 Return ratios RoAE 31.1 26.7 17.9 17.0 18.7 RoACE 21.0 19.7 15.2 13.9 14.1 Turnover ratios (days) Debtors ( Days) 10 10 10 11 10 Creditors ( Days) 57 50 39 41 36 Inventory (Days) 36 39 37 38 34 Net working capital (2) 3 3 9 14 Solvency Ratios Total Debt/Equity 0.6 0.3 0.4 0.5 0.6 Interest coverage 8.5 10.0 5.3 4.4 4.2


Cash Flow Y/E Mar (`mn) FY09 FY10 FY11 FY12E FY13E

PBT 13,678 15,978 17,476 27,701 35,864

Add: Depreciation 3,244 3,897 8,130 11,899 13,759

Add: Interest expense 1,256 1,178 2,995 5,345 7,195

Less: Other Income (1,023) (1,213) (2,896) 0 0

Other Adjustments 0 0 0 0 0

Chg in working capital (888) (768) (704) (6,352) (1,344)

Taxes paid 3,882 5,010 3,866 8,033 10,400

CF from operations 12,385 14,061 21,135 30,559 45,073

Chg in fixed assets (8,538) (2,777) (81,175) (45,000) (60,000)

Chg in Intangi. Asset 0 0 0 0 0

Chg in investments (8,639) (6,348) (20,608) 0 0

Other income 1,023 1,213 2,896 0 0

CF from invest. acti. (16,154) (7,912) (98,887) (45,000) (60,000)

Chg in debt 4,011 (5,371) 25,401 24,000 29,000

Chg in Equity capital 0 1 1,515 0 0

Chg in Pref. capital 0 0 0 0 0

Div. & dividend tax 0 (871) (1,911) (1,911) (1,911)

Interest paid (1,256) (1,178) (2,995) (5,345) (7,195)

Other Adjustments 1,806 1,078 8,993 0 0

CF from Finan. acti. 4,561 (6,341) 31,003 16,745 19,894

Change in cash 777 (208) (46,686) 2,304 4,967

Opening cash 1,007 1,045 837 1,448 3,704

Closing cash 1,045 837 1,448 3,704 8,671

Du-Pont Analysis (%) FY09 FY10 FY11 FY12E FY13E Net Profit Margin 14.9 15.3 10.0 10.5 11.5 Asset Turnover 1.1 1.2 0.9 1.0 0.9 Leverage 1.6 1.3 1.4 1.5 1.6 ROE 31.1 26.7 17.9 17.0 18.7


Ambuja Cements Ltd.

Volume on account of higher utilization to benefit Ambuja March 15, 2012

BUY



Initiating Coverage

CMP (`) Target (`)

167.45 205.7

Potential Upside Absolute Rating

22.9% BUY

Market Info (as on 14th March, 2012)

BSE Sensex 17919

Nifty S&P 5464

Stock Detail

BSE Group A

BSE Code 500425

NSE Code AMBUJACEM

Bloomberg Code ACEM IN

Market Cap (`bn) 257.76

Free Float (%) 50%

52wk Hi/Lo 182 / 119

Avg. Daily Volume (NSE) 2103147

Face Value / Div. per share (`) 2.00 / 1.80

Shares Outstanding (mn) 1,534.3

Shareholding Pattern Promoters FIIs DII Others

50.29 25.01 13.62 11.08

Financial Snapshot (`mn)

Y/E Mar CY10 CY11P CY12E CY13E

Net Sales 73,902 86,196 104,384 124,530

EBITDA 17,630 19,948 23,201 31,413

PAT 12,143 12,277 11,475 16,709

EPS 8.0 7.9 8.0 7.5

ROE (%) 16.6 15.2 13.2 17.0

ROCE (%) 61.5 38.7 32.0 29.5

P/E 13.0 18.1 12.7 18.0

EV/EBITDA 8.2 11.5 6.8 8.0 Share Price Performance

70

80

90

100

110

120

130

140

150

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-

11

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Ambuja Cements BSE SENSEX

Rel. Perf. 1Mth 3 Mths 6Mths 1Yr

Amb. Cem (%) (1.9) 11.1 14.7 31.4

SENSEX (%) 0.4 12.8 7.2 (2.8)


Investment Rationale

Exposure to West and North to help (Ambuja Cements Ltd) ACL going ahead For the first 9MFY12, both North and West have shown a robust growth of 10.1% and 16.6% respectively. With no big ticket expansion in both West and North, peaking of interest rates, start of work on the Delhi Mumbai Industrial Corridor, we expect the consumption in North and West to grow at a CAGR of ~10% and 11.2% in FY11-FY15E respectively.

ACL currently with 23.6% market share is the second largest in West and with 13.2% market share by capacity in North is the third largest. Given ACLs large exposure to high growth areas like West & North to help ACL going ahead. Also over last 4 years ACLs installed capacity

Initiating Cement Industry - Thematic - Myirisbreport.myiris.com/GEPLCAP1/INDCEMEN_20120315.pdf ·...

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Transcript of Initiating Cement Industry - Thematic - Myirisbreport.myiris.com/GEPLCAP1/INDCEMEN_20120315.pdf ·...