Cement Jpm

Asia Pacific Equity Research 16 April 2009

India Cement: FY10E -- A likely tale of 'two' halves Earnings outlook improves on lower costs and resilient pricing • Recent demand momentum unlikely to sustain…: We do not expect the recent demand momentum seen in cement (since Nov-08) to sustain as we believe a large part of this has come from pre-election spending on public infrastructure. We maintain our FY10 demand growth estimate at 5.5%. Regionally, we expect demand momentum in south India to slow in FY10.

India Cement AC

Pinakin Parekh, CFA

(91-22) 6639 3018 [email protected]

• …But earnings could benefit from reduced costs, lower price declines: We increase our earnings estimates and PTs across our coverage universe over FY09-11, driven by: (a) lower coal costs; and (b) lower price declines in FY10E (we now assume a 5% price decline compared with 10% earlier). Importantly, we believe the rise in cement prices of 2-4% in the Mar-09 quarter has meant that cement price declines would: (a) happen from a higher level; and (b) more likely in H2Y10E. We see relatively strong H1 earnings compared with H2 in CY09/FY10.

J.P. Morgan India Private Limited

Cement Index 70.00 20.00 Jan-08 May -08 Sep-08 Jan-09

• Supply discipline more important than capacity additions: We lower our FY09-11E capacity addition target to 73MT vs. 90MT earlier, (FY09 capacity addition stood at 23MT against our expectations of 40MT). We continue to believe that a much more consolidated cement industry combined with healthy balance sheets across key players means we are going to see more ‘disciplined supply’ over the next two years.

Cement Index

BSE Sensex

Source: Bloomberg. Priced as of 16 April 2009.

• We remain OW on Grasim and UltraTech, and would be buyers of cement stocks at declines: Given the strong performance over the past few months, we see a possibility of profit-booking on ‘bad news’ (which could be waning cement dispatch momentum, and potential rollback of excise duty cuts) or sector rotation by investors, given that the cement sector rally started much earlier than the current equity rally. We would be buyers of cement stocks at declines, given our expectation of relatively healthy earnings. We remain OW on Grasim and UltraTech given: (a) relatively attractive valuations; (b) strong free cash flow generation; and (c) the option value of strong volume growth in the event that demand surprises on the upside. • Key risks remain sharper-than-expected demand and cement price declines and/or regulatory pressure. EV/EBITDA (x) for large cement companies 30 25 20 15 10 5 Apr-95

Apr-97

Apr-99 ACC

Apr-01 Ambuja

Apr-03 Ultratech

Apr-05

Apr-07

Apr-09

Grasim

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

See page 56 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Table of Contents Revising estimates upwards driven by higher pricing, lower costs ..........................................................................................3 Top picks- Remain OW on Grasim and Ultratech on valuations..................................................................................5 Demand momentum unlikely to sustain, but 5-6% growth achievable in FY10E .................................................................7 Which states/regions are driving cement demand........................................................9 Demand outlook for FY10-11E across regions, South India growth to moderate .....10

Supply discipline more important that capacity additions .10 We remain confident of disciplined supply in major regions ....................................11

Costs reduction across fuel, freight .....................................12 While INR has depreciated, sharp decline in import coal prices ...............................12 However longer term coal still remains a challenge for industry...............................13

Cement prices- Supply discipline key to pricing .................14 Recent increases sharply higher than our estimates ...................................................14 Price cuts likely to start in H2FY10E…. ...................................................................16 ….however remain convinced of greater ' supply discipline'.....................................16 Industry leverage remains low ...................................................................................17

Stronger earnings outlook means M&A likely to be delayed .................................................................................................17 Stock price corrections should be buying opportunities ...18 Companies ACC Limited..............................................................................................................22 Ambuja Cements Limited ..........................................................................................30 Grasim Industries Ltd ................................................................................................38 UltraTech Cement Ltd ...............................................................................................47 The author acknowledges the contribution of Neha Manpuria of J.P. Morgan Services India Ltd., Mumbai, to this report

2

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

We raise our estimates driven by higher pricing, lower costs

We increase our earnings estimates across over coverage universe driven by: (a) resilient pricing; and (b) lower costs. We maintain our Overweight recommendations on UltraTech and Grasim

While we do not see the current demand momentum of 9%+ continuing in FY10, we are confident of 5-6% cement demand growth in FY10. We expect the benefits of a consolidated industry in the form of more disciplined supply

We upgrade our FY10 earnings estimates across our coverage universe by 22-40%. We are positively surprised by the strong demand momentum seen recently in cement, and more importantly by the aggressive price increases by the industry in most parts of the country. Cement capacity additions are delayed and thus cement prices are expected to remain relatively strong at least till the start of the rainy season (July). Cost declines across coal, and freight (as fuel prices have come down) should also be a positive for the industry in FY10/CY09E. While sector performance has been impressive (large cement stocks are up between 50% and 100% from their Oct/Nov-08 lows), we believe valuations remain undemanding. A summary of our views across key industry variables is as follows: • Demand momentum unlikely to sustain, FY10E demand seen at 5.5%: We are not confident about the recent 9%+ demand growth seen since Nov-08. We maintain our FY10 total cement dispatch growth estimate of 5.5% (down from 8.4% dispatch growth seen in FY08) and see a recovery in FY11 with a dispatch growth of 8.5%. Higher-than-expected cement demand growth remains one of the key upside risks to our earnings estimates (the other being cement prices). • Supply discipline more important than capacity additions: Cement capacity additions have been delayed and FY09 capacity addition estimates of around 23MT are sharply lower than our estimates of 40MT. Our FY10 capacity addition estimate stands at 35MT, with around half of it back-ended towards H2FY10. North and West India remain the most consolidated regions, while the southern region is the least consolidated. We believe supply discipline (or the lack of it) would be a key determinant of cement prices.

We expect FY10 earnings to benefit from the twin tailwinds of: (a) lower costs in coal; and (b) stronger-than-expected cement prices

• Costs decline ahead of estimates, full benefits to flow in H1FY10E: Even after adjustments for rupee depreciation, imported coal costs have declined sharply (a net decline of 40% from the peak levels). With fuel prices also declining, which should help lower freight costs gradually over the next 12 months, we believe lower costs across two key components should alone raise EBITDA margins by 150-250bp. However, longer-term coal availability remains a concern, given the steadily reducing linkage in coal supplies, in our view. • Cement prices should decline, but more skewed towards H2; and declines should happen from a higher level than our earlier assumption: We lower our cement price decline estimate to 5% for FY10 compared with our earlier assumption of 10%. We maintain our FY11 price decline assumption of 5%. We believe cement price declines now would start from a higher level after the 24% increase in cement prices across many geographies in the Mar-09 quarter. A combination of delayed capacities and our expectation of a relatively strong supply discipline in key regions lead us to increase our FY10 cement pricing assumption to a 5% decline from 10% earlier. • We increase our earnings estimates due to lower price declines and higherthan-estimated cost savings: We increase our earnings estimates sharply across 3

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

our coverage universe mainly on account of: (a) price increases in the Mar-09 quarter; and (b) a lower price decline estimate of 5% for FY10 compared with our earlier assumption of 10%. We believe supply discipline, or the lack of it would be a key determinant of prices. We estimate H1FY10 earnings to be relatively stronger compared with H2FY10. • Stock picks: Grasim and UltraTech remain our top picks: While we increase our earnings estimates and price targets across the board, our top picks remain UltraTech and Grasim on relative valuations. • Even though the industry will witness surplus capacity over the next two years, strong operating earnings, low financial leverage, and domestic exposure make the sector relatively immune to a global crisis, in our view: One of the key attractions of the Indian cement sector remains the domestic exposure of the industry. With the Indian economy expected to grow between 5% and 6% in FY10 and even assuming a 1x cement/GDP multiplier against the historical multiplier of 1.2-1.4x seen in recent years, we expect cement demand to grow at least by 5-6% in FY10, even as demand from the real estate sector remains depressed. With healthy balance sheets across key companies, and a highly consolidated industry (top 4 companies to account for 45-50%) of cement capacity, we continue to see strong operating cash flows, and with valuations below historical averages, we would be buyers of cement stocks on declines. Given the strong performance over the past few months, we see the possibilities of profit-booking on ‘bad news’ (which could be waning cement dispatch momentum, and the potential rollback of excise duty cuts) or sector rotation by investors, given that the cement sector rally started much earlier than the current equity rally. We would be buyers of cement stocks at declines, given our expectation of relatively healthy earnings and cash flows. Table 1: Change in J.P. Morgan estimates Rs 2008/FY09E 2009/FY10E 2010/FY11E

Old EPS New EPS % change Old EPS New EPS % change Old EPS New EPS % change

ACC 48.5 59.0 22% 47.0 47.6 1%

Ambuja 7.4 7.1 -4% 6.9 6.1 -12%

Grasim 229.2 231.9 1% 148.9 193.2 30% 181.0 185.9 3%

UltraTech 66.6 72.1 8% 47.1 65.5 39% 48.7 59.9 23%

ACC -

Ambuja -

59.0 50.2 -15% 47.6 38.1 -20%

7.1 6.4 -10% 6.1 5.5 -10%

Grasim 231.9 233.9 1% 193.2 189.0 -2% 185.9 172.8 -7%

UltraTech 72.1 74.5 3% 65.5 64.3 -2% 59.9 46.3 -23%

Source: J.P. Morgan estimates.

Table 2: J.P. Morgan versus consensus estimates Rs 2008/FY09E 2009/FY10E 2010/FY11E

JPM Consensus % diff JPM Consensus % diff JPM Consensus

Source: Bloomberg and J.P. Morgan estimates.

4

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 1: EBITDA/MT for large cement companies Rs/MT

1,300 1,100 900

-14% 17%

-5% -23%

95% 70% 45% 20% -5% -30%

FY 09 E FY 10 E FY 11 E

-14%

426 355 17% 20% -19%

FY 08

24%

303

FY 07

12%

372

FY 06

FY 00

FY 99

100

FY 01

6%

432

FY 05

300

348

FY 04

311

FY 02

292

120%

887 683

920

700 500

145%

1,079 930

FY 03

We expect a more gradual decline in EBITDA/MT against our earlier assumptions

116%

Source: Company reports and J.P. Morgan estimates.

Top picks: We remain OW on Grasim and UltraTech on valuations We would be buyers of cement stocks on declines for the following reasons: 1) The domestic exposure of the industry makes it relatively insulated from the global crisis in terms of demand 2) Relatively strong earnings over FY10-11E as cement price declines are likely to be lower, and costs declines are ahead of estimates 3) Strong operating cash flows as EBITDA/MT higher than previous cycle lows 4) Valuations remains below historical averages

We increase our price targets and earnings estimates across our coverage universe. We remain Overweight on Grasim and UltraTech as relative valuations across earnings (EV/EBITDA) and asset-based ($EV/MT) methodologies are lower than ACC and Ambuja. Additionally, with the option of ramping up volumes sharply, if demand is higher than estimates, strong free cash flows (as both companies have more or less completed their capex programs compared to ACC and Ambuja which are in the midst of their capex programs), are positives for Grasim and UltraTech. With cotton prices continuing to move up, we also see the VSF business gaining traction in terms of pricing strength some time in H2FY10 benefiting Grasim, while UltraTech should benefit from the increase in captive power generation. Our Mar-10 price target of Rs670 for UltraTech implies 24% upside from the current price levels, while our Mar-10 price target of Rs1,850 for Grasim implies 15% upside from the current levels. While both Ambuja and ACC are debt-free and should be able to fund their large capex program via internal accruals, we expect ACC’s operating margin to lag peers and Ambuja’s margin expansion over the next two quarters (when the full benefits of strong prices and lower costs) should be restrained given third-party clinker purchases. In the longer term, we believe lack of clarity on Holcim’s strategy for further growth in India and the possibility of an ACC-Ambuja merger (unlikely in the near-term, in our view) are key negatives.

5

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Table 3: Cement valuation matrix Rs, US$ and % Company

Current price (Rs.)

Rating

Year

EPS

1,603

OW

FY09E FY10E FY11E

ACC

614

N

Ambuja

81

UltraTech

India Cement

Grasim

P/E

(Rs) 232 193 186

EPS growth (% Y/Y) (13) (17) (4)

(x) 6.9 8.3 8.6

EV/ EBITDA (x) 5.5 5.2 5.0

EV/ Tonne (US$) 82 67 52

CY09E CY10E

59 48

(5) (19)

10.4 12.9

6.3 7.6

90 80

N

CY09E CY10E

7 6

(1) (14)

11.3 13.1

6.6 7.3

102 91

541

OW

FY09E FY10E FY11E

72 65 60

(11) (9) (8)

7.5 8.3 9.0

5.1 4.7 4.6

79 69 60

120

NR

FY09E FY10E FY11E

20 18 13

(9) (27)

6.2 6.7 9.2

4.0 4.0 4.7

79 73 56

Source: Bloomberg estimates for NR stocks and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

Figure 2: EV/EBITDA for large cement companies x

30 25 20 15 10 5 Apr-95

Apr-97

Apr-99 ACC

Apr-01 Ambuja

Apr-03 Ultratech

Apr-05

Apr-07

Apr-09

Apr-05

Apr-07

Apr-09

Grasim

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

Figure 3: EV/Tonne for large cement companies $/MT

300 260 220 180 140 100 60 20 Apr-95

Apr-97

Apr-99 ACC

Ambuja

Apr-01 Ultratech

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

6

Apr-03 India Cements

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Table 4: Sensitivity analysis based on the impact on CY09/FY10 estimates from the 10% decline in cement prices ACC CY09 -30% -30% -27% -5% -27% -5%

EPS Net profit EBITDA EBITDA EBITDA/MT Net Debt/Equity

Ambuja CY09 -26% -26% -24% -5% -24% -4%

UltraTech FY10 -23% -23% -18% -4% -18% -4%

Grasim FY10 -15% -15% -10% -2% -23% -2%

Source: J.P. Morgan estimates.

Figure 4: EBITDA/MT and FCF for large cement companies

ACC

Ambuja

15,000

1,000

10,000

800

5,000

600

10,000

1,400 1,200

5,000

1,000 800

0 -5,000

200

-10,000

0

-5,000

-10,000

EBITDA/MT (RHS)

FCF Rs Mn (LHS)

Grasim

200

EBITDA/MT (RHS)

UltraTech

600

-10,000

400

-20,000

200

-30,000

0 EBITDA/MT (RHS)

600

5,000

400

0 -5,000

200

FCF Rs Mn (LHS)

FY 09 E

0

800

FY 08

800

FY 07

10,000

1,000

10,000

FY 06

1,000

FY 04

20,000

1,200

15,000

FY 03

1,200

FY 02

1,400

30,000

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 E FY 10 E FY 11 E

40,000

FCF Rs Mn (LHS)

400 0

FY 05

FCF Rs Mn (LHS)

600

FY 02 FY 03 FY 04 FY 05 CY 05 CY 06 CY 07 CY 08 CY 09 E CY 10 E

400

FY 02 FY 03 FY 04 FY 05 CY 05 CY 06 CY 07 CY 08 CY 09 E CY 10 E

0

0

EBITDA/MT (RHS)

Source: Company reports and J.P. Morgan estimates.

Demand momentum unlikely to sustain, but 5-6% growth achievable in FY10E Domestic cement demand has surprised on the upside since Nov-08, even as industrial production (IP) remained in the doldrums and demand from a key segment such as the real estate industry has remained depressed. Discussions with companies, cement dealers and other channel checks indicate two key sources for the sharp demand growth seen over the past five-six months. Key factors which drive demand 7

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

growth are: (a) pre-election spending across public infrastructure projects; and (b) strong demand from rural and semi-urban areas. Demand visibility post monsoons (rainy season in Northern India in July-Sept) remains low. We are not very confident about the industry sustaining the recent 8-10% demand momentum seen over the past few months, and hence we continue to forecast a domestic cement demand growth of 5.5% in FY10, before recovering in FY11E. Figure 5: Cement demand has improved despite weak indicators from other sectors % 25 20 15 10 5 0 -5 -10 -15 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Real GDP

Cement

Agriculture

Manufacturing

Construction

Source: RBI and J.P. Morgan estimates.

Figure 6: Cement demand and real GDP growth (%) 20.0

11

15.0

9

10.0

7

5.0

5

-

Figure 7: Cement demand growth has been strong despite weak IP in recent months 30.0

20

20.0

15

10.0

10

-

5

(10.0)

0

3

(5.0) (10.0) Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Cement

Real GDP

1

(20.0) Jan-00

-5 Sep-01

May-03

Jan-05

% cement change

Sep-06

May-08

IP

Source: RBI and J.P. Morgan estimates. Source: RBI and J.P. Morgan estimates.

Figure 8: Cement demand growth as multiplier of GDP growth %

3.0

2.7

2.5

2.7

2.0

1.8

2.0 1.1 1.2 1.1

1.5 1.0 0.5

1.6

0.4

1.3 1.1 1.2 0.8

0.0

FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 E FY 10 E FY 11 E

-

1.1 0.9 0.8 0.9

0.8

Source: RBI, CMC and J.P. Morgan estimates.

8

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 9: Indian cement dispatch growth (FY04-FY11E) %

12.0

11.4

11.0 10.0

9.0

8.5

9.0

8.5

8.5

8.2

8.0 7.0

5.9

6.0 5.0 4.0 FY05

FY06

FY07

FY08

FY09

FY10E

FY11E

Source: CMA and J.P. Morgan estimates.

Which states/regions are driving cement demand? As discussed previously, recent strength in cement demand was driven by: (a) rural and semi-urban areas; and (b) pre-election public spending. We believe it is more important to focus on cement consumption data than cement dispatches, to gather a sense of real underlying demand strength/weakness. As the chart below illustrates, more than 50% of the incremental demand seen since Nov-08 has come from four-five states: Uttar Pradesh (Northern India), Andhra Pradesh (Southern India), Madhya Pradesh, Chattisgarh, and Assam, which in FY08 accounted for less than 30% of India’s cement consumption. Northern India demand has been relatively strong. Figure 10: Key contributors to the recent cement demand growth (Nov Figure 11: Cement consumption share (%) by key states in India (YTD 08–Feb-09) FY09) 6.7% Delhi 7.6%

Raj. 5.9% Orissa 5.9% TN 5.3%

Assam 8.1% MP+Chtg

Source: CMA and J.P. Morgan estimates.

Raj. 6.2%

Bihar+Jhkd 4.6%

Guj. 6.9% MP+Chtg

Others 26.1%

7.0% Others 16.2%

10.1%

AP 16.2%

Kar. 6.5%

TN 9.0%

UP 18.0%

AP 10.1%

Mah. 12.3% UP 11.3%

Source: CMA and J.P. Morgan estimates.

9

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Demand outlook for FY10-11E across regions; south India growth to moderate

Table 5: Cement demand CAGR in top 15 states Chandigarh Haryana AP Pondicherry MP TN Andaman & Nicobar Gujarat Rajasthan J&K Karnataka Maharashtra Bihar Orissa HP

4-Y CAGR 21.8% 16.9% 16.5% 14.9% 12.9% 12.3% 12.0% 11.9% 11.8% 11.6% 9.5% 8.8% 8.8% 8.7% 8.1%

Source: CMA and J.P. Morgan estimates.

Southern India cement consumption has increased at an estimated CAGR of 12% over FY04-08 and has accounted for 40% of India’s incremental cement consumption. However, we expect growth to moderate in southern India in FY10E. With south India being the least consolidated region and large capacity additions expected over the next 12 months, we expect cement prices to remain under pressure. Figure 12: Region-wise cement demand growth %

11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0

10.4 9.0 8.0 8.2 5.5

North India

9.0 7.5

7.5 5.7

5.0

South India FY10E

6.8 5.0

East India FY11E

West India

FY04-08 CAGR

Source: CMA and J.P. Morgan estimates.

Supply discipline more important than capacity additions We revise our capacity addition estimate schedule and lower our FY09-11E capacity additions estimate to 73MT from the earlier 90MT. More importantly, we believe delays in capacity additions coupled with the ramp-up time required for achieving full capacity utilizations means the full impact of large supply additions would only be felt in 2HFY10E, compared to 1HFY10E. We expect large greenfield projects, which have not received land acquisition/environmental clearances yet, to be deferred (even Ambuja has announced the deferment of certain cement grinding projects). We believe southern India would potentially see the largest region-wise cement capacity addition. Our region-wise capacity addition and demand outlook is shown below.

10

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Table 6: India cement demand and capacity outlook MT Available capacity for the year Year-end capacity Capacity addition on available basis Capacity addition on end basis Domestic demand Demand growth (%) Exports Growth (%) Total demand Growth (%) Cap util - Available capacity (%)

FY05 150 152 6.2 7.1 121 6.7 10.1 12.2 131.0 7.1 87

FY06 156 160 5.7 8.1 135 11.5 9.2 -8.9 144.1 9.9 93

FY07 165 166 8.9 5.9 148 10.0 8.9 -3.3 157.2 9.1 95

FY08 173 189 8.5 23.2 163 10.1 5.9 -33.7 169.2 7.6 98

FY09E 205 212 31.6 22.9 177.0 8.4 6.0 1.7 183.0 8.1 89

FY10E 230 247 25.0 35.5 187 5.9 5.6 -6.7 193.0 5.5 84

FY11E 251 262 21.5 15.0 203 8.5 6.0 7.1 209.3 8.5 83

FY05

FY06

FY07

FY08

FY09E

FY10E

FY11E

34.1 35.0 38.4 5.6 4.3

36.0 38.0 41.3 7.5 5.2

39.5 39.9 45.7 10.8 6.2

43.2 50.2 49.8 8.9 6.6

56.2 56.6 54.0 8.5 -2.2

62.2 68.2 57.0 5.5 -5.2

67.2 71.2 61.6 8.0 -5.6

South India Total capacity available Year-end capacity Consumption demand Demand growth (%) Gap with total capacity

46.7 47.1 30.6 -2.8 -16.2

49.7 51.0 38.2 25.1 -11.4

53.2 53.5 43.5 13.8 -9.7

56.2 58.8 48.7 11.8 -7.6

66.9 73.0 53.3 9.5 -13.7

78.9 85.8 57.3 7.5 -21.7

86.9 90.8 62.4 9.0 -24.5

East India Total capacity available Year-end capacity Consumption demand Demand growth (%) Gap with total capacity

12.1 12.1 18.3 14.0 6.1

12.6 13.4 19.5 7.0 7.0

14.0 14.4 20.4 4.3 6.4

15.2 16.7 20.9 2.4 5.7

17.8 17.9 23.5 12.5 5.7

19.8 22.7 24.7 5.0 4.8

23.8 23.7 26.5 7.5 2.7

West India Total capacity available Year-end capacity Consumption demand Demand growth (%) Gap with total capacity

57.0 57.4 33.7 14.1 -23.3

57.4 57.4 35.8 6.2 -21.6

57.9 57.9 38.7 8.1 -19.2

58.6 63.2 44.0 13.6 -14.6

63.8 64.3 46.2 5.0 -17.6

68.8 70.6 48.5 5.0 -20.3

73.3 76.6 52.9 9.0 -20.5

Source: CMA and J.P. Morgan estimates.

Table 7: Region-wise capacity and demand outlook MT North India Total capacity available Year-end capacity Consumption demand Demand growth (%) Gap with total capacity

Source: CMA and J.P. Morgan estimates.

We are confident of disciplined supply in major regions While investors have been focused on large capacity additions and potential oversupply situation, we believe the Indian cement industry is in a fundamentally different (and better) situation than late 90s, and the early part of this decade. A much more consolidated industry, combined with lack of high financial leverage across among larger participants, removes the stress of ‘keeping the plants running’ scenario. While we forecast a 5% cement price decline in FY10 (with large price declines only from 2HFY10), we believe investors should focus on ‘supply discipline’ or the lack of it to gauge the magnitude of cement price declines we would potentially see over FY10-11.

11

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Figure 13: Change in cement prices and cement capacity

Figure 14: Change in cement prices and cement utilization

14% 12% 10% 8% 6% 4% 2% 0%

30%

100% 95%

20%

FY96

FY98

FY00

Capacity

FY02

FY04

FY06

20%

90%

10%

FY94

30%

10%

85%

0%

80%

0%

-10%

75%

-10%

FY08

FY94

FY96

FY98

FY00

FY02

Cap Util

Cement Prices

Source: CMA and J.P. Morgan estimates.

FY04

FY06

FY08

Cement Prices

Source: CMA and J.P. Morgan estimates.

Cost reduction across fuel and freight After seeing massive cost inflation, primarily from imported coal, FY10E should see the industry benefiting materially from lower imported coal costs and possibly stable/lower freight costs as fuel prices come down. We estimate the above two cost elements (which together account for ~50% of operating costs) should raise EBITDA margins by 150-250bp. Figure 15: Cost breakup of a typical cement company % of operating costs

Freight 24% Selling and distribution ex p 15%

Other Manufacturing ex p 11% Pow er and energy 22%

Raw materials 23%

Employ ee ex p 6%

Source: J.P. Morgan estimates.

While rupee has depreciated, import coal prices have sharply declined Admittedly, a sharp rupee depreciation of around 25% has to an extent offset the very steep decline in imported coal prices. However, even after adjusting for the rupee depreciation, landed coal costs are down nearly 60% from the peak levels, driven primarily by the decline in spot coal prices, but also by falling freight rates. Given the lower availability of linkage coal, the Indian cement industry has to increasingly source its coal requirements from a combination of imports and domestic e-auction coal purchases. We see the full benefit of lower coal prices to flow through from the Jun-09 quarter, given that companies across the industry carry inventories of around 1-2 months. 12

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Figure 16: Rupee depreciation has partially offset the import coal price Figure 17:… But landed cost has declined sharply from its peak Rs/MT decline… 200

52

8,500

Declined 63% from

7,500

150

47

100

42

its peak

6,500 5,500 4,500

50 Apr-08

37 May -08

Jul-08

Sep-08

Coal Price (USD/MT) Source: Bloomberg.

Nov -08

Jan-09

INR Rate

Mar-09

3,500 2,500 Apr-08

May -08

Jul-08

Sep-08

Nov -08

Jan-09

Mar-09

Source: Bloomberg and J.P. Morgan calculations.

However, long-term coal availability still remains a challenge for the industry Given the increasing pressure on domestic coal availability for power plants and India’s increasing imports of thermal coal (even a public sector aluminum company, NALCO has had to resort to coal imports in order to meet its coal requirements), we believe linkage coal availability is likely to remain an issue for the industry. While certain companies have been allocated captive coal mining blocks, given the delays in various clearances, we believe supplies from these blocks are unlikely in the near term. We expect the industry to look at acquiring coal assets overseas. In fact, one of the key strategic dilemmas to be faced by companies with strong balance sheets and cash flows in the industry, in our view, is that of the choice between the acquisition of coal and cement assets.

13

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Figure 18: Coal linkages v/s cement capacity addition

Figure 19: Receipt of linkage coal v/s non-linkage fuel sources

MT

MT

190.0 170.0 150.0 130.0 110.0 90.0 70.0 50.0

20 18 16 14

2

12 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 Linkages (MT) Source: CMA, J.P. Morgan estimates.

Cement Capacity

15

15 12

10

9 6

5

3 0

0 FY93

FY95

FY97

FY99

Receipt (MT)

FY01

FY03

FY05

FY07

Non Linkage fuel

Source: CMA, J.P. Morgan estimates. Non-linkage fuel includes open market purchase of coal, import of coal, lignite, and CP coke purchase.

Cement prices: Supply discipline key to pricing We are surprised positively by the aggressive price increases seen in cement in FebMar 2009 across most parts of India, with northern India seeing the bulk of price hikes. Given the delays in capacity additions and ramp-up, and our confidence of a more disciplined cement industry, we now forecast a 5% cement price decline in FY10 (with increases skewed towards 2HFY10) and 5% in FY11.

Recent increases sharply higher than our estimates Contrary to our expectations of flat prices in the Mar-09 quarter, cement prices increased by 2-4% across most regions, given the strong demand and new capacities still in ramp-up mode (capacities which got commissioned over the last six months). While we would be surprised in case of further price increase over May-Jun 2009, we expect any current pricing strength (of flat prices at least) to last till June 2009. While there has been some speculation of potential clinker shortages driving the sharp price increases over the past two months, we are not firm believers in this, given that clinker production has been relatively strong and more importantly closing stocks of clinker remain above-average norms.

14

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 20: National cement prices and Y/Y change 40

250

30

220

20

190

10 -

160

(10)

130

(20) Apr-95 Jul-96 Oct-97 Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Price (Rs/50kg bag)

Change (YoY %)

Source: CMA.

Figure 21: Cement pricing in key Indian cities and national average Rs/50Kg bag

250 200 150 100 Apr-94 Feb-95 Dec-95 Oct-96 Aug-97 Jun-98 Apr-99 Feb-00 Dec-00 Oct-01 Aug-02 Jun-03 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Mumbai

Chennai

Delhi

Kolkata

Ahmedabad

National Av erage

Source: CMA, J.P. Morgan estimates.

Figure 22: Change in cement prices in key cities since Dec-08 3.5%

3.3%

3.0% 2.5%

2.3%

2.2%

2.0% 1.5%

1.9% 1.0%

1.0% 0.5%

0.5%

0.0% Mumbai

Kolkata

Delhi

Ahmedabad

Chennai

National Av erage

Source: CMA, J.P. Morgan estimates.

15

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 23: Clinker production and clinker closing stock MT

8

13

7

12

6

11

5

10

4

9

3

8 Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

Clinker Closing Stock

May -08

Oct-08

Clinker Production

Source: CMA.

Price cuts likely to start in H2FY10… We expect cement price cuts to start from 2HFY10 (against our earlier assumption of Q1FY10E) as production ramp-ups from new capacities and recent demand momentum dissipate. We expect cement price declines of 5% in FY10 and 5% in FY11. We believe southern India remains the most challenging region given: (a) large capacity additions; (b) relatively less consolidation; and (c) waning demand momentum.

… However, we remain convinced of greater ‘supply discipline’ While the industry would decisively move into an ‘over supply’ situation, we are confident of a more ‘disciplined’ industry overall. We believe the relatively high level of consolidation is a key change compared to previous years. Overall, five companies now account for 43% of Feb-09 capacity share. As can be seen in charts below, north India is the most consolidated region, followed by east India. Figure 24: Consolidation in north India based on FY10E capacity Others 26%

Figure 25: Consolidation in south India based on FY10E capacity Dalmia 11%

ACC 12% Kesoram 9% JK Group Ambuja 11%

14%

Others 53%

Madras Cement 8% India Cements

Shree Cement 16% Source: CMA and J.P. Morgan estimates.

16

Grasim 20%

11%

Ultratech 8%

Source: CMA and J.P. Morgan estimates.

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 26: Consolidation in east India based on FY10E capacity

Figure 27: Consolidation in west India based on FY10E capacity Ambuja 13%

ACC 16% Others 32%

Grasim 13%

Others 42% Ambuja 15%

Ultratech 19%

Jaiprakash

OCL 16%

12%

Lafarge 11% Source: CMA and J.P. Morgan estimates.

Century 12%

Source: CMA and J.P. Morgan estimates.

Industry leverage remains low Other than a highly consolidated industry, another positive change has been the reduction in financial leverage across most firms. Given the healthy balance sheets across major cement companies, we believe we are unlikely to see a ‘keep the plants running’ scenario across India. Having said this, some micro markets which see large increases in supplies may see more than the average 5% price cuts we have assumed. Figure 28: Net debt/equity has improved with EBITDA margin improvement %, x

1.05

35% 30%

1.14

0.87

1.00

1.05

1.15

1.13

32.1%

0.98 0.79 18.4%

20% 15%

14.2%

13.9% 17.4%

16.1%

18.6%

32.4% 22.5% 0.51

25% 14.0% 15.8%

1.20 1.00 0.80

0.30

0.60 0.22

17.3%

10%

0.40 0.20 0.00

FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Net debt/Equity EBITDA % Source: Company reports.

Stronger earnings outlook means M&As likely to be delayed A relatively robust earnings scenario for FY10, in our view, could delay a potential M&A scenario in the industry. We also believe that with coal security likely to emerge as a ‘competitive advantage’, we may see companies caught between acquiring coal assets or acquiring cement assets which may not come cheap given the relatively robust earnings profile. While current greenfield replacement costs range between $100MT and $120/MT, we see little possibility of any seller not wanting a premium above the replacement cost. While forecasting with any degree of 17

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

certainty on who could be the likely sellers, we believe among majors, Grasim with a strong free cash flow generation and a robust balance sheet should be a potential acquirer of assets. Table 8: Historical M&A in cement India RsMM, $/MT Acquirer Gujarat Ambuja Grasim

Acquired company Modi Cement Indian Rayon

Capacity (MTPA) 1.8 3.2

India Cements Lafarge

Raasi Cement Tisco

1.8 1.73

Gujarat Ambuja Italicementi Lafarge

ACC Zuari Cement Raymond Woolens L&T ACC-Ambuja Cement Eastern

11.94 1.7 2.24

Madhya Pradesh Karnataka, Maharashtra Andhra Pradesh Madhya Pradesh, Bihar Multiple locations Andhra Pradesh Madhya Pradesh

17 20.2

Holcim

Gujarat Ambuja

Holcim Heidelberg

Grasim Holcim

CRH CIMPOR

Location

Invst. (RsMM) 1,660

EV/MT (US$/MT) 53 56

Year 1997 1998

Comment 93.55% stake acquired Group consolidation

3,200 5,500

75 75

1998 1998

73% stake acquired 100% acquired

7,080 3,400 7,850

144 100 80

1999 2000 2000

14.4% strategic stake acquired 100% stake acquired

Multiple locations Multiple locations

21,815 35,200

78 99

2001-04 2005

13.3

Multiple locations

45,300

183

2006

Gujarat Ambuja

18

Multiple locations

49,200

277

2007

Mysore Cement

2.1

90

2006

My Home Industries Shri Digvijay

4.2

Northern and Western India Southern India

18,560

210

2008

Western India

4,480

165

2008

51% stake acquired of cement business Acquired 40% of Ambuja Cement India, which holds 13.8% of ACC and 94% of Ambuja Cement Eastern, cash infusion to increase stake in Ambuja Cement India to 67%, and open offer for ACC at Rs370/share to increase stake to 50.1% and Eastern at Rs70/share for 6% Acquired 14.8% of promoters stake; open offer for additional 20% stake announced Acquired 3.9.% of promoters stake; open offer for additional 20% stake announced Acquired promoters stake and then made an open offer Acquired 50% stake in the company, $EV/MT not fully valid given lack of debt numbers Acquired 73% stake in the company

Source: Company reports and J.P. Morgan estimates.

Stock price corrections should be buying opportunities Cement stocks have run up sharply from their October/November lows, aided by low valuations, under-ownership, strong cement demand and subsequent price increases. While we do not expect the demand momentum to sustain (if it does, it would provide an upside to our cement prices and earnings estimates), and there is an increased likelihood of potential roll-back of excise duty cuts by the new government, we would be buyers of cement stocks at weaknesses, given the relatively strong earnings, robust free cash flow generations, and valuations which remain comfortably below historical averages.

18

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 29: Cement stocks have outperformed the index from their recent lows since Oct-08 109%

120% 100%

81%

80%

80% 55%

60%

42%

40% 20% 0% ACC

Grasim

Ambuja

UltraTech

BSE Sensex

Source: Bloomberg.

Table 9: Price performance of cement stocks % 3M 25% 23% 22% 57% 25% 56% 65% 8% 9% 37%

Grasim Ambuja Cement ACC UltraTech India Cement Century Cement Shree Cement Rain Commodities Chettinad Cement Kesoram Cement

6M 27% 50% 26% 50% 42% 20% 76% -31% -3% 24%

% change YTD 33% 20% 24% 42% 31% 39% 66% -3% 14% 25%

1Y -36% -27% -25% -29% -26% -67% -25% -61% -4% -56%

2Y -31% -23% -22% -28% -24% -57% -13% 376% 260% -47%

Source: Bloomberg.

Figure 30: FII holding in cement companies 19%

18.3%

18.6% 17.5%

18%

16.9%

17%

18.0% 16.9%

16%

15.1%

15%

14.1%

15.6%

13.4%

14% 13% 12% Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Source: Company reports.

19

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

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20

Asia Pacific Equity Research 16 April 2009

Companies

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

21

Asia Pacific Equity Research 16 April 2009

Neutral

ACC Limited

ACC.BO, ACC IN Price: Rs616.85

Margin gap with peers likely to be sustained

▲ Price Target: Rs560.00 Previous: Rs450.00

• We raise our earnings estimates and price target: We incorporate our latest assumption of only a 5% cement price decline in FY10E, compared to our earlier assumption of a 10% decline. We increase our earnings estimates by 2%-22% over CY09-10. We also increase our price target (Mar-10) to Rs560 (based on 5.7x CY09E EV/EBITDA, which corresponds to US$82/MT on CY09E EV/MT). While ACC’s valuation is in line with its historical average, at the current price ACC offers little upside, in our view. • CY09-10E large capex program likely to be funded internally: ACC plans to increase its cement capacity from 22.6MT to about 31MT over the next two years with two large projects of 3MT each expected at Wadi and Chanda. Given that ACC is a debt-free company, and the capex is likely to be financed via internal accruals, we expect free cash flow generation to be negative in CY09 before turning slightly positive in CY10. • We expect EBITDA margins to continue to lag peers, although the gap could narrow: Given that ACC has the least share of imported coal in its total coal requirement among large cement companies in India (it has a relatively higher share of third-party domestic coal purchases), the company is unlikely to benefit strongly from falling imported coal prices, in our view. We expect ACC’s EBITDA margin gap with peers to continue, although it could narrow over the next two years.

India Cement AC

Pinakin Parekh, CFA

(91-22) 6639 3018 [email protected] J.P. Morgan India Private Limited Price Performance 900 Rs 600 300 Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

ACC.BO share price (Rs) NIFTY (rebased)

YTD

1m

3m

12m

Abs

19.3%

5.2%

16.4%

-27.2%

Rel

7.8%

-19.2%

-6.8%

2.0%

• We maintain Neutral: Upside risks to our PT are stronger-than-expected demand and pricing environment over CY09. Given that ACC has a December year-end, the company should benefit from very strong 1H CY09E earnings, and most of the pressure from the price cuts will come in CY10E, in our view. Key downside risks are sharper-than-expected decline in cement prices and demand. Any potential share buyback by the company (in the event Holcim wants to increase its stake further) should provide near-term stock price strength. Bloomberg: ACC IN; Reuters: ACC.BO Rs in millions, year-end December Net sales Net profit ( pre-exceptional) EPS ( pre-exceptional) (Rs) Net sales growth (%) Net profit growth (%) ROE (%) P/E (x) EV/EBITDA (x) EV/tonne (US$) P/BV

CY07 69,219 12,051 65 20% 13% 32% 9.5 5.6 114.7 3.5

CY08 73,086 11,636 62 6% -3% 25% 9.8 6.0 97.9 2.7

CY09E 74,974 11,005 59 3% -5% 21% 10.4 6.3 89.6 2.3

CY10E 75,063 8,868 48 0% -19% 15% 12.9 7.6 80.1 2.0

52-week range (Rs) Market cap (RsMM) Market cap (US$MM) Shares outstanding (MM) Avg daily value (RsMM) Avg daily value (US$MM) Avg daily volume (MM shares) Index Exchange rate (Rs/US$) Date of price

855 - 365 115,239 2,316 188 429.9 8.7 0.8 10,947 49.8 16-Apr-09

Source: Company reports, J.P. Morgan estimates. Priced as of 16 April, 2009.

See page 56 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Company description

Table 10: ACC—P&L sensitivity metrics

ACC’s primary activities include manufacture of ordinary portland cement, fly ash-and-slag-based cement. The group operates in two segments: Cement and Ready Mix Concrete. The group has operations only in India. In Nov-07, the Group acquired Lucky Minmat Private Limited & ACC Concrete Ltd. In October 2008, ACC acquired a 40% stake in Alcon Cement Company with a capacity of 500 tons/day.

FY10E Sales volume growth assumption Impact of each 1% Average realization growth assumption Impact of each 1% Raw material cost assumption Impact of each 5% Power & energy cost assumption Impact of each 5%

EBITDA impact (%)

EPS impact (%)

+/-4%

+/-4%

+/-4%

+/-4%

+/-3%

+/-3%

+/-4%

+/-5%

Source: J.P. Morgan estimates.

Price target and valuation analysis

We raise our Mar-10 price target to Rs560 to reflect: a) our upward earnings estimate revisions by 2-22% over CY09-10; and b) an increase in our CY09E EV/EBITDA cement multiple from 5.5x to 5.7x. We value ACC based on a 5.7x CY09E EV/EBITDA (lower than its average trading multiple of the past 15 year). Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to historical averages (our target multiple is based on 15-20% discount to the average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to US$82/MT on EV/MT basis, a 18%-32% discount to the current replacement costs of US$100-120/MT.

Figure 31: ACC— CY08 revenue break-up

Cement 93% RMC 7%

Key risks to our earnings estimates and price target are: a) sharper-thanexpected price declines; b) sharp deterioration in cement demand; c) regulatory pressure on cement prices. Source: Company reports.

Table 11: EPS estimates—J.P. Morgan vs. consensus Rs 2009E 2010E 2011E

J.P. Morgan

Consensus

59.0 47.6 -

50.2 38.1 35.7

Source: Bloomberg, J.P. Morgan estimates.

23

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Increasing earnings estimates We revise our cement industry price assumption for FY10 to a 5% decline from the earlier assumed 10% decline. We maintain our FY11 assumption of a 5% decline. However, we expect earnings to be stronger in 1H FY10 than in 2H FY10. Given that ACC has a December year-end, we believe the full benefits of the Mar-09 quarter price increase should flow through in CY09 earnings. Given our assumption of cement price declines likely to be back-ended in FY10, we expect relatively large earnings decline in CY10 (as CY09 earnings should be relatively strong). Table 12: ACC—EPS estimates: J.P. Morgan versus consensus CY09E 48.5 59.0 22% 50.2 18%

Old EPS (Rs) New EPS (Rs) % change Consensus EPS estimates (Rs) % Higher/ ( Lower) than consensus

CY10E 47.0 47.6 1% 38.1 25%

Source: J.P. Morgan estimates.

Table 13: ACC—Summary of estimate changes CY09E 22.1 21.9 -1%

CY10E 24.0 23.5 -2%

617 828 34%

493 634 29%

Old EBITDA (Rs Mn) New EBITDA (Rs Mn) % change

13,632 18,133 33%

11,824 14,888 26%

Old EBITDA margins New EBITDA margins % change

19.2% 24.2% 26%

16.2% 19.8% 22%

Old volumes (MT) New volumes (MT) % change Old EBITDA per tonne (Rs/MT) New EBITDA per tonne (Rs/MT) % change

Source: J.P. Morgan estimates.

Table 14: Sensitivity analysis based on the impact on CY09/FY10 estimates from a 10% decline in cement prices

EPS Net profit EBITDA EBITDA EBITDA/MT Net debt/equity Source: J.P. Morgan estimates.

24

ACC CY09 -30% -30% -27% -5% -27% -5%

Ambuja CY09 -26% -26% -24% -5% -24% -4%

Ultratech FY10 -23% -23% -18% -4% -18% -4%

Grasim FY10 -15% -15% -10% -2% -23% -2%

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Table 15: Cement capacity break-up

North South East West All India

All Companies Capacity (MT) 68.2 85.8 22.7 70.6 247.3

Capacity (MT) 8.2 6.2 5.6 7.8 27.9

ACC Market share (%) 12.0% 7.2% 24.7% 11.0% 11.3%

Capacity (MT) 11.9 2.0 11.1 25.0

Ambuja Market share (%) 17.4% 8.8% 15.7% 10.1%

Combine Capacity (MT) Market share (%) 20.1 29.5% 6.2 7.2% 7.6 33.5% 18.9 26.8% 52.9 21.4%

Source: Company reports, J.P. Morgan estimates.

We increase our price target; maintain our Neutral rating We raise our Mar-10 price target from Rs450 to Rs560 to reflect: (a) our upward earnings estimate revisions by 2-22% over CY09-10E; and (b) an increase in our CY09E EV/EBITDA cement multiple from 5.5x to 5.7x. We value ACC at 5.7x CY09E EV/EBITDA (lower than its average trading multiple of the past 15 years). Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to the historical averages (our target multiple is based on 15-20% discount to average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to US$82/MT on an EV/MT basis, a 18%-32% discount to the current replacement cost of US$100-120/MT. Key risks to our earnings estimates and PT are: (a) sharper-than-expected price declines; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices. Figure 32: EV/Tonne for large cement companies in India 300 260 220 180 140 100 60 20 Apr-95

Apr-97 ACC

Apr-99 Ambuja

Apr-01 Ultratech

Apr-03 India Cements

Apr-05

Apr-07

Apr-09

Source: Company reports, Bloomberg, J.P. Morgan estimates. Note: Priced as of 16 April 2009.

25

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 33: EV/EBITDA for large cement companies 30 25 20 15 10 5 Apr-95

Apr-97

Apr-99

Apr-01

ACC

Apr-03

Ambuja

Apr-05

Ultratech

Apr-07

Apr-09

Grasim

Source: Company reports, Bloomberg, J.P. Morgan estimates. Note: Priced as of 16 April 2009.

Figure 34: ACC—EV/EBITDA bands x, Rs 1230

1030

830 10x 630

8x

430

6x

4x

230

Source: Company reports, J.P. Morgan estimates.

26

4x

10x

Jan-09

Jun-08

Nov-07

Mar-07

Jan-06

Aug-06

Oct-04 8x

May-05

Jul-03 6x

Mar-04

Dec-02

Sep-01

Price (Rs)

May-02

Jul-00

Feb-01

Apr-99

Nov-99

Sep-98

Jan-98

Jun-97

Apr-96

Nov-96

30

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 35: ACC—US$ EV/tonne bands US$, Rs $200 1250

1050

$150

850 $100 650 $80 450

250

50 Jan-96

Apr-97

Jul-98

Oct-99

Jan-01

Price

$80

Apr-02

Jul-03

$100

Oct-04

$150

Jan-06

Apr-07

Jul-08

$200

Source: Company reports, J.P. Morgan estimates.

Figure 36: ACC—P/E bands x, Rs ACC-P/E

1600 1400

25x

1200

20x

1000

16x

800

12x

600 400 200 0 Apr-96

Apr-97

Apr-98

Apr-99

Mar-00

Mar-01

Mar-02

Mar-03

Price (Rs)

Mar-04 12x

Mar-05

Mar-06

16x

20x

Mar-07

Mar-08

Mar-09

25x

Source: Company reports, J.P. Morgan estimates.

27

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

All Data As Of

16-Apr-09

Q-Snapshot: ACC Ltd. Quant Return Drivers (a Score >50% indicates company ranks 'above average') vs Country Score 0% (worst) to 100% (best) vs Industry Value 30% P/E Vs Market (12mth fwd EPS) 47% 27% P/E Vs Sector (12mth fwd EPS) 45% 7% EPS Growth (forecast) 24% 15% 29% Value Score Price Momentum 72% 12 Month Price Momentum 63% 91% 1 Month Price Reversion 80% 78% 69% Momentum Score Quality 40% Return On Equity (forecast) 71% 21% Earnings Risk (Variation in Consensus) 58% 26% 71% Quality Score Earnings & Sentiment 34% Earnings Momentum 3mth (risk adjusted) 41% 19% 1 Mth Change in Avg Recom. 17% 81% Net Revisions FY2 EPS 82% 52% Earnings & Sentiment Score 47% 31% COMPOSITE Q-SCORE* (0% To 100%) 51%

Recoms

20 15 10 5 0 Up

Dn

Up

Dn

FY1

Consensus Growth Outlook (%)

75% 50% 25% 0% 0%

LOW/WEAKER 25%

Unchanged

50%

75%

100%

INDUSTRY Quant Return Drivers Summary (vs Country)

17.0% 0.18 100% 75%

-80.0 -0.18 33%

50% 25% 0% VALUE

PRICE

EPS Momentum (%)

12 10 8 6 4 2 0

Unchanged

HIGH/STRONGER

30 20 10 0 -10 -20 -30

-1 Mth

FY2

FY1

20.0

QUALITY

EARNINGS

Historical Total Return (%)

5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0

(Local Currency %)

Targets

-21.6% 11.3%

(%)

25

100% C O U N T R Y

1.2x 1.2x -23.3%

EPS Revisions** Consensus Changes (4wks)

Consensus Changes (4wks)

Targets & Recommendations**

J.P. Morgan Composite Q-Score Raw Value

-3 Mth

24 11

-22 1Mth

3Mth

-26 3Yr

1Yr

FY2 11.1

10.0

4.4

3.5

0.0 -10.0 -20.0 -30.0

-11.7 -19.6 EPS Actual To FY1

-26.9

EPS FY1 To FY2

EPS FY2 To FY3

Cash Flow FY1 To FY2

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths) Name Code Industry Bank of India Regional Banks 532149-IN Ambuja Cements Ltd. Construction Materials 500425-IN Reliance Capital Ltd. Finance/Rental/Leasing 500111-IN Mahindra & Mahindra Ltd. Motor Vehicles 500520-IN Tata Motors Ltd. Trucks/Construction/Farm Machinery 500570-IN Construction Materials ACC Ltd. 500410-IN ABB Ltd. (India) Electrical Products 500002-IN Hindalco Industries Ltd. Aluminum 500440-IN Bosch Ltd. Auto Parts: OEM 500530-IN Regional Banks Bank of Baroda 532134-IN Railroads Container Corp. of India Ltd. 531344-IN

Dividends FY1 To FY2

USD MCAP 2,661 2,371 2,367 2,332 2,274 2,225 2,100 2,029 2,023 1,977 1,967

Sales FY1ToFY2

ADV 1.92 0.46 24.64 1.25 3.23 1.52 0.88 2.25 0.14 1.13 0.10

PE FY1 4.9 13.3 15.3 11.3 16.1 13.0 19.7 8.6 16.5 5.6 12.3

Q-Score* 92% 46% 12% 38% 13% 31% 24% 3% 46% 93% 54%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/ Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

28

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Summary of financials: ACC Limited Rs in millions, year-end December Profit and Loss statement

Cash flow statement CY07

CY08

CY09E

CY10E

69,219 20% 18,321 17% 26% 17,911 17% 26% 738.7 17,172 -4,661 -27% 12,051 13% 187.4 64.6 14%

73,086 6% 17,328 -5% 24% 17,274 -4% 24% 399.6 16,874 -5,238 -31% 11,636 -3% 187.4 62.4 -3%

74,974 3% 18,133 5% 24% 16,212 -6% 22% 262.5 15,950 -4,944 -31% 11,005 -5% 187.4 59.0 -5%

75,063 0% 14,888 -18% 20% 13,114 -19% 17% 262.5 12,852 -3,984 -31% 8,868 -19% 187.4 47.6 -19%

CY07

CY08

CY09E

CY10E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

7,435 2,893 7,309 4,394 22,030

9,842 3,102 7,933 6,475 27,352

3,526 3,749 7,497 5,000 19,772

4,792 3,753 7,506 5,000 21,051

Investments Net fixed assets Total assets

8,448 39,639 70,118

6,791 50,816 84,958

2,500 63,367 85,639

2,000 70,367 93,418

Liabilities Payables Others Total current liabilities Total debt Other liabilities Total liabilities Shareholders' equity BVPS

13,922 6,663 20,585 3,064 3,315 26,964 43,154 230

17,774 9,639 27,413 4,820 3,448 35,681 49,277 263

15,000 7,000 22,000 3,500 3,358 28,858 56,781 303

16,500 7,500 24,000 3,500 3,358 30,858 62,560 334

Revenues % change Y/Y EBITDA % change Y/Y EBITDA Margin (%) EBIT % change Y/Y EBIT Margin (%) Net Interest Earnings before tax Tax as % of EBT Net Income (Pre Exceptional) % change Y/Y Shares Outstanding EPS (pre exceptional) % change Y/Y Balance sheet

CY07

CY08

CY09E

CY10E

Net Income (Pre Exceptional) Depreciation & amortization Change in working capital Cash flow from operations

12,051 3,051 4,580 19,681

11,636 2,942 3,914 18,492

11,005 3,420 -4,149 10,276

8,868 3,774 1,987 14,629

Net Capex Free cash flow

-8,731 10,950

-14,118 4,373

-15,971 -5,695

-10,774 3,854

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Beginning cash Ending cash DPS

-113 -4,648 2,734 -4,385 6,202 7,435 20

-1,610 1,756 489 -4,391 7,435 9,842 20

-1 -1,320 0 -3,501 9,842 3,526 17

0 0 0 -3,089 3,526 4,792 15

Ratio analysis %

CY07

CY08

CY09E

CY10E

EBITDA margin Operating margin Net profit margin

26% 26% 17%

24% 24% 16%

24% 22% 15%

20% 17% 12%

Sales growth Net profit growth EPS growth

20% 13% 14%

6% -3% -3%

3% -5% -5%

0% -19% -19%

Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity ROE ROCE

24.8 -6% -10% 99% 162% 32% 38%

43.4 -6% -10% 86% 172% 25% 32%

69.1 0% 0% 88% 151% 21% 27%

56.7 -1% -2% 80% 149% 15% 20%

Source: Company reports, Bloomberg, J.P. Morgan estimates.

29

Asia Pacific Equity Research 16 April 2009

Neutral

Ambuja Cements Limited

ABUJ.BO, ACEM IN Price: Rs80.35

Fairly valued

▲ Price Target: Rs75.00 Previous: Rs60.00

• We increase our earnings estimates and price target: We incorporate our latest cement price assumption of a 5% price decline in FY10E compared with our earlier assumption of a 10% decline, and subsequently increase our earnings estimates by 21-25% over CY09-10. For the same reason, we raise our Mar-10 price target to Rs75 (based on 6.0x CY09E EV/EBITDA, which corresponds to $94/MT on CY09E EV/MT). While our valuations are in line with historical averages, at the current price Ambuja offers little upside, in our view. • Near-term margin expansion to be constrained by clinker purchases: While Ambuja should benefit from the recent price hikes and also lower imported coal costs (the company sources around 30% of its coal requirement via imports), we expect the near-term margin expansion to be constrained as it faces some clinker issues, and thus is dependent on outside clinker purchases. We expect the clinker issues to be sorted out once the Bhatpara clinker kiln gets commissioned in H2CY09. • While grinding units have been deferred, the bulk terminal in Kochi should give access to south India: Ambuja has deferred the Sanand (1.5MT) grinding unit till 2010, and suspended the Barh grinding unit (1MT). We do not find the suspension/deferment of grinding units surprising given the clinker issues. The new bulk terminal at Kochi should give access to south India; however, we expect the pricing environment to remain weak in the region. • We maintain Neutral: We maintain Neutral and raise our Mar-10 price target to Rs75 from Rs60. Key upside risks to our price target include continued strength in cement prices and demand, while downside risks remain a sharper-than-expected decline in cement demand and cement prices. Any potential share buyback by the company (in the event Holcim wants to increase its stake further) should provide near-term stock price strength.

India India Cement AC

Pinakin Parekh, CFA

(91-22) 6639 3018 [email protected] J.P. Morgan India Private Limited Price Performance 120 Rs

80 40 Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

ABUJ.BO share price (Rs) NIFTY (rebased)

YTD

1m

3m

12m

Abs

9.8%

12.6%

10.6%

-33.9%

Rel

-1.7%

-11.8%

-12.6%

-4.7%

Bloomberg: ACEM IN; Reuters: ABUJ.BO Rs in millions, year-end December Net sales Net profit (pre-exceptional) EPS (pre-exceptional, Rs) Net sales growth (%) Net profit growth (%) ROE (%) P/E (x) EV/EBITDA (x) EV/Tonne ($) P/B (x)

CY07 57,048 9,832 6.5 -9 -35 24 12.5 5.5 134.2 2.6

CY08 62,346 10,939 7.2 9 11 21 11.2 6.5 112.2 2.2

CY09E 63,681 10,882 7.1 2 -1 18 11.3 6.6 101.9 2.0

CY10E 63,350 9,359 6.1 -1 -14 14 13.1 7.3 90.6 1.8

52-week range (Rs) Market cap (RsMM) Market cap (US$MM) Shares outstanding (MM) Avg daily value (RsMM) Avg daily value (US$MM) Avg daily volume (MM shares) Index Exchange rate (Rs/US$) Date of price

117.95 - 43 122,873 2,469 1,523 149.3 3.0 2.1 10,947 49.8 16-Apr-09

Source: Company data, J.P. Morgan estimates. Priced as of 16 April, 2009.

See page 56 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Company description

Table 16: Ambuja—P&L sensitivity metrics

Ambuja Cements Limited was earlier known as Gujarat Ambuja Cements Limited (GACL). The group’s principal activity is to manufacture and market cement and clinker for both domestic and export markets. The total cement capacity of the company is 16 million tonnes. It has three subsidiaries— Ambuja Cement Rajasthan Limited (ACRL), Ambuja Cement Eastern Limited (ACEL) and Ambuja Cement India Limited (ACIL). Ambuja also has a strategic investment in ACC through its subsidiary (ACIL). Figure 37: Ambuja—CY08 Customer break-up

Domestic Ex port

96%

4%

CY10E Sales volume growth assumption Impact of each 1% Average realization growth assumption Impact of each 1% Raw material cost assumption Impact of each 5% Power & energy cost assumption Impact of each 5%

EBITDA impact (%)

EPS impact (%)

+/-3%

+/-4%

+/-3%

+/-4%

+/-2%

+/-3%

+/-3%

+/-4%

Source: J.P. Morgan estimates.

Price target and valuation analysis

We increase our Mar-10 price target to Rs75 as: (a) we increase our earnings estimate by 21-25% over CY09-10E; and (b) increase our CY09E EV/EBITDA cement multiple to 6.0x from 5.5x. We value Ambuja on 6.0x CY09E EV/EBITDA (lower than its past 15-year average trading multiple). Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to the historical averages (our target multiple is based on 15-20% discount to the average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to $94/MT on EV/MT basis, 6-21% discount to current replacement costs of $100-120/MT. Key risks to our earnings estimates and price target are: (a) sharperthan-expected price decline; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices.

Source: Company reports.

Table 17: EPS est—J.P. Morgan vs. consensus (Rs) 2009E 2010E 2011E

J.P. Morgan 7.1 6.1 -

Consensus 6.4 5.5 5.7

Source: Bloomberg, J.P. Morgan estimates.

31

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

We increase our earnings estimates We change our cement industry pricing assumptions for FY10 to a 5% decline from our earlier assumption of a 10% decline. We maintain our FY11 assumption of a 5% decline. We, however, expect earnings to be relatively stronger in 1HFY10 compared with 2HFY10. As Ambuja has a December year-end, we believe the full benefits of the Mar-09 quarter price hikes should flow through in this year’s earnings. Given our assumption that cement price declines could be back-ended in FY10, we see relatively large earnings decline in CY10 (as CY09E earnings should be relatively stronger). Table 18: Summary of J.P. Morgan estimates and consensus CY09E 5.7 7.1 25% 6.4 11%

Old EPS (Rs) New EPS (Rs) % change Consensus EPS estimates (Rs) % Higher/ ( Lower) than consensus

CY10E 5.1 6.1 21% 5.5 12%

Source: J.P. Morgan estimates.

Table 19: Summary of change in estimates CY09E 18.9 18.7 -1%

CY10E 20.3 20.0 -2%

748 978 31%

656 822 25%

Old EBITDA (Rs Mn) New EBITDA (Rs Mn) % change

14,133 18,252 29%

13,322 16,405 23%

Old EBITDA margins New EBITDA margins % change

24.1% 28.7% 19%

22.3% 25.9% 16%

Old volumes (MT) New volumes (MT) % change Old EBITDA per tonne (Rs/MT) New EBITDA per tonne (Rs/MT) % change

Source: J.P. Morgan estimates.

Table 20: Sensitivity analysis based on the impact on CY09/FY10 estimates from a 10% decline in cement prices

EPS Net profit EBITDA EBITDA EBITDA/MT Net debt/Equity Source: JPMorgan estimates.

32

ACC CY09 -30% -30% -27% -5% -27% -5%

Ambuja CY09 -26% -26% -24% -5% -24% -4%

UltraTech FY10 -23% -23% -18% -4% -18% -4%

Grasim FY10 -15% -15% -10% -2% -23% -2%

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Table 21: Cement capacity break-up All companies Capacity (MT) 68.2 85.8 22.7 70.6 247.3

North South East West All India

Capacity (MT) 8.2 6.2 5.6 7.8 27.9

ACC Market share (%) 12.0% 7.2% 24.7% 11.0% 11.3%

Capacity (MT) 11.9 2.0 11.1 25.0

Ambuja Market share (%) 17.4% 8.8% 15.7% 10.1%

Combine Capacity (MT) Market share (%) 20.1 29.5% 6.2 7.2% 7.6 33.5% 18.9 26.8% 52.9 21.4%

Source: Company reports and J.P. Morgan estimates.

We increase our price target and maintain Neutral rating We increase our Mar-10 price target to Rs75 as: (a) we increase our earnings estimate by 21-25% over CY09-10E; and (b) increase our CY09E EV/EBITDA cement multiple to 6.0x from 5.5x. We value Ambuja on 6.0x CY09E EV/EBITDA (lower than its past 15-year average trading multiple). Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to the historical averages (our target multiple is based on 15-20% discount to the average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to $94/MT on an EV/MT basis, 6-21% discount to the current replacement cost of $100-120/MT. Key risks to our earnings estimates and price target are: (a) sharper-than-expected price declines; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices. Figure 38: EV/Tonne for large cement companies 300 260 220 180 140 100 60 20 Apr-95

ACC

Apr-97

Ambuja

Apr-99 Ultratech

Apr-01 Apr-03 India Cements

Apr-05

Apr-07

Apr-09

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

33

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 39: EV/EBITDA for large cement companies 30 25 20 15 10 5 Apr-95

Apr-97

Apr-99

Apr-01

ACC

Apr-03

Ambuja

Apr-05

Ultratech

Apr-07

Apr-09

Grasim

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009

Figure 40: Ambuja EV/EBITDA band Rs, x 180 160 140

12x

120

10x 100

8x 80

6x

60 40 20 0 Jul-96

Jul-98

Jul-00 Price (Rs)

Source: Company reports and J.P. Morgan estimates.

34

Jul-02 6x

8x

Jul-04 10x

Jul-06 12x

Jul-08

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 41: Ambuja $EV/Tonne band $, Rs $210

160 150

$180

140 130

$150

120 110 100

$120

90 80 70 60 50 40 30 20 10 0 Jul-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Price (Rs)

$180

$210

$120

$150

Source: Company reports and J.P. Morgan estimates.

Figure 42: Ambuja P/E band x, Rs

200 180 160 20x

140 120

16x

100 12x

80 60

8x

40 20 0 Jul-95

Jun-97

Jun-99

Jun-01

Price (Rs)

Jun-03 8x

16x

Jun-05 20x

Jun-07 12x

Source: Company reports and J.P. Morgan estimates.

35

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

All Data As Of

16-Apr-09

Q-Snapshot: Ambuja Cements Ltd. Quant Return Drivers (a Score >50% indicates company ranks 'above average') vs Country Score 0% (worst) to 100% (best) vs Industry Value 31% P/E Vs Market (12mth fwd EPS) 49% 29% P/E Vs Sector (12mth fwd EPS) 47% 4% EPS Growth (forecast) 19% 10% 27% Value Score Price Momentum 69% 12 Month Price Momentum 59% 70% 1 Month Price Reversion 53% 70% 58% Momentum Score Quality 30% Return On Equity (forecast) 63% 38% Earnings Risk (Variation in Consensus) 68% 33% 68% Quality Score Earnings & Sentiment 75% Earnings Momentum 3mth (risk adjusted) 75% 73% 1 Mth Change in Avg Recom. 75% 83% Net Revisions FY2 EPS 86% Earnings & Sentiment Score 84% 84% 46% COMPOSITE Q-SCORE* (0% To 100%) 64%

Up

Recoms

Dn

25% 0% 0%

LOW/WEAKER 25%

50% 25% 0% VALUE

PRICE

QUALITY

24

2.0 0.0

26

-1 Mth

-3 Mth

FY1

-14 1Mth

-24 1Yr

3Mth

3Yr

FY2 4.9

0.4 -5.7

-20.0

EARNINGS

Historical Total Return (%) 30 20 10 0 -10 -20 -30

FY2

0.0 -10.0

100%

75%

-4.0 Unchanged

75%

100% -2.6 0.05 50%

-2.0 Dn

50%

INDUSTRY Quant Return Drivers Summary (vs Country)

14.5% 0.14

4.0

FY1

10.0

50%

6.0

Up

Consensus Growth Outlook (%)

75%

EPS Momentum (%)

14 12 10 8 6 4 2 0

Unchanged

HIGH/STRONGER

(Local Currency %)

Targets

-24.3% 24.3%

(%)

30 25 20 15 10 5 0

100% C O U N T R Y

1.1x 1.2x -30.1%

EPS Revisions** Consensus Changes (4wks)

Consensus Changes (4wks)

Targets & Recommendations**

J.P. Morgan Composite Q-Score Raw Value

-1.4

-13.4

-30.0 -40.0 -50.0

-46.9

EPS Actual To FY1

EPS FY1 To FY2

EPS FY2 To FY3

Cash Flow FY1 To FY2

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths) Name Code Industry Punjab National Bank Regional Banks 532461-IN Jaiprakash Associates Ltd. Industrial Conglomerates 532532-IN Kotak Mahindra Bank Ltd. Financial Conglomerates 500247-IN Bharat Petroleum Corp. Ltd. Oil Refining/Marketing 500547-IN Bank of India Regional Banks 532149-IN Construction Materials Ambuja Cements Ltd. 500425-IN Reliance Capital Ltd. Finance/Rental/Leasing 500111-IN Mahindra & Mahindra Ltd. Motor Vehicles 500520-IN Tata Motors Ltd. Trucks/Construction/Farm Machinery 500570-IN Construction Materials ACC Ltd. 500410-IN Electrical Products ABB Ltd. (India) 500002-IN

Dividends FY1 To FY2

USD MCAP 2,856 2,790 2,766 2,680 2,661 2,371 2,367 2,332 2,274 2,225 2,100

Sales FY1ToFY2

ADV 2.23 9.47 2.79 0.93 1.92 0.46 24.64 1.25 3.23 1.52 0.88

PE FY1 5.4 24.9 21.8 10.3 4.9 13.3 15.3 11.3 16.1 13.0 19.7

Q-Score* 95% 29% 25% 52% 92% 46% 12% 38% 13% 31% 24%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/ Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

36

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Summary of financials: Ambuja Cements Limited Rs in millions, year-end December Profit and loss statement

Cash flow statement CY07

CY08

CY09E

CY10E

57,048 -9% 20,451 -4% 36% 20,023 2% 35% 759 19,265 9,433 49% 9,832 -35% 1,514 6 -35%

62,346 9% 17,779 -13% 29% 16,936 -15% 27% 321 16,615 5,676 34% 10,939 11% 1,523 7 11%

63,681 2% 18,252 3% 29% 16,512 -2% 26% 270 16,242 5,360 33% 10,882 -1% 1,523 7 -1%

63,350 -1% 16,405 -10% 26% 14,239 -14% 22% 270 13,969 4,610 33% 9,359 -14% 1,523 6 -14%

CY07

CY08

CY09E

CY10E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

6,508 1,457 5,816 2,093 15,873

8,518 2,246 9,398 3,275 23,437

4,812 1,592 7,960 3,000 17,364

5,270 1,584 7,919 3,000 17,772

Investments Net fixed assets Total assets

12,889 36,567 65,329

3,324 51,400 78,161

3,500 61,918 82,782

3,500 67,252 88,524

Liabilities Loan funds Payables Others Total current liabilities Other liabilities Total liabilities Shareholders' equity BVPS

3,304 6,755 4,936 11,691 3784 18779 46,551 30.7

2,887 10,032 4,706 14,738 3808 21432 56,729 37.2

3,000 8,500 5,000 13,500 3800 20300 62,482 41.0

3,000 9,000 6,000 15,000 3800 21800 66,724 43.8

Revenues % change (Y/Y) EBITDA % change (Y/Y_ EBITDA margin (%) EBIT % change Y/Y EBIT Margin (%) Net Interest Earnings before tax Tax as % of EBT Net Income (Pre Exceptional) % change Y/Y Shares Outstanding EPS (pre exceptional) % change Y/Y Balance sheet

CY07

CY08

CY09E

CY10E

PBIT Depreciation & amortization Change in working capital Cash flow from operations

18,088 2,363 3,305 25,691

15,182 2,598 (2,230) 17,304

15,312 2,940 852 20,304

12,739 3,666 1,550 19,455

Net Capex Free cash flow

7,504 7,996

17,263 (5,956)

13,458 1,216

9,000 5,575

Equity raised/ (repaid) Debt raised/ (repaid) Dividends paid

11 8,077 6,232

0 2,428 4,488

(12) (3,820) 5,117

0 458 5,117

Beginning cash Ending cash DPS

3,781 6,508 4

6,508 8,518 3

8,518 4,812 3

4,812 5,270 3

Ratio analysis %

CY07

CY08

CY09E

CY10E

EBITDA margin Operating margin Net profit margin

36% 35% 17%

29% 27% 18%

29% 26% 17%

26% 22% 15%

Sales growth Net profit growth EPS growth

-9% -35% -35%

9% 11% 11%

2% -1% -1%

-1% -14% -14%

Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity ROE ROCE

27.0 -5% -7% 0.9 1.4 24% 40%

55.5 -7% -10% 0.8 1.4 21% 29%

67.6 -2% -3% 0.8 1.3 18% 25%

60.8 -3% -3% 0.7 1.3 14% 20%

Source: Company data, J.P. Morgan estimates.

37

Asia Pacific Equity Research 16 April 2009

Overweight

Grasim Industries Ltd

GRAS.BO, GRASIM IN Price: Rs1,610.30

FY10—Year of strong free cash flow

▲ Price Target: Rs1,850.00 Previous: Rs1,350.00

• We raise our earnings estimates and price target: We incorporate our latest assumption of a 5% cement price decline in FY10 compared to our earlier assumption of a 10% decline and increase our earnings estimates by 1%-30% over FY09-11. We also increase our Mar-10 price target from Rs1,350 to Rs1,850 (based on a sum-of-the-parts methodology). We believe Grasim’s valuations—based on earnings and assets across Grasim and its subsidiary UltraTech—look compelling. Given its strong capacity growth, in the event of cement demand surprising on the upside Grasim should benefit from its recent capacity additions. • FY10-11E—Strong free cash flow generation; cash usage should be the key: As most of the aggressive capacity expansion across cement companies (including its subsidiary Ultratech) has been completed, we expect Grasim to generate strong free cash flow from FY10. We expect the company to play a key role in any potential domestic M&A. We believe captive coal will emerge as a key competitive advantage for Grasim. However, it remains to be seen how the company utilizes its strong free cash flow over the next 12-18 months.

India India Cement AC

Pinakin Parekh, CFA

(91-22) 6639 3018 [email protected] J.P. Morgan India Private Limited Price Performance 2,500 Rs 1,500 500 Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

GRAS.BO share price (Rs) NIFTY (rebased)

YTD

1m

3m

12m

Abs

27.9%

5.0%

17.8%

-38.5%

Rel

16.4%

-19.4%

-5.4%

-9.3%

• VSF—While a strong demand recovery is unlikely in the near term, increase in cotton prices is a positive: Although we do not expect a “Vshaped” VSF demand recovery, a rise in cotton prices is a positive for VSF, in our view. We believe sharply lower sulfur costs should ease margin pressure in the near term. We expect VSF’s earnings to recover gradually over the next few quarters. • We maintain OW: We expect Grasim’s near-term earnings to benefit from lower coal prices and increase in cement prices. Key risk to our price target and view is sharper-than-expected decline in cement demand and prices. Bloomberg: GRASIM IN; Reuters: GRASS.BO Rs in millions, year-end March Net sales Net profit (post minority) EPS (Rs) Net sales growth (%) Net profit growth (%) ROE (%) P/E (x) P/BV (x) EV/EBITDA (x) Div yield (%

FY08 157,243 24,473 267 17% 28% 31% 6.0 2.1 4.4 1.9%

FY09E 165,205 21,268 232 5% -13% 21% 6.9 1.5 5.5 1.7%

FY10E 157,053 17,723 193 -5% -17% 15% 8.3 1.3 5.2 1.6%

FY11E 161,586 17,052 186 3% -4% 13% 8.6 1.2 5.0 1.6%

52-week range (Rs) Market cap (RsMM) Market cap (US$MM) Shares outstanding (MM) Avg daily value (RsMM) Avg daily value (US$MM) Avg daily volume (MM shares) Index Exchange rate (Rs/US$) Date of price

2,734 - 824 146,931 2,953 92 430.3 8.7 0.3 10,947 49.8 16-Apr-09

Source: Company reports, Bloomberg, J.P. Morgan estimates. Priced as of 16 April, 2009.

See page 56 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Company description

Table 22: Grasim—P&L sensitivity metrics

Grasim’s principal activities include manufacture of viscose staple fibre (VSF), cement, sponge iron, chemicals and textiles. The company’s VSF plants are located at Nagda in Madhya Pradesh, Kharach in Gujarat and Harihar in Karnataka, with an aggregate capacity of 333,975tpa. Grasim, along with its subsidiary UltraTech Cement Ltd., has a capacity of 35MT and is a leading cement player in India.

FY10E Cement sales volume growth assumption Impact of each 1% Cement average realization growth assumption Impact of each 1% VSF sales assumption Impact of each 5%

EBITDA impact (%)

EPS impact (%)

+/-0%

+/-1%

+/-0%

+/-1%

+/-1%

+/-1%

Source: J.P. Morgan estimates.

Price target and valuation analysis

Figure 43: Grasim—FY08 revenue break-up Tex tiles 1% Chemical

3% Sponge

We raise our Mar-10 price target from Rs1,350 to Rs1,850 to reflect: (a) our upward earnings estimate revisions by 1%-30% over FY09-11; and b) an increase in our FY10E EV/EBITDA cement multiple to 5.7x from 5.5x. We value Grasim using a sum-of-the-parts methodology. Our price target corresponds to US$81/MT on an EV/MT basis, a 19%33% discount to the current replacement cost of US$100-120/MT.

VSF

Key risks to our earnings estimates and PT are: (a) a sharper-thanexpected cement price decline; b) a sharp deterioration in cement demand; and c) regulatory pressure on cement prices.

19%

6% Cement 72%

Source: Company reports.

Table 23: EPS est—J.P. Morgan vs. consensus Rs FY09E FY10E FY11E

J.P. Morgan

Consensus

231.9 193.2 186

233.9 189.1 172.9

Source: Bloomberg, J.P. Morgan estimates.

39

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

We raise our earnings estimates We revise our cement industry price assumption for FY10 to a 5% decline from our earlier assumption of a 10% decline. We maintain our FY11 assumption of a 5% decline. However, we expect earnings to be relatively strong in 1H FY10 compared to 2H FY10. We expect cement segment earnings for Grasim to benefit from: a) lower fuel costs across both Grasim and its subsidiary UltraTech; and b) lowerthan-expected cement price declines in FY10 (also price declines are likely to occur from a higher level, given the price increase in the March-09 quarter) Table 24: EPS estimates—J.P. Morgan versus consensus FY09E 229.2 231.9 1% 233.9 -1%

Old EPS (Rs) New EPS (Rs) % Change Consensus EPS estimates (Rs) % Higher/ ( Lower) than consensus

FY10E 148.9 193.2 30% 189.1 2%

FY11E 181.0 185.9 3% 172.9 8%

Source: J.P. Morgan estimates, Bloomberg.

Table 25: Sensitivity analysis based on impact on CY09/FY10 estimates from a 10% decline in cement prices

EPS Net Profit Rs Mn EBITDA Rs Mn EBITDA % EBITDA/MT Net Debt/Equity

ACC CY09 -30% -30% -27% -5% -27% -5%

Ambuja CY09 -26% -26% -24% -5% -24% -4%

Ultratech FY10 -23% -23% -18% -4% -18% -4%

Grasim FY10 -15% -15% -10% -2% -23% -2%

Source: J.P. Morgan estimates.

Pan-India presence a positive, in our view Grasim, along with its subsidiary UltraTech, has a pan-India presence with decent capacity share across key regions. We believe Grasim’s across-the-country presence means the company is not highly exposed to any particular regional price declines. Given our expectation of cement prices to be the weakest in southern India, we see this as a positive. Table 26: Grasim + UltraTech—Capacity break-up post expansions MT, %

North South East West All India

All companies FY10E capacity (MT) 68.2 85.8 22.7 70.6 247.3

Capacity (MT) 12.5 6.2 7.3 26.0

Grasim Market share (%) 18% 7% 10% 11%

UltraTech Capacity (MT) Market share (%) 8.0 9% 2.6 11% 12.9 18% 23.5 10%

Combine Capacity (MT) Market share (%) 12.5 18% 14.2 17% 2.6 11% 20.2 29% 49.5 20%

Source: Company reports, J.P. Morgan estimates.

VSF earnings recovery likely in 2H FY10 Although we do not see a strong demand recovery for VSF in the very near term, we are enthused by the recent sharp increases in cotton prices globally (VSF is a 40

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

competing fibre to cotton). While VSF prices have declined, cost pressure has also materially eased with a sharp fall in sulfur costs. We believe 3Q FY09 VSF EBITDA margins were the cyclical lows. We expect a gradual VSF EBITDA margin recovery from now. VSF is still a high-ROIC business. Table 27: Grasim's VSF business assumptions FY09E -17.8% -19.6% 4,943 20.5%

Volume growth Sales growth EBITDA (RsMM) EBITDA margin

FY10E 8.7% 0.0% 5,907 24.5%

FY11E 20.0% 12.5% 7,597 28.0%

Source: Company reports, J.P. Morgan estimates.

Figure 44: VSF—EBITDA margins and EBITDA %

12,000

40%

10,000

35%

8,000

30%

6,000 4,000

25%

2,000

20%

0 FY93

FY95

FY97

FY99

FY01

FY03

EBITDA (Rs Mn)

FY05

FY07

FY09E FY11E

EBITDA %

Source: Company reports, J.P. Morgan estimates.

Strong free cash generation We believe Grasim benefits from having completed most its projects; hence, its free cash flows should be relatively strong over the next two years and the company should move into a net cash position. With an under-leveraged balance sheet, and strong free cash flows, we believe cash usage will be key (if spent on acquisitions— on what acquisitions and at what price?). While we expect the company to look at acquiring cement assets, given the reducing coal linkage supplies, we expect it to also look at acquiring coal assets.

41

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 45: Grasim—Free cash flow versus debt/equity ratio 40,000 30,000 20,000 10,000 (10,000) (20,000) (30,000)

29,584

1.36 12,137

7,518

6,013

1,071

0.69

0.65

0.58

0.51

0.61 (12,413)

FY04

FY05

FY06

FY07

Free Cash Flow

1.50 1.00

0.41 (6,415)

0.50 0.17

(20,730) FY03

22,600

FY08

FY09E

FY10E

0.03 FY11E

-

Net Debt/Equity

Source: Company reports, J.P. Morgan estimates.

We raise our price target; maintain OW We increase our Mar-10 price target from Rs1,350 to Rs1,850 to reflect: a) our upward earnings estimate revisions by 1%-30% over FY09-11; and b) an increase in our FY10E EV/EBITDA cement multiple to 5.7x from 5.5x. We value Grasim based on a sum-of-the-parts methodology. Our price target corresponds to US$81/MT on an EV/MT basis, a 19%-33% discount to the current replacement cost of US$100120/MT. Key risks to our earnings estimates and PT are: (a) sharper-than-expected cement price declines; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices. Table 28: Grasim—Sum-of-the-parts multiples VSF Cement Chemicals Source: J.P. Morgan estimates.

42

Multiple 6.0x of EBITDA 5.7x of EBITDA 2.0x of Sales

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Table 29: Grasim—Implied cement EV/tonne CMP No of shares Mkt cap.

FY09E 1850 91.7 169645

FY10E 1850 91.7 169645

Grasim standalone debt 54% of UTCEM debt Total debt

35,000 10,860 45,860

20,000 6,516 26,516

Grasim cash + liquid investments 54% of UTCEM Total cash

2,567 1,340 3,907

5,550 2,047 7,597

Net debt Total EV

41,953 211,598

18,919 188,564

VSF EBITDA VSF [email protected]

4942.55 27,184

5906.95 32,488

4250 8500

4500 9000

175,914

147,076

Grasim Cement 54% of UTCEM Total cement

26.00 12.54 38.54

26.00 12.76 38.76

Cement EV/MT In US$

4,564 97

3,794 81

Chemicals sales EV @2.0x sales Cement EV

Source: Company reports, J.P. Morgan estimates.

Figure 46: EV/EBITDA for large cement companies in India 30 25 20 15 10 5 Apr-95

Apr-97

Apr-99 ACC

Apr-01 Ambuja

Apr-03 Ultratech

Apr-05

Apr-07

Apr-09

Grasim

Source: Company reports, Bloomberg, J.P. Morgan estimates. Note: Priced as of 16 April 2009.

43

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 47: Grasim—EV/EBITDA bands x, Rs 4,000

3,500

10x 3,000

2,500

7x 2,000

5x

1,500

4x 1,000

500

0 Apr-96

Apr-98

Mar-00

Mar-02 Price (Rs)

Mar-04

4x

5x

Mar-06

7x

Mar-08

10x

Source: Company reports, J.P. Morgan estimates.

Figure 48: Grasim—P/E bands x, Rs 4500 4000 3500 3000 15x 2500 2000

10x

1500 7x 1000

5x

500

Price (Rs)

Source: Company reports, J.P. Morgan estimates.

44

5x

7x

10x

15x

Dec-08

Sep-07

May-08

Jul-06

Feb-07

Apr-05

Dec-05

Sep-04

Jul-03

Feb-04

Apr-02

Nov-02

Sep-01

Jun-00

Feb-01

Apr-99

Nov-99

Jan-98

Sep-98

Jun-97

Apr-96

Nov-96

0

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

All Data As Of

16-Apr-09

Q-Snapshot: Grasim Industries Ltd. Quant Return Drivers (a Score >50% indicates company ranks 'above average') vs Country Score 0% (worst) to 100% (best) vs Industry Value 59% P/E Vs Market (12mth fwd EPS) 74% 68% P/E Vs Sector (12mth fwd EPS) 73% 6% EPS Growth (forecast) 24% 30% 56% Value Score Price Momentum 53% 12 Month Price Momentum 44% 94% 1 Month Price Reversion 85% 64% 54% Momentum Score Quality 62% Return On Equity (forecast) 84% 49% Earnings Risk (Variation in Consensus) 73% 58% Quality Score 86% Earnings & Sentiment 43% Earnings Momentum 3mth (risk adjusted) 49% 31% 1 Mth Change in Avg Recom. 28% 46% Net Revisions FY2 EPS 53% 54% Earnings & Sentiment Score 49% 47% COMPOSITE Q-SCORE* (0% To 100%) 65%

15 10 5 0 Up

Dn

10 5 0

FY1

Consensus Growth Outlook (%)

25% 0%

LOW/WEAKER 25%

Unchanged

50%

75%

100%

100% 75%

-61.2 -0.07 0%

50% 25% 0% VALUE

PRICE

EPS Momentum (%)

15

Dn

50%

INDUSTRY Quant Return Drivers Summary (vs Country)

22.7% 0.12

20

Up

75%

0%

25

Unchanged

HIGH/STRONGER

4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0

30 20 10 0 -10 -20 -30 -40

-1 Mth

FY2

FY1

QUALITY

EARNINGS

Historical Total Return (%) (Local Currency %)

20

C O U N T R Y

-35.4% 8.7%

EPS Revisions**

Recoms

100%

0.7x 0.7x -23.7%

(%)

25

Targets

Consensus Changes (4wks)

Consensus Changes (4wks)

Targets & Recommendations**

J.P. Morgan Composite Q-Score Raw Value

-3 Mth

25 9

-19 1Mth

-35 1Yr

3Mth

3Yr

FY2

0.0 -0.6

-5.0 -10.0

-7.4

-7.0

-15.0

-12.4

-20.0

-19.2

-25.0 -30.0

-28.2

EPS Actual To FY1

EPS FY1 To FY2

EPS FY2 To FY3

Cash Flow FY1 To FY2

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths) Name Code Industry Aluminum National Aluminium Co. Ltd. 532234-IN Nestle India Ltd. Food: Major Diversified 500790-IN Power Finance Corp. Ltd. Finance/Rental/Leasing 532810-IN Mundra Port & Special Economic Zone Ltd. Other Transportation 532921-IN Reliance Infrastructure Ltd. Electric Utilities 500390-IN Construction Materials Grasim Industries Ltd. 500300-IN Punjab National Bank Regional Banks 532461-IN Jaiprakash Associates Ltd. Industrial Conglomerates 532532-IN Kotak Mahindra Bank Ltd. Financial Conglomerates 500247-IN Oil Refining/Marketing Bharat Petroleum Corp. Ltd. 500547-IN Regional Banks Bank of India 532149-IN

Dividends FY1 To FY2

USD MCAP 3,187 3,156 3,094 3,063 3,031 2,881 2,856 2,790 2,766 2,680 2,661

Sales FY1ToFY2

ADV 0.44 0.73 0.36 1.76 23.24 1.40 2.23 9.47 2.79 0.93 1.92

PE FY1 12.4 23.8 12.0 40.4 13.6 7.2 5.4 24.9 21.8 10.3 4.9

Q-Score* 9% 79% 34% 21% 53% 47% 95% 29% 25% 52% 92%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/ Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

45

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Grasim Industries Ltd: Summary of financials Rs in millions, year-end March Profit and loss statement

Cash flow statement FY08

FY09E

FY10E

FY11E

157,243 17% 47,667 27% 30% 46,539 31% 30% 1,827 44,712 33% 14,617 33% 30,095 4,595 24,473 267 28%

165,205 5% 41,989 -12% 25% 37,450 -20% 23% 3,425 34,025 -24% 8,665 25% 25,360 4,093 21,268 232 -13%

157,053 -5% 39,551 -6% 25% 33,870 -10% 22% 2,720 31,150 -8% 9,710 31% 21,440 3,717 17,723 193 -17%

161,586 3% 37,066 -6% 23% 31,329 -8% 19% 1,250 30,079 -3% 9,625 32% 20,454 3,402 17,052 186 -4%

FY08

FY09E

FY10E

FY11E

Inventories Debtors Cash and bank balances Loans and advances Total CA

17,450 10,185 2,903 12,047 42,585

18,065 10,530 1,631 14,000 44,226

17,233 9,399 6,916 11,000 44,549

18,802 9,725 10,355 11,000 49,882

LT investments Net fixed assets Goodwill Total assets

16,607 129,223 19,913 208,327

13,820 150,674 16,824 225,544

12,820 148,493 16,824 222,686

12,820 142,828 16,824 222,354

Liabilities Provisions Other current liabilities Total current liabilities Total debt Other liabilities Total liabilities Shareholders' equity

0 36,783 36,783 55,771 24,336 116,889 91,438

622 28,750 29,372 55,000 29,069 113,441 112,103

622 29,750 30,372 32,000 33,728 96,100 126,586

498 28,250 28,748 16,000 37,115 81,863 140,491

Revenues % change Y/Y EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (pre-exceptional) Minority interest PAT (post minority interest) EPS-consolidated % change Y/Y Balance sheet

Source: Company reports, Bloomberg, J.P. Morgan estimates.

46

FY08

FY09E

FY10E

FY11E

Net income (pre-exceptional) Depreciation & amortization Change in working capital Cash flow from operations

30,095 5,905 1,992 37,992

25,360 7,839 -10,324 22,876

21,440 9,181 5,962 36,584

20,454 9,437 -3,519 26,372

Net capex Free cash flow

-50,404

-29,291

-7,000

-3,772

-12,413

-6,415

29,584

22,600

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Beginning cash Ending cash DPS

-1,116 7,040 2,751 -3,164 3,692 2,903

-1,768 -771 7,822 -2,927 2,903 1,631

-4,343 -23,000 4,659 -2,614 1,631 6,916

-3,935 -16,000 3,387 -2,614 6,916 10,355

Ratio analysis %

FY08

FY09E

FY10E

FY11E

EBITDA margin Operating margin Net profit margin

30% 30% 19%

25% 25% 15%

25% 25% 14%

23% 23% 13%

Sales growth EPS growth

17% 28%

5% -13%

-5% -17%

3% -4%

Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity ROE ROCE

26.1 25% 51% 75% 228% 31% 30%

12.3 24% 41% 73% 201% 21% 20%

14.5 11% 17% 71% 176% 15% 17%

29.7 3% 3% 73% 158% 13% 16%

Asia Pacific Equity Research 16 April 2009

Overweight

UltraTech Cement Ltd

ULTC.BO, UTCEM IN Price: Rs546.55

Attractive valuations

▲ Price Target: Rs670.00 Previous: Rs475.00

• We increase our earnings estimates and price target: We incorporate our latest cement price assumption of a 5% price decline in FY10 compared with our earlier assumption of a 10% decline and subsequently increase our earnings estimates by 8-40% over FY09-11. We increase our Mar-10 price target to Rs670 (based on 5.7x FY11E EV/EBITDA). We believe valuations across earnings and asset based, for UltraTech remain compelling.

India India Cement AC

Pinakin Parekh, CFA

(91-22) 6639 3018 [email protected] J.P. Morgan India Private Limited Price Performance

• Operational cost savings beyond coal: UltraTech is likely to see operational cost savings beyond lower coal prices, given the commissioning of its captive power plants. The company is increasing its captive power capacity to 80% by setting up 225MW of captive power plants, which should reduce its power costs, in our view. • Strong free cash flows over FY10-11E: Like Grasim, having completed most of its large capex plans across cement and power, UltraTech should have strong free cash flows over FY10-11E. We believe cash usage (if used on acquisitions then, what assets and at what price) remains a key variable to focus on.

800 Rs 500 200 Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

ULTC.BO share price (Rs) NIFTY (rebased)

YTD

1m

3m

12m

Abs

34.6%

13.4%

46.2%

-32.3%

Rel

23.1%

-11.0%

23.0%

-3.1%

• Near-term earnings to benefit from lower coal, cement price hikes; key risk remains a sharper-than-expected decline in cement demand and prices: Our Mar-10 price target of Rs670 (up from Rs475) is based on 5.7x FY10E EV/EBITDA (which corresponds to $83/MT on EV/MT). UltraTech is among the cheapest large-cap cement stocks in India. Key risks to our earnings estimates and price target remain a sharper-than-expected price and demand declines. Bloomberg: UTCEM IN; Reuters: ULTC.BO Rs in millions, year-end March Net sales Net profit EPS (Rs) Net sales growth (%) Net profit growth (%) ROE (%) P/E (x) P/B (x) EV/EBITDA (x) EV/tonne (US$)

FY08 55,092 10,076 80.9 12.2 28.8 45.2 6.7 2.5 4.8 108

FY09E 61,775 8,975 72.1 12.1 (10.9) 28.6 7.5 1.9 5.1 79

FY10E 61,116 8,151 65.5 (1.1) (9.2) 20.6 8.3 1.6 4.7 69

FY11E 61,056 7,461 59.9 (0.1) (8.5) 15.9 9.0 1.3 4.6 60

52-week range (Rs) Market cap (RsMM) Market cap (US$MM) Shares outstanding (MM) Avg daily value (RsMM) Avg daily value (US$MM) Avg daily volume (MM shares) Index Exchange rate (Rs/US$) Date of price

843 - 245.25 67,353 1,354 124 52.1 1.1 0.1 10,947 49.8 16-Apr-09

Source: Company data and J.P. Morgan estimates. Priced as of 16 April, 2009.

See page 56 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Company description

Table 30: UltraTech—P&L sensitivity metrics

UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures and markets ordinary portland cement, portland blast furnace slag cement and portland pozzalana cement. It also manufactures ready-mix concrete (RMC). UltraTech Cement has five integrated plants, six grinding units and three terminals—two in India and one in Sri Lanka. UltraTech Cement is the country’s largest exporter of cement clinker. Its export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. UltraTech Cement operates as a subsidiary of Grasim Industries Limited. Figure 49: UltraTech—FY08 customer break-up

Ex port 9%

Domestic

FY10E Sales volume growth assumption Impact of each 1% Average realization growth assumption Impact of each 1% Raw material cost assumption Impact of each 5% Power & energy cost assumption Impact of each 5%

EBITDA impact (%)

EPS impact (%)

+/-2%

+/-2%

+/-4%

+/-5%

+/-2%

+/-3%

+/-5%

+/-6%

Source: J.P. Morgan estimates.

Price target and valuation analysis

We increase our Mar-10 price target to Rs670 as: (a) we increase our earnings estimate by 8-40% over FY09-11; and (b) we increase our FY10E EV/EBITDA multiple to 5.7x. We value UltraTech on 5.7x FY10E EV/EBITDA multiple, which is lower than its average trading one-year forward multiple. Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to the historical averages (our target multiple is based on 15-20% discount to average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to $83/MT on an EV/MT basis, 17-31% discount to the current replacement cost of $100-120/MT.

91%

Key risks to our earnings estimates and price target are: (a) a sharperthan-expected price declines; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices. Source: Company reports.

Table 31: EPS est—J.P. Morgan vs. consensus (Rs) FY09E FY10E FY11E

J.P. Morgan

Consensus

72.1 65.5 59.9

73.8 59.7 46.1

Source: Bloomberg, J.P. Morgan estimates.

48

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

We increase our earnings estimates We change our cement industry pricing assumption for FY10 to a 5% decline from our earlier assumption of a 10% decline. We maintain our FY11 assumption of a 5% decline. We, however, expect earnings to be relatively stronger in 1HFY10 compared with 2HFY10. UltraTech should benefit not only from lower coal costs (we believe the company is dependent on 40-45% imported coal, the highest among large cement companies), but also from increasing reliance on captive power plants. We believe the commissioning of 225MW power plants would take captive power generation to around 80%. Table 32: Summary of J.P. Morgan estimates and consensus FY09E 66.7 72.1 8% 74.5 -3%

Old EPS (Rs) New EPS (Rs) % change Consensus EPS estimates (Rs) % Higher/ ( Lower) than consensus

FY10E 47.1 65.5 39% 64.4 2%

FY11E 48.7 59.9 23% 46.3 29%

Source: J.P. Morgan estimates.

Table 33: Summary of change in estimates FY09E 18.2 16.3 -10%

FY10E 20.4 17.8 -13%

FY11E 22.4 19.1 -15%

848 931 10%

638 840 32%

585 700 20%

Old EBITDA (Rs Mn) New EBITDA (Rs Mn) % change

15,244 16,740 10%

12,053 16,112 34%

12,047 14,194 18%

Old EBITDA margins New EBITDA margins % change

25.9% 27.1% 5%

21.5% 26.4% 23%

20.7% 23.2% 12%

Old volumes (MT) New volumes (MT) % change Old EBITDA per tonne (Rs/MT) New EBITDA per tonne (Rs/MT) % change

Source: J.P. Morgan estimates.

Table 34: Grasim + UltraTech capacity break-up post expansions MT, %

North South East West All India

All companies FY10E capacity (MT) 68.2 85.8 22.7 70.6 247.3

Capacity (MT) 12.5 6.2 7.3 26.0

Grasim Market share (%) 18% 7% 10% 11%

UltraTech Capacity (MT) Market share (%) 8.0 9% 2.6 11% 12.9 18% 23.5 10%

Combine Capacity (MT) Market share (%) 12.5 18% 14.2 17% 2.6 11% 20.2 29% 49.5 20%

Source: Company reports and J.P. Morgan estimates.

49

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 50: UltraTech’s EBITDA/MT and EBITDA margin Rs, %

35% 30%

1,200

31.2%

28.9%

1,000

25% 20% 15% 10%

14%

13%

27.1%

16.8%

26.4%

800 23.2%

600 400 200

5% 0%

FY04

FY05

FY06

FY07

FY08

EBITDA per tonne

FY09E

FY10E

FY11E

EBITDA %

Source: Company reports and J.P. Morgan estimates.

Table 35: Sensitivity analysis based on the impact on CY09/FY10 estimates from a 10% decline in cement prices ACC CY09 -30% -30% -27% -5% -27% -5%

EPS Net Profit EBITDA EBITDA EBITDA/MT Net debt/Equity

Ambuja CY09 -26% -26% -24% -5% -24% -4%

UltraTech FY10 -23% -23% -18% -4% -18% -4%

Grasim FY10 -15% -15% -10% -2% -23% -2%

Source: J.P. Morgan estimates.

Strong free cash generation We believe UltraTech, like Grasim, benefits from the completion of most of its projects and hence free cash flows should be relatively strong over the next two years, and the company should move into a net cash position. With an underleveraged balance sheet, and strong free cash flows, we believe cash usage would be the key (if spent on acquisitions, than what acquisitions and what price would be key questions). Figure 51: UltraTech net debt/equity and free cash flows Rs in millions, %

15,000 10,000 5,000

1.34 1.38 2,346

9,987

0.84 1,689

3,804

0.61

10,846

1.00 0.54 0.50

0.23

0 -2,477

-5,000 FY05

FY06

FY07

FY08E

Free Cash Flow (Rs Mn) (LHS) Source: Company reports and J.P. Morgan estimates.

50

1.50

(0.01)

(0.50)

-3,538 FY09E

-

FY10E

FY11E

Net Debt/Equity (RHS)

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

We increase our price target; maintain OW We increase our Mar-10 price target to Rs670 as: (a) we increase our earnings estimate by 8-40% over FY09-11E; and (b) increase our FY10E EV/EBITDA multiple to 5.6x. We value UltraTech on 5.7x FY10E EV/EBITDA multiple, which is lower than its average trading one-year forward multiple. Our target multiple is lower than the historical average one-year forward multiple as we move into a surplus capacity environment over the next 24 months, and margins should remain constrained over the next two years. However, we do not ascribe a large discount to the historical averages (our target multiple is based on 15-20% discount to the average multiple) as we expect earnings to be relatively higher than previous trough cycles. Our price target corresponds to $83/MT on an EV/MT basis, 17-31% discount to the current replacement cost of $100-120/MT. Key risks to our earnings estimates and price target are: (a) a sharper-than-expected price decline; (b) a sharp deterioration in cement demand; and (c) regulatory pressure on cement prices. Figure 52: EV/Tonne for large cement companies $/MT

300 260 220 180 140 100 60 20 Apr-95

Apr-97 ACC

Apr-99 Ambuja

Apr-01 Ultratech

Apr-03 India Cements

Apr-05

Apr-07

Apr-09

Apr-03

Apr-05

Apr-07

Apr-09

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

Figure 53: EV/EBITDA for large cement companies x

30 25 20 15 10 5 Apr-95

Apr-97

Apr-99 ACC

Apr-01 Ambuja

Ultratech

Grasim

Source: Company reports, Bloomberg and J.P. Morgan estimates. Note: Priced as of 16 April, 2009.

51

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 54: UltraTech EV/EBITDA band x, Rs

1,200

10x

1,000

8x 800

6x

600

400

4x

200 Aug-04

Feb-05

Aug-05

Feb-06

Aug-06 Feb-07 Aug-07 Price (Rs) 4x 6x

Feb-08 8x

Aug-08 10x

Feb-09

Source: Company reports and J.P. Morgan estimates.

Figure 55: UltraTech $EV/Tonne band $, Rs 1,400

175$

1,200

150$ 1,000

800

100$ 600

80$

400

200 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09

Price (Rs) Source: Company reports and J.P. Morgan estimates.

52

80$

100$

150$

175$

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

Figure 56: UltraTech P/E band x, Rs ULTRATECH-P/E

1,200

1,000

15x

800 10x

600

7x

400

5x 200 Aug-04

Aug-05

Aug-06 Price (Rs)

Aug-07 5x

7x

Aug-08 10x

15x

Source: Company reports and J.P. Morgan estimates.

53

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

All Data As Of

16-Apr-09

Q-Snapshot: Ultratech Cement Ltd. Quant Return Drivers (a Score >50% indicates company ranks 'above average') vs Country Score 0% (worst) to 100% (best) vs Industry Value 60% P/E Vs Market (12mth fwd EPS) 75% 54% P/E Vs Sector (12mth fwd EPS) 64% 24% EPS Growth (forecast) 37% 35% 60% Value Score Price Momentum 63% 12 Month Price Momentum 53% 80% 1 Month Price Reversion 64% 67% 55% Momentum Score Quality 83% Return On Equity (forecast) 94% 55% Earnings Risk (Variation in Consensus) 75% 81% Quality Score 95% Earnings & Sentiment 85% Earnings Momentum 3mth (risk adjusted) 82% 78% 1 Mth Change in Avg Recom. 81% 88% Net Revisions FY2 EPS 96% Earnings & Sentiment Score 94% 93% 83% COMPOSITE Q-SCORE* (0% To 100%) 90%

15 10 5 0 Up

Dn

10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0

50% 25% 0% 0%

LOW/WEAKER 25%

50% 25% 0% VALUE

PRICE

80 60 40 20 0 -20 -40

6.0 4.0

-1 Mth

FY2

FY1

QUALITY

EARNINGS

Historical Total Return (%)

0.0

FY1

100%

75%

2.0 Unchanged

75%

100% 16.2 0.09 100%

8.0

Dn

50%

INDUSTRY Quant Return Drivers Summary (vs Country)

31.0% 0.12

10.0

Up

Consensus Growth Outlook (%)

75%

EPS Momentum (%)

14 12 10 8 6 4 2 0

Unchanged

HIGH/STRONGER

(Local Currency %)

20

C O U N T R Y

-28.9% 19.0%

EPS Revisions**

Recoms

100%

0.7x 0.9x -10.3%

(%)

25

Targets

Consensus Changes (4wks)

Consensus Changes (4wks)

Targets & Recommendations**

J.P. Morgan Composite Q-Score Raw Value

-3 Mth

57 19

1Mth

-20

-29 1Yr

3Mth

3Yr

FY2 4.4

2.0

-5.0

-7.6 -13.0 -23.9 EPS Actual To FY1

EPS FY1 To FY2

EPS FY2 To FY3

Cash Flow FY1 To FY2

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths) Name Code Industry Regional Banks Canara Bank 532483-IN Bharat Electronics Ltd. Aerospace & Defense 500049-IN United Spirits Ltd. Beverages: Alcoholic 532432-IN Unitech Ltd. Real Estate Development 507878-IN JSW Steel Ltd. Steel 500228-IN Ultratech Cement Ltd. Construction Materials 532538-IN Oracle Financial Services Software Ltd. Financial Publishing/Services 532466-IN Colgate-Palmolive (India) Ltd. Household/Personal Care 500830-IN Divi's Laboratories Ltd. Pharmaceuticals: Other 532488-IN Electrical Products Areva T&D India Ltd. 522275-IN Pharmaceuticals: Generic Lupin Ltd. 500257-IN

Dividends FY1 To FY2

USD MCAP 1,520 1,489 1,437 1,362 1,342 1,331 1,315 1,244 1,191 1,111 1,109

Sales FY1ToFY2

ADV 0.79 0.24 12.75 12.48 2.25 0.22 0.51 0.32 1.34 0.30 0.44

PE FY1 4.2 9.6 23.4 7.4 9.8 7.5 12.1 22.6 15.1 21.7 12.6

Q-Score* 90% 32% 14% 3% 10% 83% 64% 99% 53% 51% 97%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/ Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.' Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation. * The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

54

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Summary of financials: UltraTech Cement Ltd Rs in millions, year-end March Profit and loss statement

Cash flow statement FY08

FY09E

FY10E

FY11E

55,092 12% 17,201 21% 31% 15,827 26% 29% 757 15,070 29% 4,994 33% 10,076 29% 124 80.9 29%

61,775 12% 16,740 -3% 27% 13,965 -12% 23% 1,500 12,465 -17% 3,490 28% 8,975 -11% 124 72.1 -11%

61,116 -1% 16,112 -4% 26% 13,186 -6% 22% 1,020 12,166 -2% 4,015 33% 8,151 -9% 124 65.5 -9%

61,056 0% 14,194 -12% 23% 11,422 -13% 19% 450 10,972 -10% 3,511 32% 7,461 -8% 124 59.9 -8%

FY08

FY09E

FY10E

FY11E

Cash and cash equivalents Accounts receivable Inventories Others Current assets

1,007 2,166 6,098 3,768 13,039

767 2,574 7,722 3,000 14,063

2,070 2,547 7,640 3,000 15,256

6,368 2,544 7,632 3,000 19,544

Investments Net fixed assets Total assets

1,709 47,836 62,584

1,700 58,904 74,667

1,700 57,178 74,133

1,700 54,178 75,422

Revenues % change Y/Y EBITDA % change Y/Y EBITDA margin (%) EBIT % change Y/Y EBIT margin (%) Net interest Earnings before tax % change Y/Y Tax as % of EBT Net income (pre-exceptional) % change Y/Y Shares outstanding EPS (pre-exceptional) % change Y/Y Balance sheet

Liabilities Payables Others Total current liabilities Total debt Other liabilities Total liabilities Shareholders' equity

7,770 5,016 12,786 17,405 5424 35614 26,970

9,000 4,372 13,372 20,000 5424 38796 35,871

9,000 4,372 13,372 12,000 5424 30796 43,337

9,500 4,248 13,748 6,000 5423 25171 50,250

FY08

FY09E

FY10E

FY11E

Net income (pre-exceptional) Depreciation & amortization Change in working capital Cash flow from operations

10,076 2,372 3,141 15,589

8,975 3,375 (1,445) 10,905

8,151 3,726 110 11,987

7,461 3,772 386 11,618

Net capex Free cash flow

(18,066) (2,477)

(14,443) (3,538)

(2,000) 9,987

(772) 10,846

Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Beginning cash Ending cash

(16) 1,619 0 (728) 896 1,007

611 2,595 0 (685) 1,007 767

0 (8,000) 0 (685) 767 2,070

(0) (6,000) 0 (548) 2,070 6,368

Ratio analysis %

FY08

FY09E

FY10E

FY11E

EBITDA margin Operating margin Net profit margin

31% 29% 18%

27% 23% 15%

26% 22% 13%

23% 19% 12%

Sales growth Net profit growth EPS growth

12% 29% 29%

12% -11% -11%

-1% -9% -9%

0% -8% -8%

Interest coverage (x) Net debt to total capital Net debt to equity Sales/assets Assets/equity ROE ROCE

20.9 0.3 0.6 0.9 2.3 45% 29%

9.3 0.3 0.5 0.8 2.1 29% 20%

12.9 0.1 0.2 0.8 1.7 21% 18%

25.4 0.0 0.0 0.8 1.5 16% 15%

Source: Company data, J.P. Morgan estimates.

55

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures •

Client of the Firm: ACC Limited is or was in the past 12 months a client of JPMSI. Ambuja Cements Limited is or was in the past 12 months a client of JPMSI. Grasim Industries Ltd is or was in the past 12 months a client of JPMSI.

ACC Limited (ACC.BO) Price Chart 2,170

Date

Rating Share Price (Rs)

Price Target (Rs)

22-Jan-07

N

1115.80

1220.00

24-Apr-08

N

844.45

920.00

24-Jul-08

N

591.10

650.00

23-Oct-08

N

452.15

520.00

25-Nov-08 N

402.85

450.00

N Rs520 1,860 N Rs650 1,550 N Rs1,220

N Rs920

N Rs450

1,240 Price(Rs) 930 620 310 0 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

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 03, 2004 - May 09, 2005. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Ambuja Cements Limited (ABUJ.BO) Price Chart Date 246 N Rs90

205 OW Rs153

164 Price(Rs)

OW Rs132

N Rs60

123 82 41 0 Apr 06

Jul 06

Oct 06

Jan 07

Apr 07

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 03, 2004 - Sep 21, 2004. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

56

Apr 09

Rating Share Price (Rs)

Price Target (Rs)

26-Aug-07 OW

135.40

153.00

26-Apr-08 OW

114.80

132.00

27-Jul-08

N

81.80

90.00

25-Nov-08 N

56.05

60.00

Asia Pacific Equity Research 16 April 2009

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Grasim Industries Ltd (GRAS.BO) Price Chart Date OW Rs4,368

5,922

OW Rs2,800OW Rs3,520

4,935 3,948

OW Rs1,900

N Rs2,235

OW Rs2,700

N Rs2,800 OW Rs3,057

OW Rs3,470

OW Rs1,350

Price(Rs) 2,961 1,974 987

Rating Share Price (Rs)

Price Target (Rs)

01-May-06 N

2517.10

2235.00

13-Mar-07 N

2014.25

2800.00

14-Mar-07 OW

2053.90

2800.00

04-Jul-07

OW

2702.55

3057.00

30-Jul-07

OW

2946.85

3520.00

28-Oct-07

OW

3805.55

4368.00

04-May-08 OW

2384.10

3470.00

27-Jul-08

OW

1817.20

2700.00

24-Oct-08

OW

1182.00

1900.00

908.40

1350.00

25-Nov-08 OW

0 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

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 03, 2004 - May 09, 2005. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

UltraTech Cement Ltd (ULTC.BO) Price Chart Date

Rating Share Price (Rs)

Price Target (Rs)

20-Jul-08

OW Rs475

1,806

OW Rs600

1,505

OW Rs750

1,204

OW

538.65

750.00

19-Oct-08 OW

375.80

600.00

25-Nov-08 OW

265.40

475.00

Price(Rs) 903 602 301 0 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

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jul 20, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Pinakin Parekh, CFA: ACC Limited (ACC.BO), Ambuja Cements Limited (ABUJ.BO), Cipla Limited (CIPL.BO), Dr Reddy's Limited (REDY.BO), Glenmark Pharmaceuticals Ltd (GLEN.BO), Grasim Industries Ltd (GRAS.BO), Hindalco Industries (HALC.BO), JSW Steel (JSTL.BO), National Aluminium Co Ltd (NALU.BO), Ranbaxy Laboratories Ltd (RANB.BO), Steel Authority of India Ltd (SAIL.BO), Sun Pharmaceutical (SUN.BO), Tata Steel Ltd (TISC.BO), UltraTech Cement Ltd (ULTC.BO) 57

Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2009

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

Overweight (buy) 35% 54% 35% 75%

Neutral (hold) 46% 54% 51% 73%

Underweight (sell) 19% 42% 14% 57%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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Pinakin Parekh, CFA (91-22) 6639 3018 [email protected]

Asia Pacific Equity Research 16 April 2009

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