Cement Sector-nadir Not Yet-190309 (1)

INDIA 19 March 2009

Nadir? Not Yet

Cement Sector

Rajan Kumar [email protected] 91 22 4215 9640

INDIA

Cement

Cement

Initiation

Underweight

19 March 2009 Sector valuations over cycles

Nadir? Not Yet

14

P/BV --ACC VS AMBUJA

12

 Utilization levels to decline on increased capacity: The oversupply situation will lead to a fall utilization levels from 98% in FY08 to 91% in FY09, and further to 80% and 76% in FY10 and FY11, respectively. Incrementally, effective capacity is slated to register 17% CAGR over FY08-FY11 vs demand 8% CAGR.

10 8 6 4 2

ACC

Apr-08

Jul-05

Jun-06

May-07

Aug-04

Oct-02

Sep-03

Nov-01

Nov-00

Jan-99

Dec-99

Feb-98

Apr-96

Mar-97

Jul-93

Jun-94

May-95

Aug-92

0 Aug-91

 Valuations to remain subdued: We expect valuations to remain subdued for at least one year due to oversupply. Initiating coverage on the sector with an Underweight rating, Sell on ACC and India Cements, Reduce on Ambuja Cements Hold on Grasim, Accumulate on UltraTech and Buy on Shree Cements. Easing cement prices and deteriorating return ratios over FY10-11E are likely to keep valuations under pressure.

Ambuja

As on 17 March 2009

One-year indexed performanceCentrum cement universe vs Nifty 140 120 100 80 60 40 20

 Easing cost pressure, efficiency drives insufficient to sustain margins: Commissioning of new CPPs and split grinding units would only partly neutralize higher energy costs despite the easing of international coal prices. We estimate EBIDTA/tonne to decline by 16.5% over FY09-11 to Rs674.  Key risks: Upside risk: Better price and production discipline, lower input costs and favourable government intervention. Downside risk: Breakdown of production and price discipline, increased cost pressure. Rajan Kumar [email protected] 91 22 4215 9640

Company Name

Rating

Mkt Cap Rsbn

CMP Rs

Target Price (Rs)

% Upside /Downside

EV/Ton (USD) FY09E FY10E

FY09

FY10E

Feb-09

Mar-09

Jan-09

Dec-08 Nifty

Al l Indi a Demand Supply Ba lance mn MT

FY07 FY08 FY09E FY10E FY11E

Effective Capacity

162

171

198

249

277

Cement Production

155

168

181

195

210

Consumption Gr. (%)

10.2

9.8

7.6

8

8

Consumption

149

164

177

191

206

Clinker Exports

3

2

2.4

1.9

1.4

Cement Exports

5.9

3.6

3.6

4.1

3.6

Capacity Utilization

96

98

91

78

76

Average Cement Price Assum ption Rs per Bag

Dec-08

FY10E

FY11E

Nor th

227

207

192

East

227

207

192

South

259

234

219

West

232

207

192

All India

235

215

200

ROE (%) FY11E

Nov-08

Oct-08

Sep-08

Aug-08

Jul-08

Jun-08

May-08

Centrum Cement Index

P/BV (x)

FY11E

Apr-08

0 Mar-08

 Sharp correction in cement prices inevitable: Declining utilization levels will likely result in a sharp correction in cement prices in FY10 with the fragmented southern region witnessing the maximum decline. We expect downward pressure across regions in FY11 on higher supplies from new capacities.

FY09E FY10E

ROCE (%) FY11E

FY09E

FY10E

FY11E 9.2

ACC *

Sell

104

555

436

(21.4)

79.9

74.3

75.1

2.1

1.9

1.9

23.6

17.7

9.8

20.9

16.2

Ambuja Cements*

Reduce

102

67

61

(8.9)

95.4

88.5

86.5

1.8

1.6

1.5

21.2

15.7

13.0

19

14.4

12

Grasim Industries

Hold

134

1461

1474

0.9

61.7

54.2

1.2

1.1

1.0

20.8

15.5

11.9

15.2

12.1

9.5

Ultratech Cement

Accumulate

60

480

527

10.0

70.9

66.7

56.9

1.7

1.4

1.2

30.5

22.8

15.4

18.6

15.3

11.5

India Cements

Sell

28

98

83

(14.6)

66.0

57.8

55.3

0.9

0.9

0.8

17.3

13.0

8.5

12.3

9.4

6.8

Shree Cements

Buy

21

603

823

36.6

44.8

40.2

27.9

2.0

1.6

1.4

58.2

25.6

21.1

25.5

14.8

13.4

* Year ending December Source: Bloomberg, Centrum Research

Table of Contents Executive Summary ………………………………………………………………………….………4 Investment Argument ………………………………………………………………………….……6 Downside risk remains despite undemanding valuations…………………………………..6 Oversupply concerns to outweigh compelling long-term demand dynamics……………..8 Sharp correction in cement prices inevitable………………………………………………10 Easing cost pressure and efficiency drives insufficient to sustain current margins……….12

Valuation ……………………………………………………………………………………………15 Key Risk……………………………………………………………………………………..20 Annexure……………………………………………………………………………………21

Companies ACC ………………………………………………………………………………….……...22 Ambuja Cements…………………………………………………………………………...31 Grasim Industries…………………………………………………………….…………….40 UltraTech Cement……………………………………………………………..…………...50 India Cements……………………………………………………………….……………..59 Shree Cements…………………………………………………………………………….68

3

Cement Sector

Executive Summary We initiate coverage on the Indian cement sector with an Underweight rating as oversupply and loss of pricing power would weigh on valuations for at least one year. We have covered six companies (ACC, Ambuja Cements, Grasim Industries, Ultra Tech Cement, India Cements and Shree Cements), which had a combined 50.5% market share in FY08. Between 17 March 2008 and 17 March 2009, our cement index, as measured by the cumulative market capitalization of these six companies, has performed in-line with the S&P CNX Nifty giving a negative return of 40% (the Nifty had a negative 39% return). The meltdown in equities post the sub-prime financial crisis in the US, tightening of FII inflows and hardening interest rates in India coupled with sharp increase in energy cost and expectations that cement prices would decline on new capacity led to this steep correction. Valuations of the stocks under our coverage have come off from a peak of 3.2-6.9x P/BV and EV/tonne of US$154-280 in Oct 2007 to 0.9-1.9x P/BV and US$34-90/tonne as on 17 March 2009. Valuation could see further contraction during FY10 as 95mt of capacity additions over FY09-11 would bring down utilization levels resulting in a sharp drop in cement prices. We estimate 17.5% earnings decline over FY0911 despite correction of energy prices. ROE would contract by 11.1pp from 23.5% in FY09E to 12.4% in FY11E, comparable with FY03 ROE of 10.2% (excluding India Cement and UltraTech). The decline in return ratios coupled with the lack of acquisition triggers is expected to result in the valuations of ACC and Ambuja Cements further contracting to their FY03 average of 1.5x P/BV and at a 10-30% discount to asset replacement cost. We have a Sell rating on ACC and India Cements, Reduce on Ambuja Cements, Hold on Grasim Industries, Accumulate on UltraTech and Buy on Shree Cements.

Oversupply concerns outweigh compelling long-term demand dynamics For India with 1bn plus population and US$3tn economy (in PPP terms, World Bank estimates) on a high-growth trajectory, the long-term demand dynamics for cement remains compelling. Cement demand is a proxy of economic growth and would be supported by the following factors.  Rise in urban population (2.6% CAGR over 2001-2025) to 533mn on migration to cities for better jobs (Source: Planning Commission)  Estimated shortage of 24.7mn dwelling units in urban areas (Source: Planning Commission)  The imperative for building sound physical infrastructure for sustained growth Also supporting our argument of compelling demand dynamics is the fact that only 44% of urban houses and 11.9 % of rural houses are made from concrete roofs (Source: India Census 2001). Further, the government’s thrust of providing affordable houses to the economically and socially weak groups could give a significant boost to cement demand as demonstrated by the experience in states like Andhra Pradesh where an ambitious project for providing houses to lowincome groups coupled with higher spending on infrastructure boosted cement consumption to 25% CAGR over FY05-FY08. Historically, cement demand has grown by about 1.1-1.2x GDP growth (see annexure) and registered 8% CAGR over the last 10 years. We believe higher GDP growth and thrust on infrastructure could translate into a higher cement demand at over 9% CAGR over the next 5 years.

Slowdown in GDP growth to impact demand in near-term However, over FY09-11E demand growth is expected to be subdued on account of the economic slowdown and growth would primarily be a function of counter-cyclical measures to revive infrastructure and realty growth. Centrum Research has forecast GDP growth at 5.5% and 7.5% in FY10 and FY11, respectively. In such a scenario, maintaining an 8% CAGR in cement would be a challenge.

Utilization levels to fall on increased capacity On the supply side, we estimate that cement industry would be adding about 95mt capacity over FY09-11E with the southern region alone accounting for 44mt. We expect utilization levels to decline from 98% during FY08 to 91% in FY09 and further to 80% in FY10 and 76% in FY11. In such a scenario, maintaining production and price discipline would become increasingly difficult with the southern region worst hit. We expect average cement prices to decline by Rs25 per bag in the southern region and by Rs20 in other regions from the current levels of Rs235 at all-India level with a further decline of Rs15 across regions in FY11. On the cost front, easing of international coal prices and sea freight is expected to provide relief to coast-based plants dependent on international coal. However, freight costs would increase marginally as benefits of lower road freights would be offset by 8% hike in rail freight on account of reclassification of cement in December 2008 by Indian railways. 4

Cement Sector

Recent government interventions to provide only temporary relief Over the last three months, the government has reversed most of the measures it had initiated in CY07 to curtail the rise in cement prices. The reduction of excise duty by 4% has given cement companies a cushion of Rs8-10 per bag (Rs4-6 per bag passed on to consumers) and the reimposition of CVD on imported cement prices has brought import of cement from Pakistan to a halt. Besides cement demand would also be supported by counter-cyclical measures aimed at reviving growth. However, government intervention can at best be expected to sustain 8% demand CAGR over FY09-11. Capacity additions being far in excess of demand, we expect that government measures would be able to sustain the prices only temporarily. In this context, we view the recent price hike by the cement companies are only an aberration.

Earnings outlook and valuations-Worsening return ratios to weigh down valuation We estimate companies under our coverage would register a 16.6% decline in earnings over FY0811 with EBIDTA/tonne falling from a peak of Rs1,092 in FY08 to Rs674 in FY11. We expect the overall universe’s ROE to decline from a high of 34.4% in FY08 to 12.4% in FY11E. This would be comparable to the ACC’s ROE of 9% registered during FY03. Grasim and Ambuja Cements (then Gujarat Ambuja) had recorded ROEs of 12% and 14%, respectively, in FY03. Under an overcapacity scenario when cement prices could possibly take a sharp hit and the sensitivity of cement companies’ earnings to prices is very high, we believe P/BV and asset-based (EV/tonne) methodology is more appropriate than earnings-based matrix like P/E multiple or EV/EBIDTA to value the space. Cement companies are trading at about 0.9-2x FY10E P/BV, and US$33-94 on an EV/tonne basis, a 59% discount to 18% premium to FY10E replacement cost of US$75-90/tonne. Though these valuations look reasonable in absolute terms, they are still at premium to the P/BV of 1.43x commanded by Gujarat Ambuja between July 2002 and June 2003. We believe that with ROEs set to decline to their FY03 levels in FY11, valuations should also fall to the levels of FY03. Historically, ACC commanded higher P/BV of 1.9x during FY03 as compared to 1.5x by Gujarat Ambuja on account of acquisition triggers. Now, we believe valuations would be primarily determined by growth in profitability and return ratios. Besides lack of M&A trigger could be drag on valuations. Hence we have an Underweight stance on the sector. Among the covered companies, we believe ACC (Sell) and Ambuja Cements (Reduce) are expensive, while UltraTech (Accumulate) and Grasim (Neutral) are better placed on account of benefits of efficiency enhancement drives and ongoing capacity expansions. Sharp correction in pet coke prices and new revenue stream from merchant power sales would sustain Shree Cement (Buy) robust earning. India Cements’ (Sell) valuation would be under stress over concerns of inevitable oversupply coupled with fragmentation in its key southern India market. Exhibit 1: Valuation Summary EV/Ton (USD)

P/BV (x)

ROE (%)

ROCE (%)

Mkt Cap Rs (Bn)

CMP Rs

Target Price

% Upside /Downside

FY11E

FY09

FY09E

FY10E

FY11E

FY09E

FY10E

FY11E

Sell

104

555

436

(21.4)

79.9

74.3

75.1

2.1

1.9

1.9

23.6

17.7

9.8

20.9

16.2

9.2

Ambuja Cements*

Reduce

102

67

61

(8.9)

95.4

88.5

86.5

1.8

1.6

1.5

21.2

15.7

13.0

19

14.4

12

Grasim Industries

Hold

134

1461

1474

0.9

61.7

54.2

1.2

1.1

1.0

20.8

15.5

11.9

15.2

12.1

9.5

Company Name

Rating

ACC *

FY09E FY10E

FY10E FY11E

Ultratech Cement

Accumulate

60

480

527

10.0

70.9

66.7

56.9

1.7

1.4

1.2

30.5

22.8

15.4

18.6

15.3

11.5

India Cements

Sell

28

98

83

(14.6)

66.0

57.8

55.3

0.9

0.9

0.8

17.3

13.0

8.5

12.3

9.4

6.8

Shree Cements

Buy

21

603

823

36.6

44.8

40.2

27.9

2.0

1.6

1.4

58.2

25.6

21.1

25.5

14.8

13.4

* Year ending December Source: Bloomberg Centrum Research

5

Cement Sector

Investment Argument Downside risks remain despite undemanding valuations We expect valuations of major cement manufacturers to remain under stress over FY09-10E as expectations of a sharp correction in cement prices and deteriorating ROEs would result in the P/BV multiples contracting. We expect valuations to stabilize at about 1.5x FY10E P/BV and at 1030% discounts from current replacement cost of US$75-90/tonne. This means cement stocks are susceptible to further downsides from current levels. Further, the lack of pricing power precludes a trigger for any re-rating of the sector before the end of FY10. Using ACC and Ambuja Cements as proxies for the cement sector, we see the P/BV multiple fell from a peak of 5.2x and 4.2x in Dec 2007 to 1.96x and 1.61x on 17 march 2009. The asset valuations also fell from US$250-300/tonne to US$75-$88/tonne during the same time period. This was in-line with the last two cement cycles of 1994-96 and 2001-02 when valuations contracted sharply following the drop in cement prices as return ratios deteriorated. Going ahead, we expect valuations to track the previous cycles when after correcting sharply from their peaks in 2001-02, stocks traded in a narrow band till the time visibility on improving demand supply balance emerged and brought an expectation of cement price hike and consequent improvement in return ratios.

Exhibit 2: Asset valuations - ACC and Ambuja Cements

EV/Ton($)

600

Exhibit 3: P/BV multiples – ACC and Ambuja Cements (x) 14

Asset Value -ACC Vs Ambuja

500

12

400

10

300

8

P/BV --ACC VS AMBUJA

6

200

4

100

2 Apr-08

May-07

Jul-05

Jun-06

Aug-04

Oct-02

Sep-03

Nov-01

Nov-00

Jan-99

ACC

Dec-99

Feb-98

Apr-96

Mar-97

Jul-93

Jun-94

May-95

$80

Aug-92

Feb-09

Oct-06

Dec-07

Jun-04

Aug-05

Apr-03

Feb-02

$50

0 Aug-91

Ambuja

Nov-00

Jul-98

Sep-99

May-97

Jan-95 ACC

Mar-96

Nov-93

Jul-91

Sep-92

0

Ambuja

Source: Bloomberg, Company, Centrum Research

We believe valuations during FY10E would be impacted by negative news flows, chiefly decline in cement prices as supplies from newly commissioned plants enter the market. We expect ROEs of ACC and Ambuja Cements to decline from their peaks of 34% and 32%, respectively, in CY07 to 17.7% and 15.7% in CY09E, and further to 9.8% and 13% in CY10E. Further, with utilization levels declining, we believe valuations would tests their lows. Any up-tick is likely only on increased utilization levels post FY11. Exhibit 4: ROEs over cycle (%) ROE 45 40 35 30 25 20 15 10 5 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E ACC

Ambuja Cements

Source: Company, Centrum Research

6

Cement Sector

P/BV and EV/tonne a more appropriate valuation methodology In a cyclical downturn, we prefer valuation methodologies like P/BV multiple and asset-based multiple (EV/tonne) against earning-based multiples like P/E and EV/EBIDTA. During a downturn, earnings contract significantly on account of the companies’ high earnings sensitivity to cement prices. The P/BV and EV/tonne multiple gives a better picture to find the bottom of the sector. (Refer Annexure-II Sensitivity of earning to cement price decline.) Replacement cost to decline in-line with commodity cycle In-line with the commodity cycle, the cost of setting up a green-field cement plant increased from US$75-90 in FY06 to US$100-120 in FY08. With commodity prices easing, replacement costs are expected to come down to U$75-90/tonne, which would be reflected in the cement sector’s asset valuations. Strong balance sheets precludes M&A activities Buoyed by robust earnings during FY05-09, cement manufacturers cleaned their balance sheet by paying-off old debts, added new capacity and initiated efficiency enhancement drives like setting up coal-based captive power plants and split grinding units. We expect the sector to have a net debt-equity ratio of 0.1x in FY11 against 0.6x in FY04. We believe strong balance sheets and prospects of reasonable earnings would help the industry tide over the ensuing downturn with relative ease. The flip side is that this would also result in the absence of any significant trigger for M&A activities as smaller cement players would not be desperate to sell. Exhibit 5: Debt-equity ratios to decline Net Debt/Equity FY02

FY04

FY08

FY09E

FY11E

ACC

1.5

0.9

(0.2)

(0.2)

0.2

Ambuja Cements

0.5

0.3

(0.3)

(0.1)

(0.1)

2.0

0.7

0.7

0.3

Shree Cement

1.8

1.4

0.4

0.2

(0.2)

Grasim Industries

0.4

0.1

0.5

0.4

0.2

India Cement

3.2

5.7

0.6

0.5

0.4

Centrum Cement Universe

0.9

0.6

0.2

0.2

0.1

UltraTech Cements

Source: Company, Centrum Estimates

7

Cement Sector

Near-term oversupply concerns outweigh compelling long-term demand dynamics Historically, cement demand has grown at 1.1-1.2x GDP growth and register 8% CAGR over last 10 years (FY1998-2008). We believe that with increased thrust on infrastructure, a 9-10 % CAGR over next 5 years is a distinct possibility. However, in the near-term (FY09-11), demand is expected to be subdued on account the slowdown in the economy as India faces global headwinds. In this scenario, demand growth would be primarily be determined by the efficacy of government’s counter-cyclical measures like increased spending on infrastructure and cheap loans for the housing sector. According to Centrum Research estimates, GDP is expected to grow 5.5% in FY10 and 7.5% in FY11. In such a scenario, an 8% demand CAGR over FY10-11 would be a challenge. Exhibit 6: Cement consumption and GDP growth (Rsbn) 35,000

(Rsbn) 12,000

30,000

10,000

25,000

8,000

20,000 6,000

15,000

4,000

10,000

2,000

5,000 40

60

80

100

FY91

120

140

160

(mn ton) GDP

180 FY08

GFCF

Source: Centrum Research

For India with a 1bn plus population and the 3rd largest economy in PPP terms (World Bank Estimates) in a high-growth phase, long-term demand dynamics remain compelling. India’s cement demand, a proxy of economic growth and urbanization, remains a compelling long term story primarily due to lower per capita consumption (144kg in FY08), as against the 400kg world average and 1,000kg in China. Exhibit 7: Per capita cement consumption in India still low (kg) 1,200

Exhibit 8: Indian cement sector has scope to grow (Mn mt) 1,600

Per Capita Cement Consumption 2008 1014

1,400

1,000

Market Size 1349

1,200

800 549

600

1,000

524

417

405

400

339

305

800

305 143

200

128

600 400

Source: Centrum Research

Africa

India

US

Asia (Ex China)

CIS

World

Americas (Ex US)

Japan

EU

China

-

164

200

115

58

58

58

Japan

Russia

Spain

China

India

USA

Source: Centrum Research

8

Cement Sector

The following reasons make us sanguine that long-term demand dynamics for cement remain intact.  India’s urban population is expected to increase to 533mn by 2025 (2.6% CAGR over 20012025) on back of migration to cities for better jobs and prospects (Source: Report of 11th FiveYear Plan Working Group on Urban Housing, Ministry of Housing & Urban Poverty Alleviation).  There was an estimated shortage of 24.7mn urban housing units at the beginning of 11th Five-Year Plan (Source: Report of 11th Five-Year Plan Working Group on Urban Housing, Ministry of Housing & Urban Poverty Alleviation).  Out of the existing 145mn housing units nationwide, only 44% of urban houses and 11.9 % of rural houses were made with concrete roofs (Source: Census 2001).  In a bid to boost and upgrade infrastructure, the government has more than doubled the allocation for infrastructure to Rs20.7tn during the 11th Five-Year Plan with focus on creating long-term physical infrastructure assets like roads, bridges, ports, irrigation dams, hydroelectric and thermal power and railways. Besides, the shift of building roads on a BOT basis may encourage the creation of RMC roads vs. bitumen-paved roads, as they are costeffective over long term, owing to lower maintenance costs.  Government role in providing affordable houses to the economically and socially weaker groups/low income groups, either through interest subsidies or direct incentives could give a significant boost to cement demand as demonstrated in states like Andhra Pradesh.. Utilization levels to fall on capacity build-up On the supply side, we estimate that the industry would be adding about 95mt of additional capacity over FY09-11 with southern region alone accounting for 45mt. We estimate 17% CAGR in effective available capacity to 277mt over FY08-11. Under our demand growth assumption of 8% CAGR over FY09-11, the capacity utilization would come off from a peak of 98% in FY08 to 92% in FY09 and further to 80% and 76% in FY10E and FY11E. Exhibit 9: Capacity utilisation levels to come down (mn MT)

FY06

FY07

FY08

FY09E

FY10E

FY11E

Capacity at Beginning of year

155

161

168

199

222

276

Operative Capacity

152

158

163

189

215

270

Capacity Addition During the Year

6

7

31

24

54

17

Add On Capacity

2

4

8

8.8

29

7

155

162

171

197

245

277 210

Effective Capacity Cement Production

142

155

168

181

195

Consumption Growth assumption

12.0

10.2

9.8

8.0

8.0

8.0

Consumption

136

149

164

177

191

207

Clinker Exp

3.2

3.1

2.4

2.4

1.9

1.4

Cement Exports

6.0

5.9

3.6

3.6

4.1

3.6

Capacity Utilization (%)

92

96

98

92

80

76

Source: Centrum Research

Besides, of the 95mt capacity added during FY09-11, the top six groups which command a market share of 73% in FY08 would add 57mt (60% of new capacity added).This would bring down consolidation in industry below FY08 level. Exhibit 10: Market shares of cement companies in India (FY08) Market Share All India

Others 27%

Birla 32%

Shree Cement 4% Jaypee Group 4% JK Group 4% India cement 6%

Holc im 23%

Source: CMA

9

Cement Sector

A surplus scenario and fragmentation in the industry would make price understanding among players increasingly difficult. This is especially so in the southern market, which looks most promising at present on account of higher growth and a tightened demand scenario, would get much more fragmented with about 24.8mt (55%) of new capacity being added by smaller players and utilization levels falling to 73% and 71% in FY10 and FY11 respectively from a high of 98% in FY08. Options of increasing blending and better product mix already exhausted Cement manufacturers have been increasing the sale of blended cement over the years by using fly ash and slag, by-products of power plants and steel plants respectively as blending material for producing Portland Pozzolana Cement (PPC) and Portland Blast Furnace Slag Cement (PBFC). The sale of blended cement constituted 75% of the total cement sales in FY08 as against 50% in FY03 and blending ratio (cement production/clinker used) increased from 1.19x to 1.33x. This leaves very little possibility of improving the product mix by increasing blending ratio. In fact, the industry will either reduce the blending ratio on its own to curtail supplies to maintain production and price discipline among players or just see more of OPC supplies coming from new players as they try to establish their foothold (A scenario of pricing pressure coupled with worsening product mix). Though it is difficult to visualize the industry’s manoeuvrability to maintain price discipline through adjusting product mix, we hazard to say that overall trade-off of changing product mix to maintain could at best be neutral. Exhibit 11: Product mix over the years Product Mix FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

Production (Mn Ton)

93.6

102.5

111.4

117.5

127.6

141.8

155.7

168.2

OPC (%)

62.0

56.3

50.3

45.5

43.9

39.4

31.2

25.5

PPC (%)

26.2

31.5

38.7

44.4

47.2

52.2

60.1

66.1

PBFC (%)

11.0

11.6

10.4

9.6

8.4

8.0

8.3

8.1

Others (%) Total (%) Blending Ratio Source: CMA

0.8

0.6

0.5

0.5

0.5

0.4

0.4

0.4

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

1.1

1.2

1.2

1.2

1.2

1.3

1.3

1.3

Exhibit 12: Blending ratio has peaked out Blending ratio

(X) 1.50 1.40

1.30 1.30 1.20

1.17

1.19

1.21

1.23

1.26

1.33

1.13

1.10 1.00 FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

Source: CMA

10

Cement Sector

Sharp correction in cement prices inevitable With new supplies expected to bring down utilization levels to 80% in FY10 and 76% in FY11, we believe a sharp correction in cement prices is inevitable. We expect prices would correct by about Rs21 per bag from Q4FY09 levels. We have assumed an Rs20/bag decline in prices in the eastern, western and northern regions and Rs25/bag decline in the southern region in FY10 (from Q4FY09 levels), with a further decline of Rs15 bag across all regions in FY11. A tight supply scenario had led to significant increase in cement prices from 2006 onwards with the average all-India prices rising from Rs160 in Jan 2006 to Rs239 in Oct 2008. Prices were Rs234 per bag in Jan 2009 post the reduction in excise duty in Dec 2008. The extent of cement price fall would vary across regions and would be determined by the ability of players to effect production and price discipline based on new capacity addition and consolidation level in each zone. In our view, the eastern and western regions are relatively better placed due to lower capacity addition and already high levels of consolidation. The northern region’s consolidation advantage would be partly offset by higher capacity additions. In the southern region, lower consolidation and higher capacity addition would make any price understanding increasingly difficult. Exhibit 13: Cement prices headed south Average Cement Prices (All India)

260 240

Rs/50 Kg Bag

220 200 180 160 140 120 Jul- 09E

Jul- 10E

Aug-08

Sep-07

Oct-06

Nov-05

Dec-04

Jan-04

Feb-03

Mar-02

Apr-01

May-00

Jun-99

Jul-98

Sep-96

Aug-97

Oct-95

Nov-94

Dec-93

Jan-93

100

Source: Industry, Centrum Research

Overview of the four zones Exhibit 14: Demand-supply dynamics by zone North*

Zone

West

East

South

FY06

FY07

FY08 FY09E FY10E FY11E

FY06

FY07

FY08 FY09E FY10E FY11E

FY06

FY07

FY08 FY09E FY10E FY11E

FY06

FY07

FY08 FY09E FY10E

FY11E

Capacity at Beginning of year

53.7

56.1

59.4

74.1

80.5

99.4

29.4

28.9

28.9

31.8

31.8

39.2

23.0

24.2

25.4

30.0

30.9

37.1

49.0

51.4

53.9

62.6

79.0

100.1

Operative Capacity

52.6

55.1

58.3

68.7

77.9

97.3

29.4

28.9

28.9

31.4

30.8

38.2

23.0

24.2

23.5

27.9

29.5

35.7

47.5

49.9

52.4

60.6

77.0

98.6

Capacity Add ition D uring th e Year

2.5

3.3

14.7

6.4

18.9

1.5

(0.4)

-

2.9

-

7.4

9.1

1.3

1.1

4.6

0.9

6.1

1.0

2.4

2.5

8.7

16.4

22.0

5.5

Add On Cap aci ty

0.6

1.9

4.4

1.5

8.4

1.0

(0.4)

-

-

-

4.5

4.5

-

-

1.0

0.8

3.8

0.9

2.0

1.8

2.6

6.5

12.9

0.5

Effective Capacity

53.2

56.9

62.7

70.3

86.3

98.3

28.9

28.9

28.9

31.4

35.3

42.7

23.0

24.2

24.5

28.6

33.3

36.6

49.5

51.6

54.9

67.1

89.9

99.0

Produc tion

52.2

56.1

61.5

66.7

72.1

77.4

27.1

30.0

30.7

30.4

31.2

33.1

20.1

22.1

23.8

26.4

28.6

31.0

45.4

50.2

54.2

60.1

65.4

70.1

Con sumpt ion

47.6

52.3

57.3

61.0

65.9

71.2

25.9

28.3

32.2

34.2

36.9

39.9

22.7

24.0

25.3

27.9

30.1

32.5

39.4

44.8

49.2

54.1

58.4

63.1

Growth assumptio n

6.6

9.8

12.2

6.5

8.0

8.0

5.5

9.1

14.0

6.0

8.0

8.0

11.5

5.9

5.7

10.0

8.0

8.0

24.9

13.8

9.7

10.0

8.0

8.0

Expor ts

1.0

0.8

0.8

0.8

0.8

0.8

6.9

7.8

5.1

5.1

5.1

4.1

0.2

0.1

0.0

0.0

0.0

0.0

1.1

0.3

0.1

0.1

0.1

0.1

Transfer to other Zone

5.4

4.5

4.7

6.2

6.7

6.7

2.1

1.9

1.7

1.7

1.7

1.7

1.2

1.0

1.0

1.0

1.0

1.0

6.0

6.2

6.2

7.2

8.2

8.2

Transfer from ot her Zo ne

1.9

1.5

1.3

1.3

1.3

1.3

7.8

7.9

8.6

10.6

12.6

12.6

4.0

3.0

2.5

2.5

2.5

2.5

1.1

1.2

1.2

1.2

1.2

1.2

Net Transfer From o ther Z one

(3.6)

(3.0)

(3.4)

(4.9)

(5.4)

(5.4)

5.7

6.1

6.9

8.9

10.9

10.9

2.7

2.0

1.5

1.5

1.5

1.5

(4.9)

(5.1)

(5.0)

(6.0)

(7.0)

(7.0)

Capacity Utilization

98.1

98.5

98.2

95.0

83.6

78.7

93.6

103.7

106.0

96.8

88.3

77.5

87.6

91.1

97.4

92.2

86.0

84.8

91.7

97.2

98.6

89.6

72.8

70.8

*Equivalent of North plus Central Regions of CMA Source: Centrum Research

Northern region: The northern region is a structurally strong market with high consolidation. The top 5 players had an 88% market share in FY08. The addition of 26mn new capacity over FY09-11, all by the top 5 players, would keep the northern market fairly consolidated. The region would also benefit from reinstatement of CVD on imported cement as the northern market, especially Punjab, was earlier affected by imports from Pakistan. However, declining utilization level to 83.6% in FY10E and 78.7% in FY11E from a peak of 98.2% in FY08 would lead to softening of prices. 11

Cement Sector

Exhibit 15: Market share of players in the north (FY08) Market Share in North

260

Others 12%

Cement Price-All India Vs North Zone

240 220 Rs/50 kg bags

Holcim 29%

Jaypee Group 10%

200 180 160 140

JK Group 10%

Shree Cement 11%

North

Birla 28%

Jul-08

Nov-08

Mar-08

Jul-07

Nov-07

Mar-07

Jul-06

Nov-06

Mar-06

Jul-05

Nov-05

Mar-05

Jul-04

Nov-04

Mar-04

120

All India

Source: CMA, Centrum Research

Eastern region: The top 4 players command 87% market share. Capacity addition of 8mt over FY09-11 with 6mt by major players would keep the industry fairly consolidated. Utilization levels should stay at about 86% in FY10 and 85% in FY11. Exhibit 16: Market share of players in the east (FY08) Market Share in East

Cement Price-All India Vs East Zone

260

Others 13%

Rs/50 kg bags

240

OCL INDIA 8%

Birla 34%

220 200 180 160 140

Lafarge India 19%

East

Holcim 26%

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

Nov-04

Jul-04

Mar-04

120

All India

Source: CMA, Centrum Research

Western region: The western market has been a fairly consolidated market with top 5 players having a 90% market share in FY08. Capacity additions of 16.5mt over FY 09-11 with 11mt (66%) coming from top 5 players would keep the industry fairly consolidated. Utilisation levels are estimates at 88% in FY10E and 78% in FY11E. However, the slowdown in exports (which constituted 18% of FY08 capacity) and increased supplies from southern region and diversion of exports to domestic markets could disrupt the demand-supply balance and price understanding amongst players. Exhibit 17: Market share of players in the west (FY08) Mar ket Share in West

Sanghi Indus Ltd 5%

Birla 47 %

Rs/50 kg bags

240

JK G roup 4%

Mehata Group 6%

Cement Price-All India Vs West Zone

260

Others 10 %

220 200 180 160 140

West

All India

Holcim 28 %

Source: CMA, Centrum Research

12

Cement Sector

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

Jul-04

Nov-04

Mar-04

120

Southern region: The southern market has been relatively fragmented market with top 4 player commanding 64% market share in FY08. Capacity addition of 45mt during FY09-11 is expected to bring down the capacity utilization to 73% in FY10E and 71% in FY11E from 98% in FY08. Further, 25mt capacity addition (55% of total) by new/smaller players would further fragment the industry putting a sharp pressure on prices. Exhibit 18: Market share of players in the south (FY08) Market Share of South

280

Cement Price-All India Vs South Zone

260 240

Birla, 24.12 Rs/50 kg bags

My Home Indus LTD, 5.29

others, 9.54

Penna Cement, 6.13

Zurai, 7.13

220 200 180 160 140

South

Jul-08

Nov-08

Mar-08

Jul-07

Nov-07

Mar-07

Jul-06

Nov-06

Mar-06

Jul-05

Nov-05

Mar-05

Jul-04

India cement, 18.98

Nov-04

Mar-04

120

Dalmia Cement, 7.32

All India

Holcim, 9.10 Madras Cement, 12.39

Source: CMA, Centrum Research

Efficiency drives, easing cost pressure insufficient to sustain current margins With falling cement prices, we believe savings from easing cost pressure would not be sufficient to sustain current margins. Power and freight costs constitute about 55% of total cost. Cement companies have been undertaking measure to enhance efficiency like commissioning CPPs to control power costs and installing split-grinding units to rationalize freight costs. They would also benefit from the steep fall in international coal and sea freights. We believe that the savings from these measures would be able to partly neutralize the cost push on energy front which are still higher than the FY08 average despite significant the easing of international coal prices. Despite these measures, unit operational cost of production would fall by mere 2.1% CAGR over FY09-11 to Rs2,359 in FY11 against 5.1 % CAGR fall in realization (to Rs3,033) leading to significant 16.5% CAGR reduction in EBIDTA per tonne to Rs674 in FY11E. The major cost element of cement are power & fuel (29%), freight (26.1%) and other expenses (23.9%), which include packing cost, repair and maintenance, and spares and consumables, employee cost (6.4%) and raw materials (limestone, gypsum and blending materials). Exhibit 19: Cost structure of cement industry Operating Expenses/Ton (Rs)

CAGR FY04-08

% Cost (FY08)

646

8.2

29.1

578

15.9

26.1

405

530

7.0

23.9

592

FY04

FY08

Energy Cost

470

Freight

320

Other Expenses Staff Cost

FY11E

CAGR

% Cost (FY11)

806

683

(8.0)

28.9

604

639

2.8

27.1

579

(1.1)

24.5

FY09E

95

142

10.7

6.4

161

155

(2.0)

6.6

209

319

11.2

14.4

299

304

0.8

12.9

Total Op. Cost

1,500

2,215

10.2

100.0

2,463

2,359

(2.1)

100.0

Realization/Ton

1,805

3,307

16.3

3,429

3,033

(5.9)

128.6

306

1,092

37.5

966

674

(16.5)

28.6

Raw Material

EBIDTA/Ton

Source: CMA, Centrum Research

Energy cost: We expect the cost of coal to peak at Rs491/tonne in FY09E and decline by 8.5% CAGR to Rs411 per tonne in FY11E. Increase in prices of domestic linkage coal prices (10% in June 2004 and 10% for Coal India Ltd and 15 % for North Eastern Collieries in Dec 2007) and the sharp rise in international coal prices and sea freight coupled with reduction of fixed price linkage to the sector, resulted in coal cost for the sector rising at 10% CAGR from Rs241 in FY04 to Rs352 in FY 08 and by further 39% in FY09E to Rs491. However, now with international coal easing and freight rates down, we expect the cost of coal to decline at 8.5% CAGR over FY09-11E to Rs400 assuming US$85 CIF for international coal and constant prices of domestic linkage coal.

13

Cement Sector

Exhibit 20: Coal prices and freight rates have declined Price/Ton (USD) 250

Baltic Freight Index

14,000

Newcastle Spot Coal (USD)

12,000 10,000

200

8,000

150

6,000

100

4,000

50

2,000 Jan 09

Sep 08

Jan 08

May 08

Sep 07

Jan 07

May 07

Sep 06

Jan 06

May 06

Sep 05

Jan 05

May 05

Sep 04

Jan 04

Jan 09

Ju 08

Oct 08

Jan 08

Apr 08

Ju 07

Oct 07

Jan 07

Apr 07

Ju 06

Oct 06

Jan 06

Apr 06

Ju 05

Oct 05

May 04

-

0

Source: Centrum Research

Cement manufacturing is a power-intensive business and 1 tonne of cement requires about 85kWh of electricity. Electricity cost per tonne increased 5% CAGR from Rs244 in FY04 to Rs297 in FY08 caused by increase in tariffs (state grid rates increased 4.4% CAGR to Rs3.8 per unit, liquid fuel-based power plant rates surged 18% CAGR to Rs4.5 per unit and that from coal-based captive power plants increased 8.8% CAGR to Rs2.2 per unit). Dependence on state grid for power declined from 48% of total requirement in FY04 to 43% in FY08, while that from coal-based CPPs increased from 32% to 47%. Power sourced from high-cost liquid fuel based CPPs decreased from 19.7% to 9.2%. The cost savings on reduced dependence on grid power and DG sets was neutralized by increased cost of energy (international coal prices rose to Rs0.61/kCal in FY08 from Rs0.35/kCal in FY04.) We believe the commissioning of CPPs and softening fuel prices would lead to an 8.6% CAGR decline in the average cost of power over FY09-11 to Rs256 per tonne in FY11E after peaking at Rs306 per tonne in FY09. We expect power & fuel costs to peak at Rs806 per tonne in FY09. Thereafter, as the benefits of softening energy costs and coal-based CPP starts flowing, we expect the cost to decline 8% CAGR over FY09-11 to Rs683/tonne. The major beneficiaries of falling coal prices would be UltraTech, Grasim Industries, India Cements and Ambuja Cements which are dependent to the extent of 30-70% of their energy requirements on international coal. We have assumed CIF cost of international coal at US$85 per tonne and an exchange rate of Rs51.5/US$1 in FY10 and FY11. Shree Cements would be also benefit as it is completely dependent on pet coke whose prices have fallen over 50% from their peak of Rs8,100/tonne to Rs4,000/tonne at present. Despite softening of international coal prices, coal cost would still be under pressure as CIL is reducing the supplies of fixed-price linkage coal. Linkages were reduced from 100% to 75% of coal requirement. Actual supplies of linkage coal to Industry have come down in absolute term by 14% YoY in 3QFY09. In this scenario the industry would be forced to purchase coal from e- auction or international sources which are far costlier than linkage coal even at US$85 per tonne, Exhibit 21: International coal still costlier than domestic sources Cost (Rs/KCAL) Distance From Port/Pithead (Km) Source

100

500

1,000

Domestic-Linkage(AV of C/D/E/F)

0.30

0.39

0.49

2,000 0.67 Current Cost Structure

Domestic-Non Linkage

0.51

0.60

0.70

0.88 100% premium to Coal

International(CIF $37)

0.30

0.34

0.40

FY04 Average Cost

International(CIF $93)

0.61

0.65

0.71

FY08 Average Cost

International(CIF $85)

0.71

0.76

0.81

FY10 Average cost Assumption

International(CIF $200)

1.51

1.56

1.61

Peak cost

Pet Coke @ 4000/ton

0.494

Current Landed Cost at Shree cement plant

Source: Centrum Research

14

Cement Sector

Logistics costs to stay high: We estimate the average logistic cost/tonne would increase at 2.7% CAGR over FY09-11 to Rs639 in FY11 based on 8% growth in rail freight cost in FY10 and flat road freight cost over FY09-11. During FY04-08 freight costs registered 16% on account of (1) Reporting of sales as freight inclusive instead of ex works after the implementation of VAT in March 2005; (2) The Supreme Court’s verdict against overloading on trucks in November 2005; and (3) Increase in diesel prices. During FY08, the cement sector’s dependence on rail and road was 38% and 62%, respectively. For shorter routes (below 400km) roadways are preferred mode of freight movements as it does not involve secondary transportation while railways become economical for lead distance above 400km. However, in an overcapacity scenario, the average lead distance might increase as companies explore new markets. Besides, despite the recent cut in diesel prices, there has not been any softening in the road freight cost due to pick up in demand for freight and recent reclassification of cement from by railways in December 2008 would lead to a hike of about 8% in rail freight transport in FY10E. Exhibit 22: Average road freight rates firm despite the recent cut in diesel prices 200 180 160 140 120 100 80 60 Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

40

Source: Capitaline

Other expenses to remain under control: Other expenses comprising packing charges (linked to crude price), stores & spares and repair & maintenance registered 7% CAGR over FY04-08. We expect these costs to decline marginally over FY09-11E due to lower crude prices translating into lower cost of packing materials and benefit of possible reduction in maintenance cost due to modernization is offset by some decline in utilization level.

15

Cement Sector

Valuations Valuations have corrected significantly from their peak in Oct 2007 and stocks are available at what we believe is a reasonable P/BV range of 0.9-2.0x and EV/tonne of US$34-94. However, expectations of a sharp correction in cement prices due to oversupply during FY10-11 would keep valuations under further stress. We expect the sector’s valuation to contract to FY03 level, in-line with the decline in overall ROE to 12.4%. We are negative on ACC (Sell) and Ambuja Cements (Reduce) due to expensive valuations. UltraTech Cement (Accumulate) and Grasim (Hold) are better placed on account of benefits of efficiency enhancement drives and ongoing capacity expansions. We believe a sharp correction in pet coke prices and new revenue stream from merchant power sales would sustain Shree Cement’s (Buy) robust earning. India Cements is a Sell as its valuations would be under stress over concerns of inevitable oversupply coupled with fragmentation in its key southern market.

Exhibit 23: ACC – P/BV

ACC – Asset value USD/Ton

(x) 14

250

12

200

$50

$100

$150

$200

A pr-0 8

A pr-07

A pr-0 6

A pr-0 5

Apr -0 4

Apr -0 3

Apr -0 2

Apr -0 1

Ap r-0 0

Apr -9 9

Ap r-9 8

Ap r-9 7

May-08

May-07

Jul-05

Jun-06

Jul-04

Aug-03

Sep-01

Aug-02

Oct-99

Sep-00

Nov-98

Dec-96

Nov-97

Jan-95

Dec-95

Feb-94

Feb-93

Apr-91

Mar-92

A pr-96

0

0

A pr-9 5

2

50 A pr-9 4

4

100

A pr-93

6

150

A pr-92

8

A pr-91

En terp rise valu e

10

ACC

Source: Bloomberg, Centrum Research

Exhibit 24: Ambuja Cement – P/BV

Ambuja Cement – Asset value 600

6.0

500 USD/Ton

(x)

5.0 4.0

400 300

3.0

200

2.0

100

USD50

USD150

Jul-07

Jul-05

Jul-03

Jul-01

Jul-99

Jul-97

Jul-95

Jul-91

Jun-07

May-08

Jul-06

Sep-05

Oct-04

Nov-03

Jan-03

Feb-02

Apr-01

Jun-99

May-00

Aug-98

Oct-96

Sep-97

Dec-95

Jan-95

Apr-93

Feb-94

Jun-91

May-92

0.0

Jul-93

0

1.0

Ambuja cement

Source: Bloomberg, Centrum Research

Exhibit 25:India Cement – P/BV

India Cement – Asset value

(x) 4.5

250

4.0

200

USD/Ton

3.5 3.0 2.5 2.0 1.5

150 100 50

1.0

2X

2.5X

3.5X

India Cement

50x

100x

150x

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-00

India Cement

Apr-00

0

0.5 -

200x

1.5X

Source: Bloomberg, Centrum Research

16

Cement Sector

Exhibit 26: Grasim – P/BV (x)

5 4 3 2 1

Grasim

1.5X

2X

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

0

2.5X

3.5X

Source: Bloomberg, Centrum Research

Exhibit 27: Shree Cement – P/BV

Shree Cement - Asset Value

(x)

20 0 18 0 16 0

10 9 8

USD/Ton

7 6 5 4

EV/Ton Band of Shree Cement

14 0 12 0 10 0 80 60

EV/Ton $

80 x

13 0x

Oct-08

Oct-07

Apr-08

Apr-07

Oct-06

Oct-05

Apr-06

Oct-04

30 x

Apr-05

Oct-03

Apr-04

Oct-02

Oct-08

Oct-07

Apr-08

Apr-07

Oct-06

Oct-05

Apr-06

Apr-05

Oct-04

Apr-04

Oct-03

Oct-02

Apr-03

Apr-02

Oct-01

Apr-01

0

Apr-03

Apr-01

1

Oct-01

2

Apr-02

40 20 0

3

18 0x

Source: Bloomberg, Centrum Research

UltraTech – Asset value

2x

4x

5x

Ultrate ch

50 X

80 X

13 0X

13 0X

18 0

6x

Source: Bloomberg, Centrum Research

17

Cement Sector

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

Apr-07

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

Aug-07

May-07

Feb-07

Nov-06

Aug-06

Feb-06

Ultratech

May-06

Nov-05

Aug-05

Feb-05

May-05

Nov-04

Aug-04

0

Dec-06

1

Aug-06

2

Apr-06

3

Dec-05

4

Aug-05

USD/Ton

5

Apr-05

6

20 0 18 0 16 0 14 0 12 0 10 0 80 60 40 20 0

Dec-04

(x) 7

Aug-04

Exhibit 28:UltraTech – P/BV

ACC: The high sensitivity of ACC’s earnings to cement prices makes is vulnerable in a declining realizations scenario. Besides its old assets make the company a high-cost producer despite the benefits of low-price linkage coal (60% dependence), coal-based CPPs (70%) and optimum product mix leaving very little option of improving its operating cost structure. At CMP, the stock trades at a PE of 11.3x CY09E and 19.3x CY10E, EV/EBIDTA of 5.7x and 8.4x and 1.9x and 1.9x on P/BV. We initiate coverage with a Sell rating and one-year price target of Rs436, valuing the stock at 1.5x CY09 P/BV. Y/E Dec (Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

CY07

58.5

73.1

16.6

28.3

11.3

229.3

60.0

42.7

29.0

3.3

9.2

5.7

CY08

70.7

20.8

19.3

27.3

12.7

12.6

67.5

34.8

29.1

2.5

8.2

4.5

CY09E

77.2

9.2

16.6

21.5

10.7

(15.6)

58.5

23.6

20.9

2.1

9.5

4.9

CY10E

78.3

1.4

16.3

20.8

9.2

(13.9)

49.1

17.7

16.2

1.9

11.3

5.7

CY11E

79.1

1.0

12.4

15.7

5.4

(41.4)

28.8

9.8

9.2

1.9

19.3

8.4

RoE (%) RoCE (%)

P/BV P/E (x) EV/EBITDA (x)

Source: Company, Centrum Research

Ambuja Cements: Though Ambuja Cements would benefit from falling international coal prices (40% dependence) and commissioning of new CPPs, its cost advantage would narrow as other cement manufacturers implements efficiency enhancement measures. At CMP, the stock trades at 1.6x P/BV and US$88.5/tonne on EV/tonne for CY09. Current valuation is still on the higher side of bear care average of 1.5x P/BV. Initiate with Reduce and one-year target price of Rs61. Y/E Dec (Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

CY06* CY07

YoY %

Fully DEPS

RoE (%)

62.7

140.6

21.3

34.0

56.3

(10.2)

20.5

36.3

14.6

212.1

9.6

34.4

24

13.1

(10.2)

8.6

32.2

28.8

CY08

62.3

10.7

17.8

28.5

10.9

(16.6)

7.2

21.2

CY09E

61.9

(0.7)

15.6

25.1

9.4

(14.4)

6.1

CY10E

63.3

2.3

15.3

24.2

8.4

(10.8)

5.5

RoCE (%) P/BV

P/E (x)

EV/EBITDA (x)

2.9

7.0

3.9

2.2

7.8

3.9

19

1.8

9.4

5.0

15.7

14.4

1.6

10.9

6.1

13.0

12

1.5

12.3

6.1

Source: Company, Centrum Research

UltraTech Cements: Ultratech Cements is in process of ramping up its newly commissioned plant at Tadpatri in Andhra Pradesh that would help it boost volumes to offset lower realisations. The company would also benefit significantly from the fall in international coal prices and savings from its CPPs (225MW over FY09-10). At CMP, the stock trades at a PE of 6.6x FY10E and 8.2x FY11E, 1.4x and 1.2x P/BV, 4.4x and 4.5x EV/EBIDTA and US$67 and US$57 per tonne on EV/tonne. We believe this discount to ACC is not warranted given UltraTech’s better operating matrix. Accumulate with a one-year target price of Rs527, valuing the stock at 1.5x P/BV on FY10E. Y/E Mar (Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

FY07

49.7

46.8

14.3

FY08 FY09E FY10E

56.2 62.5 67.2

13.2 11.1 7.5

17.3 17.1 17.2

28.8

7.8

248.7

63.1

55.9

24.2

3.4

7.6

5.3

30.8 27.3 25.5

10.1 9.6 9.1

28.7 (5.1) (5.5)

81.1 77.0 72.7

45.2 30.5 22.8

23.8 18.6 15.3

2.2 1.7 1.4

5.9 6.2 6.6

4.6 4.9 4.4

FY11E

68.1

1.4

15.2

22.4

7.2

(20.0)

58.2

15.4

11.5

1.2

8.2

4.5

Source: Company, Centrum Research

Grasim Industries: Grasim is ramping up its 4.4mt cement capacity at Sambhupura (Rajasthan) and expected to commission another 4.4mt plant in Kotputli in Rajasthan in Q1FY10. The company would also benefit from softening of international coal and pet coke prices (50%) and commissioning of CPPs. However, performance of the VSF division would remain subdued due to global slowdown and competition from substitutes. At CMP, the stock trades at 7.2x FY10E and 8.6x FY11E on P/E, 4.5x and 4.6x EV/EBIDTA, 1.1x and 0.95x P/BV. Initiate with a Hold rating and one-year SOTP-based price target of Rs1,474. Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

FY07

140.7

37.6

39.7

28.2

19.7

89.6

214.6

34.5

21.4

2.0

6.8

4.1

FY08 FY09E FY10E

169.7 178.3 182.8

20.6 5.1 2.5

49.6 43.5 42.0

29.2 24.4 22.9

26.2 21.2 18.5

33.4 (19.3) (12.8)

286.2 231.0 201.5

33.4 20.8 15.5

21.1 15.2 12.1

1.5 1.2 1.1

5.1 6.3 7.2

3.6 4.4 4.5

FY11E

190.6

4.3

37.3

19.6

15.6

(15.8)

169.8

11.9

9.5

1.0

8.6

4.6

Y/E Mar (Rsmn)

Source: Company, Centrum Research

18

Cement Sector

Shree Cements: A key player in the northern market, Shree Cements would benefit from the steep fall in pet coke prices. We believe the judicious capital allocation in CPP would enable it to sustain its earning through sale of merchant power. At CMP, the stock trades at a P/E of 7.1x FY10E and 7.1x FY11E (P/CEPS of 2.6 x and 2.4x), EV/EBIDTA of 2.7x and 1.9x, and P/BV of 1.6x and 1.4x. In asset value terms, the stock trades at US$39 and US$23 per tonne its FY10 and FY11 capacity. With ROCE estimated at 14.48 and 13.4% in FY10E and FY11E and ROE at 25.6% and 21.1%, valuation looks compelling. We initiate coverage with Buy and one-year price target of Rs823, an upside of 36% from current level. At the target price, the stock would be valued at 2.2x P/BV on FY10E and EV/ton of US$55. Y/E Mar(Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

FY07

14.1

102.3

5.9

42.1

1.6

899.6

45.6

42.3

15.2

4.2

13.2

4.4

FY08

21.1

50.1

8.6

40.9

2.9

81.3

82.6

51.1

18.9

3.1

7.3

3.1

FY09E

26.1

23.9

8.8

33.5

5.0

72.7

142.7

58.2

25.5

2.0

4.2

2.4

FY10E

24.1

(7.9)

8.1

33.9

3.0

(40.2)

85.4

25.6

14.8

1.6

7.1

2.7

FY11E

26.0

8.0

8.4

32.2

3.0

(0.3)

85.2

21.1

13.4

1.4

7.1

1.9

Source: Company, Centrum Research

India Cements: India Cement’s key southern market would witness serious price pressure on account huge capacity build up and fragmentation. The company would not be able to reap the full benefits of the decline in international coal prices which would be offset by its foray into shipping. At CMP, the stock trades at a PE of 6.9x FY10E and 9.8x FY11E, 4.4x and 5x on EV/EBIDTA, and 0.9x and 0.8x on P/BV. This is a significant premium to Shree Cements, a comparable peer, which has exposure to the northern market and 100% dependence on captive power and a superior balance sheet. We recommend Sell with a one-year price target of Rs83, valuing the stock at an EV/tonne of US$50/tonne and P/BV of 0.65x on FY10E and assigning a value of Rs 9 /share to its IPL franchise. Y/E Mar(Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

FY07

22.6

FY08

30.4

46.3

7.3

32.6

4.8

791.4

18.4

41.9

20.9

1.8

5.3

5.9

35.0

10.8

35.5

6.5

36.2

23.1

32.4

18.9

1.1

4.2

FY09E

3.7

34.6

13.6

10.4

30.2

4.8

(26.5)

17.0

17.3

12.3

0.9

5.8

4.0

FY10E

34.0

(1.7)

9.3

27.2

4.0

(16.4)

14.2

13.0

9.4

0.9

6.9

4.4

FY11E

34.7

1.9

7.6

22.0

2.8

(29.8)

10.0

8.5

6.8

0.8

9.8

5.0

Source: Company, Centrum Research

Valuation matrix table EV/Ton (USD)

Company Name Rating

Mkt Cap Rs (Bn)

CMP Rs

Target Price

% Upside /Downside

FY09E FY10E

P/BV (x) FY11E

FY09

ROE (%)

FY10E FY11E

FY09E

FY10E

ROCE (%) FY11E

FY09E

FY10E

FY11E 9.2

ACC *

Sell

104

555

436

(21.4)

79.9

74.3

75.1

2.1

1.9

1.9

23.6

17.7

9.8

20.9

16.2

Ambuja Cements*

Reduce

102

67

61

(8.9)

95.4

88.5

86.5

1.8

1.6

1.5

21.2

15.7

13.0

19

14.4

12

Grasim Industries

Hold

134

1461

1474

0.9

61.7

54.2

1.2

1.1

1.0

20.8

15.5

11.9

15.2

12.1

9.5

Ultratech Cement

Accumulate

60

480

527

10.0

70.9

66.7

56.9

1.7

1.4

1.2

30.5

22.8

15.4

18.6

15.3

11.5

India Cements

Sell

28

98

83

(14.6)

66.0

57.8

55.3

0.9

0.9

0.8

17.3

13.0

8.5

12.3

9.4

6.8

Shree Cements

Buy

21

603

823

36.6

44.8

40.2

27.9

2.0

1.6

1.4

58.2

25.6

21.1

25.5

14.8

13.4

* Year ending December Source: Company, Centrum Estimates

19

Cement Sector

Key risks Upside risks 

 

Better-than-expected demand growth would allow cement manufacturers to maintain production and price discipline leading to lower fall in cement prices Further easing of cost pressure Favourable government intervention

Downside risks 

 

20

Early breakdown of production and price discipline due to weak demand or earlier than scheduled commissioning of plants Unanticipated cost pressure Adverse government intervention

Cement Sector

Annexure - I Cement demand grew 8% CAGR over FY98-08 with cement /GDP growth multiple of 1.24 (%)

(x)

GDP Vs Cement Demand Growth

14

3.5

12

3.0

10

2.5

8

2.0

6

1.5

4

1.0

2

0.5 FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY01

FY00

FY99

(2)

FY98

-

(4)

(0.5) (1.0)

GDP Growth

Consumption Growth - Cement

Cement Growth Multiple

Source: CSO, CMA

Annexure - II Sensitivity of earnings To Rs 5/ bag cement price fall EPS (Rs) Company Name

Sensitivity (%)

ROCE (%)

FY10 E

FY11E

FY10

FY11

FY10 E

ACC

Sensitivity (bps)

ROE (%)

FY11E

FY10

FY11

FY10 E

Sensitivity (bp)

FY11E

FY10

FY11

49.1

28.8

11.6

21.6

16.2

9.2

168.6

158.2

17.7

9.8

206.2

210.9

Ambuja Cements

6.1

5.5

10.1

12.5

14.4

12.0

134.2

124.6

15.7

13.0

148.3

135.5

Ultratech Cements

72.7

58.2

11.9

14.7

15.3

11.5

150.1

126.3

22.8

15.4

242.6

180.1

Grasim Industries

201.5

169.8

8.0

10.4

12.1

9.5

98.1

90.6

15.5

11.9

115.2

104.1

India Cements

14.2

10.0

12.8

20.8

9.4

6.8

95.7

101.2

13.0

8.5

156.4

159.5

Shree Cements Source: Centrum Research

85.4

85.2

14.7

15.7

14.8

13.4

165.6

141.0

25.6

21.1

335.7

240.8

21

Cement Sector

INDIA

ACC

Cement

Initiation

Sell Target Price: Rs436 CMP: Rs555* Downside: 22%

19 March 2009

Key Data

Weak construct

Bloomberg Code

*as on 17 March 2009

 Valuations to track operating performance: Historically, ACC has been commanding high valuations despite its subdued performance, primarily on account of acquisition triggers. We expect the market to value ACC purely on its earnings, with Holcim now having close to majority stake.

Reuters Code

 Earnings highly sensitive to cement prices: ACC’s earnings are highly sensitive to cement prices. With prices set to decline, we estimate 29% de-growth y-o-y in earnings over CY08-10 with ROE declining 13.8pp to 9.8%.

Face Value (Rs)

 High-cost structure makes ACC susceptible to worsening product mix: ACC was a high cost producer at Rs2,149/tonne in CY08 vs industry average of Rs1,859/tonne. This exposes the company to further cost pressures in a scenario of worsening product mix.  Little room to contain energy costs: The company’s high dependence on coal-based CPPs (70% of power requirement) and low-cost domestic coal linkages (60%) gives ACC little leeway in controlling energy cost at a time when domestic coal linkages are being reduced.

ACC IN ACC.BO

Current Shares O/S (mn)

187.7

Diluted Shares O/S(mn)

187.7

Mkt Cap (Rsbn/USDbn)

105.6/2.0

52 Wk H / L (Rs)

860/365

Daily Vol. (3M NSE Avg.)

552,694 10

1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Foreign, 10.6

Public & Others, 17.0

Institutions, 23.0

Govt Holding, 0.2 Non Promoter Corp. Hold., 3.0

Promoters, 46.2

As on 31 December 2008

One Year Indexed Stock Performance 140

 Premium valuations not justified: At CMP, ACC trades at 11.3x CY09E and 19.3x CY10E, 5.7x and 8.4x EV/EBIDTA, and 1.9x and 1.9x P/BV. On an asset replacement basis, it is valued at US$74/tonne for CY09E and US$75/tonne for CY10E, which is a substantial premium to UltraTech, a company of same scale and superior earnings.

120 100 80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09

ACC LIMITED

Rajan Kumar [email protected] 91 22 4215 9640

 Sell with target price of Rs436: We initiate coverage with a Sell rating and target price of Rs436 valuing the stock at 1.5x CY09 P/BV. At our target price, the stock would trade at a P/E of 8.9x, EV/EBIDTA of 4.44x and EV/tonne of US$58.

NSE S&P CNX NIFTY INDEX

Price Performance (%)

ACC

1M

6M

1Yr

2.5

(6.2)

(27.8)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Dec (Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

CY07

58.5

73.1

16.6

28.3

11.3

229.3

60.0

42.7

29.0

3.3

9.2

5.7

CY08

70.7

20.8

19.3

27.3

12.7

12.6

67.5

34.8

29.1

2.5

8.2

4.5

CY09E

77.2

9.2

16.6

21.5

10.7

(15.6)

58.5

23.6

20.9

2.1

9.5

4.9

CY10E

78.3

1.4

16.3

20.8

9.2

(13.9)

49.1

17.7

16.2

1.9

11.3

5.7

CY11E 79.1 1.0 Source: Company, Centrum Research

12.4

15.7

5.4

(41.4)

28.8

9.8

9.2

1.9

19.3

8.4

Shareholding pattern (%) Promoters

Q408

Q109

Q209

Q309

43.0

43.0

46.2

46.21

Foreign

15.12

9.13

8.9

9.4

Institutions

20.91

22.39

23.2

23.0

Public & Others

21.0

25.5

21.7

21.4

Total

100

100

100

100

Pan India presence

Company Background ACC is the largest and oldest player in the Indian cement sector with a capacity of 23.2mt and 12% market-share in FY08. It was formed in 1936 with the merger of 10 existing cement companies and was part of the Tata Group until 2000 when the Tatas sold their 14.45% stake to Ambuja Cements. In 2005, ACC became part of Swiss cement major, Holcim, through a structured deal between Holderind Investments, an investment arm of Holcim and Ambuja Cement in which Holderind Investment acquired a two-third stake in Ambuja Cement India, a subsidiary of Ambuja Cement (later raised to 100% with the exercise of a call option to acquire the remaining onethird stake) which in turn acquired a further 20% stake in ACC through an open offer.

Key events/timelines 1936

Established 1n 1936 as a result of merger of 10 existing companies.

2000

Ambuja Cements (then Gujarat Ambuja Cements) acquires 14.5% Tata’s stake through its investment arm Ambuja Cements India Limited (ACIL) valuing the company at US$ 144/ton

2005

ACC became part of Swiss cement major, Holcim, through a structured deal between Holderind Investments, an investment arm of Holcim and Ambuja Cement in which Holderind Investment acquired a two-third stake in ACIL which in turn acquired a further 20% stake in ACC through an open offer.

2006-08

Holcim raises its stake to 46.2 through raising its stake in ACIL from 67% to 100% through exercise of call option and also open market purchases of ACC Shares.

June 2009

Commissioning of 1.12mt brownfield expansion and 30MW CPP at Bargarh in Orissa

Sept 2009

Commissioning of 3mt brownfield expansion and 50MW CPP at Wadi (New) in Karnataka

June 2010

Commissioning of 3mt brownfield expansion and 30MW CPP at Chanda in Maharashtra

Source: Company Source: Company

Key management personnel Name

Position

Mr Sumit Banerjee

Managing Director

Mr Sunil Nayak

Chief Financial Officer

Mr J DattaGupta

Chief Commercial Officer

Source: Company

23

ACC

ACC is a high-cost producer despite high dependence on CPP and domestic coal (CY08/FY09)

Investment Rationale 

With no more acquisition triggers, valuations will now track operating performance

Rs/ton 2,400 2,200

 

ACC’s adverse cost structure makes it susceptible to worsening product mix

Cost of Production- Ex freight 2,149 1,960

2,000

1,859

1,825 1,750

1,800 1,600

The company has little leeway in containing energy costs due to high dependence on CPPs and fixed cost domestic coal

1,449

1,400 1,200 1,000 ACC

Ambuja

Ultratech

Shree

India

Industry AV

Source: Companies, Centrum Research

Summary Financials Y/E Dec (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters (x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton

CY06

CY07

CY08

CY09E

CY10E

58,512

70,674

77,197

78,276

79,084

73.1

20.8

9.2

1.4

1.0

16,554

19,311

16,624

16,292

12,409

180.1

16.7

(13.9)

(2.0)

(23.8)

28.3

27.3

21.5

20.8

15.7

2,610

3,130

3,205

3,559

4,552

792

744

400

550

990

1,573

1,718

2,780

1,551

1,177

14,726

17,156

15,822

13,757

3,939

4,981

5,252

4,540

8,067 2,662

(8.3)

(1.9)

(0.2)

(0.2)

11,270

12,688

10,708

9,217

5,405

229.3

12.6

(15.6)

(13.9)

(41.4)

19.3

18.0

13.9

11.8

6.8

(0.2)

14,112

20,242

17,079

10,421

11,091

(6,724)

(10,504)

(11,773)

(13,031)

(13,800)

(4,273)

(10,571)

(2,985)

(4,947)

2,613

5,162

1,240

2,499

(7,557)

(96)

31,645

41,623

48,242

53,063

54,071

7,832

3,147

4,820

4,820

12,820

79

81

25

25

25

42,820

48,230

56,508

61,328

70,337

35,345

40,384

52,717

62,358

74,606

4,757

7,906

5,169

5,000

2,000

2,708

(74)

(1,390)

(6,044)

(6,283)

42,820

48,230

56,507

61,328

70,337

29.0

29.1

20.9

16.2

9.2

34.4

33.4

23.8

18.3

9.9

42.7

34.8

23.6

17.7

9.8

60.0

67.5

58.5

49.1

28.8

167.4

221.1

262.3

290.7

298.5 0.3

0.3

0.2

0.2

0.2

0.0

(0.2)

(0.1)

0.0

0.2

21.6

26.0

43.4

29.6

12.5

9.2

8.2

9.5

11.3

19.3

3.3

2.5

2.1

1.9

1.9

5.7

4.5

4.9

5.7

8.4

1.8

1.3

1.2

1.3

1.4

127.2

87.6

79.9

74.3

75.1

Sharp profit decline in CY10E

Source: Company, Centrum Research

24

ACC

Investment Argument Acquisition triggers gone, valuations to track operating performance Historically, ACC commanded premium valuations over peers despite its poor earnings matrix primarily on account of the acquisition trigger. However, now with Swiss cement major Holcim having acquired a near majority (46.21%) stake in ACC and also majority stake in Ambuja Cements, the market would value both companies purely on earnings. We believe that given the high sensitivity of its earnings to cement prices, ACC’s earnings and therefore valuations would be impacted in a declining prices scenario. We estimate 27% degrowth in earnings over CY08-10 with ROE declining 13pp to 11% which compares with the 11.6% ROE of FY03. With ROE falling to FY02-03 range of 11-12%, we expect the average P/BV multiple of ACC and Ambuja Cements to contract to 1.5x the average valuation commanded by Ambuja Cements (then Gujarat Ambuja) in FY03. ACC’s valuation during FY03 would not be a right benchmark as acquisition trigger kept valuations at a premium at 1.9x.

Exhibit 1: ACC’s P/BV multiple (during FY0203) was higher …Due to Acquisition trigger (x) 6

Exhibit 2: … despite lower ROEs (%) ROE 45

P/BV --ACC VS AMBUJA

40 35 30 25 20 15 10 5

5 4 3 2 1

ACC

Jan-09

Jun-08

Nov-07

Mar-07

Jan-06

Aug-06

Jun-05

Oct-04

Mar-04

Jan-03

Aug-03

Jun-02

Oct-01

Mar-01

Jan-00

Aug-00

Oct-98

May-99

Mar-98

Jan-97

Aug-97

0

0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08FY09EFY10EFY11E ACC

Ambuja

Ambuja Cements

Source: Company, Centrum Research

High-cost structure makes ACC susceptible to worsening product mix ACC remains a high-cost producer at Rs2,173/tonne in CY08 vs the industry average of Rs1,859/tonne on account of its old plants. This exposes the company to further cost pressures in a scenario of worsening product mix for the industry. ACC already has among the best product mix in the industry with blended cement in the form of PPC/PBFC accounting for 90% of its sales against the industry average of 75%. However with more capacities and thereby competition emerging, the product mix of the industry as well as ACC is bound to shift to lower proportion of blended cements. Exhibit 3: ACC’s cost of production is the highest among peers Rs/ton 2,400 2,200

Cost of Production- Ex freight 2,149 1,960

2,000

1,859

1,825 1,750

1,800 1,600

1,449

1,400 1,200 1,000 ACC

Ambuja

Ultratech

Shree

India

Industry AV

Source: Company, Centrum Research

25

ACC

Little leeway in containing energy costs The company’s high dependence on coal-based CPPs (70% of power requirement) and low-cost domestic coal linkages from Coal India (60%) gives ACC very little leeway in controlling energy costs. This is in contrast to other cement producers which are expected to see a substantial savings in energy cost in FY10 due to commissioning of coal-based CPP across plants (UltraTech and Grasim) or benefit from the fall in international coal/pet coke prices (Ambuja Cements, Shree Cement, UltraTech, Grasim and India Cements). Exhibit 4: ACC’s power and fuel costs to stay high

(Rs/ton) 1,000

Power and Fuel Cost Trend ACC Vs Industry

800 600 400 200 ACC FY08

Ambuja Ultratech Shree India Industry Cements Cement Cements Cements Average FY09

FY10

FY11

Source: Centrum Research

26

ACC

Financial Analysis 29% earnings de-growth over CY08-10E We expect ACC to post flat revenue growth over CY08-10E to Rs77.85bn on back of 7% CAGR in volumes and 6.4% Y-o-Y decline in realizations. We expect 13.6% Y-o-Y decline in operating profit to Rs12.4 bn over CY08-10E and net profit to decline 29% Y-o-Y to Rs5.4 bn over the same period. We expect EBIDTA/tonne to decline 35% from Rs779/tonne in CY08 to Rs506/tonne in CY10 and EBIDTA margin contract 584bp to 15.7%. We have assumed an 8% CAGR in RMC revenue and a PBIT loss of Rs800mn and Rs600mn respectively in CY09E and CY10E, respectively. Exhibit 5: ACC’s operating and net profit to decline sharply CY06

CY07

CY08

CY09E

CY10E

Revenue

58,512

70,674

77,197

78,276

79,084

EBIDTA

16,554

19,311

16,624

16,292

12,409

(Rsmn)

Margin (%) Net Profit

28.3

27.3

21.5

20.8

15.7

11,270

12,688

10,708

9,217

5,405

Source: Company, Centrum Research

Exhibit 6: Operating performance Cement sale (mt) Cement sale (Rsmn) Realization/tonne (Rs) EBIDTA/ton (Rs) RMC Sale (Rsmn) RMC PBIT Margin (%)

CY06

CY07

CY08

CY09E

CY10E

18.8 53,107 2,893 882

20.0 64,001 3,282 964

21.3 70,489 3,405 779

22.5 72,061 3,291 723

24.5 72,791 3,050 507

2,998 27 0.9

3,670 (607) (16.5)

5,493 (918) (16.7)

6,222 (800) (12.9)

6,386 (600) (9.4)

Source: Company, Centrum Research

Strong balance sheet, cash flow to finance ongoing expansion ACC is incurring an Rs30 bn capex over CY08-10 to increase its capacity by 7.2mt to 30.4mt. The expansions would strengthen the company's position in the southern and eastern regions and would be financed by internal accruals and debt leaving the company with a net debt of Rs11.9bn and debt-equity ratio of 0.2 x in CY10E. Exhibit 7: Expansion projects underway Project

Capacity

Time of commissioning

Bargarh Expansion Waddi- New Chanda

1.12mt cement and 30MW power plant 3mt cement and 50MW power plant 3mt cement and 30MW power plant

Mid 2009 2HCY09 Mid 2010

Source: Company

27

ACC

Valuations Valuations have come down significantly from Oct 2007 peaks ACC’s valuations have come down significantly from their peak one-year rolling forward P/BV of 4.92x in Oct 2007 to 2.1x at present. On a one-year rolling forward EV/tonne basis, valuations have plunged from US$275/tonne in Oct 2007 to US$74/tonne on17, March 2009. Exhibit 8: ACC’s valuations down but still higher than UltraTech’s ACC CY09E Capacity (mt) Sale Volume (mt) EBIDTA/Ton (Rs) ROCE (%) ROE (%) P/BV (x) EV/Ton (x) EV/EBIDTA (x) P/E (x)

Ultratech FY10E

CY10E

27.3 22.5 723.2 16.2 17.7 1.9 74.3 5.7 11.3

30.3 24.5 506.6 9.2 9.8 1.9 75.1 8.4 19.3

FY11E

23.1 20.1 851.6 15.3 22.8 1.4 66.7 4.4 6.6

25.1 20.8 732.8 11.5 15.4 1.2 56.9 4.5 8.2

Source: Centrum Research

At 1.9x CY09E P/BV, the stock trades at a significant premium to the average P/BV of 1.5X commanded by Ambuja Cement (then Gujarat Ambuja) in FY02-03. With earnings expected to degrow 29% CAGR over CY08-10, and ROE to dip to 11%, we expect the stock would come under significant pressure. We initiate coverage with a Sell rating and one-year price target of Rs423 valuing the stock at 1.5x CY09 P/BV. At our target price, the stock would trade at P/E of 8.9x CY09E, 4.44x on EV/EBIDTA and US$58 per tonne on EV/tonne. Exhibit 9: P/BV multiple to stay in lower narrow band (x) 14 12 10 8 6 4 2

May-08

May-07

Jul-05

Jun-06

Jul-04

Aug-03

Sep-01

Aug-02

Sep-00

Apr-01

Oct-99

Ap r-00

Nov-98

Nov-97

Dec-96

Jan-95

Dec-95

Feb-94

Feb-93

Apr-91

Mar-92

0

Source: Company, Centrum Research

Exhibit 10: Asset value has declined USD/Ton 250 200 150 100

$50

$100

$150

$200

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-99

Ap r-98

Ap r-97

Apr-96

Apr-95

Apr-94

Apr-93

Apr-92

0

Apr-91

50

ACC

Source: Company, Centrum Research

28

ACC

Key risks Upside risks 

Better production and price discipline in the cement industry could result in higher-thanestimated prices, thereby improving ACC’s earnings and valuations



Government intervention that would boost demand like increased funds for infrastructure, boost to housing tax benefits specific to the sector could result in improved earnings

Downside risks

29



A breakdown of production and price discipline among cement players could impact ACC’s earnings



Supplies from newly-commissioned plants hitting the market ahead our assumed schedule



Any increase in the price of key inputs

ACC

Financials Exhibit 11: Income Statement Y/E Dec (Rsmn) Revenues

CY06

CY10E

Y/E Dec (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC change Working capital adj. Gross cash from op. Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op and EI CF from investing Dec (Inc) in FA Pur (Sale) of Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

70,674

77,197

78,276

79,084

20.8

9.2

1.4

1.0

9,791

11,986

16,118

15,961

17,207

16.7

17.0

20.9

20.4

21.8

8,119

9,379

9,975

11,005

11,995

% of Sales Other Expenses

CY09E

73.1

% of Sales Freight

CY08

58,512

Growth in revenues (%) Power and Fuel

Exhibit 13: Cash flow CY07

13.9

13.3

12.9

14.1

15.2

12,206

15,709

18,469

17,506

19,072

% of Sales

20.9

22.2

23.9

22.4

24.1

16,554

19,311

16,624

16,292

12,409

EBITDA Margin

28.3

27.3

21.5

20.8

15.7

EBIDTA/Ton (Rs)

882

964

779

723

507

2,610

3,130

3,205

3,559

4,552

13,944

16,181

13,419

12,732

7,857

792

744

400

550

990

PBIT from operations

13,152

15,437

13,019

12,182

6,867

Other non op. income

1,573

1,718

2,780

1,551

1,177

PBT bef. extra-ord. items

14,725

17,156

15,799

13,733

8,043

Extra-ord. income/ (exp)

1,609

2,099

425

-

-

16,334

19,254

16,224

13,733

8,043

Provision for tax

3,939

4,981

5,252

4,540

2,662

Effective tax rate

24.1

25.9

32.4

33.1

33.1

12,395

14,273

10,972

9,193

5,381

41.3

(8.3)

(1.9)

(0.2)

(0.2)

Exhibit 14: Key Ratios

9.0

1.8

23.9

23.9

23.9

Y/E Dec

PAT after minority int.

12,363

14,283

10,998

9,218

5,405

Adjusted PAT

11,270

12,688

10,708

9,217

5,405

229.3

12.6

(15.6)

(13.9)

(41.4)

19.3

18.0

13.9

11.8

6.8

EBITDA

Depreciation PBIT Interst expenses

PBT

PAT Minority Interest Sh. of profit in associates

Growth in PAT (%) PAT margin

Source: Company, Centrum Research

Exhibit 12: Balance Sheet Y/E Dec (Rsmn)

CY06

CY07

CY08

CY09E

Share Capital

1,875

1,878

1,878

1,878

1,878

Reserves

29,770

39,744

46,364

51,184

52,193

Shareholders' fund

31,645

41,623

48,242

53,063

54,071

79

81

25

25

25

Debt

7,832

3,147

4,820

4,820

12,820

Deferred Tax Liability

3,264

3,380

3,421

3,421

3,421

Total Cap. Employed

42,820

48,230

56,508

61,328

70,337

Gross Block

49,447

55,923

61,139

84,339

105,139

Accumulated dep.

19,618

21,993

24,536

28,095

32,647

Net Block

29,829

33,931

36,603

56,244

72,492

5,515

6,453

16,114

6,114

2,114

Minority Interest

Capital WIP Total Fixed Assets

CY10E

35,345

40,384

52,717

62,358

74,606

Investments

4,757

7,906

5,169

5,000

2,000

Inventories

6,539

7,417

7,993

8,149

8,233

Debtors

2,290

3,058

3,579

3,646

3,683

Cash & bank balances

6,225

7,464

9,915

2,355

2,259

Loans and Advances

4,486

4,400

5,541

5,541

5,541

Total current assets

19,540

22,340

27,028

19,691

19,717

Current lia & provisions

16,832

22,413

28,418

25,735

26,000

Net current assets

2,708

(74)

(1,390)

(6,044)

(6,283)

Misc. Expenditure

10

14

11

14

14

42,820

48,230

56,507

61,328

70,337

Total Assets

Source: Company, Centrum Research

30

CY06

CY07

CY08

CY09E

CY10E

14,726 2,610 660 17,995 (47) 18,042 3,930 14,112 2,047 16,158

17,156 3,130 578 20,864 (1,299) 22,163 1,921 20,242 2,073 22,315

15,822 3,205 (66) 18,961 (1,311) 20,272 3,193 17,079 178 17,257

13,757 3,559 550 17,866 2,906 14,960 4,540 10,421 10,421

8,067 4,552 990 13,609 (144) 13,753 2,662 11,091 11,091

(5,333) (1,392) (6,724)

(8,319) (2,185) (10,504)

(15,772) 3,999 (11,773)

(13,200) 169 (13,031)

(16,800) 3,000 (13,800)

216 (1,917) (890) (1,681) (4,273) 5,162

40 (4,393) (862) (5,356) (10,571) 1,240

14 1,766 (413) (4,351) (2,985) 2,499

(550) (4,396) (4,947) (7,557)

8,000 (990) (4,396) 2,613 (96)

Source: Company, Centrum Research

Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$)

CY06

CY07

CY08

CY09E

CY10E

28.3 26.5 25.2 19.3

27.3 25.3 24.3 18.0

21.5 21.0 20.5 13.9

20.8 18.2 17.6 11.8

15.7 11.4 10.2 6.8

73.1 180.1 229.3

20.8 16.7 12.6

9.2 (13.9) (15.6)

1.4 (2.0) (13.9)

1.0 (23.8) (41.4)

29.0 34.4 42.7

29.1 33.4 34.8

20.9 23.8 23.6

16.2 18.3 17.7

9.2 9.9 9.8

1.4 (50.1) 13.3 104.3 40.8

1.5 (61.7) 15.8 115.8 38.3

1.3 (79.6) 16.9 134.4 37.8

1.2 (65.0) 17.0 120.0 38.0

1.1 (65.0) 17.0 120.0 38.0

60.0 79.9 167.4 15.0

67.5 92.7 221.1 20.0

58.5 75.6 262.3 20.0

49.1 68.0 290.7 20.0

28.8 53.0 298.5 20.0

0.3 0.0 21.6

0.2 (0.2) 26.0

0.2 (0.1) 43.4

0.2 0.0 29.6

0.3 0.2 12.5

9.2 3.3 5.7 1.8 1.8 -

8.2 2.5 4.5 1.3 1.5 -

9.5 2.1 4.9 1.2 1.3 -

11.3 1.9 5.7 1.3 1.3 74.3

19.3 1.9 8.4 1.4 1.3 75.1

Source: Company, Centrum Research

ACC

INDIA

Ambuja Cements

Cements

Initiation

Reduce Target Price: Rs61 CMP: Rs67* Downside: 9%

19 March 2009 Key Data

Premium drivers dissipating  Acquisition triggers gone, cost advantage narrowing: With Holcim acquiring close to majority stake (45.68%) in Ambuja Cements, we see no more acquisition triggers. Further, with competitors catching up, its cost advantage is expected to narrow with EBIDTA/tonne advantage sliding from Rs212 in FY04 to Rs72 in FY11E.

*as on 17 March 2009

 Valuations at premium to bear-case average: Valuations continue to be on the higher side of bear case average of 1.5x P/BV, despite a significantly fall from a peak of 4.1x P/BV in Oct 2007 to 1.65x currently and EV/tonne of US$304 to US$88.5.

Bloomberg Code

ACEM IN

Reuters Code

ABUJ.BO

Current Shares O/S (mn)

1,522.6

Diluted Shares O/S(mn)

1,522.6

Mkt Cap (Rsbn/USDbn)

105.4/2.0

52 Wk H / L (Rs)

129/43

Daily Vol. (3M NSE Avg.)

17,55,304

Face Value (Rs)

2

1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Public & Others, 9.7

 Expansions to strengthen presence in relatively consolidated market: The company is adding 4.4mt clinker capacity in Himachal Pradesh and Chhattisgarh to enhance presence in the structurally strong northern and eastern markets. It is also adding 5.5mn grinding capacity and CPPs to rationalize freight and power costs and a bulk terminal in Kochi to tap the deficit market in Kerala.

Foreign, 26.6

Promoters, 46.5

Institutions, 15.9 Non Promoter Corp. Hold., 1.4

 Diversified fuel mix, new CPPs to result in lower energy cost: Ambuja Cements will likely benefit from the fall in international coal/pet coke prices and from savings at its new CPPs, thanks to the diversified fuel mix at its kiln and power plants.

As on 31 December 2008

One Year Indexed Stock Performance 140 120 100

 Reduce with target price of Rs61: We believe valuations are expensive at CY09E and CY10E P/E of 10.9x and 12.26x, EV/EBIDTA of 6.1 and 6.1x and EV/tonne of US$88.5 and US$86, respectively. Initiating coverage on the stock with a reduce rating and one-year price target of Rs61, implying a P/BV of 1.5x.

Rajan Kumar [email protected] 91 22 4215 9640

 Key risks: Upside: Higher cement prices on account of better production and price discipline. Downside: Worsening export market and cost push through energy price rally.

80 60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09

AMBUJA CEMENTS L

NSE S&P CNX NIFTY INDEX

Price Performance (%)

Ambuja

1M

6M

1Yr

(3.3)

(14.6)

(43.0)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar(Rsmn)

Rev

CY06*

62.7

140.6

21.3

34.0

14.6

212.1

9.6

34.4

26.4

2.9

7.0

3.9

CY07

56.3

(10.2)

20.5

36.3

13.1

(10.2)

8.6

32.2

33.1

2.2

7.8

3.9

CY08

62.3

10.7

17.8

28.5

10.9

(16.6)

7.2

21.2

24.6

1.8

9.4

5.0

CY09E

61.9

(0.7)

15.6

25.1

9.4

(14.4)

6.1

15.7

17.5

1.6

10.9

6.1

CY10E

63.3

2.3

15.3

24.2

8.4

(10.8)

5.5

13.0

12.6

1.5

12.3

6.1

YoY (%)

Source: Company, Centrum Research

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

Shareholding Pattern (%) Promoter

Q408

Q109

Q209

Q309

46.5

46.5

46.5

46.5

Foreign

23.1

21.2

21.6

22.0

Institutions

13.7

15.8

15.6

15.9

Public & Others Total

16.8

16.5

16.4

15.6

100.0

100.0

100.0

100.0

Strong presence in structurally strong markets

Company Background Ambuja Cements is the fourth largest cement producer in India with a capacity of 18.3mt and had a 10% market share in FY08. It is also the largest exporter of cement from India. Promoted by Seksaria and Neotia families, Ambuja Cement became one of the most efficient cement producers due to its focus on cost control in energy and logistics by creating supporting infrastructure like CPPs, a captive port, ships, bulk terminals and split-grinding units. The company is now part of the Holcim group.

Key events/timeline 1986

Started with 0.7 million mt capacity in Gujarat. India

1997

Enters Eastern Market through acquisition of Modi Cement

2001

Acquires DLF Cements in Rajasthan

2000

Buys14.5% stakes in ACC from Tatas through its investment vehicle ACIL

2005

ACIL restructured as JV with Holcim and increase stake in ACC.

2006

Founder promoters sold part of stake to Holcim and Ambuja Cements becomes Holcim Group Company.

Mid 2009

Clinkerization unit (2.2mt) at Rauri in Himachal Pradesh, grinding unit (1.5mt) in Dadri (UP) , bulk terminal at Cochin and 90MW coal-based plants at Ambuja Nagar, Bhatapara and Maratha cement

2nd half 09

Clinkerization unit (2.2mt) and grinding augmentation (1mt) at Bhatapara

2010

Grinding units at Nalagarh (1.5mt) and Ahmedabad (1.5mt)

Source: Company Source: Company

Key management personnel Name

Position

Mr. A. L. Kapur

Managing Director

David Atkinson

Chief Financial Officer

Mr. A Kapur

Head Marketing and Commercial

Mr. P. B. Kulkarni

Director

Mr. N. P. Ghuwalewala

Director

Mr. B. L. Taparia

Director and Company Secretary

Source: Company

32

Ambuja Cement

Investment Rationale

 

Acquisition trigger gone, narrowing cost advantages to result in lower premium for company’s assets

1400

Operating Performance - Ambuja Cement Vs Industry

1200 1000

Though valuations have come down significantly, they are still on the higher side of a bear-case average of 1.5x P/BV

EBIDTA/TON (Rs)



Cost advantage over peers narrowing

Diversified fuel mix, new CPPs to result in lower energy cost

800 600 400 200 0 FY04 Ambuja Cement

FY08 ACC

Ultratech

FY09E Shree

FY11E

India Cements

Industry Average

Source: Centrum Research

Summary Financials Y/E Dec (Rsmn)

CY06

CY07

CY08

CY09E

CY10E

63,327

Key Income Statement Revenue

62,683

56,314

62,347

61,910

YoY growth (%)

140.6

16.0

10.7

(0.7)

2.3

Operating profit

21,331

20,451

17,779

15,569

15,325

YoY growth (%)

194.6

15.7

(13.1)

(12.4)

(1.6)

34.0

36.3

28.5

25.1

24.2

3,261

2,363

2,598

2,926

4,183 202

Operating margin Depreciation Interest expenses

1132

759

321

202

Other non operating income

1,003

1,935

1,754

931

994

17,941

19,265

16,615

13,372

11,933

3,384

9,433

5,676

4,012

3,580

PAT (adjusted)

14,617

13,122

10,939

9,360

8,353

YoY growth (%)

212.1

(10.2)

(16.6)

(14.4)

(10.8)

23.3

23.3

17.5

15.1

13.2

PBT Provision for tax Minority interest

PAT margin Key CF Statement Cash generated from operations

18,042

15,525

9,662

11,786

12,678

Cash flow from investing activities

(6,327)

(1,629)

(2,749)

(11,544)

(6,273)

Cash flow from financing activities

(8,889)

(11,244)

(4,821)

(4,121)

(4,121)

2,826

2,652

2,093

(3,880)

2,284

34,917

46,613

56,729

62,170

66,604

8,654

3,304

2,887

2,887

2,887

Total Capital Employed

47,410

53,701

63,423

68,864

73,298

Fixed Assets

30,311

34,699

47,535

58,518

61,607

Investments

11,331

12,889

3,324

3,324

3,324

5,690

6,050

12,521

6,979

8,324

47,410

53,701

63,423

68,864

73,298

ROCE

24.0

28.8

19.0

14.4

12.0

ROIC

37.3

54.7

33.1

16.9

12.6

ROE

34.4

32.2

21.2

15.7

13.0

Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest

Net current assets Total Assets Key Ratio

RoE declining to FY03 levels

Per share Ratios (Rs) Fully diluted EPS Cash EPS DPS Book value

9.6

8.6

7.2

6.1

5.5

11.8

10.2

8.9

8.1

8.2

3.4

2.2

2.2

2.2

2.2

23.0

30.6

37.3

40.8

43.7

Solvency Ratio (x) 0.2

0.1

0.1

0.0

0.0

Net Debt-Equity

Debt-equity

(0.2)

(0.3)

(0.2)

(0.1)

(0.1)

Interest coverage ratio

18.8

27.0

55.5

77.0

75.8

P/E (Fully Diluted)

7.0

7.8

9.4

10.9

12.3

P/BV

2.9

2.2

1.8

1.6

1.5

EV/EBITDA

4.3

3.9

5.0

6.1

6.1

EV/Sales

1.5

1.5

1.6

1.6

1.6

114.5

99.8

95.4

88.5

86.5

Valuation parameters(x)

EV/Ton

Source: Company, Centrum Research

33

Ambuja Cement

Investment Argument Acquisition triggers gone, narrowing cost advantages to result in lower premium With Holcim having acquired a near majority stake (45.68%), we believe the lack of acquisition triggers would lead to lowering of premium commanded by Ambuja Cements. Further, the company’s cost advantage over other cement players in terms operating performance (measured by EBIDTA/tonne) has been narrowing. We estimate a decline in the company’s advantage over Industry in EBIDTA/tonne from Rs212 in FY04 to Rs73 in FY11. Gujarat Ambuja is among the most efficient cement manufacturers in India with assets like captive ports, bulk terminals and ships. It was the first company to introduce the concept of bulk transport of cement by sea. It has also pioneered cost-cutting by setting up its own CPPs and split grinding units. This resulted in substantial savings in power & fuel and logistics costs making the company among the lowest-cost cement producers in the country which was the main reason why the stock has commanded a premium over peers. But now with competitors also setting up their own CPPs and split-grinding units, Ambuja Cement’s cost advantages would reduce translating into lower premium of its assets. Exhibit 1: Cost advantage narrowing 1400

Operating Performance - Ambuja Cement Vs Industry

1200 EBIDTA/TON (Rs)

1000 800 600 400 200 0 FY04 Ambuja Cement

FY08 ACC

Ultratech

FY09E Shree

India Cements

FY11E Industry Average

Source: Centrum Research

Valuations still at premium to bear-case average Though valuations have come down significantly from a peak of 4.1x P/BV in Oct 2007 to 1.61x 8 17 March 2009 and from US$304 to US$88 on EV/tonne over the same period, they are still on the higher side of a bear case average of 1.5x P/BV achieved during FY03. With ROE expected to come decline from 32.2% in CY07 to 15.7% and 13% in CY09E and CY10E, respectively, which compares with ROE of 12% and 13% in FY02 and FY03, we expected the P/BV multiple to decline to 1.5x in CY09E (this was the average multiple commanded by Ambuja Cements in FY03).

34

Ambuja Cement

Exhibit 2: Stock still trading above average FY02-03 P/BV of 1.5x 6.0 5.0 4.0 3.0 2.0 1.0

May-08

Jul-06

Jun-07

Oct-04

Sep-05

Jan-03

Nov-03

Apr-01

Feb-02

Jun-99

May-00

Aug-98

Oct-96

Sep-97

Jan-95

Dec-95

Apr-93

Feb-94

May-92

Jun-91

0.0

Source: Centrum Research

Expansion to strengthen presence in relatively consolidated markets The company is adding a total of 4.4mt clinker capacity by end CY09 which along with its associated grinding capacity would take its total capacity to 22.4mt by the end of CY10. It is also setting up a bulk terminal at Kochi (Kerala) to tap the deficit market. Ambuja Cements has a strong presence in relatively consolidated cement markets of northern India, which accounted for 40% of sales in FY08, western region (38%) and eastern region (13%) and derives 7% of its sales from exports. It is India’s largest exporter of cement and commands a 19% of overall cement exports. The two Holcim companies ACC and Ambuja Cements, command a share of 29% 28% and 26% in northern, western and eastern markets, respectively. The company’s expansion in the northern and eastern regions complements ACC’s expansions in the southern and western regions. That way, Holcim would have a uniform presence across country. Ambuja Cements expansion would strengthen its presence in relatively consolidated markets while the bulk terminal at Kochi would allow it access to cement-deficit Kerala market through sea route. Exhibit 3: Expansions to consolidate Holcim’s presence across regions Holcim's share in Indian cement market ACC (%)

Ambuja (%)

Holcim (%)

Market size (mt)

North East South West Exports

16.5 17.0 7.5 8.1 0.0

12 9 1 20 19

29 26 8 28 19

57 25 49 32 6

All India

12

10

22

170

Holcim capacity share (mt) FY09 End % Share In Capacity

ACC

Ambuja

Holcim

Total

23.4

18.2

41.6

215

10.88

8.47

19.35

FY11 End

30.52

22.2

52.72

% Share In Capacity

10.63

7.74

18.37

287

Addition of 3mt each in North, South, East and West Source: Company, Centrum Research

Diversified fuel mix, new CPPs to result in lower energy cost The company’s diversified fuel mix (35% imported coal, 35% domestic linkage coal and 30% others) and benefits of new coal-based CPP would lead to a lower energy cost with power and fuel cost declining 13.6% in CY09 to Rs645/tonne and then rise 2.5% to Rs666/tonne in CY10 on account of higher clinker production post commissioning of new plants . Lower dependence on fixed price domestic linkages makes Ambuja Cements less vulnerable to reduction in fixed price domestic linkages.

35

Ambuja Cement

Financial Analysis Flat revenue growth over CY08-10E We estimate almost flat 0.8% revenue CAGR over CY08-10 to Rs63.2bn as the 7.3% CAGR in cement volumes would be off-set by the 6% y-o-y decline in domestic realizations and 8.5% y-oydecline in export realizations. EBIDTA would decline 7.2% y-o-y to Rs15.32bn over CY08-10E and PAT would decline 12.6% to Rs8.35bn. EBIDTA/tonne would decline 13.5% to Rs751. ROCE and ROE are expected to decline 7.1pp and 8.2pp to 12% and 13%, respectively, in CY10. Exhibit 4: Flat growth in sales, declining profitability CY06 Cement sale (mt)

CY07

CY08

CY09E

CY10E

22.6

16.8

17.7

18.6

20.4

Net Sale (Rsmn)

62,683

56,314

62,347

61,910

63,327

EBIDTA (Rsmn)

21,331

20,451

17,779

15,569

15,325

945

1,221

1,003

838

751

14,617

13,122

10,939

9,360

8,353

EBIDTA/tonne (Rs) PAT Source: Company, Centrum Research

Strong balance sheet and cash-flow to finance on going capex Ambuja Cements is adding 4.4mt clinker unit, 5.5mt grinding capacity, 90MW CPP, a bulk terminal and three ships. The expansions would require a capex of Rs35 bn which would be financed through the internal accruals and income from sale of ACIL’s stake to Holcim. We estimate Ambuja Cement would have a strong balance sheet post these expansions with net cash of Rs3.5bn in CY10.

36

Ambuja Cement

Valuation Sell with target price of Rs61 At CMP of Rs67, the stock trades at 10.9x CY09E and 12.3x CY10E on a P/E basis, EV/EBIDTA of 6.1x CY09E and 6.1x Cy10E , EV/tonne of US$88.4 for CY09E and US$86.4 for CY10E. On a P/BV basis, it trades at 1.61x CY09E and 1.51x CY10E, which is on the higher side of the 1.5x P/BV valuation commanded by the stock during the period of last down cycle in FY02-03. We recommend Reduce with a one-year price target of Rs61, valuing the stock at P/BV of 1.5x. At our target price, the stock would trade at a P/E of 10.14x CY10E, 5.39x FY10E EV/EBIDTA and EV/tonne of US$82 for CY10.

Exhibit 5: P/BV has declined sharply from peak but still higher than bear case Average 1.5X (x) 6.0 5.0 4.0 3.0 2.0 1.0

May-08

Jun-07

Jul-06

Sep-05

Oct-04

Nov-03

Jan-03

Feb-02

Apr-01

May-00

Jun-99

Sep-97

Aug-98

Oct-96

Dec-95

Jan-95

Feb-94

Apr-93

Jun-91

May-92

0.0

Source: Company, Centrum Research

Exhibit 6: Asset value has declined. Stock to trade in lower narrow band

600 USD/Ton

500 400 300 200 100

USD50

USD150

Jul-07

Jul-05

Jul-03

Jul-01

Jul-99

Jul-97

Jul-95

Jul-93

Jul-91

0

Ambuja cement

Source: Company, Centrum Research

37

Ambuja Cement

Key risks Upside risks 

Better production and price discipline could result in higher-than-expected cement prices.



Favourable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks

38



Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Competition’s supplies hitting the market ahead our assumed schedule.



An increase in international coal prices which increase Ambuja Cements’ costs and impact margins



Worsening of exports market (particularly the Middle East) in terms of lower demand and realization getting depressed by new capacity coming up

Ambuja Cement

Financials Exhibit 7: Income Statement Y/E Dec (Rsmn) Revenues

CY06 62,683

Growth in revenues (%) Power and Fuel

12,399

% of Sales Freight

CY09E

CY10E

Y/E Dec (Rs mn)

CY06

CY07

CY08

CY09E

CY10E

63,327

CF from operating Profit before tax Depreciation Interest expenses/other OP profit before WC chg Working capital adj. Gross cash from op. Direct taxes paid Cash from operations

18,416 3,261 825 22,503 463 22,965 (4,449) 18,517

27,124 2,363 (435) 29,052 (1,179) 27,873 (4,489) 23,384

19,698 2,598 (1,015) 21,281 (2,612) 18,670 (5,924) 12,746

13,372 2,926 202 16,500 (702) 15,797 (4,012) 11,786

11,933 4,183 202 16,318 (60) 16,258 (3,580) 12,678

Extraordinary (Inc) Cash From Op Ex OI

(475) 18,042

(7,859) 15,525

(3,083) 9,662

11,786

12,678

CF from investing Capex Investment Cash from investment

(7,564) 1,238 (6,327)

(5,215) 3,586 (1,629)

(16,415) 13,666 (2,749)

(11,544) (11,544)

(6,273) (6,273)

481 (3,402) (1,202) (4,766) (8,889) 2,826

323 (5,253) (483) (5,831) (11,244) 2,652

12 (434) (497) (3,902) (4,821) 2,093

(202) (3,919) (4,121) (3,880)

(202) (3,919) (4,121) 2,284

CY06

CY07

CY08

CY09E

CY10E

34.0 28.8 28.6 23.3

36.3 32.1 34.2 23.3

28.5 24.4 26.6 17.5

25.1 20.4 21.6 15.1

24.2 17.6 18.8 13.2

140.6 194.6 573.3

16.0 15.7 178.8

10.7 (13.1) (39.8)

(0.7) (12.4) (29.3)

2.3 (1.6) (10.8)

24.0

28.8

19.0

14.4

12.0

37.3 34.4

54.7 32.2

33.1 21.2

16.9 15.7

12.6 13.0

2.5 0.5 5.2 40.9 36.1

1.9 (7.1) 9.4 75.8 59.2

2.0 3.8 13.1 86.3 77.0

1.1 3.5 13.5 80.0 70.0

1.1 3.5 13.5 80.0 70.0

9.6 11.8 23.0 3.4

8.6 10.2 30.6 2.2

7.2 8.9 37.3 2.2

6.1 8.1 40.8 2.2

5.5 8.2 43.7 2.2

0.2 (0.2) 18.8

0.1 (0.3) 27.0

0.1 (0.2) 55.5

0.0 (0.1) 77.0

0.0 (0.1) 75.8

7.0 2.9 4.3 1.5 1.6

7.8 2.2 3.9 1.5 1.8

9.4 1.8 5.0 1.6 1.6

10.9 1.6 6.1 1.6 1.7

12.3 1.5 6.1 1.6 1.6

56,314

62,347

61,910

16.0

10.7

(0.7)

2.3

10,042

13,257

11,997

13,596

19.8

17.8

21.3

19.4

21.5

11,175

12,205

14,070

15,299

18.7

19.8

19.6

22.7

24.2

10,972

8,580

10,949

10,961

12,043

% of Sales EBITDA

CY08

11,719

% of Sales Other Expenses

Exhibit 9: Cash flow CY07

17.5

15.2

17.6

17.7

19.0

21,331

20,451

17,779

15,569

15,325

34.0

36.3

28.5

25.1

24.2

EBITDA Margin EBIDTA/Ton (Rs)

945

1,221

1,003

838

751

3,261

2,363

2,598

2,926

4,183

18,070

18,088

15,182

12,643

11,141

1,132

759

321

202

202

PBIT from operations

16,937

17,329

14,861

12,441

10,939

Other non op. income

1,003

1,935

1,754

931

994

PBT bef. extra-ord. items

17,941

19,265

16,615

13,372

11,933

Extra-ord. income/ (exp)

475

7,859

3,083

-

-

Depreciation PBIT Interst expenses

18,416

27,124

19,698

13,372

11,933

Provision for tax

3,384

9,433

5,676

4,012

3,580

Effective tax rate

18.4

34.8

28.8

30.0

30.0

PAT

15,033

17,691

14,023

9,360

8,353

CF from financing Procds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

Adjusted PAT

14,617

13,122

10,939

9,360

8,353

Source: Company, Centrum Research

212.1

(10.2)

(16.6)

(14.4)

(10.8)

23.3

23.3

17.5

15.1

13.2

PBT

Growth in PAT (%) PAT margin

Exhibit 10: Key Ratios

Source: Company, Centrum Research

Y/E Dec

Exhibit 8: Balance Sheet Y/E Dec (Rsmn)

CY06

CY07

CY08

CY09E

Share Capital

3,034

3,045

3,045

3,045

CY10E 3,045

Reserves

31,872

43,564

53,680

59,121

63,555

Shareholders' fund

34,917

46,613

56,729

62,170

66,604

Debt

8,654

3,304

2,887

2,887

2,887

Deferred Tax Liability

3,839

3,784

3,808

3,808

3,808

47,410

53,701

63,423

68,864

73,298

Minority Interest

Total Capital Employed Gross Block

45,425

52,311

57,069

84,086

91,359

Accumulated dep.

20,533

22,712

25,142

28,068

32,251

Net Block

24,892

29,599

31,928

56,018

59,107

5,419

5,100

15,608

2,500

2,500

Total Fixed Assets

30,311

34,699

47,535

58,518

61,607

Investments

11,331

12,889

3,324

3,324

3,324

Inventories

4,088

5,816

9,398

8,887

9,206

950

1,578

2,480

2,524

2,576

Cash & bank balances

3,781

6,426

8,518

4,639

6,923

Loans and Advances

3,887

3,921

6,863

4,499

3,499

Total current assets

12,706

17,741

27,259

20,549

22,204

Current lia & provisions

7,016

11,691

14,738

13,569

13,880

Net current assets

5,690

6,050

12,521

6,979

8,324

Misc. Expenditure

77

62

43

43

43

47,410

53,701

63,423

68,864

73,298

Capital WIP

Debtors

Total Assets

Source: Company, Centrum Research

Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value DPS Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales

Source: Company, Centrum Research

39

Ambuja Cement

INDIA

Grasim Industries

Diversified

Initiation

Hold Target Price: Rs1,474 CMP: Rs1,461* Upside: 1% *as on 17 March 2009

19 March 2009

Key Data

Perfectly priced

Bloomberg Code

 Expansion to consolidate presence in cement sector: Grasim Industries, together with subsidiary UltraTech, is expanding its cement capacity by 13.8mt which would take its total capacity to 48.2mt by FY10E and help it sustain its capacity share of 17.6%, apart from consolidating its position in the northern and southern regions.

Reuters Code

 Efficiency-enhancing measures, backward integration to rationalize costs: The company is setting up CPPs (369MW) across its cement plants, which would reduce its dependence on grid and high-cost DG power. It is also setting up bulk-handling terminals, jetties and splitgrinding units to facilitate access to its markets and rationalize logistics cost.

1 USD = Rs51.5

 Diversified fuel mix to ease cost pressure: We expect cost pressures on the energy front to ease significantly with softening international coal prices. Currently, Grasim depends on diversified fuel, relying on imported coal and pet coke, domestic coal (linkage) and domestic coal (eauctions) and open market purchases in equal proportions.

GRASIM IN GRAS.BO

Current Shares O/S (mn)

91.7

Diluted Shares O/S(mn)

91.7

Mkt Cap (Rsbn/USDbn)

133.9/2.6

52 Wk H / L (Rs)

2,890/824

Daily Vol. (3M NSE Avg.)

269,642

Face Value (Rs)

10

Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Public & Others, 12.4

Foreign, 35.7

Promoters, 25.2

Non Promoter Corp. Hold., 4.4

Institutions, 22.3

As on 31 December 2008

One Year Indexed Stock Performance

 Pain in VSF business to continue: The VSF business remains challenging, as the decline in prices of substitutes (PSF and cotton) exerts pressure on VSF prices.

140

 Fairly valued, Hold: At CMP, the stock trades at 7.2x and 8.6x P/E, 4,5x and 4.6x EV/EBIDTA and 1.06x and 0.98x P/BV for FY10E and FY11E, respectively. We initiate coverage with a Hold rating.

40

120 100 80 60

20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09

GRASIM INDS LTD

NSE S&P CNX NIFTY INDEX

Price Performance (%)

Rajan Kumar [email protected] 91 22 4215 9640

Y/E Mar (Rsmn)

 Key risks: Upside: Higher-than-expected cement prices and improvement in outlook for textiles. Downside: A rally in energy prices.

Grasim

1M

6M

1Yr

10.2

(22.9)

(44.9)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY( %)

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

140.7

37.6

39.7

28.2

19.7

89.6

214.6

34.5

21.4

2.0

6.8

4.1

169.7

20.6

49.6

29.2

26.2

33.4

286.2

33.4

21.1

1.5

5.1

3.6

178.3

5.1

43.5

24.4

21.2

(19.3)

231.0

20.8

15.2

1.2

6.3

4.4

182.8

2.5

42.0

22.9

18.5

(12.8)

201.5

15.5

12.1

1.1

7.2

4.5

190.6 4.3 Source: Company, Centrum Research

37.3

19.6

15.6

(15.8)

169.8

11.9

9.5

1.0

8.6

4.6

FY07 FY08 FY09E FY10E FY11E

Shareholding Pattern (%) Promoter

Q408

Q109

Q209

Q309

25.2

25.2

25.2

25.2

Foreign

22.23

21.17

20.1

20.6

Institutions

20.46

20.99

21.7

22.3

Public & Others Total

32.1

32.7

33.0

31.9

100.0

100.0

100.0

100.0

Pan India presence including subsidiary UltraTech

Company Background Grasim Industries, the flagship of the Aditya Birla Group, is among India's largest private sector companies. Starting as a textiles manufacturer in 1948, today Grasim's businesses comprise viscose staple fibre (VSF), cement, sponge iron, chemicals and textiles. Its core businesses are VSF and cement, which contribute to over 90% of its revenues and operating profits. In order to focus on its cement and VSF business, the company sold off its sponge iron business Vikram Ispat to Welspun Power and Steel. Grasim, along with its subsidiary UltraTech Cements, is consolidating its presence in cement through capacity expansions and efficiency enhancements. In the VSF segment, the company is focusing on backward integration like captive plantations in Laos and has increased its stake in Canadian JVs for reliable sourcing of wood pulp. It is also focusing on product innovation like introduction of specialty fibres and non-woven VSF products to drive sales.

Key events/timeline 1947-1977

Incorporation and expanding presence in textiles and Viscose staple fibre.

1985

Foray in Cement with Vikram Cement Plant at Jawad MP. Expanded in 1987 and 1991.

1992-1996

Diversification into International Business, Software and Sponge Iron.

1999

Demerger of Group Company’s Aditya Birla Nuvo cement and transfer to Grasim Industries .

2000-2002

Divestment/Spinning off of non core biz to focus on Cement, VSF and Sponge Iron.

2004

Acquisition of L & T cement business.

2008

Arrangement with Welspun Power and Steel to sell sponge iron business.

Sep 2008

4.4mt capacity addition at Sambhupura Rajasthan. This plant is under ramp up.

Q2FY10

4.5mt expansion at Kotputli to be commissioned.

Source: Company Source: Company

Key management personnel Name

Position

Mr Kumar Mangalam Birla

Chairman

Mr DD Rathi

CFO

Mr Shailendra K Jain

Director and Business Head (VSF)

Mr Saurabh Misra

Business Head (Cement)

Source: Company

41

Grasim

Investment Rationale

Sum of The Part Valuation



Ongoing expansions to consolidate presence in cement and VSF business

Value

Valuation Parameter

Cement VSF

EV/Ton @US$75/Ton EBIDTA*4

Efficiency enhancing measures and backward integration to rationalize costs

Investments

Idea *1, L&T*1 and AV Nuvo *.7

 

Diversified fuel mix to ease cost pressure



Pain in VSF segment to continue despite softening of input costs

Investments other than equities

Rsbn

Per Share (Rs)

186 18

2,030 200

10

105

11

119

Cash

10.2

111

Total Value of Firm

235

2,565

Less Debt Value of Share Holders Equity inc MI

68 167

745 1,820

31.7 135

346 1,474

Less Minority Interest Value of Share Holders Equity

1.5X Price/Book (Minority Interest)

Value/Share (Rs)

1,474

Summary Financials Y/E March (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Cash EPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales MCAP/Sales

FY07

FY08

FY09E

FY10E

FY11E

140,695 37.6 39,723 92.1 28.2 6,100 2,286 3,177 34,514 10,922 3,915 19,674 89.6 14.0

169,739 20.6 49,598 24.9 29.2 6,703 2,221 4,623 45,296 14,658 4,565 26,237 33.4 15.5

178,349 5.1 43,488 (12.3) 24.4 8,422 3,317 2,500 34,249 8,734 4,333 21,183 (19.3) 11.9

182,813 2.5 41,955 (3.5) 22.9 10,268 3,317 2,500 30,870 8,335 4,058 18,477 (12.8) 10.1

190,604 4.3 37,333 (11.0)

29,638 (35,019) 6,699 1,318

36,972 (42,316) 4,555 (789)

31,031 (24,610) (8,115) (1,694)

35,192 (17,580) (8,653) 8,959

32,445 (5,760) (8,653) 18,033

65,623

91,438

112,181

125,822

136,552

60,256

67,346

67,846

68,346

68,846

8,587

12,760

17,093

21,151

24,317

134,466

171,544

197,119

215,319

229,715

103,165

149,136

171,184

178,496

172,900

22,719

16,607

14,607

14,607

14,607

8,575

5,795

11,329

22,217

42,208

134,467

171,544

197,119

215,319

229,715

21.4 10.2 34.5

21.1 23.5 33.4

15.2 16.5 20.8

12.1 12.7 15.5

9.5 10.2 11.9

214.6 281.1 27.5 715.7

286.2 359.3 33.1 997.3

231.0 322.9 40.0 1,223.5

201.5 313.5 45.0 1,372.3

169.8 293.6 45.0 45.0

0.6 0.3 16.1

0.5 0.3 21.4

0.4 0.3 11.3

0.3 0.2 10.3

0.3 0.3 0.1

6.8 2.0 4.1 1.3 1.0

5.1 1.5 3.6 1.1 0.8

6.3 1.2 4.4 1.1 0.8

7.2 1.1 4.5 1.1 0.7

8.6 1.0 4.6 1.0 0.7

19.6 11,355 3,317 3,000 25,660 6,928 3,167 15,565 (15.8) 8.2

Expansions and cost savings to result in lesser de-growth in operating profit

Source: Company, Centrum Research

42

Grasim

Investment Argument Expansion to consolidate presence in cement sector Grasim, together with subsidiary UltraTech Cements, is expanding its cement capacity by 13.8mt which would take total combined capacity to 48.2mt by FY10E and help it maintain its 17.5% capacity share, apart from consolidating its position in the northern and southern regions. The expansions would be through both green-field and brown-field projects and are expected to enhance the combine’s market share to 20%. The company also is aggressively expanding its ready mix concrete (RMC) capacity by 2.4x to 22.6mn cubic meters. Exhibit 1: AV Birla Group’s share in Indian cement sector Grasim (%) North East South West Exports All India

AV Birla Share In Indian Cement Space (FY08 sales) UltraTech(%) AV Birla (%) Market Size (mt)

13.0 7.1 7.9 9.3 0.0 9.5

0.6 13.2 7.5 21.5 40.7 9.9

13.6 20.3 15.4 30.8 40.7 19.4

57 25 49 32 6 170

AV Birla share in capacity (mt) FY09 End % Share In Capacity

Grasim 20.6 9.6

UltraTech 23.1 10.7

AV Birla 43.7 20.3

All India 215 100.0

FY11 End % Share In Capacity

25.1 8.7

25.1 8.7

50.2 17.5

287 100

Adding 8.9mt in North and 4.9mt in South between FY08 and FY10 Source: Company, Centrum Research

We believe Grasim’s ongoing expansion would enable the company to post a higher-thanaverage volume growth of 12% CAGR over FY09-FY11E on a consolidated basis (16% on standalone basis) vs the industry average of 7.3%, which should help partially offset the expected declined in realizations. Exhibit 2: Expansion to drive volume growth above industry average Indian Cement Industry Vs AV Birla Group FY05 Sales Volume (mt) AV Birla Group

Industry

28.2

Growth (%)

FY06

FY07

FY08

FY09E

29.0

31.6

32.8

34.3

5% CAGR

Market share (%) Sales Volume (mt)

20.58 137

Growth (%)

FY10E

FY11E

40.2

43.2

12% CAGR

20.05 145

19.98 158

19.26 170

18.75 183

7.5% CAGR

20.44 197

20.46 211

7.3% CAGR

Source: Company, Centrum Research

Exhibit 3: Performance of Grasim’s cement division (standalone) Capacity (mt) Sale Volume (mt) Capacity Utilization (%)

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09E

FY10E

FY11E

11.4

12.9

13.1

13.1

13.1

13.1

16.8

21.2

25.7

25.7

9.7

11.2

12.0

12.6

14.0

14.5

15.5

16.5

20.1

22.4

85.1

86.4

91.2

96.3

106.6

110.7

92.4

78.0

78.0

86.9

Average Realization (Rs)

1917

1690

1712

1874

2046

2867

3192

3403

3092

2873

Cement Sale (Rsbn)

20.70

21.84

24.15

27.98

34.26

48.89

58.90

68.31

77.45

81.58

Cement EBIDTA

4.69

3.59

4.47

5.51

8.00

16.23

18.60

18.23

18.33

15.22

EBIDTA/Ton

492

324

378

443

578

1126

1181

1074

914

681

EBIT/Ton

350

198

247

311

455

998

1069

932

716

470

Source: Company, Centrum Research

43

Grasim

Efficiency-enhancing moves, backward integration to cut costs We believe Grasim’s moves to boost efficiency in its cement business and backward integration in the VSF business would help in cutting and rationalizing costs. The company is setting up coalbased CPPs across its cement units with a cumulative capacity of 369MW (225MW by UltraTech) over FY09-10E, that would reduce its dependence on grid and high-cost DG power from 60% of requirement at present to 20% by end FY10. Besides the company is also setting up two bulkhandling terminals, one jetty and split grinding unit to facilitate access to the captive market and rationalize logistics cost. In the VSF segment, Grasim is focusing on backward integration through steps like plantation project in Laos, increasing its stake in Canadian JVs AV Cell to 45% and up-gradation of another Canadian JV’s AV Nackawick’s pulp plant to staple grade pulp to ensure captive sourcing of Staple grade wood pulp. Post conversion of AV Nackawick facility to staple grade facility in Q3FY09, 60% of Grasim’s pulp requirement would be met through captive sources.

Diversified fuel mix to ease cost pressure We believe the cost pressures on energy front would ease significantly with the softening in international coal prices. Currently, Grasim depends on a diversified fuel mix relying on imported coal and pet coke, domestic coal (linkage) and domestic coal (e-auctions) and open market purchases in equal proportions (25% each). With international coal prices and consequently prices of pet coke and domestic coal (e auction) easing, Grasim would see a significant easing of cost pressure on energy front. We estimate Rs145 per tonne savings in power and fuel cost in FY10E.

Pain in VSF business to continue The outlook for the VSF business remains challenging as the decline in prices of substitutes (PSF and cotton) exerts pressure on VSF prices. With cotton prices declining post a good crop and PSF also easing with the correction in crude prices, premium of VSF prices over PSF and Cotton has significantly widened. We believe there would be a shift in preference of cotton over VSF for blending with PSF and shift towards more PSF in poly-viscose yarn putting further pressure on VSF demand. This coupled with the fall in international VSF prices would keep domestic VSF prices under pressure. We have assumed a price of Rs101/ kg for VSF in FY09 and Rs85/kg in FY10 and FY11 while a utilization level of 65% in FY09 and 75% in FY10 on existing capacity of 334,000tpa. Chinese VSF prices have fallen 45% from their peak of 22.2 yuan/kg (about Rs125/kg) during OctDec 2007 to 12.2Yuan/kg (Rs95/kg) in Dec 2008. The Chinese government has also announced an export subsidy of 15% effective from Oct 2008. This brings down the import parity of Rs80/kg. As against this Grasim has reduced domestic VSF price from Rs107 in Oct-Dec 2007 to Rs93/kg in January 2008 on ex factory basis, which is still at a premium of over 13% over Chinese import parity prices. Further, we expect VSF prices in China, the largest producer and consumer of the fibre, to be subdued over CY09-10 on account of huge capacity expansion underway (60% over CY07 capacity of 1.2mt) and higher cotton crop globally on account of higher acreage devoted to the crop. Exhibit 4: Premium of VSF prices over cotton and PSF has widened Rs/Kg

Fiber Price Trends

120 100 80 60 40 20

PSF-1.2 d

VSF Ex-factory (1.5 d)

Aug-

Dec-

Apr-07

Aug-

Dec-

Apr-05

Aug-

Dec-

Apr-03

Aug-

Dec-

Apr-01

Aug-

Dec-

Apr-99

Aug-

Dec-

Apr-97

0

Cotton-S.6

Source: Company, Centrum Research

44

Grasim

Exhibit 5: Performance of VSF division to remain subdued FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09E

FY10E

FY11E

Capacity

220,775

220,775

251,850

253,675

257,325

257,325

334,325

334,325

334,325

334,325

Volume Sold (MT)

181,520

227,900

229,110

231,533

242,399

250,725

269,781

215,825

248,199

268,054

Capacity Utilization

82

103

91

91

94

97

81

65

74

80

13.3

16.4

17.6

19.6

19.1

23.1

30.0

22.4

20.9

22.6

EBIDTA

3.5

5.9

5.7

6.1

5.0

7.1

11.0

4.8

4.6

4.9

Margin

27

36

32

31

26

31

37

21.4

21.9

21.5

Sale Rs bn

Source: Company, Centrum Research

45

Grasim

Financial Analysis Flat sales growth, cement segment to impact EBIDTA growth We expect the company to register 3.4% revenue CAGR over FY09-FY11E led by 7% CAGR in cement revenue and 0.5% CAGR in VSF revenue. Operating profit would decline 7.3% over the same period to Rs37.3bn mainly on account of the 7.1% decline in cement segment’s EBIDTA to Rs30.5bn. The VSF segment would likely register flat 0.7% CAGR to Rs4.86 bn. It should be noted that the FY09 results would not comparable with FY10 and FY11 results as the company sold its sponge iron division in FY09.

Profitability, return ratios to decline However, higher depreciation charges (16% CAGR to Rs11.3bn in FY11E) and 10% CAGR in other income to Rs3bn would result in PBT declining to Rs25.66bn and PAT declining 15.9% to Rs15bn. Lower provisioning of taxes (11% lower) to Rs6.93bn and minority interest (14.3% CAGR degrowth) to Rs15.56. We expect ROCE and ROE would come down by 5.7pp and 8.9pp to 9.5% and 11.9% in FY11E. Exhibit 6: Segmental performance (consolidated) FY05

FY06

FY07

Net sales

92.9

102.2

140.7

169.7

178.3

182.8

190.6

Sales- Cement

54.9

68.5

99.3

116.2

130.8

144.6

149.7

% of total

59.1

67.0

70.6

68.4

73.3

79.1

78.5

Sales-VSF

19.6

19.1

23.1

30.0

22.4

20.9

22.6

% of total

21.1

18.7

16.4

17.7

12.5

11.4

11.9

EBIDTA

20.3

20.7

39.7

49.6

43.5

42.0

37.3

9.0

12.4

29.3

36.0

35.3

35.5

30.5

44.3

60.1

73.8

72.6

81.2

84.6

81.6

6.1

5.0

7.1

11.0

4.8

4.6

4.9

30.1

23.9

17.9

22.1

11.0

10.9

13.0

(Rs bn)

EBIDTA- Cement % of total EBIDTA-VSF % of total

FY08

FY09E

FY10E

FY11E

Source: Company, Centrum Research

46

Grasim

Valuation Valuation at substantial discount to ACC and Ambuja Cements At CMP, the stock trades at a PE of 7.1x FY10Eand 8.5x FY11E, EV/EBIDTA of 4.4x and 4.5x, P/BV of 1.02x and 0.94x. On asset value, the cement assets would be valued at $61.2/tonne of 48.2mt capacity which is at substantial discount to ACC’s valuations of US$76/tonne and Ambuja Cements US$94/tonne. We initiate coverage with a Hold rating and one-year price target of Rs1,482 valuing Grasim cement assets at US$75/tonne. Exhibit 7: SOTP of Grasim Industries Value

Valuation Parameter

Cement

EV/Ton @US$75/Ton

Rsbn

VSF

EBIDTA*4

Investments

Idea *1, L&T*1 and AV Nuvo *.7

186

Per Share (Rs) 2,030

18

Investments other than equities

200

10

105

11

119

Cash

10.2

111

Total Value of Firm

235

2,565

Less Debt Value of Share Holders Equity inc minority interest Less Minority Interest

1.5X Price/Book (Minority Interest)

Value of Share Holders Equity Value/Share Source: Company, Centrum Research

68

745

167

1,820

31.7

346

135

1,474 1,474

Exhibit 8: Price/Book Value (x)

5 4 3 2 1

Grasim

1.5X

2X

2.5X

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

0

3.5X

Source: Company, Centrum Research

47

Grasim

Key Risks Upside risks 

Better production and price discipline leading to higher-than-expected cement prices.



Further favorable government intervention towards demand generation as well as tax benefits specific to the sector.



Upturn in outlook of textile sector leading to revival of VSF demand.

Downside risks

48



Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Competition’s supplies hitting the market ahead our assumed schedule.



Rally in international coal price.



Worsening of Exports market in terms of demand and realization in wake of new capacity coming up.

Grasim

Financials Exhibit 9: Income Statement Y/E Mar (Rsmn) Revenues

FY07

PBT from operations

178,349

182,813

20.6

5.1

2.5

4.3

39,723

49,598

43,488

41,955

37,333

190,604

28.2

29.2

24.4

22.9

19.6

6,100

6,703

8,422

10,268

11,355

33,623

42,895

35,066

31,687

25,977

2,286

2,221

3,317

3,317

3,317

31,337

40,674

31,749

28,370

22,660

Other non op. income PBT bef. extra-ord. items

FY11E

169,739

Depreciation Interst expenses

FY10E

37.6

EBITDA Margin PBIT

FY09E

140,695

Growth in revenues (%) EBITDA

Exhibit 11: Cash flow FY08

3,177

4,623

2,500

2,500

3,000

34,514

45,296

34,249

30,870

25,660

Extra-ord income/ (exp)

-

-

-

-

-

PBT

34,514

45,296

34,249

30,870

25,660

Provision for tax

10,922

14,658

8,734

8,335

6,928

Effective tax rate

31.6

32.4

25.5

27.0

27.0

23,593

30,639

25,516

22,535

18,732

3,915

4,565

4,333

4,058

3,167

PAT Minority Interest PAT after minority int.

19,678

26,073

21,183

18,477

15,565

Adjusted PAT

19,678

26,073

21,183

18,477

15,565

Growth in PAT (%)

14.0

15.5

11.9

10.1

8.2

PAT margin

14.0

15.4

11.9

10.1

8.2

Y/E Mar (Rsmn) CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC change Working capital adjustment Gross cash from op. Direct taxes paid Cash from operations Extraordinary (Inc) Cash From Op & EI CF from investing Capex Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

FY07

FY08

FY09E

FY10E

FY11E

34,514 6,100 712 41,326 (1,132) 40,194 (10,557) 29,638 29,638

45,296 6,703 (382) 51,617 (574) 51,043 (14,072) 36,972 2,980 39,952

34,249 8,422 3,317 45,988 (7,223) 38,765 (7,734) 31,031 9,180 40,211

30,870 10,268 3,317 44,455 (1,928) 42,527 (7,335) 35,192 35,192

25,660 11,355 3,317 40,333 (1,959) 38,374 (5,928) 32,445 32,445

(26,851) (8,168) (35,019)

(51,181) 5,885 (45,296)

(35,790) 2,000 (33,790)

(17,580) (17,580)

(5,760) (5,760)

3,422 11,175 (2,286) (5,612) 6,699 1,318

634 7,201 (3,095) (185) 4,555 (789)

(500) (3,317) (4,298) (8,115) (1,694)

(500) (3,317) (4,836) (8,653) 8,959

(500) (3,317) (4,836) (8,653) 18,033

Source: Company, Centrum Research

Source: Company, Centrum Research

Exhibit 12: Key Ratios Exhibit 10: Balance Sheet

Y/E Mar

Y/E Mar (Rsmn)

Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales

Share Capital

FY07

FY08

FY09E

FY10E

FY11E

917

917

917

917

917

Reserves

64,706

90,462

111,205

124,846

135,576

Shareholders' fund

65,623

91,379

112,121

125,763

136,492

Minority Interest

8,587

12,760

17,093

21,151

24,317

Debt

48,730

55,771

55,271

54,771

54,271

Deferred Tax Liability

11,526

11,575

12,575

13,575

14,575

134,466

171,544

197,119

215,319

229,715

143,718

157,198

200,475

236,265

253,845

Total Cap. Employed Gross Block Accumulated dep.

60,125

63,397

67,319

77,587

88,942

Net Block

83,593

93,801

133,156

158,678

164,902

Capital WIP

19,572

55,335

38,028

19,818

7,998

103,165

149,136

171,184

178,496

172,900

Investments

22,719

16,607

14,607

14,607

14,607

Inventories

13,581

17,443

18,079

18,532

19,321

Debtors

8,252

10,185

11,238

12,521

14,099

Cash & bank balances

3,692

2,903

1,207

10,167

28,199

Loans and Advances

7,479

12,047

13,054

14,054

15,054

Total Fixed Assets

Total current assets

33,004

42,578

43,578

55,273

76,674

Current lia & provisions

24,429

36,783

32,249

33,057

34,465

8,575

5,795

11,329

22,217

42,208

Net current assets Misc. Expenditure Total Assets

134,467

Source: Company, Centrum Research

171,544

197,119

215,319

229,715

FY07

FY08

FY09E

FY10E

FY11E

28.2 26.2 24.5 14.0

29.2 28.0 26.7 15.5

24.4 21.1 19.2 11.9

22.9 18.7 16.9 10.1

19.6 15.2 13.5 8.2

37.6 92.1 89.6

20.6 24.9 33.4

5.1 (12.3) (19.3)

2.5 (3.5) (12.8)

4.3 (11.0) (15.8)

21.4 23.7 34.5

21.1 23.5 33.4

15.2 16.5 20.8

12.1 12.7 15.5

9.5 10.2 11.9

1.0 (7.2) 21.4 63.4 34.7

1.0 (20.2) 21.9 79.1 37.0

0.9 (6.5) 23.0 66.0 36.5

0.8 (4.5) 25.0 66.0 36.5

0.8 (2.5) 27.0 66.0 36.5

214.6 281.1 27.5 715.7

286.2 359.3 33.1 997.3

231.0 322.9 40.0 1,223.5

201.5 313.5 45.0 1,372.3

169.8 293.6 45.0 1,489.3

0.6 0.3 16.1

0.5 0.3 21.4

0.4 0.3 11.3

0.3 0.2 10.3

0.3 0.1 8.7

6.8 2.0 4.1 1.3 1.0

5.1 1.5 3.6 1.1 0.8

6.3 1.2 4.4 1.1 0.8

7.2 1.1 4.5 1.1 0.7

8.6 1.0 4.6 1.0 0.7

Source: Company, Centrum Research

49

Grasim

INDIA

UltraTech Cement

Cement

Initiation

Accumulate Target Price: 527 CMP: 480 Upside: 9.8%

19 March 2009 Key Data

Ensconced safely

Bloomberg Code

 High exposure to consolidated markets to ensure stability in realisations: We believe UltraTech’s high exposure to consolidated markets would ensure stability in realizations and earnings. The company derived cumulatively 60% of sales in FY08 from the consolidated western (40.5%) and eastern (19.6%) markets.

*as on 17 March 2009

 Expansion to boost growth and efficiency: UltraTech is expected to register volume growth from its 4.9mt capex and cost savings from CPPs. It has undertaken a capex of Rs46.2bn (Rs22bn already incurred) over FY08-11 towards boosting capacity and setting up CPPs (225MW) across its plants.

UTCEM IN

Reuters Code

ULTC.BO

Current Shares O/S (mn)

124.5

Diluted Shares O/S(mn)

124.5

Mkt Cap (Rsbn/USDbn)

59.6/1.2

52 Wk H / L (Rs)

885/245

Daily Vol. (3M NSE Avg.)

108,811

Face Value (Rs)

10

1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Foreign, 2.9

Public & Others, 15.7

Institutions, 9.2

 Adequate cashflow to fund capex: We believe its robust cashflows of Rs38bn over FY09-11E would be more than adequate to fund the remaining Rs24.7bn capex through internal accruals. We expect the company’s net debtequity ratio at 0.14x in FY11E.  Softening in international coal prices to result in significant costs savings: With international coal prices softening and more CPPs getting commissioned, we estimate UltraTech’s energy cost per tonne to decline 22% and 5.5% to Rs705 and Rs666, respectively, in FY10E and FY11E.

Non Promoter Corp. Hold., 17.4

Promoters, 54.8

As on 31 December 2008

One Year Indexed Stock Performance 140 120 100 80

 Accumulate at discount valuations: UltraTech trades at a substantial discount to ACC, despite its superior earnings matrix The stock trades at a P/E of 6.6x and 8.2x, P/BV of 1.4x and 1.2x , EV/EBIDTA of 4.4x and 4.5x and EV/tonne of US$66.7 and US$57 for FY10E and FY11E, respectively. We recommend Accumulate with one-year price target of Rs527.

Rajan Kumar [email protected] 91 22 4215 9640

 Key risks: Upside: Higher-than-expected cement prices. Downside: Worsening export market and rally in energy prices.

60 40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09

ULTRATECH CEMENT

NSE S&P CNX NIFTY INDEX

Price Performance (%)

UltraTech

1M

6M

1Yr

16.7

(9.9)

(41.8)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar (Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

FY07

49.7

46.8

14.3

FY08

56.2

13.2

17.3

FY09E

62.5

11.1

17.1

FY10E

67.2

7.5

17.2

25.5

9.1

(5.5)

72.7

22.8

15.3

1.4

6.6

4.4

FY11E

68.1

1.4

15.2

22.4

7.2

(20.0)

58.2

15.4

11.5

1.2

8.2

4.5

Source: Company, Centrum, Reseach

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

28.8

7.8

248.7

63.1

55.9

24.2

3.4

7.6

5.3

30.8

10.1

28.7

81.1

45.2

23.8

2.2

5.9

4.6

27.3

9.6

(5.1)

77.0

30.5

18.6

1.7

6.2

4.9

Shareholding Pattern (%) Promoter Foreign Institutions Public & Others Total

Q408

Q109

Q209

Q309

54.4

54.4

54.4

54.8

6.7

5.8

5.9

2.2

8.8

8.73

8.7

9.2

30.1

31.1

31.1

33.9

100.0

100.0

100.0

100.0

Company Background UltraTech Cements, a 54% subsidiary of Grasim Industries, was created through an arrangement of hiving off of L&T cements business into a separate company and its acquisition by Grasim through stake sale by L&T sales and open offer. UltraTech is India’s second largest cement company after ACC with a capacity of 18.2mt. It is also the largest exporter of cement clinker from India. The company has recently expanded its capacity by 4.9mt in the southern region and putting up coal-based CPPs (225MW) and 35MW waste heat recovery systems at various locations to curtail it power and fuel cost.

High exposure to western and eastern markets

Key events/timelines 2004 Sept 2008

Demerger of L&T Cement Business into separate company, (Cemco) .Grasim acquires majority control purchasing L&T stake and through open offer. 4.9mt cement capacity, 50MW power plant at Tadpatri in Andhta Pradesh with split-grinding unit at Ginigera in Karnataka. These plants are under final stage of commissioning and ramp up

2009

Completion of 175MW CPPs across plants and modernization and upgradation of manufacturing units

2010

Grinding and jetty capacity expansion at Pipavav /Jafrabad and bulk terminal in Mumbai

Source: Company Source: Company

Key management personnel Name

Position

Mr Kumar Mangalam Birla

Chairman

Mr S Misra

Managing Director

Mr K C Birla

Executive President & Chief Financial Officer

Mr S K Maheshwari

Chief Manufacturing Officer

Mr O P Puranmalka

Chief Marketing Officer

Source: Company

51

Ultratech Cement

Significant savings in power & fuel costs

Investment Rationale 

High exposure to consolidated markets to ensure price stability

(Rs per MT) 1000 895

900



Ongoing expansion to enhance growth and boost efficiency



Strong cash flow to finance ongoing capex



Softening international coal prices to result in significant cost savings

800 731 700

705

665

644

666

600 500 400 FY06

Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton

FY08

FY09E

FY10E

FY11E

Source: Company, Centrum Estimates

Summary Financials Y/E Mar (Rsmn)

FY07

FY07

FY08

FY09E

FY10E

FY11E

49,684 46.8 14,316

56,238 13.2 17,308

62,504 11.1 17,080

67,196 7.5 17,157

68,125

149.1

20.9

(1.3)

0.5

(11.1)

28.8

30.8

27.3

25.5

22.4

2,287 868 592 11,753 3,887 17.5 7,849 248.7 15.8

2,396 757 998 15,153 5,038 14.6 10,101 28.7 18.0

3,252 1,420 800 13,208 3,626 9,582 (5.1) 15.3

3,992 1,560 880 12,485 3,431 9,054 (5.5) 13.5

4,497 1,360 1,040 10,433 3,190 7,243 (20.0) 10.6

11,208 (10,466) (406) 335

13,809 (14,419) 769 158

12,079 (13,500) 1,956 535

15,281 (6,690) (6,080) 2,512

13,689 (4,470) (5,880) 3,340

17,682 15,786 53 39,142 32,429 4,592 2,121 39,142

27,026 17,405 57 49,942 48,089 1,467 387 49,942

35,733 21,655 57 63,900 58,336 1,467 4,097 63,900

43,768 18,155 57 69,434 61,034 1,467 6,933 69,434

49,991 14,655 57 73,157 61,008 1,467 10,683 73,157

24.2

23.8

18.6

15.3

11.5

26.6

25.8

19.4

16.1

12.3

55.9

45.2

30.5

22.8

15.4

63.1 142.0

81.1 217.1

77.0 287.0

72.7 351.6

58.2 401.6

0.9 0.8 16.5

0.6 0.6 22.9

0.6 0.6 12.0

0.4 0.3 11.0

0.3 0.1 11.2

7.5 3.3 5.2 1.5

5.9 2.2 4.6 1.4

6.2 1.7 4.9 1.3

6.5 1.4 4.4 1.2

8.2 1.2 4.5 1.1

72.9

69.6

59.3

1.4 15,249

Volume expansion and savings from power to help sustain operating profit

Source: Company, Centrum Research

52

Ultratech Cement

Investment Argument Exposure to consolidated markets to ensure stability in realisations UltraTech’s has high exposure to consolidated markets of the western region (40.5% of sales in FY08) and eastern region (19.6%). The northern region (1.88%), Southern region (21.4%) and exports (16.6%) account for the remaining sales. We believe this high exposure (60% of sales) to structurally strong markets would ensure stability in realizations. Exhibit 1: Western market - A structurally strong market with declining dependence on exports Key statistics of western region Effective Capacity (mt)

28.9

28.9

28.9

31.4

35.3

42.7

Consumption (mt)

25.9

28.3

32.2

34.8

37.6

40.6

6.9

7.8

5.1

5.1

5.1

4.1

26.6

27.6

15.9

14.7

13.6

10.1

Net Transfer From other Zones (mt)

5.7

6.1

6.9

8.9

10.9

10.9

% of consumption

22

21

21

25

29

27

93.6

104

106

99

90

79

Exports (mt) % of consumption

Capacity Utilization (%) Source: Company, Centrum Research

Ongoing expansions to boost growth and efficiency The company’s ongoing cement expansion (4.9mt) and addition of 225MW coal-based CPPs would result in volume growth and boost efficiency. While the expansion of its Tadpatri plant in Andhra Pradesh would allow UltraTech to post a volume growth of 8% over FY09-11, commissioning of new CPPs would increase its dependence on coal-based CPPs from 22% in FY08 to 57% in FY09E and further to 88% and 98%, respectively, in FY10E and FY11E. The company has undertaken an Rs46.2bn capex (Rs22bn already incurred) over FY09-11 towards adding a 4.9mt cement unit to its Tadpatri plant, strengthening the company’s presence in the south and 2mt split-grinding augmentation in western region. The capex would also involve setting-up CPPs (cumulative capacity 225MW), 25MW waste heat recovery systems, expansion of jetties and port terminals and modernizing its RMC plants. Exhibit 2: UltraTech’s expansion projects Projects

Place

Timeline

Status

4.9mt cement capex and 50 MW CPP 175MW CPP

Tadpatri, AP Various Places

Q3FY09 FY08-FY10

2mt split-grinding, jetty expansion and bulk terminals RMC Modernization/Upgradation

Gujarat Various Places Various Places

FY10-11 FY09-10 FY09-11

Commissioned 92MW commissioned at GCW Underway Underway Underway

Source: Company, Centrum Research

The AV Birla Group’s current expansion plans focuses on attaining a balanced presence in all the four zones with UltraTech’s 4.9mt expansions at Tadpatri (southern region) and 2mt augmentation of grinding capacity (western) complementing Grasim’s 8.9mt expansion in the northern region. Exhibit 3: AV Birla Group’s share in Indian cement sector UltraTech (%) 1 13 8 22 41 10

AV Birla (%) 14 20 15 31 41 19.4

Market size (mtpa)) 57 25 49 32 6 170

Grasim Ultratech FY09 End 20.6 23.1 % Share In Capacity 9.6 10.7 FY11 End 25.1 25.1 % Share In Capacity 8.75 8.75 Adding 8.9mt in North and 4.9mt in South between FY08 and FY10 Source: Company, Centrum Research

AV Birla 43.7 20.3 50.2 17.49

All India 215 100.0 287 100

North East South West Exports All India

Grasim (%) 13 7 8 9 0 9

AV Birla Group’s share in capacity

53

Ultratech Cement

Strong cash flow to finance ongoing capex We estimate robust cash-flows of Rs38bn over FY09-11 would allow the company to finance the remaining Rs24.7bn capex through internal accruals. The company’s debt-equity ratio is expected to rise from 0.16x at present to 0.3x in FY11E with the company’s net debt-equity ratio at 0.14x in FY11E.

Softening in international coal prices to result in significant costs savings With international coal prices softening and lower power costs from CPPs, we estimate UltraTech’s energy cost per tonne would decline 22% YoY in FY10E to Rs705 and 5.5% YoY to Rs666 in FY11E. The CPPs would allow the company to lower its dependence on high-cost grid power. The company would also significantly benefit from the recent softening in international coal/pet coke prices on account of its diversified fuel mix as it uses equal proportions of imported international coal/ pet coke, linkage coal from Coal India (CIL) and coal sourced through e-auctions in equal proportions. International coal prices have declined from a peak of US$200 in July 2008 to US$61. We have assumed CIF prices of coal at US$85 per tonne in FY10E and FY11E and exchange rate of Rs51.5/US$. We estimate savings of Rs228/tonne in energy cost over FY09-11 would offset the decline of average realization to a great extent resulting in an EBIDTA per tonne of Rs851 and Rs732 in FY10E and FY11E, respectively, against FY09E EBIDTA/tonne of Rs961.

54

Ultratech Cement

Financial Analysis 4.4% sales CAGR over FY09-11E, but profitability to decline Despite the 7.1% decline in average realizations over CY09-11E, we believe the 8.1% volume CAGR to 20.8mt would lead to 4.4% sales CAGR to Rs68.1bn. However, operating profit and net profit would decline by 5.5% to Rs15.2bn and 13.1% to Rs7.2bn. EBIDTA would decline 5.5% to Rs15.2bn on 6.6% decline in energy cost and 11.2% rise in logistics costs and 10% increase in other expenses. Higher depreciation (up 17.5% to Rs4.5bn) offset by other income (14% CAGR to Rs1.04bn) and lower tax (down 6.2%) would result in PAT declining 13%. Exhibit 4: UltraTech’s operating performance FY07 Cement volume (mt) Average Realization (Rs /MT) YoY (%)

FY09E

FY10E

FY11E

17.1

17.2

17.8

20.1

20.8

2,887

3,161

3,365

3,064

2,908

28.2

9.5

6.5

(8.9)

(5.1)

49,684

56,238

62,504

67,196

68,125

YoY (%)

46.8

13.2

11.1

7.5

1.4

Energy/ton (Rs)

665

731

895

705

666

3.3

9.9

22.4

(21.2)

(5.5)

519

542

593

614

634

0.2

4.4

9.4

3.5

3.3

335

441

534

587

606

Net Sales (Rs mn)

YoY (%) Freight/ton (Rs) YoY (%) Other Expenses/ton (Rs) YoY (%)

4.1

31.8

20.9

10.0

3.2

14,316

17,308

17,080

17,157

15,249

301.9

20.9

(1.3)

0.5

(11.1)

837

1,004

961

852

733

yoy (%)

301.9

20.0

(4.3)

(11.4)

(14.0)

Depreciation (Rs mn)

2,287

2,396

3,252

3,992

4,497

134

139

183

198

216 10,753

EBIDTA (Rs mn) YoY (%) EBIDTA/tonne (Rs)

Depreciation/Ton (Rs) PBIT (Rs mn)

12,030

14,912

13,828

13,165

PBIT/Ton (Rs)

703

865

778

653

517

Interest (Rs mn)

868

757

1,420

1,560

1,360

OI (Rs mn)

55

FY08

592

998

800

880

1,040

PBT (Rs mn)

11,753

15,153

13,208

12,485

10,433

Tax (Rs mn)

3,887

5,038

3,626

3,431

3,190

PAT (Rs mn)

7,867

10,115

9,582

9,054

7,243

ROCE (%)

24.2

23.8

18.6

15.3

11.5

ROE (%) Source: Company, Centrum Research

55.9

45.2

30.5

22.8

15.4

Ultratech Cement

Valuation Analysis Stock trading at substantial discount to ACC despite superior earnings matrix At CMP, the stock trades at a P/E of 6.6x FY10E and 8.2x FY11E, 1.4x and 1.2x on P/BV, 4.4x and 4.5x EV/EBIDTA and EV/tonne of US$67 and US$57, respectively. This is a substantial discount to ACC valuations 11.5x CY09E and 18x CY10E on P/E, 5.9x and 7.9x on EV/EBIDTA, 2x and 1.9x on P/BV and EV/tonne of US$76 and US$71.6, respectively. Given similar scale and exposure of the two companies and UltraTech’s superior earnings matrix (EBIDTA/tonne of Rs852 and Rs733 for FY10E and FY11E, respectively, vs ACC’s Rs724 and Rs505 in CY09E and CY10E, respectively), we believe UltraTech should trade at a premium to ACC. We initiate coverage with an Accumulate rating and price target of Rs527 valuing the stock at P/BV of 1.5x FY10E (at par with ACC’s target valuation of 1.5x CY09 P/BV).

Exhibit 5: P/BV multiple to decline (x)

7 6 5 4 3 2 1

Ultratech

2x

4x

5x

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

Aug-07

Feb-07

May-07

Nov-06

Aug-06

May-06

Feb-06

Nov-05

Aug-05

Feb-05

May-05

Nov-04

Aug-04

0

6x

Source: Company, Centrum Research

Exhibit 6: Asset value has declined USD/Ton

Ultratech

50X

80X

130X

130X

Dec-08

Aug-08

Apr-08

Dec-07

Aug-07

Apr-07

Dec-06

Aug-06

Apr-06

Dec-05

Aug-05

Apr-05

Dec-04

Aug-04

200 180 160 140 120 100 80 60 40 20 0

180

Source: Company, Centrum Research

56

Ultratech Cement

Key Risks Upside risks 

Better production and price discipline resulting in higher-than-expected cement prices.



Further favorable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks

57



Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants.



A rally in international coal price.



Worsening of exports market in terms of demand and realization in wake of new capacity coming up.

Ultratech Cement

Financials Exhibit 6: Income Statement Y/E Mar (Rsmn) Revenues Growth in reven. (%) Power and Fuel % of Sales Freight % of Sales Other Expenses % of Sales EBITDA EBITDA Margin EBIDTA/Ton (Rs) Depreciation PBIT Interst expenses PBT from op. Other non op. incom. PBT bef. extra-ord.itm Extra-ord. inc./ (exp) PBT Provision for tax Effective tax rate PAT Minority Interest PAT after minor.int. Adjusted PAT Growth in PAT (%) PAT margin

FY07 49,684 46.8 11,392 22.9 8,880 18 7,548 15.2 14,316 28.8 837 2,287 12,030 868 11,161 592 11,753 11,753 3,887 33.1 7,867 17.5 7,849 7,849 248.7 15.8

Exhibit 8: Cash flow FY08 56,238 13.2 12,542 22.3 9,345 16.6 9,200 16.4 17,308 30.8 1,004 2,396 14,912 757 14,155 998 15,153 15,153 5,038 33.2 10,115 14.6 10,101 10,101 28.7 18.0

FY09E 62,504 11.1 15,902 25.4 10,544 16.9 10,436 16.7 17,080 27.3 961 3,252 13,828 1,420 12,408 800 13,208 13,208 3,626 27.5 9,582 9,582 9,582 (5.1) 15.3

FY10E 67,196 7.5 14,208 21.1 12,369 18.4 12,209 18.2 17,157 25.5 852 3,992 13,165 1,560 11,605 880 12,485 12,485 3,431 27.5 9,054 9,054 9,054 (5.5) 13.5

FY11E 68,125 1.4 13,869 20.4 13,200 19.4 12,806 18.8 15,249 22.4 733 4,497 10,753 1,360 9,393 1,040 10,433 10,433 3,190 30.6 7,243 7,243 7,243 (20.0) 10.6

Source: Company, Centrum Research

Exhibit 7: Balance Sheet Y/E Mar (Rsmn)

FY07

FY08

FY09E

FY10E

FY11E

Share Capital

1,245

1,245

1,245

1,245

1,245

Reserves

16,437

25,781

34,489

42,523

48,746

Shareholders' fund

17,682

27,026

35,733

43,768

49,991

Minority Interest Debt Deferred Tax Liability

53

57

57

57

57

15,786

17,405

21,655

18,155

14,655

5,621

5,454

6,454

7,454

8,454

Total Capital Employed

39,142

49,942

63,900

69,434

73,157

Gross Block

48,199

50,050

72,884

86,384

93,074

Accumulated dep.

22,742

24,795

28,047

32,039

36,536

Net Block

25,458

25,255

44,836

54,344

56,538

Capital WIP

6,972

22,834

13,500

6,690

4,470

32,429

48,089

58,336

61,034

61,008

Investments

4,592

1,467

1,467

1,467

1,467

Inventories

4,412

6,197

6,946

7,587

7,916

Total Fixed Assets

Debtors

1,739

2,026

2,272

2,481

2,589

Cash & bank balances

1,001

1,143

1,678

4,189

7,529

Loans and Advances

2,543

3,830

4,316

4,816

5,316

Total current assets

9,695

13,196

15,211

19,074

23,350

Current lia & provisions

7,574

12,809

11,115

12,140

12,667

Net current assets

2,121

387

4,097

6,933

10,683

Misc. Expenditure

-

-

-

-

-

39,142

49,942

63,900

69,434

73,157

Total Assets

Source: Company, Centrum Research

Y/E Mar (Rsmn)

FY07

FY08

FY09E

FY10E

FY11E

CF from operating Profit before tax Depreciation Interest exp./other OP prof.bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from op.

11,753 2,287 639 14,679 738 15,418 (4,210) 11,208

15,153 2,396 423 17,973 674 18,646 (4,837) 13,809

13,208 3,252 1,420 17,880 (3,175) 14,705 (2,626) 12,079

12,485 3,992 1,560 18,037 (325) 17,712 (2,431) 15,281

10,433 4,497 1,360 16,289 (410) 15,879 (2,190) 13,689

Extraordinary (Inc) Cash From Op Ex OI

11,208

13,809

12,079

15,281

13,689

(7,628) (2,838) (10,466)

(17,921) 3,502 (14,419)

(13,500) (13,500)

(6,690) (6,690)

(4,470) (4,470)

1,310 (892) (824) (406) 335

1,667 (890) (8) 769 158

4,250 (1,420) (874) 1,956 535

(3,500) (1,560) (1,020) (6,080) 2,512

(3,500) (1,360) (1,020) (5,880) 3,340

CF from investing Capex Investment Cash from investment CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

Source: Company, Centrum Research

Exhibit 9: Key Ratios Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$)

FY07

FY08

FY09E

FY10E

FY11E

28.8 24.2 23.7 15.8

30.8 26.5 26.9 18.0

27.3 22.1 21.1 15.3

25.5 19.6 18.6 13.5

22.4 15.8 15.3 10.6

46.8 149.1 248.7

13.2 20.9 28.7

11.1 (1.3) (5.1)

7.5 0.5 (5.5)

1.4 (11.1) (20.0)

24.2 26.6 55.9

23.8 25.8 45.2

18.6 19.4 30.5

15.3 16.1 22.8

11.5 12.3 15.4

1.4 (10.3) 12.6 54.9 32.0

1.3 (29.4) 13.0 82.0 39.7

1.1 (10.9) 13.1 64.0 40.0

1.0 (11.1) 13.3 65.0 40.6

1.0 (11.4) 13.7 66.9 41.8

63.1 81.4 4.0 142.0

81.1 100.4 5.0 217.1

77.0 103.1 6.0 287.0

72.7 104.8 7.0 351.6

58.2 94.3 7.0 401.6

0.9 0.8 16.5

0.6 0.6 22.9

0.6 0.6 12.0

0.4 0.3 11.0

0.3 0.1 11.2

7.6 3.4 5.3 1.5 1.2

5.9 2.2 4.6 1.4 1.1

6.2 1.7 4.9 1.4 1.0 70.9

6.6 1.4 4.4 1.2 0.9 66.7

8.2 1.2 4.5 1.1 0.9 56.9

Source: Company, Centrum Research

58

Ultratech Cement

INDIA

India Cements

Cement

Initiation

Sell Target Price: Rs82 CMP: Rs98* Downside: 15%

19 March 2009

Key Data

In southern quagmire

*as on 17 March 2009

Bloomberg Code

ICMN IN

 Southern market to witness steep correction in prices: The southern region, which accounted for 92% of India Cements’ FY08 sales, is adding 44mt capacity during FY09-11. This would reduce utilization levels from 99% in FY08 to 90% in FY09 and further to 73% and 71% in FY10 and FY11, respectively, leading to a steep fall in prices due to the high degree of fragmentation in the region.

Reuters Code

ICEM.BO

 Delays in project expansion to impact volume growth: India Cements’ ongoing expansions have seen significant delays, resulting in flat despatches despite 11.6% YoY higher consumption in the southern zone during 9MFY09. Going forward, the company may find it challenging to increase volumes on account of the huge capacity build-up.

1 USD = Rs51.5

Current Shares O/S (mn)

282.4

Diluted Shares O/S(mn)

282.4

Mkt Cap (Rsbn/USDmn)

27.6/536.2

52 Wk H / L (Rs)

203/69

Daily Vol. (3M NSE Avg.)

10,10,146

Face Value (Rs)

10

Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Public & Others, 7.2

Foreign, 34.5 Promoters, 28.0

 Benefits of fall in cost of imported coal partly offset by foray into shipping: India Cements is unlikely to enjoy the full benefit of fall in international coal (70% dependence) prices, as this would be partly offset by its foray into shipping.  IPL franchise marginal significant for valuations: Despite the success of Indian Premier League (IPL), the market would value India Cements primarily on its core earnings even though there could be a possible upside of Rs9 per share, based on the valuation of recent stake sale in Rajasthan Royals.  Expensive valuations: At CMP, the stock trades at a P/E of 6.9x and 9.8x, EV/EBIDTA of 4.4x and 5.1x, P/BV of 0.85x and 0.8x, FY10E and FY11E, respectively. . Its assets are available at US$58 and US$55 per tonne on FY10E and FY11E capacity. This is at a significant premium to comparable peer Shree Cement.  Sell with price target of Rs82: We rate the stock a Sell, valuing its cement assets at US$50/tonne on EV/tonne and 0.65x FY10E P/BV and IPL franchise at Rs9/share. Rajan Kumar [email protected] 91 22 4215 9640

Y/E Mar(Rsmn)

Rev

YoY (%)

FY07

22.6

FY08

30.4

FY09E FY10E

 Key risks: Upside: India Cements’ participation in M&A as an acquisition target. Downside: A rally in international coal prices.

Non Promoter Corp. Hold., 11.9

Institutions, 18.4

Govt Holding, 0.0

As on 31 December 2008

One Year Indexed Stock Performance 140 120 100 80 60 40 20 Mar-08 May-08

Jul-08

INDIA CEMENTS

Sep-08 Nov-08 Jan-09 Mar-09 NSE S&P CNX NIFTY INDEX

Price Performance (%)

India C.

1M

6M

1Yr

(3.7)

(25.6)

(42.0)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

46.3

7.3

32.6

4.8

791.4

18.4

41.9

20.9

1.8

5.3

5.9

35.0

10.8

35.5

6.5

36.2

23.1

32.4

18.9

1.1

4.2

3.7

34.6

13.6

10.4

30.2

4.8

(26.5)

17.0

17.3

12.3

0.9

5.8

4.0

34.0

(1.7)

9.3

27.2

4.0

(16.4)

14.2

13.0

9.4

0.9

6.9

4.4

FY11E 34.7 1.9 Source: Company, Centrum Research

7.6

22.0

2.8

(29.8)

10.0

8.5

6.8

0.8

9.8

5.0

Shareholding Pattern (%) Q408 Promoter

28.1

Q109

Q209

28.1

28.1

Q309 28.0

Foreign

31.4

28.5

30.5

28.5

Institutions

16.9

17.8

17.7

18.4

Public & Others Total

23.6

25.7

23.7

25.1

100.0

100.0

100.0

100.0

Company Background India Cements is a major player in south India with 19% market share in FY08. It commenced operation in 1949 with the commissioning of its first cement plant at Sankarnagar in Tamil Nadu, which has an installed capacity of 100,000tpa. With the acquisition of Coromandel Cement’s plant the company grew to become the largest cement player in the south in 1990 with 2.6mt capacity. Currently, it has a capacity of 9.1mt. It is adding another 3.7mt capacity through de-bottlenecking and brown-field expansions and also expects to set up a 1.5mt greenfield plant in Rajasthan to diversify its presence in the northern market.

Presence in southern India Key events/timelines 1949

100,000tpa plant at Sankar Nagar

1969

Sankarnagar capacity expanded to 0.9mt

1971

Addition of 0.6mt at Sankari Durg

1990

Acquisition of Coromondel Cement (1mtpa)

1996

Set up green-field cement plant at Dalavoi, Tamil Nadu (0.9mt)

1997

Acquired cement plant of Visaka Cement Industries (0.9mt)

1998

Acquired Yerraguntla cement plant (Andhra Pradesh) of Cement Corporation of India (0.4mt)

1998

Acquired Raasi Cements, Nalgonda Andhra Pradesh (1.8mt)

1999

Acquired Nalgonda Cement Plant (Andhra Pradesh) of Sri Vishnu Cement (1mt) later sold to Zuari industries (2001)

2007

Merged Visaka Cement Industries with itself

Source: Company Source: Company

Key management personnel Name

Position

Mr N Srinivasan

Vice Chairman & Managing Director

Mr N Ramachandran

Executive Director

Source: Company

60

India Cement

Cement prices in south higher than all-India average

Southern region to witness steep fall in cement prices fall due to fragmentation and huge capacity build up.



Delay in India Cements’ expansion to impact volume growth.



Benefit from fall in cost of imported coal partly offset by foray into shipping.

Cement Prices All india Vs Southern Zone

250 200 150 100

South

Jul-08

Nov-08

Mar-08

Jul-07

Nov-07

Mar-07

Jul-06

Nov-06

Mar-06

Jul-05

Nov-05

Mar-05

Jul-04

50

IPL success would have a marginal significance for valuation.

Mar-04



300

Nov-04



Rs/50 kg bag

Investment Rationale

All India

Source: Company, Centrum Research

Summary Financials Y/E March (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS CPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton

FY07

FY08

FY09E

FY10E

FY11E

22,552 46.3 7,345 181.5 32.6 1,026 1,498 101 4,922 131

30,443 35.0 10,795 47.0 35.5 1,279 1,099 511 8,929 2,071

34,577 13.6 10,443 (3.3) 30.2 1,914 1,004 466 7,992 2,737

34,004 (1.7) 9,252 (11.4) 27.2 2,239 1,004 407 6,417 2,218

34,656 1.9 7,619 (17.7) 22.0 2,464 1,004 476 4,628 1,627

Margin to decline on softening cement prices

4,790 791.4 21.2

6,524 36.2 21.4

4,798 (26.5) 13.9

4,010 (16.4) 11.8

2,814 (29.8) 8.1

Adj PAT to decline close to 30% in FY11E

6,937 (2,396) (2,224) 1,811

10,650 (10,173) 1,959 1,955

7,636 (6,000) (1,646) (788)

7,251 (4,000) (2,326) 925

6,228 (2,000) (2,326) 1,902

14,266 20,588

25,968 18,115

29,489 18,428

32,366 18,428

34,044 18,428

35,283 21,566 551 12,835 35,283

46,340 33,151 1,293 11,659 46,340

50,174 37,237 1,293 11,406 50,174

53,051 38,998 1,293 12,522 53,051

54,729 38,535 1,293 14,664 54,729

20.9 22.2 41.9

18.9 20.3 32.4

12.3 12.5 17.3

9.4 10.0 13.0

6.8 7.1 8.5

18.4 22.3 1.0 54.8

23.1 27.7 2.0 92.1

17.0 23.7 3.0 104.3

14.2 22.1 4.0 114.5

10.0 18.7 4.0 120.5

1.5 1.3 4.9

0.8 0.6 10.1

0.7 0.5 10.7

0.6 0.5 9.5

0.6 0.4 7.9

5.3 1.8 5.9 1.9

4.2 1.1 3.7 1.4

5.8 0.9 4.0 1.3 66.0

6.9 0.9 4.4 1.3 57.8

9.8 0.8 5.0 1.2 55.3

Source: Company, Centrum Research

61

India Cement

Investment Argument Key southern market to witness steep correction in prices The southern region is India Cements’ main market accounting for 92% of sales in FY08 (Tamil Nadu – 33.8%, Andhra Pradesh - 23.4%, Kerala - 15.7% and Karnataka - 16.9%). The region is adding 44mt additional capacity during FY09-11. This would bring down utilization levels from 99% in FY08 to 90% in FY09 and further to 73% and 71% in FY10 and FY11 leading to a steep fall in prices due to high degree of fragmentation in the region. We have assumed cement prices in the southern region would fall by Rs25/bag in FY10E and by a further Rs15/bag in FY11E from the current level of Rs259/bag Exhibit 1: Utilization levels in southern region to decline Southern zone (mt)

FY06

FY07

FY08

FY09E

FY10E

FY11E

Capacity at Beginning of year

49.0

51.4

53.9

62.6

79.0

100.1

Operative Capacity

47.5

49.9

52.4

60.6

77.0

98.6

2.4

2.5

8.7

16.4

22.0

5.5

Capacity Addition Add On Capacity

2.0

1.8

2.6

6.5

12.9

0.5

Effective Capacity

49.5

51.6

54.9

67.1

89.9

99.0

Production

45.4

50.2

54.2

60.6

66.0

70.7

Consumption

39.4

44.8

49.2

54.6

58.9

63.6

Growth assumption (%)

8.0

24.9

13.8

9.7

11.0

8.0

Exports

1.1

0.3

0.1

0.1

0.1

0.1

Transfer to other Zone

6.0

6.2

6.2

7.2

8.2

8.2

Transfer from other Zone

1.1

1.2

1.2

1.2

1.2

1.2

Net Transfer From other Zone

(4.9)

(5.1)

(5.0)

(6.0)

(7.0)

(7.0)

Capacity Utilization (%) Source: CMA, Centrum Research

91.7

97.2

98.6

90.3

73.4

71.4

Exhibit 2: New capacities would disrupt demand-supply balance Expansion that could disrupt demand supply Balance in South Capacity (mt)

Start Time

Status Under Ramp Up

1

Madras Cements

2

Q4FY09

2

Dalmia Cements

2

Q4FY09

Under Ramp Up

3

Sagar Cements

2

Q3FY09

Under Ramp Up

4

Ultratech Cements

4.9

Q3FY09

Under Ramp Up

5

Kesoram Industries

1.65

Q1FY10

Expected Start April 2009

6

ACC-Wadi(N)

3

Q3FY10

Under commissioning

7

Chettinad

2

Q3FY10

Under commissioning

8

Dalmia Cements

3

Q3FY10

Under commissioning

9

JK Cements

3

Q3FY10

Under commissioning Under commissioning

10

Deccan Cements

1.2

Q2FY10

11

NCL

1.5

Q3FY10

Under commissioning

12

Andhra Cements

1.5

Q2FY10

Under commissioning

13

India cements

1.2

Q2FY10

Under commissioning

14

Orient Paper

0.6

Q2FY10

Under commissioning

Total

29.6

Source: CMA, Centrum Research

62

India Cement

Delays in expansion projects to impact volume growth India Cements’ ongoing expansion projects have seen significant delays resulting in flat despatches vs consumption growth of 11.6% in southern zone during 9MFY09. Going ahead, the company would find it very challenging to increase volumes on account of the huge capacity build-up. Exhibit 3: India Cements’ despatches vs industry growth India Cements Vs Industry Growth (mt) Consumption -India Consumption -Southern Zone Cement's Sale by India Cements

9MFY09

9MFY08

Growth YoY (%)

128.5 40.2 6.8

118.1 36.0 6.8

8.8 11.6 0.9

Source: Company, Centrum Research

Foray into shipping to offset fall in imported coal prices We believe the savings from the decline in international coal prices (India Cements depends on imported coal for 70% of its energy requirements) would be offset by the company’s foray into shipping as sea freight have fallen steeply. India Cements incurred a capex of Rs2.36bn in FY08 to acquire two second-hand ships of about 38,000dwt and 41,000dwt primarily to hedge against rising freight cost on coal. However, the landed cost of Indonesian coal (CIF Chennai) has come down significantly from a peak of US$140/tonne in Aug 2008 to US$85/tonne at present on account of steep fall in coal prices and sea freight. Hence, India Cements would not be able to take benefits of falling sea freight on account of its investments in ships. Marginal value from IPL Despite the success of Indian Premier League (IPL), the market would value India Cements primarily on its core earnings even though there could be a possible upside of Rs9 per share based on the valuation of recent stake sale in Rajasthan Royals. India Cement forayed into Indian Premier League by acquiring franchise rights for 10 years for Chennai team for US$91mn.

63

India Cement

Financial Analysis Flat growth in sales, operating profit and PAT to decline On account of increased competition and sharp correction in cement realizations in the southern region, we expect India Cements to post flat growth in sales over FY09-11E (1.7% decline in FY10 and 1.9% growth in FY11). Operating profit and adjusted PAT are expected to decline 15% and 24% over the same period. ROCE and ROE would show a contraction of 540bp and 890bp to 6.8% and 8.5% respectively over FY09-11E. Exhibit 4: Lackluster performance over FY09-11E Cement Volume (MNMT) YoY (%) Cement Realization (Rs/MT) YoY (%) Net Sales (Rs mn) EBIDTA (Rs mn) EBIDTA/TON (Rs) Source: Centrum Research

64

FY07

FY08

FY09

FY10E

FY11E 11.5

8.4

9.2

9.4

10.5

12.7

9.4

2.2

11.3

9.5

2,667

3,282

3,530

3,171

2,952

30.3

23.0

7.6

(10.2)

(6.9)

22,552

30,443

34,577

34,004

34,656

46.0

35.0

13.6

(1.7)

1.9

7,345

10,795

10,443

9,252

7,619

871

1,170

1,107

881

663

India Cement

Valuation Analysis Expensive valuations At CMP, the stock trades at a P/E of 6.9x FY10E and 9.8x FY11E, 4.4x and 5x on EV/EBIDTA, and 0.85x and 0.8x on P/BV. Its assets are available at US$57.8 and US$55 .3 per tonne of its FY10E and FY11E capacity. The stock trades at a significant premium to Shree Cement, a comparable peer with similar scale, superior earning matrix and presence in relatively consolidated northern market. Shree Cement trades at P/E of 7.1x FY10E and 7.1x FY11E (3 x and 2.8x on P/CEPS), 2.7x and 1.9x EV/EBIDTA, and 1.6x and 1.4 x P/BV. Sell with price target of Rs82 We believe the premium is unjustified given the imminent scenario of over capacity building up in the southern zone. We recommend Sell with a price target of Rs82 valuing the cement assets at FY10E EV/tonne of US$50 and 0.65x P/BV and IPL franchise at Rs9 per share based on based on the valuation of recent stake sale in Rajasthan Royals. Exhibit 5: Sharp decline in P/BV - to hover at these levels (x) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5

Ind ia Cement

2X

2.5X

3.5X

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-00

-

1.5X

Source: Company, Centrum Research

Exhibit 6: Asset value declining – further downside likely USD/Ton 250 200 150 100 50

India Cement

50 x

10 0x

15 0x

Apr-08

Apr-07

Apr-06

Apr-05

Apr-04

Apr-03

Apr-02

Apr-01

Apr-00

0

20 0x

Source: Company, Centrum Research

65

India Cement

Risks Upside risks 

India cements participating in M&A as an acquisition target.



Super-earning and /or value unlocking from divestment of IPL franchise.



Cement prices holding to higher level for a period more than envisaged by us.

Downside risks

66



Rally in International Coal price.



Capacity buildup and fragmentation of south Indian cement industry ahead of our estimates.

India Cement

Financials Exhibit 7: Income Statement Y/E Mar (Rsmn) Revenues

FY07

FY11E

Y/E Mar (Rsmn)

FY07

FY08

FY09E

FY10E

FY11E

34,656

CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from operations

4,920 1,026 1,493 7,439 (375) 7,064 (127) 6,937

8,928 1,279 1,048 11,255 357 11,613 (963) 10,650

7,992 1,914 1,004 10,909 (536) 10,374 (2,737) 7,636

6,417 2,239 1,004 9,660 (191) 9,469 (2,218) 7,251

4,628 2,464 1,004 8,096 (240) 7,855 (1,627) 6,228

Extraordinary Inc (Exp) Cash From Op Inc EO

(507) 6,431

(481) 10,169

(779) 6,857

7,251

6,228

CF from investing Capex Investment Cash from investment

(1,392) (1,004) (2,396)

(9,182) (991) (10,173)

(6,000) (6,000)

(4,000) (4,000)

(2,000) (2,000)

CF from financing Procds. from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

1,252 (584) (2,893) (2,224) 1,811

5,833 (1,917) (1,958) 1,959 1,955

37 313 (1,004) (992) (1,646) (788)

(1,004) (1,323) (2,326) 925

(1,004) (1,323) (2,326) 1,902

30,443

34,663

34,004

35.0

13.9

(1.9)

1.9

5,488

6,906

8,601

8,344

9,138

Freight

24.3

22.7

24.8

24.5

26.4

3,588

4,600

4,995

5,544

6,072

% of Sales

15.9

15.1

14.4

16.3

17.5

2,735

3,436

4,692

4,630

5,010

% of Sales EBITDA

FY10E

46.3

% of Sales

Other Expenses

FY09E

22,552

Growth in revenues (%) Power and Fuel

Exhibit 9: Cash flow FY08

12.1

11.3

13.5

13.6

14.5

7,345

10,795

10,485

9,186

7,565

32.6

35.5

30.2

27.0

21.8

EBITDA Margin EBIDTA/Ton (Rs)

871

1,170

1,108

875

658

Depreciation

1,026

1,279

1,914

2,239

2,464

PBIT

6,318

9,516

8,571

6,947

5,101

Interst expenses

1,498

1,099

1,004

1,004

1,004

PBT from operations

4,820

8,418

7,568

5,943

4,097

Other non op. income

101

511

466

419

486

PBT bef. extra-ord. items

4,922

8,929

8,034

6,362

4,583

Extra-ord. income/ (exp)

-

(481)

(645)

-

-

PBT

4,922

8,448

7,389

6,362

4,583

Provision for tax

131

2,071

2,751

2,200

1,612

Effective tax rate

2.7

24.5

37.2

34.6

35.2

4,790

6,377

4,638

4,163

2,971

PAT after minority int.

4,790

6,377

4,638

4,163

2,971

Adjusted PAT

4,790

6,524

4,872

3,974

2,784

791.4

36.2

(25.3)

(18.4)

(29.9)

21.2

21.4

14.1

11.7

8.0

PAT

Source: Company, Centrum Research

Minority Interest

Growth in PAT (%) PAT margin

Source: Company, Centrum Research

Exhibit 8: Balance Sheet Y/E Mar (Rsmn)

FY07

FY08

FY09E

FY10E

FY11E

Share Capital

2,604

2,819

2,826

2,826

2,826

Reserves

11,662

23,150

26,663

29,540

31,218

Shareholders' fund

14,266

25,968

29,489

32,366

34,044

20,588

18,115

18,428

18,428

18,428

Minority Interest Debt Deferred Tax Liability Total Capital Employed

430

2,257

2,257

2,257

2,257

35,283

46,340

50,174

53,051

54,729

Gross Block

30,741

39,844

46,844

52,844

55,844

Accumulated dep.

10,602

12,442

14,356

16,595

19,058

Net Block

20,139

27,402

32,488

36,249

36,786

1,428

5,749

4,749

2,749

1,749

21,566

33,151

37,237

38,998

38,535

551

1,293

1,293

1,293

1,293

Inventories

2,485

3,506

4,034

3,967

4,043

Debtors

2,602

3,111

3,650

3,589

3,658

Cash & bank balances

2,302

4,256

3,468

4,393

6,295

Loans and Advances

9,786

10,621

10,621

10,621

10,621

Total current assets

17,175

21,494

21,773

22,570

24,617

4,340

9,835

10,366

10,048

9,953

Net current assets

12,835

11,659

11,406

12,522

14,664

Misc. Expenditure

331

238

238

238

238

35,283

46,340

50,174

53,051

54,729

Capital WIP Total Fixed Assets Investments

Current lia & provisions

Total Assets

Source: Company, Centrum Research

Exhibit 10: Key Ratios Y/E Mar Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS DPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$)

FY07

FY08

FY09E

FY10E

FY11E

32.6 28.0 21.8 21.2

35.5 31.3 29.3 21.4

30.2 24.7 23.1 13.9

27.2 20.6 18.9 11.8

22.0 14.9 13.4 8.1

46.3 181.5 791.4

35.0 47.0 36.2

13.6 (3.3) (26.5)

(1.7) (11.4) (16.4)

1.9 (17.7) (29.8)

20.9 22.2 41.9

18.9 20.3 32.4

12.3 12.5 17.3

9.4 10.0 13.0

6.8 7.1 8.5

0.9 12.1 42.1 70.2 40.2

0.9 5.1 37.3 74.3 42.0

0.8 6.3 38.5 74.8 42.6

0.8 4.5 38.5 76.6 42.6

0.7 7.0 38.5 74.2 42.6

18.4 22.3 1.0 54.8

23.1 27.7 2.0 92.1

17.0 23.7 3.0 104.3

14.2 22.1 4.0 114.5

10.0 18.7 4.0 120.5

1.5 1.3 4.9

0.8 0.6 10.1

0.7 0.5 10.7

0.6 0.5 9.5

0.6 0.4 7.9

5.3 1.8 5.9 1.9 1.1 -

4.2 1.1 3.7 1.4 0.9 -

5.8 0.9 4.0 1.3 0.8 66.0

6.9 0.9 4.4 1.3 0.8 57.8

9.8 0.8 5.0 1.2 0.8 55.3

Source: Company, Centrum Research

67

India Cement

Initiation

INDIA

xx Month Year

Shree Cement

Cement

Initiation

Buy Target Price: Rs823 CMP: Rs603* Upside: 36%

19 March 2009 Key Data

Best bet  Strong foothold in relatively consolidated market: Shree Cement is a key player in the relatively consolidated northern zone with 11% market share (FY08), which will likely benefit the company from price stability in an oversupply scenario.

*as on 17 March 2009

 Significant cost savings on energy front: We expect the company to register significant savings in energy costs with easing pet coke prices. Shree Cement is totally dependant on pet coke, where prices nearly halved from a peak of Rs8,000/tonne in August 2008.  Foray into merchant power sale and judicious investments in captive power plants to sustain high earnings: The company forayed into merchant power in Q2FY09 and expects to add 85MW captive power, primarily meant for merchant power sale, given the likely overcapacity scenario in cement. We view this as judicious allocation of capital, which would allow it to sustain its cash earnings over FY09-11.

Bloomberg Code

SHCM IN

Reuters Code

SRCM.BO

Current Shares O/S (mn)

34.8

Diluted Shares O/S(mn)

34.8

Mkt Cap (Rsbn/USDmn)

21.0/407.8

52 Wk H / L (Rs)

1,165/320

Daily Vol. (3M NSE Avg.)

113,07

Face Value (Rs)

10

1 USD = Rs51.5 Source: Bloomberg ; * As on 17 Mar 2009

Shareholding Pattern Public & Others, 5.7

Foreign, 15.2

Institutions, 10.0

Non Promoter Corp. Hold., 5.4

Promoters, 63.8

As on 31 December 2008

 Strong balance sheet to aid organic and inorganic growth: Strong balance sheet with net debt-equity ratio of 0.3x in FY10E and robust cash flow from operations of Rs6.7bn give the company enough leeway for further expansion, either through new capacity additions and acquisitions.

One Year Indexed Stock Performance 140 120 100 80 60

 Buy with target price of Rs823: On our target price, the stock presents an upside of 36% from current level, valuing the stock at US$55/tonne and 2.2x FY10E P/BV. The stock currently trades at 7.1x and 7.1x a P/E (P/CEPS of 2.9x and 2.8x), 2.7x and 1.9x EV/EBIDTA, 1.63x and 1.37x P/BV, and US$40 and US$28 EV/ tonne for FY10E and FY11E, respectively. Valuations look attractive on an understated ROCE of 14.4% and 14.2% and ROE of 24.6% and 22.4% for FY10E and FY11E, respectively.

Rajan Kumar [email protected] 91 22 4215 9640

 Key risks: Upside: Favorable government intervention like reducing duties and improved demand. Downside: Higher-than-expected decline in cement prices and higher pet coke prices.

40 20 Mar-08 May-08

Jul-08

Sep-08 Nov-08 Jan-09 Mar-09

SHREE CEMENT

NSE S&P CNX NIFTY INDEX

Price Performance (%)

Shree C.

1M

6M

1Yr

12.7

7.3

(41.1)

NIFTY 0.2 (30.7) (38.3) Source: Bloomberg, Centrum Research

Y/E Mar(Rsmn)

Rev

YoY (%)

EBITDA

EBITDA (%)

Adj PAT

YoY %

Fully DEPS

RoE (%)

RoCE (%)

P/BV

P/E (x)

EV/EBITDA (x)

FY07

14.1

102.3

5.9

42.1

1.6

899.6

45.6

42.3

15.2

4.2

13.2

4.4

FY08

21.1

50.1

8.6

40.9

2.9

81.3

82.6

51.1

18.9

3.1

7.3

3.1

FY09E

26.1

23.9

8.8

33.5

5.0

72.7

142.7

58.2

25.5

2.0

4.2

2.4

FY10E

24.1

(7.9)

8.1

33.9

3.0

(40.2)

85.4

25.6

14.8

1.6

7.1

2.7

FY11E 26.0 8.0 Source: Company, Centrum Research

8.4

32.2

3.0

(0.3)

85.2

21.1

13.4

1.4

7.1

1.9

Shareholding Pattern (%) Promoter

Q408

Q109

Q209

Q309

63.7

63.7

63.7

63.8

Foreign

7.7

6.9

4.9

4.2

Institutions

7.2

7.7

9.6

10.0

Public & Others Total

21.5

21.7

21.8

22.1

100.0

100.0

100.0

100.0

Company Background Promoted by Kolkata-based Bangur family, Shree Cement commenced operations in 1986, with a capacity of 0.6mtpa at Beawar, Rajasthan. This was subsequently enhanced to 2.6mtpa by Dec 2001. The company’s focus on aggressive marketing and initiatives on cost-cutting made it a key player in the northern market and amongst the most cost-efficient players in industry. It was among the first cement manufacturer to install coal-based CPP and switch to pet coke, a by product of petroleum refineries, as the main fuel for its kiln, which led to significant reduction in its energy cost. Shree Cement has demonstrated an aggressive track record of executing projects ahead of schedule and managed to tap opportunities created by the commodity cycle through timely capacity enhancements. It increased its capacity by over 3x during FY05-08 mainly through internal accruals. The company is currently expanding its clinker capacity by 1mt, setting up an 85MW CPP and 3mt split-grinding unit.

Presence across northern India

Key events/timelines 1986

Started operations with 0.6mt cement unit at Beawar

2001

Capacity enhanced to 2.6mt

FY05-08

Expanded capacity from 2.6mt to 9.1mt through addition of clinker lines 3 to 6 and 3mt Kush Kera grinding unit

March - June 2009

Commissioning of 1mt clinker unit line VII

March 2010

Addition of additional 85MW power plant -35 MW waste heat recovery plant and 50MW coal /pet coke based plant

March 2010

Addition of 3mn grinding capacity at Suratgarh and Roorkee

Source: Company

Source: Centrum Research

Key management personnel Name

Position

Mr BG Bangur

Executive Chairman

Mr HM Bangur

Managing Director

Mr MK Singhi

Executive Director

Source: Company

69

Shree Cement

Energy costs have eased

Investment Rationale  

Rs/Ton 8,000

Strong foothold in relatively consolidated northern market Significant easing of cost pressure as pet coke prices decline

700 556

6,000 459

5,000



Rs/Ton 800

709

7,000

Capacity enhancements, investment in CPP to help sustain high earnings

4,000

506

489

506

600 500

426

400

316

3,000

300

2,000

200

1,000

100 0

FY04

FY05

FY06

FY07

Shree cements energy cost

FY08

FY09E

FY10E

FY11E

Average pet coke price

Source: Company, Centrum Research

Summary Financials Y/E Mar (Rsmn) Key Income Statement Revenue YoY growth (%) Operating profit YoY growth (%) Operating margin Depreciation Interest expenses Other non operating income PBT Provision for tax Minority interest PAT (adjusted) YoY growth (%) PAT margin Key CF Statement Cash generated from operations Cash flow from investing activities Cash flow from financing activities Net cash increase/decrease Key Balance Sheet Data Shareholders' fund Debt Minority Interest Total Capital Employed Fixed Assets Investments Net current assets Total Assets Key Ratio ROCE ROIC ROE Per share Ratios (Rs) Fully diluted EPS CPS DPS Book value Solvency Ratio (x) Debt-equity Net Debt-Equity Interest coverage ratio Valuation parameters(x) P/E (Fully Diluted) P/BV EV/EBITDA EV/Sales EV/Ton

FY07

FY08

FY09E

FY10E

FY11E

14,055 102.3 5,922 171.6 42.1 4,331 104 212 1,700 124

21,091 50.1 8,624 45.6 40.9 4,788 497 733 4,072 1,079

26,139 23.9 8,755 1.5 33.5 2,074 761 877 6,797 1,514

24,069 (7.9) 8,149 (6.9) 33.9 4,111 944 976 4,069 1,095

25,986 8.0 8,361 2.6 32.2 4,505 944 1,145 4,057 1,091

1,588 899.6 11.3

2,879 81.3 13.6

4,971 72.7 19.0

2,975 (40.2) 12.4

2,966 (0.3) 11.4

4,395 (6,425) 5,162 3,345

7,030 (9,002) 3,517 1,157

5,401 (3,620) (373) 246

6,714 (7,900) (457) (1,643)

7,226 (500) (288) 6,439

4,546 9,314

6,728 13,307

10,361 13,307

12,847 13,307

15,324 13,307

13,822 8,427 500 4,895 13,822

19,851 7,779 5,910 6,161 19,850

23,483 9,326 5,910 8,248 23,483

25,969 13,114 5,910 6,945 25,969

28,446 9,110 5,910 13,427 28,446

15.2 17.3 42.3

18.9 31.5 51.1

25.5 47.5 58.2

14.8 20.8 25.6

13.4 19.8 21.1

45.6 169.9 6.0 144.6

82.6 220.1 8.0 193.1

142.7 202.3 12.0 297.4

85.4 203.5 12.0 368.8

85.2 214.5 12.0 439.7

1.8 1.2 57.1

2.0 0.4 17.3

1.3 0.2 11.5

1.0 0.3 8.6

0.9 (0.2) 8.9

13.2 4.2 4.4 1.9 -

7.3 3.1 3.1 1.4 -

4.2 2.0 2.4 0.9 44.8

7.1 1.6 2.7 1.0 37.0

7.1 1.4 1.9 0.7 24.6

Earnings from merchant power sales to help sustain operating profit

RoE and RoCE understated on account of aggressive depreciation

Source: Company, Centrum Research

70

Shree Cement

Investment Argument Strong foothold in northern zone Shree Cement is a key player in northern market with 11% share (FY08 sales). The company derives its sales from Rajasthan, Haryana, UP and Delhi and commands Number 1 position in the Rajasthan, Haryana and Delhi markets. With current capacity of 9.1mt, the company is expected to command a 12% market share in the northern market by FY09 end. The high level of consolidation in the northern zone would ensure better price stability in an oversupply scenario. At the same time, some of the Shree Cement’s market, particularly Punjab, would benefit from the re-imposition of CVD on imported cement which led to stoppage of import from Pakistan. Exhibit 1: Shree Cement is a major player in northern region State

Contribution to total sales (%)

Market share (%)

8.63

8.33

Punjab Rajasthan

36.12

22.16

Haryana

26.27

23.91

9.99

17.47

Delhi Uttar Pradesh Northern zone

12.48

4.85

100.00

11.00

Source: Company, Centrum Research

Significant cost savings on energy front We expect the company to register significant savings in energy costs on account of steep fall in pet coke prices. We estimate power and fuel cost per ton to decline by Rs205/tonne in FY09E and Rs506/tonne in FY10E. Shree Cement is totally dependant on pet coke, a by-product from petroleum refineries, whose prices have declined from a peak of Rs8,000/tonne in Aug 2008 to Rs4,000/tonne at present. Shree Cement was among the first cement manufacturers to substitute coal with pet coke, which made it amongst the lowest cost producers of cement. However, the company faced significant cost pressure during FY09 when pet coke prices surged to Rs8,000/tonne as price of international coal and crude rose. However, with both crude and coal prices falling, the price of pet coke has plunged to Rs4,000/tonne. Exhibit 2: Energy costs have eased Rs/Ton 8,000

Rs/Ton 800

709

700

7,000 556

6,000 459

5,000 4,000

506

489

506

600 500

426

400

316

3,000

300

2,000

200

1,000

100 0

FY04

FY05

FY06

FY07

Shree cements energy cost

FY08

FY09E

FY10E

FY11E

Average pet coke price

Source: Company, Centrum Research

71

Shree Cement

Foray in merchant power sale, investments CPP to sustain high earnings With ensuing overcapacity in cement sector, the company added another revenue stream in Q2FY09 through sale of surplus power from its captive power plants on merchant basis. The company is setting up another 85MW CPP which would be utilized primarily for merchant sale of power. Given the power deficit in the country, we view company’s foray into merchant power as an excellent tactical move and judicious allocation of capital as incremental earnings from power would sustain its cash earning over FY09-11E, despite overcapacity scenario in cement industry. Shree Cement has been a prime beneficiary of the cement up-cycle of 2005-09 when it tripled its cement capacity to 9.1mt through strong project execution capability. It is adding another 1mt clinker capacity by Q1FY10 and augmenting grinding capacity by 3mt by setting up grinding units at Suratgarh in Rajasthan and Roorkee in Uttaranchal. Exhibit 3: Shree Cement’s expansion plans Project

Capacity

Capex (Rs mn)

Timeline

VII clinker line Grinding Units

1 million

2,500

Q4/FY09/Q1FY10

3 million

3,200

FY10/Early FY11

1,200

FY10/Early FY11

4,000

FY10 End

Up-gradation of line I & II Power Plant

50 mw

Waste Heat Recovery system

35 mw

TOTAL

10,900

Source: Company

The projects would require a capex of Rs10.9bn over FY09-11E and we estimate the company would be able to finance these projects through internal accruals and end up with a net cash of Rs2.5bn by FY11.

Strong cash flow and balance sheet to allow organic, inorganic growth A strong balance sheet with net debt (cash)/equity of 0.3 and -0.16 in FY10E and FY11E, and a net free cash flow of Rs 5.5 bn in over FY10-11 gives Shree Cement enough leeway for further expansions either through new capacity additions and acquisitions.

72

Shree Cement

Financial Analysis Revenue from merchant power sales to keep earnings intact We expect revenue and EBIDTA to decline 8% and 6%, respectively, in FY10E as the cement space faces an overcapacity scenario. However, in FY11E, we expect 8% growth in revenue and 3% EBIDTA growth on account of significant contribution from the sale of merchant power (12% contribution to revenue and 24% to operating profit). Exhibit 4: Merchant power sales to prop earnings FY06

FY07

FY08

FY09E

FY10E

FY11E

3.2

4.8

6.6

8.2

8.2

8.7

Cement-Revenue

6,948

14,055

21,091

25,541

23,273

22,737

% contribution

100.0

100.0

100.0

97.7

96.7

87.5

Realization

2,169

2,908

3,192

3,098

2,833

2,614

Power Revenue

597

796

3,249

% contribution

2.3

3.3

12.5

26,139

24,069

25,986

EBIDT Cement

8,435

7,751

6,367

% contribution

96.3

95.1

76.2

EBIDT-Power

320

397

1994

3.7

4.9

23.8

Cement Volume

Total revenue

6,948

14,055

21,091

% contribution Operating Profit

2,180

5,922

8,624

8,755

8,149

8,361

Per /ton-Cement

681

1,225

1,305

1,023

944

732

Per /ton-Including profit from power sale Source: Company, Centrum Research

681

1,225

1,305

1,062

992

961

Cash earnings to remain robust over FY09-11E Due to reporting of depreciation on WDV and accelerated depreciation on new asset, reported profit might look depressed (48% YoY decline in FY10 and 1% increase in FY11). Therefore, we believe cash earnings would be right criteria for looking at the company’s profitability. We expect Shree Cement’s cash earnings to register a modest growth of 3.3% and 5.1% in FY10 and FY11, respectively to Rs209/share and Rs220/share after the 8% de-growth in FY09.

73

Shree Cement

Valuation Compelling valuations At CMP, the stock trades at compelling EV/tonne of US$35.9 and US$22.5 for FY10E and FY11E capacity of 10.1mt, despite superior earnings of EBIDTA/tonne of Rs950 and Rs730/tonne in FY10E and FY11E, respectively. On P/BV, it trades at 1.56x FY10E and 1.33x FY11E. On P/E multiple, the stock trades at 7.1x FY10E and 7.1x FY11E, which makes it look fairly valued. But given the company’s policy of following WDV method of depreciation and accelerated depreciation on newly commissioned assets, reported earning would look depressed. Therefore, we find P/CEPS and EV/EBIDTA as a better earnings matrix for the company. The stock trades at P/CEPS of 2.9x FY10E and 2.8x FY11E and EV/EBIDTA of 2.7x and 1.9x, which are at steep discount to peers.

Buy with price target of Rs823 We initiate coverage with a Buy rating and target price of Rs823, valuing the stock at P/BV of 2.2x FY10E and EV /tonne of US$55 on FY10 E. Exhibit 5: Shree Cement’s valuation Value of Cement assets @ US$55/ton Additional Power Asset of 85MW Total Add Investments Cash EV of Shree Cement Less - Debt Fair value of Equity Target Price (Rs)

28,608 4,000 32,608 5,910 3,277 41,796 13,122 28,673 823

Source: Centrum Research

Exhibit 6: P/BV multiple (x) 10 9 8 7 6 5 4 3 2 1

Oct-07

Oct-08

Apr-07

Oct-07

Apr-08

Oct-06 Oct-06

Apr-07

Apr-06

Oct-05

Apr-05

Oct-04

Apr-04

Oct-03

Apr-03

Oct-02

Apr-02

Oct-01

Apr-01

0

Source: Company, Centrum Research

Exhibit 7: Asset value too low compare to robust earning USD/Ton 200 180 160

EV/Ton Band of Shree Cement

140 120 100 80 60

EV/Ton $

30x

80x

130x

Oct-08

Apr-08

Apr-06

Oct-05

Apr-05

Oct-04

Apr-04

Oct-03

Apr-03

Oct-02

Apr-02

Oct-01

Apr-01

40 20 0

180x

Source: Company, Centrum Research

74

Shree Cement

Key Risks Upside risks 

Better production and price discipline resulting in higher than expected cement prices.



Favourable government intervention towards demand generation as well as tax benefits specific to the sector.

Downside risks

75



Early breakdown of production and price discipline with higher supplies hitting from newly commissioned plants. Some supplies hitting the market ahead our assumed schedule.



Rally in international coal/crude prices leading to increase in pet coke prices.

Shree Cement

Financials Exhibit 8: Income Statement Y/E Mar (Rsmn) Revenues

FY07

Exhibit 10: Cash flow FY08

FY09E

FY10E

FY11E

Y/E Mar (Rsmn)

FY07

FY08

FY09E

FY10E

FY11E

25,986

CF from operating Profit before tax Depreciation Interest expenses/other OP profit bef. WC chg. Working capital adj. Gross cash from op. Direct taxes paid Cash from operations

1,894 4,331 (316) 5,909 (380) 5,529 (1,133) 4,395

3,683 4,788 334 8,804 (539) 8,265 (1,235) 7,030

5,636 2,074 1,045 8,755 (1,841) 6,915 (1,514) 5,401

4,069 4,111 (32) 8,149 (340) 7,809 (1,095) 6,714

4,057 4,505 (201) 8,361 (43) 8,318 (1,091) 7,226

Extraordinary (Inc) Cash From Op Ex OI

212 4,608

(389) 6,641

(1,161) 4,240

6,714

7,226

CF from investing Capex Investment Cash from investment

(5,974) (452) (6,425)

(4,234) (4,768) (9,002)

(3,620) (3,620)

(7,900) (7,900)

(500) (500)

5,586 13 (437) 5,162 3,345

3,993 (476) 3,517 1,157

(0) 116 (489) (373) 246

32 (489) (457) (1,643)

0 201 (489) (288) 6,439

14,055

21,091

26,139

24,069

Growth in revenues (%)

102.3

50.1

23.9

(7.9)

8.0

Power and Fuel

2,345

3,672

5,849

4,157

4,401

% of Sales Freight

16.7

17.4

22.4

17.3

16.9

2,243

3,598

4,407

4,220

4,468

% of Sales Other Expenses

16.0

17.1

16.9

17.5

17.2

1,343

1,850

2,524

2,588

2,740

% of Sales EBITDA

9.6

8.8

9.7

10.8

10.5

5,922

8,624

8,755

8,149

8,361

42.1

40.9

33.5

33.9

32.2

EBITDA Margin EBIDTA/Ton (Rs)

1,225

1,305

1,062

992

732

Depreciation

4,331

4,788

2,074

4,111

4,505

PBIT

1,592

3,837

6,681

4,037

3,856

104

497

761

944

944

PBT from operations

1,488

3,339

5,920

3,093

2,912

Other non op. income

212

733

877

976

1,145

PBT bef. extra-ord. items

1,700

4,072

6,797

4,069

4,057

Extra-ord. income/ (exp)

195

(389)

(1,161)

-

-

Interst expenses

PBT

1,894

3,683

5,636

4,069

4,057

Provision for tax

124

1,079

1,514

1,095

1,091

Effective tax rate

6.6

29.3

26.9

26.9

26.9

1,770

2,604

4,122

2,975

2,966

PAT

CF from financing Procds from sh cap & prem. Borrowings/ (Repayments) Interest paid Dividend paid Cash from financing Net cash increase/ (dec)

Source: Company, Centrum Research

Minority Interest PAT after minority int. Adjusted PAT

1,588

2,879

4,971

2,975

2,966

899.6

81.3

72.7

(40.2)

(0.3)

Exhibit 11: Key Ratios

PAT margin

11.3

13.6

19.0

12.4

11.4

Y/E Mar

Cash Profit

5,918

7,666

7,045

7,086

7,470

Growth in Cash Profit (%)

229.1

29.5

(8.1)

0.6

5.4

42.1

36.3

27.0

29.4

28.7

Growth in PAT (%)

PAT margin

Source: Company, Centrum Research

Exhibit 9: Balance Sheet Y/E Mar (Rsmn)

FY07

Share Capital

FY08

FY09E

FY10E

FY11E

348

348

348

348

348

Reserves

4,197

6,380

10,013

12,499

14,975

Shareholders' fund

4,546

6,728

10,361

12,847

15,324

9,314

13,307

13,307

13,307

13,307

(38)

(185)

(185)

(185)

(185)

13,822

19,851

23,483

25,969

28,446

Minority Interest Debt Deferred Tax Liability Total Cap. Employed Gross Block

16,081

21,873

24,673

33,073

33,573

Accumulated dep.

11,092

14,273

16,347

20,459

24,963

Net Block

4,990

7,600

8,326

12,614

8,610

Capital WIP

3,438

180

1,000

500

500

Total Fixed Assets

8,427

7,779

9,326

13,114

9,110

500

5,910

5,910

5,910

5,910

1,561

1,766

2,865

2,967

3,204

Investments Inventories Debtors Cash & bank balances

263

494

859

791

854

3,533

4,674

4,920

3,277

9,716

Loans and Advances

2,384

4,026

4,026

4,026

4,026

Total current assets

7,741

10,960

12,671

11,062

17,800

Current lia & prov.

2,846

4,799

4,423

4,117

4,374

Net current assets

4,895

6,161

8,248

6,945

13,427

Misc. Expenditure Total Assets

-

-

-

-

-

13,822

19,851

23,483

25,969

28,446

Margin Ratios (%) EBITDA Margin PBIT Margin PBT Margin PAT Margin Growth Ratios (%) Revenues EBITDA Net Profit Cash Earning Return Ratios (%) ROCE ROIC ROE Turnover Ratios Asset turnover ratio (x) Working capital cycle (days) Avg collection period (days) Avg payment period (days) Inventory holding (days) Per share (Rs) Fully diluted EPS CEPS Book Value Solvency ratios Debt/ Equity Net Debt/Equity

Interest coverage Valuation parameters (x) P/E P/BV EV/ EBITDA EV/ Sales M-Cap/ Sales EV/Ton (US$)

FY07

FY08

FY09E

FY10E

FY11E

42.1 11.3 12.1 11.3

40.9 18.2 19.3 13.6

33.5 25.6 26.0 19.0

33.9 16.8 16.9 12.4

32.2 14.8 15.6 11.4

102.3 171.6 899.6 229.1

50.1 45.6 81.3 29.5

23.9 1.5 72.7 (8.1)

(7.9) (6.9) (40.2) 0.6

8.0 2.6 (0.3) 5.4

15.2 17.3 42.3

18.9 31.5 51.1

25.5 47.5 58.2

14.8 20.8 25.6

13.4 19.8 21.1

1.0 (34.0) 8.5 83.0 40.5

1.1 (19.2) 12.0 61.8 30.6

1.1 (10.4) 12.0 62.4 40.0

0.9 (4.4) 12.0 61.4 45.0

0.9 (4.4) 12.0 61.4 45.0

45.6 169.9 144.6

82.6 220.1 193.1

142.7 202.3 297.4

85.4 203.5 368.8

85.2 214.5 439.7

1.8 1.2 57.1

2.0 0.4 17.3

1.3 0.2 11.5

1.0 0.3 8.6

0.9 (0.2) 8.9

13.2 4.2 4.4 1.9 1.5

7.3 3.1 3.1 1.4 1.0

4.2 2.0 2.4 0.9 0.8 44.8

7.1 1.6 2.7 1.0 0.9 40.2

7.1 1.4 1.9 0.7 0.8 27.9

Source: Company, Centrum Research

Source: Company, Centrum Research

76

Shree Cement

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Persons who may receive this document should consider and independently evaluate whether it is suitable for his/ her/their particular circumstances and, if necessary, seek professional/financial advice. Any such person shall be responsible for conducting his/her/their own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this document. The projections and forecasts described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. Projections and forecasts are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections and forecasts were based will not materialize or will vary significantly from actual results, and such variances will likely increase over time. All projections and forecasts described in this report have been prepared solely by the authors of this report independently of the Company. These projections and forecasts were not prepared with a view toward compliance with published guidelines or generally accented accounting principles. No independent accountants have expressed an opinion or any other form of assurance on these projections or forecasts. You should not regard the inclusion of the projections and forecasts described herein as a representation or warranty by or on behalf of the Company, Centrum, the authors of this report or any other person that these projections or forecasts or their underlying assumptions will be achieved. For these reasons, you should only consider the projections and forecasts described in this report after carefully evaluating all of the information in this report, including the assumptions underlying such projections and forecasts. The price and value of the investments referred to in this document/material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance. Future returns are not guaranteed and a loss of original capital may occur. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. Centrum does not provide tax advice to its clients, and all investors are strongly advised to consult regarding any potential investment. Centrum and its affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Foreign currency denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the investment. In addition, investors in securities such as ADRs, the value of which are influenced by foreign currencies effectively assume currency risk. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions. This report/document has been prepared by Centrum, based upon information available to the public and sources, believed to be reliable. No representation or warranty, express or implied is made that it is accurate or complete. Centrum has reviewed the report and, in so far as it includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. The opinions expressed in this document/material are subject to change without notice and have no obligation to tell you when opinions or information in this report change. This report or recommendations or information contained herein do/does not constitute or purport to constitute investment advice in publicly accessible media and should not be reproduced, transmitted or published by the recipient. The report is for the use and consumption of the recipient only. This publication may not be distributed to the public used by the public media without the express written consent of Centrum. This report or any portion hereof may not be printed, sold or distributed without the written consent of Centrum. Neither this document nor any copy of it may be taken or transmitted into the United State (to US persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Neither Centrum nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This document does not constitute an offer or invitation to subscribe for or purchase or deal in any securities and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. This document is strictly confidential and is being furnished to you solely for your information, may not be distributed to the press or other media and may not be reproduced or redistributed to any other person. In particular, neither this document nor any copy thereof may be taken or transmitted into the United States, Canada or Japan or distributed, directly or indirectly, in the United States, Canada or Japan or to any US person. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe any such restrictions. By accepting this report, you agree to be bound by the fore going limitations. No representation is made that this report is accurate or complete. The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorised or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. None of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith.

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Shree Cement

Sanjeev Patni

Head - Institutional Equities

[email protected]

91-22-4215 9699

Harendra Kumar

Head - Research

Strategy

[email protected]

91-22-4215 9620

Dhananjay Sinha

Economist

Economy & Strategy

[email protected]

91-22-4215 9619

Niraj Shah

Sr Analyst

Metals & Mining, Pipes

[email protected]

91-22-4215 9685

Mahantesh Sabarad

Sr Analyst

Automobiles/Auto Ancillaries

[email protected]

91-22-4215 9855

Madanagopal R

Sr Analyst

Power

[email protected]

91-22-4215 9684

Abhishek Anand

Analyst

Media, Education

[email protected]

91-22-4215 9853

Anand Dama

Analyst

Financial Services

[email protected]

91-22-4215 9644

Ankit Kedia

Analyst

Media

[email protected]

91-22-4215 9634

Himani Singh

Analyst

Hospitality, Healthcare

[email protected]

91-22-42159865

Nitin Padmanabhan

Analyst

Technology

[email protected]

91-22-4215 9690

Piyush Choudhary

Analyst

Telecom

[email protected]

91-22-4215 9862

Pranshu Mittal

Analyst

Sugar, Retail

[email protected]

91-22-4215 9854

Rajan Kumar

Analyst

Cement

[email protected]

91-22-4215 9640

Rupesh Sankhe

Analyst

Real Estate, Infrastructure

[email protected]

91-22-4215 9636

Saikiran Pulavarthi

Analyst

Financial Services

[email protected]

91-22-4215 9637

Research

Siddhartha Khemka

Analyst

Logistics

[email protected]

91-22-4215 9857

Sriram Rathi

Analyst

Pharmaceuticals

[email protected]

91-22-4215 9643

Adhidev Chattopadhyay

Associate

Real Estate

[email protected]

91-22-4215 9632

Janhavi Prabhu

Associate

Sugar, Retail

[email protected]

91-22-4215 9864

Jatin Damania

Associate

Metals & Mining, Pipes

[email protected]

91-22-4215 9647

Vijay Nara

Associate

Automobiles/Auto Ancillaries

[email protected]

91-22-42159641

Sales V. Krishnan

+91-22-4215 9658

[email protected]

+91 98216 23870

Ashish Tapuriah

+91-22-4215 9675

[email protected]

+91 99675 44060

Chirag Vora

+91-22-4215 9677

[email protected]

+91 98207 63682

Ashvin Patil

+91-22-4215 9866

[email protected]

+91 98338 92012

Siddharth Batra

+91-22-4215 9863

[email protected]

+91 99202 63525

Centrum Securities (Europe) Ltd., UK Dan Harwood Michael Orme

CEO Global Strategist

+44-7830-134859

[email protected]

+44 (0) 775 145 2198

[email protected]

Nicole Rappel

Client Management

+44 (0) 798 441 6878

[email protected]

+1-646-701-4465

[email protected]

Centrum Securities LLC, USA Melrick D’Souza

Key to Centrum Investment Rankings Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

Centrum Broking Private Limited Member (NSE, BSE), Depository Participant (CDSL) and SEBI registered Portfolio Manager Regn Nos CAPITAL MARKET SEBI REGN. NO.: BSE: INB 011251130, NSE: INB231251134 DERIVATIVES SEBI REGN. NO.: NSE: INF 231251134 (TRADING & SELF CLEARING MEMBER) CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-20-99 PMS REGISTRATION NO.: INP000000456 Website: www.centrum.co.in Investor Grievance Email ID: [email protected]

78

REGD. OFFICE Address Bombay Mutual Bldg.,2nd Floor, Dr. D. N. Road, Fort, Mumbai - 400 001 Correspondence Address Centrum House, 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai 400 098. Tel: (022) 4215 9000

Shree Cement