Db - Indian Cement Sector
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Db - Indian Cement Sector as PDF for free.
More details
- Words: 26,777
- Pages: 62
Company
Global Markets Research
GEMS: Asia India Resources Construction Materials
12 July 2007
Indian Cement Sector We’re in the midst of a supercycle – staying bullish
FITT Research Fundamental, Industry, Thematic, Thought Leading Deutsche Bank Company Research's Investment Policy Committee has deemed this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing market opinion, we believe the Indian cement sector will experience a sustained upcycle lasting a few years. Street concerns on oversupply, demand slowdown, pricing and valuations are overdone, representing a buying opportunity in our view. Our FY09 (Mar) EPS estimates are 30-100% above consensus. Fundamental – Analyzing the economic attractiveness of the sector Industry – Sector earnings to grow at a 22% CAGR over the next three years Thematic – Demand-supply mismatch may well extend much beyond 2010 Thought leading – Entering a sustainable earnings era Top large-cap picks: ACC and Ambuja; top mid-cap pick: India Cements
`
Manish Saxena Research Analyst (91) 22 6658 4034 [email protected]
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
GEMS: Asia India Resources Construction Materials
12 July 2007
Indian Cement Sector We’re in the midst of a supercycle – staying bullish
FITT Research Top picks ACC (ACC.BO),INR1,072.40 Grasim (GRAS.BO),INR2,819.55 Ambuja Cements Ltd (ACEM.BO),INR127.80 India Cements (ICMN.BO),INR220.20 Shree Cements (SHCM.BO),INR1,335.20
Buy Buy Buy Buy Buy
UltraTech Cement Limited (ULTC.BO),INR899.30
Buy
Manish Saxena
Research Analyst (91) 22 6658 4034 [email protected]
Fundamental, Industry, Thematic, Thought Leading Deutsche Bank Company Research's Investment Policy Committee has deemed this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing market opinion, we believe the Indian cement sector will experience a sustained upcycle lasting a few years. Street concerns on oversupply, demand slowdown, pricing and valuations are overdone, representing a buying opportunity in our view. Our FY09 (Mar) EPS estimates are 30-100% above consensus. – Analyzing the economic attractiveness of the sector Fundamental In this report, we analyze the industry utilization of the sector, the bargaining
power of players and their relative margin/return attractiveness. Our analysis suggests that (1) utilization rates in the sector are likely to remain at 90% over FY07-10E, resulting in five continuous years of peak operating rates – the first-time ever in the last 100 years, and (2) the companies which are integrated and lowcost producers enjoy RoCE/RoE profiles that are among the best globally.
– Sector earnings to grow at a 22% CAGR over the next three years Industry We believe the sharp increase in India’s infrastructure capex alone can sustain
10% annual cement volume growth. Real estate growth and pre-election spending should also help. Consequently, we prefer companies that (1) are expanding capacity and have the ability to bring capacities on stream, (2) are less vulnerable to energy cost inflation, and (3) are in attractive regional markets within India.
– Demand-supply mismatch may well extend much beyond 2010 Thematic We have performed a comprehensive review of new capacities being
implemented in India. Our analysis shows that only 51m tonnes, i.e. 67% of the ordered capacity and 47% of the announced capacity, will get commissioned till FY2010 (Mar). Imports are unlikely to pose a threat due to tight regional demandsupply and port bottlenecks. Even though our demand-supply scenario assumes all the ordered capacity will come through, India would have only a minor surplus in FY10. Our estimate of cement prices increasing by 3% in FY08 from the current levels and a further 4% in FY09 may end up being overly conservative. leading – Entering a sustainable earnings era Thought Longer term, we expect Indian cement prices to increase in line with inflation –
note that India’s low per capita consumption is near an inflection point and the industry is gradually consolidating. Energy cost inflation and scalability of output at limestone mines would be the key challenges.
Top large-cap picks: ACC and Ambuja; top mid-cap pick: India Cements We believe ACC is the most integrated direct cement play that will also benefit from local sourcing of coal. India Cements and UltraTech also look attractive due to their greater exposure in the more attractive south India. We maintain our Buy on Ambuja Cements, Grasim and Shree Cement.
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
12 July 2007
Construction Materials Indian Cement Sector
Table of Contents
Look beyond the obvious ................................................................. 3 Multiple constraints in capacity addition!.................................................................................. 3 Equipment orders placed for 68% of announced capacity ....................................................... 3 Regulatory approvals for 21% of announced capacity pending ................................................ 4 Financial closure seems difficult for 27% of announced capacity ............................................ 4 Project delays add a different twist to likely capacity additions ................................................ 5 Supplies to India from other regions are unlikely ...................................................................... 6
Demand growth in top gear ............................................................. 8 Despite strong historical growth, per capita consumption is low ............................................. 8 Indian cement demand skewed towards housing .................................................................... 8 Infrastructure to give demand a big boost ................................................................................ 9 Infrastructure spending to propel the growth in medium term............................................... 10 Pre-election spends can spice up demand growth ................................................................. 10 Pan-India cement demand to grow at 10% CAGR over FY07-10............................................ 11
Deficit to continue till 1HFY10........................................................ 13 Estimates corroborate deficit forecasts till H1FY10/CY09....................................................... 13
Cement prices on a roll again......................................................... 15 Data-points suggest strong price momentum to continue ..................................................... 15 Steady rise in consolidation .................................................................................................... 15 Price estimates lower than landed cost of imports................................................................. 17
Asymmetric margin improvement ................................................. 18 Cost pressures to differentiate companies’ earnings.............................................................. 18
Valuations are attractive................................................................. 20 Stocks yet to touch Jan-07 levels ........................................................................................... 20 Our estimates for FY09e are now 30-100% higher than consensus....................................... 21 Valuations at discount to the region........................................................................................ 21 Target multiples assumed at discount to region and historical band ...................................... 22
ACC ................................................................................................... 23 Ambuja Cements Ltd....................................................................... 28 Grasim .............................................................................................. 36 India Cements .................................................................................. 41 Shree Cements................................................................................. 46 UltraTech Cement Limited.............................................................. 52 Appendix A....................................................................................... 57 Capacity ordered..................................................................................................................... 57
Page 2
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Look beyond the obvious Multiple constraints in capacity addition! Cement prices spiraling to a decadal high have left most Indian cement producers scrambling for new capacity additions at a frenzied pace for the first time in the last two decades. But in our opinion, most Indian producers have found the going tough. As in any project implementation, there are multiple constraints in expanding capacities. The actual capacity addition that can be realized would be the one fulfilling all of the multiple constraints that need to be met. Considering only three constraints, i.e. ordering, financial and regulatory approval, of the five possible ones, the maximum realizable new cement capacity that could come up in India during FY07-FY10E
Figure 1 shows that even considering only three constraints - ordering, financial and regulatory approval - of the five possible ones, the maximum realizable new cement capacity that could come up in India during FY07-FY10 is 51MTPA. Also, the maximum realizable clinker capacity addition based on our analysis can be no more than 39MTPA. This implies that only less than 50% of the announced capacity additions in India of 108m tonnes could see the light of day over FY07-10. Figure 1: Multiple constraints on realizing announced capacity
Realizable capacity, 51.3 MTPA
is 51 MTPA
Financial closure possible, 146.4MTPA
Regulatory approved, 81.1 MTPA
Ordered, 73.7 MTPA Source Ministry of Forest, Ministry of environment, CMA, Deutsche Bank
The three quantifiable constraints which overlap are:
Equipment orders placed for 68% of announced capacity Actual placement of orders with equipment suppliers should be taken as confirmed with the first advance payment or letter of intent. While almost all equipment suppliers recognise a letter of intent as a confirmation of new orders, we believe that the first advance payment received by them is a better metric to measure equipment orders. Be that as it may, letters of intent received by cement equipment suppliers point to a total of 73.7MTPA of cement capacities to be commissioned over FY07-10. Appendix A (page 60) gives the details of orders for capacity additions by the cement manufacturers.
Deutsche Bank Securities Inc.
Page 3
12 July 2007
Construction Materials Indian Cement Sector
Regulatory approvals for 21% of announced capacity pending Environmental and forest clearance in India is through an open hearing system and, at times, results in delays of more than 10 years (e.g. Sanghi Industries). Our correspondence with the Ministry of Environment and Forests revealed that 81.1MTPA of capacity has been approved. We are surprised that few companies have even placed orders without first obtaining regulatory clearances. Figure 2 shows that clearances for 23MTPA of capacity (21% of announced capacity) are still pending. Surprisingly, a few
Figure 2: Regulatory clearances
companies have placed
MTPA
orders without obtaining regulatory clearances
Approved
120
Not approved Not Ordered
Announced
100 80
Ordered
60 40 20 Source: Ministry of Forest, environment, CMA, Deutsche Bank
Financial closure seems difficult for 27% of announced capacity Cement capacity orders (unlike the power sector) in recent times have redefined the point at which ordering is recognized by equipment suppliers. Figure 3: Funding constraints
MTPA
Financial closure possible
120
Not Ordered
Financial closure not possible Announced
100 80
Ordered
60 40 20 Source: Prowess, CMA, Deutsche Bank
Page 4
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
As our bottom-up analysis of the financials of each company in the sector reveals, there have been many instances of companies ordering capacity that cannot be financed even assuming 20% equity dilution and raising debt to 1.5x equity. Figure 3 shows that approximately 29MTPA of capacity orders (27% of announced capacity) may not be commissioned due to difficulties in financial closure.
Project delays add a different twist to likely capacity additions Equipment suppliers have manufacturing capability of 15-18MT for supplies in India and Middle East
Effective incremental capacity addition will be far less than headline capacity addition numbers
Project delays are primarily due to the manufacturing constraints of equipment suppliers and inadequate availability of civil contractors at the site. 1.
Capacity constraint with equipment suppliers: This is contingent on workshop and vendors´ scalability of equipment suppliers. Our discussions with equipment suppliers suggest that the maximum cement capacity in India for all suppliers taken together is 1518 MTPA. Hence equipment suppliers may prioritize supplies to players in India in a manner that suits their long-term interests.
2.
Availability of contractors to carry out civil and erection works. This depends on construction and infrastructure work and the experience of a contractor. We have not been able to quantify the impact of this constraint. Our talks with Indian cement companies suggest that they are running cost over-runs to an extent of 40-50% on the civil construction side.
Finally, even assuming that Indian companies are able to meet the above two challenges and 74m tonnes of capacity is commissioned, incremental production may be only 51m tonnes over FY07-10E. Capacity addition does not become effective spot on April 1st of each year, but is dependent on the handover of the plant. This implies that effective capacity addition in each year is lower than name plate capacity addition. Figure 4: Effective capacity addition is different from name plate capacity addition
(mn tonnes)
Incremental cement capacity Effective incremental cement capacity Incremental production
45 40 35 30 25 20 15 10 5 0 FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Ban, CMAk
Stabilization of new units
Finally, the cement output from new units is subject to two conditions:
has taken 5-6 months in recent times
Deutsche Bank Securities Inc.
Stabilization of new units: This takes 5-6 months. We note that Kesoram and Binani Cement have yet to reach peak utilisation levels despite commissioning of capacities about 3-6 months ago.
Page 5
12 July 2007
Construction Materials Indian Cement Sector
Rise in blending ratio: This is subject to stabilization of chemical composition of clinker output. Unless this happens, the blending ratio cannot be increased.
Supplies to India from other regions are unlikely Global trade of cement at less than 4% of total production is limited by the extremely low shelf life of the product. With the shelf life of cement at less than 90 days, its fast consumption is imperative; else the material is at risk of losing its basic properties. If India were to buy 2m tonnes of cement in global spot cement market, there is a possibility that spot prices could rise by 20-30%
More importantly, the spot trade of cement is in the range of 25-35m tonnes currently, which is less than 2% of global production. If India were to buy 2m tonnes of cement in the spot market (i.e., 10% of total spot trade), spot prices may rise by 20-30%, making the buying completely unviable. Figure 5: Global cement trade is 3-4% of production Clinker
Cement
(mn tonnes)
120 100 80 60 40 20 0
1998
1999
2000
2001
2002
2003
2004
2005
Source: Deutsche Bank, Ocean Shipping Consultant
Regional demand –supply scenario is tight as well The Middle East is one of the fastest growing regions in the world with a demand increase of ~18% in FY07. Key centers of demand growth are the UAE, Saudi Arabia, Iran and Iraq. While Saudi Arabia is balanced in terms of demand–supply, the problem seems to be in the UAE following the breakdown of the Gulf Cement and Union Cement plants. In addition, new capacities in Iran have got delayed while reconstruction demand in Iraq is quite high, resulting in a tight demand–supply scenario. The only surplus region for supplies to India is Thailand. Pakistani cement players, in our opinion, may look at the Middle East market which is quite lucrative at this juncture. Figure 6: Regional demand-supply scenario (in m tonnes) Country
Region
Demand
Supply
Thailand
SE Asia
27
40
13
-
Indonesia
SE Asia
34
42
8
-
India
Indian Subcontinent
149
156
5
1
Pakistan
Indian Subcontinent
27
33
6
-
Middle East
120
100
-
(20)
The Middle East
Exports Surplus/Deficit
Source: CMA, Ocean freight liners
Page 6
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Port capacity for cement imports is limited in India
Deutsche Bank Securities Inc.
Port capacity in India acts as a big bottleneck for imports Cement unloading on ports in India can be done only by existing cement producers as others do not have the equipment with a discharge rate greater than 1000 tonnes. So a demurrage cost of USD10-15/t may have to be paid by importers of cement – other than existing players.
Page 7
12 July 2007
Construction Materials Indian Cement Sector
Demand growth in top gear Despite strong historical growth, per capita consumption is low Over the last twenty-five years, Indian cement demand growth (Figure 7) has been on average 7.6%. The growth rate has shown a steady improvement in each five-year plan period. Despite the long-term strong growth, the per capita consumption in India (Figure 8) is quite low. With per capita income levels rising at a ~ 10% for the economy – the income levels currently at USD 700/per person should cross USD 1000 in the next 3 years. Note in South East Asia cement consumption showed a J-curve in demand at a level where the percapita income crossed USD 1000/person Figure 7: Demand growth on a rise (mn t)
India consumption
250
Figure 8: But per capita cons is low ((%))
% annual grwth(RHS)
12 10
200
8
150
6
100
900 700
4
500
50
2
300
0
FY92
FY97
FY02
FY07
FY12 E
Source: Deutsche Bank
100 -100
China
Japan Europe World Per capita consumption
US
Asia (ex China)
India
Source: Deutsche Bank
Indian cement demand skewed towards housing The demand from the housing sector is ~53% of the total Indian cement demand. Figure 9: Housing is the major driver… Defense 4%
Infrastructure 15% Roads 5%
Housing 53%
Irrigation 23%
Source: Deutsche Bank, NCAER
Fear of collapse of real estate prices has had virtually no impact on
There are fears of a slowdown in the demand from the housing sector due to a drop in real estate prices in the country. The worry is that builders may postpone construction of new buildings if the property prices were to correct.
cement demand
Page 8
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 10: …but not property prices (% Change YoY)
Cement demand growth - RHS
Housing Prices
(% Change YoY)
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10%
-5%
-20%
-10%
-30%
-15%
Source: Deutsche Bank, Builders Association, CMA
Proportion of cement demand from housing sector is estimated to come down
As Figure 10 shows, historically real estate prices have had little correlation with the cement demand growth. The cement demand growth in housing is more dependent on the number of new houses being built and repairs to houses. Even assuming a 7% growth in new houses (lower than the GDP growth), we get incremental cement demand to be about 4-5m tonnes .per year for the next three years.
Figure 11: New house builds in India assumed to grow at 7%, a rate lower than GDP growth Particulars
FY05
FY06
FY07e
FY08e
FY09e
FY10e
Urban pucca houses built per year (A)- mn
1.7
1.8
2.0
2.1
2.2
2.4
Cement consumption norm per house (B)-t
28.0
28.0
28.0
28.0
28.0
29.0
Cement consumed in Urban pucca houses (C)=A*B - mnt
47.6
51.4
55.5
59.4
63.0
69.1
2.2
2.3
2.5
2.6
2.8
2.9
Rural pucca houses built per year (D)-mn Cement consumption norm per house (E)-t Cement consumed in rural pucca houses (F)=D*E- mn t Repair Demand (H) Sub-total G= C+F +H As a proportion of total demand
6.0
6.0
6.0
6.0
6.0
7.0
13.2
14.0
14.8
15.7
16.7
20.6
3
3
5
7
9
10
60.8
65.4
70.4
75.1
79.6
89.7
52
51
51
50
49
48
Source: Deutsche Bank, National Housing
Infrastructure to give demand a big boost Assuming 10% cement intensity in projects, the top eight engineering companies in India would incrementally add 4-
Our analysis shows that Infrastructure should be the biggest growth driver for cement demand in the country. If we were to look only at order books of the top eight construction and manufacturing equipment companies in India, we find that their combined order book has virtually doubled over the last two years from INR1,000bn (USD25bn) to INR1,950bn (USD48.75bn) for completion over the next 24-30 months.
6mtonnes of demand per annum
Deutsche Bank Securities Inc.
Page 9
12 July 2007
Construction Materials Indian Cement Sector
Figure 12: Total order book of top 8 Indian engineering and construction companies (Rs. Bn) 2,500 2,000 1,500 1,000 500 FY05
FY06
FY07
Source: Deutsche Bank, BHEL, L&T, Siemens, ABB, IVRCL, Gammon, Punj Lloyd, Nagurjana,
Assuming 10% cement intensity in structures, the order book of these 8 engineering companies would incrementally add 4-6m tonnes of demand annually.
Infrastructure spending to propel the growth in medium term Infrastructure spending can drive an incremental cement demand of 46m tonnes over FY07-12E
As seen from Figure 13, India is likely to spend ~USD211bn on infrastructure over the next five years. These investments are much lower than the government’s estimate of USD320bn of spends over the same period. Our analysis, based on the bottom-up approach, suggests that the projects are likely to kick off on time. Therefore, the infrastructure investments could drive an incremental cement demand of 46m tonnes over FY07-12E.
Figure 13: Infrastructure demand growth buoys up cement demand (Rs billion)
Cement component of
Infrastructure investment
Demand of cement
Investment (%)
FY97-02
FY03-07
FY07-12e
FY97-02
FY03-07
4.2
66
103
250
1
2
4
Irrigation
6
574
1,452
2100
12
31
45
Ports
5
50
100
300
1
2
5
Power
-
866
1452
2400
13
19
36
Thermal
2
475
820
1100
3
6
8
Hydel
7
351
432
1000
9
11
25
Nuclear
3
40
200
300
0
2
3
Railways
4.2
464
606
800
7
9
12
Telecom
1
801
870
870
3
3
3
Tourism
5.5
6
29
30
0
1
1
6
586
1,379
1700
13
30
36
3,413
5,991
8,450
49
96
142
Airports
Urban infrastructure Total
FY07-12e
Source: Deutsche Bank, Planning Commission, NICMR
Pre-election spends can spice up demand growth As seen in Figure 14, the ´Election effect´ has by and large pushed cement demand ahead of the trend line. National elections are scheduled for September 2009 and several state
Page 10
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
assembly elections are lined up for the next two years. This could spice up the total demand growth in India. Figure 14: ´Election effect´ to boost cement demand
(% YoY)
Average growth in last 3 years
Election year growth
25 Growth can be
20
higher in FY10 than estimated
Higher base in
15
2003
10 5 0 2002
2003
2004
assembly assembly assembly
2004
2005
2006
2009e
national
assembly
assembly
national
Source: Deutsche Bank
Pan-India cement demand to grow at 10% CAGR over FY07-10 Based on our sectoral outlook, we have marginally revised our demand growth assumptions in India to 10% from 9%. The key reasons are: (1) Stronger-than-expected order book of Indian construction and engineering companies (2) No slowdown seen in construction of houses at important consumption centers Figure 15: Robust demand growth to continue (Mn tonnes)
Domestic demand
Demand growth rate - RHS
(%)
220
11%
200
10%
180
9%
160 8%
140
7%
120 100
6% FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA
On a regional basis we expect North and West to lead the demand growth trends in India. While South could also do well, the skewed nature of projects in North and West makes us believe that demand growth in South could be a shade lower than other regions.
Deutsche Bank Securities Inc.
Page 11
12 July 2007
Construction Materials Indian Cement Sector
Figure 16: Regional demand growth assumptions Regions
FY06
FY07
FY08e
FY09e
North
27.1
29.9
33.4
37.0
41.1
11
Infrastructure projects like Delhi Airport, 15000MW hydro projects to drive demand growth
East
22.6
23.9
26.2
28.8
31.6
10
Recent pick –up in infrastructure projects to drive growth
West
25.7
28.7
31.8
35.2
39.0
11
Urban infrastructure and state spends driving demand
South
37.6
43.5
47.9
52.7
57.9
10
Demand driven mainly by high income levels of population
Central
20.6
22.4
24.2
26.1
28.2
8
Elections, irrigations would act as triggers for demand
133.9
148.9
163.8
180.3
198.3
10
9%
11%
10%
10%
10%
All India y-o-y chg (%)
FY10e CAGR (%) FY07-10e
Remarks
Source: CMA, Deutsche Bank
Page 12
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Deficit to continue till 1HFY10 Estimates corroborate deficit forecasts till H1FY10/CY09 Our estimates show that the Indian cement sector will face a deficit scenario till 1HFY10/CY09. Figure 17 summarizes our estimates for cement demand and supply, and utilization for the next three years. Figure 17: Cement deficit till CY09 Year
Net Clinker capacity at start of year (mnt)
Additions in Clinker Clinker year (mnt) Utilisation Utilisation existing new units (%) units (%)
Cement : Clinker Ratio(x)
Cement Domestic Production Demand (mnt) (mnt)
Exports cements (mnt)
Exports clinker (mnt)
Surplus / (Deficit)
FY99
81
7
84
40
1.19
81.7
79.2
2.06
1.5
0.4
FY00
87
2
97
40
1.11
94.2
91.3
1.95
1.2
1.0
FY01
89
5
89
40
1.16
93.6
88.5
3.14
2.0
1.9
FY02
95
12
83
40
1.27
102.4
96.0
3.38
1.8
3.1
FY03
107
5
88
40
1.17
111.4
107.2
3.47
3.5
0.7
FY04
112
5
93
40
1.12
117.5
112.8
3.38
5.6
1.3
FY05
117
6
93
40
1.16
127.6
122.9
4.07
5.92
0.6
FY06
123
5
95
40
1.22
141.8
135.6
6.00
3.15
0.3
FY07
127
4
92
60
1.28
155.7
149.0
5.87
3.15
0.8
FY08e
131
6
91
60
1.29
162.0
163.9
5.57
3.15
(7.4)
FY09e
138
30
94
40
1.26
176.5
180.3
5.57
3.15
(9.3)
FY10e
167
18
90
40
1.30
206.8
198.3
5.57
3.96
3.0
Source: Deutsche Bank, CMA
Lack of planned maintenance has resulted in forced plant outages, risking utilization levels of existing plants
While deriving our estimates for utilization levels, we are faced with the daunting task of trying to figure out the threat of forced outages faced by existing cement capacities. Figure 18 shows that the cement companies, except in South and East India, have skipped the required one-month shutdowns for planned maintenance. Figure 18: Plants skip desired maintenance shutdowns (%)
FY06
FY07
110% 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% North
South
East
West
Central
Source: Deutsche Bank, CMA
Deutsche Bank Securities Inc.
Page 13
12 July 2007
Construction Materials Indian Cement Sector
So we believe that existing plants may find it difficult to keep pace with demand growth. While it is difficult to pinpoint the exact impact of such problems, the following can happen 1.
Have more forced outages of clinker units :Since almost all units are skipping the required shut-downs for maintenance schedules, there have been increasing instances of shut-downs due to breakdowns
2.
Grinding units working at 22 hours/day versus 16 hours/day stated by norms. We do not know how long this would continue before outages become widespread.
3.
Lack of contractors to undertake O&M as labor force has been shifted to greenfield capacities.
Based on our demand-supply analysis, cement companies will have to work at 90%+ utilisation levels for the next three years. Our worry is that if things aggravate, the demand itself could slow down due to lack of supplies unless supplies from the Asian countries help meet at least some cement demand in India.
Page 14
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Cement prices on a roll again Data-points suggest strong price momentum to continue Cement companies have demonstrated their ability to pass hike in state levies to end-users
Notwithstanding the government intervention, we are pleased that Indian cement producers have demonstrated their ability to pass hike in state levies to end-users. This is akin to the cigarette industry which has time and again demonstrated its ability to pass on the state levies. Importantly, the cement industry did not pass on the full benefit of excise reduction to end-users thus demonstrating the current bargaining power. We believe cement prices in India would be governed largely by the demand-supply gap and consolidation levels in Indian markets. As seen in Figure 19, India is likely to see a deficit scenario in cement for the next two years and a marginal surplus in FY10E. Figure 19: Deficit to continue (Mn tonnes)
Total Despatches
Production
220
Deficit ~ 5% of production
200 180 160 140 120 100 FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA
Steady rise in consolidation On an all India level, one would find that India has a lot to do in terms of M&A for reaching a threshold level – wherein they could enjoy long-term sustained buying power. Currently, the top two groups i.e. Grasim-Cemco and Holcim (ACC-Ambuja) control 45% of the country’s cement capacity. The next largest player is India Cements, with 9.2m tonnes of capacity. These five companies control about 48% of the effective capacity and close to 46% of the total production. But cement being a regional business and if we were to look at the regional level of consolidation, it is only a shade below that of Far East Asia and Europe. We have divided the country into four regions i.e. North, South, East and West. As seen from Figure 20the market share of the top six players in almost all regions of the country is above 70%. In fact, the North, where the top six players hold 80% of the market, looks best placed in terms of progress on gradual consolidation. The current consolidation in the sector is only likely to increase as most of smaller units in India may see delays in commissioning.
Deutsche Bank Securities Inc.
Page 15
12 July 2007
Construction Materials Indian Cement Sector
Figure 20: Gradual rise in consolidation Market share of top 3
Market share of next 3
(% market share)
90 80 70 60 50 40 30 20 FY02
FY04
FY07
FY02
North
FY04
FY07
FY02
East
FY04
FY07
FY02
West
FY04
FY07
South
Source: CMA,Deutsche Bank
Consolidation in the sector to rise as small cement players find difficulty in
Our estimates are based on the assumption that the pan-India average price will be Rs235 per 50kg bag in FY08E and Rs245 per 50 kg bag in FY09E.
ramping up production from new units
Figure 21: Our assumptions factor in price increase lesser than inflation Rs /50 kg bag
All India cement prices(INR/bag)
290 270 250 230 210
Current and forecasted price range
190 170 150 Historical price range 130
Mar-10e
Mar-09e
Q4FY08e
Q3FY08e
Q2FY08e
Q1FY08e
Q4FY07
Q3FY07
H1FY07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
110
Source: Deutsche Bank, CMA
Page 16
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Price estimates lower than landed cost of imports Our estimates for cement prices look realistic as we assume cement prices are at a discount to landed cost of imports. Historically in India, we have seen that commodity need not always be priced lower than landed cost of imports. In times of tight utilization, commodity prices can trade at a premium to landed cost of imports. Figure 22: Domestic prices have been lower than landed cost of imported cement Landed cost of imported cement
Domstic prices
(Rs. per tonne)
6,000
5,000 4,000
3,000 2,000 FY04
FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA, Company
Deutsche Bank Securities Inc.
Page 17
12 July 2007
Construction Materials Indian Cement Sector
Asymmetric margin improvement Cost pressures to differentiate companies’ earnings International coal prices have hit a 10-year high though domestic coal prices have hardly moved up. Figure 23: Rising international coal prices Imported Coal - SA
Baltic Dry Index
(INR/t)
1HCY07
2HCY06
1HCY06
2HCY05
1HCY05
2HCY04
1HCY04
2HCY03
1HCY03
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
Source: Deutsche Bank, Bloomberg
As seen in Figure 23, the players who have used international coal got a double-whammy due to the coal and freight costs. Currently, the domestic coal prices are at a 40-45% discount to landed cost of imported coal (adjusted for the calorific value). The usage pattern of domestic and international coal is mainly driven by plant locations and coal mine linkage. Figure 24: Coal usage pattern Companies
Proportion of International coal use (%) Prop. of Domestic coal/lignite use (%)
Pet coke usage (%)
Associated Cement Cos. Ltd.
15
85
Ambuja Cements Ltd.
40
60
0 0
Grasim Industries Ltd.
30
30
40
India Cements Ltd.
70
30
0
Shree Cement Ltd.
20
30
50
UltraTech Cement Ltd.
40
60
0
Source: Deutsche Bank, Company
At this juncture, companies with domestic coal linkages would be at an advantage vis-à-vis those tied up with supplies of imported coal. ACC, with the highest proportion of usage of domestic coal, is also likely to report the maximum increase in EBITDA margins.
Page 18
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 25: EBITDA margins (FY05- FY10E) Company
FY08e YoY Change (bps)
FY09e YoY Change (bps)
FY10e YoY Change (bps)
FY05
FY06
FY07
Associated Cement Cos. Ltd.#
16.9
18.2
29.4
38.5
912
41.2
264
36.7
(449)
Ambuja Cements Ltd.#
30.3
34.9
41.6
666
47.1
554
39.6
(747)
Grasim Industries Ltd.
24.2
24.4
30.4
32.9
249
36.7
379
31.8
(488)
India Cements Ltd.
12.8
17.4
32.8
37.9
511
36.3
(156)
29.0
(731)
Shree Cement Ltd.
29.0
29.4
46.3
47.8
150
50.3
257
40.7
(963)
UltraTech Cement Ltd.
14.0
17.9
30.0
35.1
505
41.2
618
37.6
(363)
Source: Deutsche Bank, Company, #Dec year ending, CY06=Mar 07
Grasim and Shree Cement Limited will be in a relatively advantageous position as both the companies use pet coke, which is insulated from global freight cost movements and is more dependent on crude oil prices. There could be cost savings accruing to players who are investing in lignite/coal-based power plants in lieu of furnace oil based DG sets. UltraTech Cemco is implementing a 92MW lignitebased power plant, while Grasim is commissioning a 95MW thermal power plant. Apart from the energy cost savings, companies are also looking at improving their distribution efficiencies. The lead distance for most cement players would also shrink as most cement players start looking at regional markets for better profitability. These savings could reduce the freight costs. Finally, the discount between trade sale and non-trade sale would also come down. Broadly, for the industry, this is as important as the price rise.
Deutsche Bank Securities Inc.
Page 19
12 July 2007
Construction Materials Indian Cement Sector
Valuations are attractive Stocks yet to touch Jan-07 levels Indian cement stocks have rebounded sharply after the Indian finance minister stated that there was no price freeze in the sector. The stocks have risen by 20-25% over the last two weeks; but are still below the Jan-07 levels. Figure 26: Performance of cement stocks vs BSE Sensex ACC
Ambuja Cem
Grasim
India Cem
Shree Cem
Sensex
Ultratech
320 290 260 230 200 170 140 110 80 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Source: Deutsche Bank, Bloomberg
Figure 27 shows that the impact of the government’s statements on stock prices has lessened. Figure 27: Government statements have increasingly lesser impact on stock performance Date
Event
Abs Perf of DB cement Index (%)
Rel perf of DB cement Index (%)
One day
Three days
One day
Three days
Remarks
22nd Jan 07
Imports duties on cement cut to zero from 12.5%
(5.5)
(5.0)
(4.3)
(5.6)
Biggest single-day correction
28th Feb 07
Govt raises excise duty on higher priced cement
(2.6)
(6.2)
(4.3)
(2.2)
Biggest three-day correction
2nd March 07
Cement prices rise higher than incremental excise duties
(2.3)
(4.7)
1.4
(2.3)
Cement stocks o/p market
6th March 07
Industry Minister (IM) asks manufacturers to cut prices
(4.3)
(5.2)
(3.4)
(6.7)
Pains seen in sector
7th March 07
First meeting of cement manufactures and FM
5.1
(4.6)
1.4
(7.1)
Expectations of agreement brings relief
9th March 07
IM and manufactures agree for a one-year price freeze
(3.7)
(2.7)
(3.8)
0.0
Fears of earnings downgrades
19th March 07
FM asks cement industry to reduce prices
3.3
1.3
2.8
(3.9)
Surprisingly stocks end positive
22nd March 07
Second meeting of FM and cement manufactures
(0.7)
(2.8)
(0.5)
0.4
Deadlock remains
25th March 07
Second meeting of industry minister and cement manufactures
(1.0)
(2.0)
0.2
0.3
Both sides ask for concessions
3rd April 07
FM exempts domestic levies on imported cement
(1.4)
3.7
(2.7)
(0.7)
Few stocks end positive
6th April 07
Manufacturers say one-year price freeze no longer valid
3.7
3.4
1.2
0.8
Stocks react positively
7th April 07
Press reports of imports of cement from Pakistan
3.7
3.4
1.2
0.8
Stocks react positively
3rd May 07
Introduction of three-tier excise duty structure
(0.2)
(0.8)
0.79
0.22
Few stocks end positive
27th June 07
FM clarifies that there is no price freeze
6.9
7.6
6.4
6.0
Biggest single-day gains
Source: Deutsche Bank, Bloomberg * Bench –marked the DB cement index to BSE_30
Page 20
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Our estimates for FY09e are now 30-100% higher than consensus Based on our new price and volume estimates, our earnings estimates are significantly above the consensus. We believe our forecasts are realistic and factor in inflationary impact of coal and freight costs. Also, our pan-India cement prices for FY08E are estimated at 14% higher than FY07 and 3-4% higher for FY09E over FY08E cement prices. This looks conservative in view of the tight demand–supply scenario in the country. Figure 28: DB vs Consensus estimates Company
ACC#
---Consensus EPS*----
----DB EPS-----
--------Variance (%) -------
FY08
FY09
FY08
FY09
FY08
FY09
70.3
67.5
93.6
114.1
33
69
GACL#
9.8
9.4
10.1
13.2
3
41
Grasim
209.1
239.1
294.8
394.2
41
65
India Cement
22.0
19.9
28.9
27.0
32
35
Shree Cement
119.5
132.1
130.9
212.9
10
61
Shree Cement Cash EPS
183.3
223.8
234.2
299.0
28
34
70.8
71.2
97.8
144.4
38
103
UltraTech
Source: Deutsche Bank, # Dec year ending, CY06=FY07, *w.e.f 1st April 07
Valuations at discount to the region Indian companies are trading at a discount to global peers. We believe that cement stocks will see superior earnings growth and RoE, resulting in a re-rating of stocks. Figure 29: Comparative valuations of Indian companies vs global peers 9-Jul-07 Company
Currency Price (INR)
------EPS (INR)-----
-------P/E (x)--------
---EV/Ebitda (x)----
--EPS Growth (%)--
FY08e
FY09e
FY08e
FY09e
FY08e
FY09e
FY08e
FY09e
Indian Companies Associated Cement Cos. Ltd.
INR
1,046
92
112
11
9
7
5
63
26
Grasim Industries Ltd.
INR
2,765
304
412
9
7
6
4
37
34
Ambuja Cements
INR
132
10
13
13
10
8
6
19
41
India Cements Ltd.
INR
222
29
27
8
8
5
4
37
-7
Shree Cement Ltd.
INR
1,334
131
213
10
6
5
3
158
63
UltraTech Cement Ltd.
INR
893
98
144
34
53
Average of Indian Companies
9
7
7
4
11
8
6
4
Global Companies Adelaide Brighton
AUD
4
0.2
0.2
17
15
10
9
11
13
Anhui Conch Cement
HKD
52
2
3
30
20
17
13
40
48
Cimsa
TRY
10
1
1
8
8
6
5
16
4
CRH PLC
EUR
38
2
3
15
14
9
8
10
10
Holcim
PHP
8
0
1
22
14
10
7
91
55
Holcim Ltd
CHF
137
9
10
15
13
7
6
7
9
Indocement
IDR
6,300
277
422
23
15
11
8
72
53
EUR
135
9
11
15
13
8
7
12
20
Semen Gresik
IDR
51,300
2,743
3,617
19
14
10
7
26
32
Siam Cement
THB
292
22
22
13
13
9
9
-14
-1
16
13
9
8
Lafarge
Average of Global Companies
Source: Deutsche Bank estimates, Company, #Dec 06 considered as Mar 07, Global companies year ending is Dec; these companies are not covered by the author of this report, for further details please see https://gm.db.com/Equities
Deutsche Bank Securities Inc.
Page 21
12 July 2007
Construction Materials Indian Cement Sector
We believe that these advantages will unfold in the next two years, leading to accelerated earnings growth.
Target multiples assumed at discount to region and historical band As shown in Figure 30, EPS growth rates of Indian cement companies are forecasted to be better than those in the region and across the globe. Despite such high growth in earnings and higher RoE/RoCE, we have assumed that Indian cement companies would trade at 1214X PER and 7-8x EV/EBIDTA one-year forward, which is a marginal discount to that of international peers. This is also at the lower end of 12-year trading bands of the stocks. Figure 30: Target price summary Company Name
Target Price Recommendation
Target PER (x)
Target EV/E (x)
EV/Ton USD Prices as on 9th July
Upside / Downside (%)
1,350
BUY
14.0
8.0
283
1,046
29
158
BUY
14.0
8.0
212
132
20
3,320
BUY
14.0
NA
161
2,765
20
300
BUY
12.0
7.5
225
222
35
Shree Cement
1,750
BUY
12.0
7.5
209
1,334
31
Ultratech
1,140
BUY
12.0
7.5
189
893
28
ACC# Ambuja Cements# Grasim India Cement
Source: Deutsche Bank, Dec year ending, CY06=FY07
Top picks are ACC and Ambuja Cement in large caps and Shree Cement and India Cement among mid-caps. Figure 31 gives a snapshot of key financials of cement companies under our coverage. Shree Cement and Grasim will likely have the highest volume growth. Ambuja Cements and UltraTech will have the highest growth in realisations. Figure 31: Key financial metrics Company Name
Volume Growth
Avg. Realization ----EBITDA Margin (%) ----
EBITDA/t
----------RoE (%) ----------
----------RoCE (%) --------
FY08 CAGR-FY07-09e ACC#
CAGR-FY07-09e
FY07
FY08e
FY09e
USD
FY07 FY08e
FY09e
FY07
FY08e FY09e
8
9
29
39
41
34
41
47
42
33
37
35
Ambuja Cements#
13
21
43
47
40
34
36
38
24
27
29
18
Grasim
16
7
30
33
37
36
31
31
31
22
25
27
India Cement
7
9
33
38
36
30
22
29
22
17
28
25
Shree Cement
33
14
46
48
50
35
46
69
67
22
45
60
Ultratech
14
17
30
35
41
31
56
55
55
36
40
46
Source: Deutsche Bank, #Dec year ending, CY06=FY07
Page 22
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
ACC Bloomberg: ACC IN
Top pick in the sector
1,072.40 1,350.00 1,172.60 - 704.65 14,911
Key changes
Earnings to benefit from tight cement supply scenario We forecast realizations for ACC to rise by 8.5% YoY in CY07e and a further 13% YoY in CY08e. Accordingly, ACC could report net sales CAGR of 21% in CY06-08E driving earnings CAGR of 32% over the same period. ROE is estimated to rise to 47% in CY07E. ACC’s margin expansion could be the best in Indian cement industry We estimate ACC to report 1,176bps expansion in margins for CY06-08E which is amongst the highest in India driven by an insignificant impact from the rise in imported coal prices as ACC’s proportion of purchase of imported coal versus domestic coal is amongst the lowest in peer group. In addition, the margin expansion could be even better if the following were to pan out: (1) Further narrowing of the differential between retail and wholesale prices and (2)Further decline in landed cost of coal as freight cost for coal shipments could decline. TP of Rs1,350 based on 3-year average PE and EV/EBITDA multiples Our target price assumes an average PE multiple of 14x FY08E and EV/EBITDA of 8.0x FY08E. Our target PE and EV/EBITDA multiples are based on the average PE and EV/EBITDA of the last three years and are in the lower quartile of the 10-year forward valuation band. At our target price, the implied EV/t of USD232 is reasonable considering that the stock traded in the USD250-450/t range in the previous up-cycle. Key risks are lower-than-expected utilization levels and higherthan-expected energy costs. Note that a 5% rise in energy cost could lower earnings by ~1%. Also, a 5% lower-than-expected realization can result in a 13% drop in earnings.
Ç Ç Ç Ç
52.4% 8.6% 7.7% 6.9%
Price/price relative 1500
200 150
1000
100 500
50 0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Raising TP to Rs1,350(+30% upside) Our new EPS estimates for ACC are Rs93.6/share (+8% vs previous estimate) in CY07 and Rs114/share (+18% vs previous estimate) in CY08. These are 33% (CY07E) and 69% (CY08E) higher than consensus. We assume cement prices in CY08 would be higher by ~9.6% than those in CY07. Despite, the recent run-up, the stock is trading at the bottom of its historical valuation band. We reiterate Buy with a new TP of Rs1,350 which implies a CY08E PE of 11.8x.
Price target 886.00 to 1,350.00 Sales (FYE) 68,232 to 74,099 Op prof margin (FYE) 31.3 to 33.7 Net profit (FYE) 16,008.8 to 17,116.0
7/ 05 10 /0 5
Reuters: ACC.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) ACC (R.H. Scale)
Performance (%) Absolute BSE 30
1m 32.9 5.5
3m 47.7 13.7
12m 28.4 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
199,894 4,947 186.6 – 65 6.6
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
47.4 -12.9 228.84 4.69 34.7 33.7
Forecasts and ratios Year End Dec 31
2005A
2006A
2007E
2008E
2009E
32,207.0
58,034.8
74,099.0
84,465.5
86,725.0
EBITDA (INRm)
5,356.8
16,233.5
27,508.0
33,625.2
30,550.2
Reported NPAT (INRm)
2,168.3
10,119.7
17,116.0
20,932.4
18,687.0
Reported EPS FD(INR)
11.84
55.02
91.73
112.18
100.15
DB EPS FD(INR)
11.84
55.02
91.73
112.18
100.15
OLD DB EPS FD(INR)
11.56
56.91
83.72
93.17
0.00
% Change
2.4%
-3.3%
9.6%
20.4%
–
DB EPS growth (%)
-32.5
364.7
66.7
22.3
-10.7
PER (x)
35.5
15.4
11.7
9.6
10.7
EV/EBITDA (x)
16.2
9.1
6.9
5.4
5.9
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Sales (INRm)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Deutsche Bank Securities Inc.
Page 23
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
#$% &'
India
Reuters Code
ACC.BO
Price as of 12 July
INR 1,072.40
Price Target
INR 1,350.00
Web Site http://www.acclimited.com Associated Cement Companies (ACC) is one of the oldest cement companies in India. ACC`s main businesses comprise manufacturing and marketing of cement, ready-mixed concrete, bulk cement and refractory products.
! +91 22 6658 4811
[email protected]
())*
())+
()),
())-%
()).%
())/%
10.13 17.5 ¯ 10.13 17.5 25.79 14.79 6.9 0.00 0.0 64.79 3.8 176 31,103 42,649 1.3 11.3 21.2 1.7
17.53 15.1 73.0 17.53 15.1 10.73 -19.84 24.6 0.00 0.0 78.95 4.3 183 48,224 60,435 1.5 9.9 14.3 2.1
11.84 35.5 -32.5 11.84 35.5 30.73 6.52 13.7 0.00 0.0 108.56 4.9 183 77,067 87,010 2.7 16.2 23.4 2.7
55.02 15.4 364.7 55.02 15.4 127.18 98.47 6.7 0.00 0.0 158.35 6.9 184 156,182 148,343 2.6 9.1 10.8 5.8
91.73 11.7 66.7 91.73 11.7 72.83 44.44 14.7 0.00 0.0 228.84 4.7 187 199,894 188,963 2.6 6.9 7.6 5.3
112.18 9.6 22.3 112.18 9.6 124.43 59.96 8.6 0.00 0.0 310.81 3.5 187 199,894 181,886 2.2 5.4 5.9 4.0
100.15 10.7 -10.7 100.15 10.7 126.11 45.56 8.5 0.00 0.0 368.72 2.9 187 199,894 179,738 2.1 5.9 6.7 3.2
32,845 3,777 1,769 0 2,008 -929 0 1,224 0 536 0 1,767
39,021 6,103 1,869 0 4,235 -882 0 480 0 657 0 3,175
32,207 5,357 1,644 0 3,713 -638 0 492 0 1,399 0 2,168
58,035 16,234 2,543 0 13,691 -520 0 826 0 3,877 0 10,120
74,099 27,508 2,529 0 24,979 -720 0 1,032 0 8,175 0 17,116
84,465 33,625 2,995 0 30,630 -720 0 1,140 0 10,118 0 20,932
86,725 30,550 3,618 0 26,932 -720 0 1,248 0 8,773 0 18,687
4,535 0 -1,934 2,600 -2,542 240 -433 3,593 0 3,401 3,459 134
1,958 0 -5,579 -3,622 553 142 -275 4,229 0 4,096 1,028 3,201
5,627 0 -4,433 1,195 -71 76 -855 -4,861 663 -4,977 -3,853 -1,007
23,392 0 -5,281 18,110 -2,093 22 -733 -3,003 -217 -3,930 12,087 -15,090
13,589 0 -5,296 8,293 0 -252 -3,203 288 -1,247 -4,413 3,880 -3,592
23,218 0 -12,030 11,188 0 -2 -2,816 0 -1,292 -4,110 7,078 -7,078
23,532 0 -15,030 8,502 0 -2 -4,694 0 -1,658 -6,354 2,148 -2,148
3,807 24,721 0 0 3,820 9,751 42,099 19,173 11,264 30,437 11,662 0 11,662 -1,173 15,366 27,028
4,835 28,431 0 0 3,267 11,564 48,097 20,312 13,178 33,491 14,606 0 14,606 -366 15,478 30,084
981 31,220 0 0 3,338 13,184 48,723 14,262 14,786 29,048 19,675 0 19,675 -818 13,281 32,956
13,068 33,959 0 0 5,431 13,861 66,319 10,660 26,112 36,771 29,547 0 29,547 -9,588 -2,408 27,139
16,948 36,726 0 0 5,431 19,296 78,401 11,448 24,253 35,701 42,700 0 42,700 -3,012 -5,500 37,200
24,026 45,762 0 0 5,431 21,241 96,459 11,448 27,016 38,465 57,995 0 57,995 -1,874 -12,577 45,417
26,173 57,173 0 0 5,431 21,665 110,442 11,448 30,194 41,642 68,801 0 68,801 -2,660 -14,725 54,076
NM 11.5 6.1 0.0 16.7 13.3 8.2 5.9 1.1 131.8 2.2
18.8 15.6 10.9 0.0 24.2 13.3 11.0 14.3 3.0 106.0 4.8
-17.5 16.6 11.5 0.0 12.7 8.3 8.5 13.8 2.7 67.5 5.8
80.2 28.0 23.6 0.0 41.1 34.9 33.3 9.1 2.1 -8.2 26.3
27.7 37.1 33.7 0.0 47.4 54.8 57.4 7.1 2.1 -12.9 34.7
14.0 39.8 36.3 0.0 41.6 51.9 53.0 14.2 4.0 -21.7 42.5
2.7 35.2 31.1 0.0 29.5 38.6 37.1 17.3 4.2 -21.4 37.4
0 102 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
3 4 102
"" +91 22-6658-4824
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
())&
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
102 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
32.9%
43.4%
28.4%
INR 704.65 - 1,172.60 INR 199,894 m USD 4,947 m
Company Identifiers Bloomberg Cusip SEDOL
ACC IN ¯ 6155915
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Page 24
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate ACC a Buy due to the following: (1) We expect the company to report earnings CAGR of 32% over CY06-08E and ROE of 47% in CY07E. (2) Net cash balance sheet with CY07E RoE at 47% and free cash flow yield of ~6-10% in the forecast period. (3) Our estimates are 33% (CY07) and 69% (CY08) higher than consensus and we expect the consensus earnings upgrade to drive the stock outperformance. (4) Benefits flowing from superior bargaining power driven by our forecast of tight utilization levels over FY07-10E. (5) Our revised target price of Rs1,350 per share offers 30%upside potential. Note our new estimates are based on revision our pan-India cement price forecast for CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (+9.6% YoY). ACC could also report the maximum jump in margins as its proportion of use of Indian coal is the highest amongst peers. Indian coal is at a 35-40% discount to landed cost of imported coal.
Valuation We have thus used an average PE multiple of 14x (earlier assumed 10xCY07E) FY08E (Mar) and 8.0xEV/EBITDA (earlier assumed 7xCY07E) FY08E (Mar) to arrive at the target price of INR1,350/share. It is important to note that these multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. This concern stands reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users and (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. We note that our target multiples are at the bottom of quartile of 10-year price bands and are also lower than the current valuations of the regional peers. Figure 32: 12-month forward rolling P/E bands Price (INR)
10
12
15
Figure 33: 12-month forward rolling EV/EBITDA band Price (INR)
17
6
9
12
15
2,700
1,800
2,400
Source: Deutsche Bank
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
0 Mar-94
Jun-07
Mar-07
Dec-06
Jun-06
Sep-06
Mar-06
300
Dec-05
600
200 0 Sep-05
900
400
Jun-05
1,200
600
Mar-05
1,500
800
Dec-04
1,800
1,000
Sep-04
1,200
Jun-04
2,100
Mar-04
1,400
Mar-95
1,600
Source: Deutsche Bank
We note that EV/t at our target price of Rs1,350 is USD232 in CY08E. This looks reasonable vis-à-vis the position of the cycle. In the previous up-cycle (in 1994-1996), the stock traded in Deutsche Bank Securities Inc.
Page 25
12 July 2007
Construction Materials Indian Cement Sector
the range of USD250-450/t when the EBITDA/t was 10-16USD/t. In the current up-cycle, the EBITDA/t is likely to be in the region of USD 30-34/t. Note that post-capex free cash for the next three years is 33% of the market capitalization. This could be used for a higher dividend payout. In such a case, dividend yield can go up to ~4%. Also the ROE at 47% should be amongst the best in the industry. Figure 34: 12-month forward EV/t (x) and EBITDA/t (x) 250
EV/Ton - LHS
35
Ebitda/Ton - RHS
30
200
25 150
20 15
100
10 50
5
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
0 Mar-94
0
Source: Bloomberg company data, Deutsche Bank
Risks ACC is a high-beta stock and any risk on the liquidity front would impact stock returns. The key variables impacting the earnings are: (1) Assumptions on cement realizations: Our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E In case the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis on our earnings models indicates that a 5% lower-than-expected price realization reduces our earnings estimates by ~13%. On the positive side, 92% of ACC’s cement sales are that of blended cement. The price of blended cement is about 3-5% lower than that of ordinary cement. As utilization rates pick up, difference between the two categories of cement would dip and ACC would stand to gain the most. (2) Assumptions on coal prices: Indian base coal prices have not been revised for the last two years. There is a possibility of the revision of coal prices sooner than later. We have assumed 11% CAGR rise in coal cost for the next three years. Any increase over and above and our base case estimates would impact the company’s earnings. Based on our sensitivity analysis we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~1% in CY07E and ~2% in CY08E. Figure 35: Sensitivity analysis CY2007e
CY2008e
CY2009e
Base case estimates-EPS(Rs/share)
93.6.0
114.1
102.0
If cement prices are 5% higher than estimates
105.9
128.1
116.5
13.1
12.3
14.2
If cement prices are 5% lower than estimates
81.4
100.0
87.6
Chg with respect to base case estimates (%)
(13.1)
(12.3)
(14.2)
If fuel prices are 5% higher than estimates
92.5
112.2
99.9
Chg with respect to base case estimates (%)
(1.2)
(1.7)
(2.1)
Chg with respect to base case estimates (%)
Source: Deutsche Bank
Page 26
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions Based on our revised price forecasts, we expect average realisation to be higher by 8.5% for CY07E and by 13% for CY08E over our earlier estimates. It is important to note that we have not changed our sales volume assumptions for the next two years. Figure 36 underlines our main assumptions. We have increased our cost estimates on the raw material front as ACC has enhanced the blending ratio from 84% to 92% in FY07E. Figure 36: Key assumptions ------------------------CY07E---------------------------Particulars
Old Estimates
New Estimates
-------------------------CY08E-----------------------
Change (%)
Old Estimates
New Estimates
Change (%)
Sales volume (m tonnes)
20.52
20.52
-
21.75
21.75
-
Average realisation (INR/tonne)
3,157
3,427
8.5
3,276
3,709
13.2
Raw Material
332
382
14.9
336
397
18.1
Freight
550
500
(9.1)
578
525
(9.1)-
Power and fuel
552
537
(2.6)
565
551
(2.4)
Cost (INR/tonne)
Source: Deutsche Bank
Forecast strong earnings ahead Our revised earnings estimates, based on higher price realizations, are 8% and 18.8% higher than previous estimates for CY07E and CY08E respectively. We thus forecast a net sales growth of 21% CAGR for CY06-08E, driving net profit growth of 32% CAGR over the same period. Figure 37: Key financials at a glance ---------------------CY07E-------------------------Particulars (INR mn)
Old Estimates
New Estimates
------------------------CY08E----------------------
Change (%)
Old Estimates
New Estimates
Change (%)
Net sales
69,590
74,099
6.5
76,128
84,465
11.0
Expenditure
45,430
46,591
2.6
49,214
50,840
3.3
EBITDA
25,191
28,540
13.3
28,054
34,765
23.9
2,529
2,529
-
2,785
2,785
-
400
720
80.0
400
720
80.0
22,613
25,642
13.4
25,220
31,611
25.3
Depreciation Interest PBT Tax
6,456
8,175
26.6
7,212
10,189
41.3
PAT
16,157
17,467
8.1
18,008
21,422
19.0
86.7
93.6
8.0
96.6
114.8
18.8
EPS (INR) Ratios EBITDA/tonne (INR)
1,158
1,391
20.1
1,217
1,427
17.3
ROE (%) (#)
44
47
345
35
42
631
RoCE (%) (#)
35
37
193
31
35
396
# indicates change in bps Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 27
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
Ambuja Cements Ltd Bloomberg: ACEM IN
Huge FCF- Buy
127.80 158.00 148.40 - 99.55 14,911
Key changes
It’s official – the price-freeze was just a mirage As highlighted in our sector note, we are now more sanguine on Indian tight supply scenario lasting till CY09E and accordingly in line with our sector price outlook, we have revised the cement price forecast for Ambuja by ~4% for CY07 and 21% for CY08. We note that despite fears of price-freeze, net average India price has moved up by 5% over that of March 07 with about 2-3% gains coming in the current month. Accordingly, we forecast an EPS of INR10.1 (up 10.2%) for CY07E and INR13.2 (up 46.2%) for CY08E. Our estimates are in line with consensus for CY07E but 38% above consensus for CY08E. Stock is trading at bottom of trading band Despite the recent run-up in the stock price, the stock is trading at the lower end of the valuation band. Our new target price is derived by using an average of target P/E to 14x FY08E and target EV/E to 8x FY08E. Note these multiples are same as those used by us prior to risk to long-term earnings emerging from fears of effects of government intervention on long-term profitability. With cement companies demonstrating their ability to pass on cost inflation etc to end-users, we believe that these concerns have mitigated. Key risks Key risks are volatility in the cement prices and rise in fuel prices. Our sensitivity analysis shows that a rise of 5% in power and fuel costs would impact earnings by ~2%. Also a 5% rise/drop in cement prices would result in ~15% rise/drop in earnings in CY07E.
128.00 to 158.00 Ç 56,648 to 58,244 Ç
23.4% 2.8%
Price/price relative 150
200 150
100
100 50
50
0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Revising target price upwards to INR158/share (+20% upside) Our new estimates for CY08 are 46% higher than our earlier estimates and 41% higher than the consensus. Ambuja Cements has a strong balance sheet with CY07E net cash of INR3.5bn. While operating free cash flow post-capex for next three years is 23% of the market capitalization, the total free cash flow to be generated in CY07E alone would be INR.44bn. This cash can be used by the company either for a buyback or a special dividends. Also even if the parent decides to make an open offer, the cost of open offer would stand greatly reduced. Reiterate Buy with a target price of Rs158/share.
Price target Sales (FYE)
7/ 05 10 /0 5
Reuters: ACEM.BO
Buy Price at 11 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) Ambuja Cements Ltd (R.H. Scale)
Performance (%) Absolute BSE 30
1m 17.0 5.9
3m 18.5 13.1
12m 20.9 40.5
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
173,664 4,298 1,517.1 – 76 4.9
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
35.6 -7.2 31.16 4.00 38.0 35.9
Forecasts and ratios Year End Jun 30
2005A
2006A
2007E
2008E
2009E
25,970.5
63,931.3
58,243.8
69,669.5
67,981.9
EBITDA (INRm)
7,124.0
21,348.0
24,041.0
31,848.6
25,976.7
Reported NPAT (INRm)
4,565.5
14,829.7
15,333.4
20,072.1
14,741.6
Reported EPS FD(INR)
3.50
10.66
10.39
13.23
9.72
DB EPS FD(INR)
3.50
10.66
10.39
13.23
9.72
DB EPS growth (%)
48.7
204.5
-2.5
27.3
-26.6
PER (x)
13.2
Sales (INRm)
15.0
7.9
12.3
9.7
EV/EBITDA (x)
9.6
5.2
6.4
4.5
5.5
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 28
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' () * #
India
Reuters Code
ACEM.BO
Price as of 11 July
INR 127.80
Price Target
INR 158.00
Web Site http://www.gujaratambuja.com/ ! ! GACL is Indias third largest cement company with a capacity of 12.5 mn tons, Holcim, the second largest cement manufacturer in the world, bought 14.8 per cent promoters stake in the GACL for Rs 21.4 billion
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
+)),
+))-
+)).
+))/'
+))0'
+))1'
2.35 15.9 ¯ 2.35 15.9 8.09 2.89 4.6 0.00 0.0 14.91 2.5 1,259 47,163 49,062 2.5 9.1 13.3 2.2
3.50 15.0 48.7 3.50 15.0 4.76 4.31 11.0 0.00 0.0 17.11 3.4 1,350 70,901 68,678 2.6 9.6 13.3 3.3
10.66 7.9 204.5 10.66 7.9 14.73 7.03 5.7 0.00 0.0 25.66 3.9 1,434 121,108 110,681 1.7 5.2 6.1 3.9
10.39 12.3 -2.5 10.39 12.3 12.47 10.07 10.2 0.00 0.0 31.16 4.0 1,517 173,664 153,910 2.6 6.4 7.4 5.6
13.23 9.7 27.3 13.23 9.7 17.26 11.99 7.4 0.00 0.0 38.35 3.3 1,517 173,664 144,872 2.1 4.5 5.1 4.9
9.72 13.2 -26.6 9.72 13.2 10.64 5.37 12.0 0.00 0.0 43.64 2.9 1,517 173,664 143,455 2.1 5.5 6.5 4.0
19,621 5,365 1,686 0 3,679 -784 0 428 0 467 0 2,856
25,971 7,124 1,954 0 5,170 -848 0 746 0 503 0 4,566
63,931 21,348 3,280 0 18,069 -802 0 957 0 3,394 0 14,830
58,244 24,041 3,108 0 20,933 -550 0 957 0 6,006 0 15,333
69,670 31,849 3,572 0 28,276 -515 0 957 0 8,646 0 20,072
67,982 25,977 4,036 0 21,940 -515 0 957 0 7,641 0 14,742
10,192 0 -6,549 3,643 907 196 -1,179 -4,816 1,627 -4,172 379 -5,195
6,420 0 -606 5,815 -1,141 934 -2,273 -1,422 -354 -3,116 1,558 -2,981
21,116 0 -11,041 10,075 -2,229 318 -5,259 -3,670 2,281 -6,331 1,515 -5,186
18,916 0 -3,645 15,271 -1,033 0 -6,994 0 1 -6,993 7,245 -7,245
26,192 0 -8,000 18,192 0 0 -9,155 0 1 -9,154 9,038 -9,038
16,140 0 -8,000 8,140 0 0 -6,724 0 1 -6,723 1,417 -1,417
688 24,982 0 0 10,110 4,227 40,007 12,697 7,181 19,878 20,129 0 20,129 217 12,009 32,137
2,247 23,634 0 0 11,251 5,013 42,144 11,275 7,768 19,043 23,101 0 23,101 757 9,028 32,129
3,780 31,396 0 0 15,301 7,994 58,470 8,654 10,886 19,540 38,930 0 38,930 -320 4,874 43,804
11,025 31,932 0 0 16,334 10,137 69,428 7,604 14,554 22,158 47,270 0 47,270 3,467 -3,421 43,850
20,063 36,360 0 0 16,334 10,178 82,934 7,604 17,141 24,746 58,188 0 58,188 3,081 -12,458 45,729
21,479 40,323 0 0 16,334 10,901 89,037 7,604 15,227 22,831 66,206 0 66,206 3,288 -13,875 52,331
NM 27.3 18.7 0.0 15.8 14.1 13.5 33.4 3.9 59.7 4.7
32.4 27.4 19.9 0.0 21.1 16.1 16.9 2.3 0.3 39.1 6.1
146.2 33.4 28.3 0.0 47.8 40.5 51.2 17.3 3.4 12.5 22.5
-8.9 41.3 35.9 0.0 35.6 35.9 52.3 6.3 1.2 -7.2 38.0
19.6 45.7 40.6 0.0 38.1 45.6 69.6 11.5 2.2 -21.4 54.9
-2.4 38.2 32.3 0.0 23.7 30.8 47.0 11.8 2.0 -21.0 42.6
2 # 324
"
# $ +91 22 6658 4811
[email protected]
+91 22-6658-4824
Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
[email protected]
5 6 # 324 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 324 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
16.1%
17.7%
17.1%
INR 99.55 - 148.40 INR 173,664 m USD 4,298 m
Company Identifiers Bloomberg Cusip SEDOL
ACEM IN ¯ B09QQ11
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 29
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We reiterate Buy on Ambuja Cements with a revised target price of Rs158 per share (+20% upside). We expect the company to report earnings CAGR of ~34%over CY06-08E and ROE of 33% and 38% in CY07E and CY08E respectively. Our earnings estimates are in line with consensus for CY07E and 38% higher than consensus for CY08E. We expect the Indian cement industry to operate at peak utilisation levels as new capacity commissioning is delayed and demand continues to grow at 9-10% annually. The cement companies are expected to report higher average realisations due to tight demand-supply scenario expected to persist till 1HFY10/CY09. We further note that cement sales have moved from 30 days credit to an upfront payment for next 30 days delivery. Accordingly, we have revised our panIndia cement price forecast for CY07 to Rs227/50kg bag (4% higher than our previous assumption) and CY08 forecast to Rs249/50kg bag (21% higher than our earlier assumption). Note that Holcim is looking to enhance its stake in the company through all possible options.
Valuation We have thus used an average PE multiple of 14x FY08E (earlier assumed 10x CY07E) and 8.0x FY08E EV/EBITDA (earlier assumed 7x CY07E) to arrive at the target price of INR152/share. It is important to note that these multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users and (2) Indian finance minister has stated that there will be no price freeze and the prices of cement will be dictated purely by demand and supply forces. Following this, we believe the overhang of government influence on long-term profitability stands largely abated. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct.
Page 30
Jun-07
Jun-06
Jun-05
12
Jun-04
10
Jun-03
8
Jun-02
6
Jun-01
Jun-94
Jun-07
Jun-06
Jun-05
0 Jun-04
0 Jun-03
50
Jun-02
50
Jun-01
100
Jun-00
100
Jun-99
150
Jun-98
150
Jun-97
200
Jun-96
200
Jun-95
250
Jun-94
250
Source: Deutsche Bank
Price (INR)
300
Jun-00
22
Jun-99
18
Jun-98
14
Jun-96
10
Jun-95
Price (INR)
300
Figure 39: 12-month forward rolling EV/EBITDA band
Jun-97
Figure 38: 12-month forward rolling P/E bands
Source: Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Ambuja cement has historically traded at EV/t of above USD250 (1994-96) at the time when EBITDA/t was above USD23 (1994-96). Recent concerns on long-term profitability have impacted stock performance. We expect the EBITDA/t to be above USD34. for the next three years. Hence EV/t of USD 212 at our target price of Rs158/share looks reasonable considering the position of the cycle. Figure 40: 12-month forward EV/ton (x) and EBITDA/ton (x) EV/Ton
Ebitda/Ton
550
38
450
33 28
350
23 250
18
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
8 Jun-96
50 Jun-95
13
Jun-94
150
Source: Bloomberg, company data, Deutsche Bank
Risks Ambuja Cements is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 5% lower-than-expected price realization reduces our estimates by ~15% in CY07E and ~13.4% in CY08E and vice versa. We have assumed a 10% CAGR in coal cost for the next three years. Any increase greater than 10% would have an impact on company’s earnings. Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~2% both in CY07E and CY08E. Figure 41: Sensitivity analysis CY07
CY08
Base case estimates-EPS
10.1
13.2
9.7
If cement prices are 5% higher than estimates
11.6
15.0
11.4
Chg with respect to base case estimates (%)
15.0
13.4
17.1
If cement prices are 5% lower than estimates
8.6
11.5
8.1
(15.0)
(13.4)
(17.1)
9.9
13.0
9.5
(2.0)
(1.7)
(2.7)
Chg with respect to base case estimates (%) If fuel prices are 5% higher than estimates Chg with respect to base case estimates (%)
CY09
Source: Company data, Deutsche Bank
Deutsche Bank Securities Inc.
Page 31
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts As stated earlier, we expect Ambuja Cements to report a 13% CAGR in sales volume over CY06-09E. This is higher than the industry growth rate assumption of 9% pa. In case of GACL the domestic realizations are in line with sectoral assumptions. Note that we have revised our pan-India cement price forecast for CY07 to Rs227/50kg bag (2.3% higher than our previous assumption) and CY08 forecast to Rs249/50kg bag (17% higher than our earlier assumption). Based on our revised price forecasts, we expect average realisation to be higher by 3% for CY07E and by ~16% for CY08E over our earlier estimates. We have made only minor changes to our sales volume assumptions. For cement exports, we have increased our assumption of FOB price to USD55/t from USD48/t for CY07E. Our assumptions for export prices factors in appreciation of the rupee. Figure 42: Key assumptions Particulars
CY07e Old Estimates
CY08e
New Old Chg (%) Estimates Estimates
CY09e
New Estimates
Old Estimates
Chg (%)
New Estimates
Chg (%)
Key Assumptions Sales volume (mn tonnes)
17.6
17.9
1.9
19.4
19.7
1.9
21.3
21.7
1.9
Average realisation (INR/tonne)
3,577
3,759
5.1
3,509
4,052
15.5
3,294
3,658
11.1
Domestic realisation (INR/tonne)
3,740
3,876
3.6
3,646
4,158
14.0
3,400
3,726
9.6
Export realisation
2,146
2,255
5.1
1,878
2,255
20.1
1,788
2,255
26.1
45
41
(8.3)
45
41
(8.3)
45
41
(8.3)
Raw material
193
120
(38.0)
188
119
(36.8)
182
112
(38.7)
Freight
604
564
(6.5)
619
580
(6.3)
637
597
(6.3)
Power
168
175
3.9
170
170
(0.2)
176
176
(0.2)
3,857
4,040
4.7
4,040
4,444
10
4,233
4,888
15.5
USD : INR Cost (INR/tonne)
Coal Prices( INR/t) Source: Deutsche Bank
Figure 43: Key forecasts Particulars INR mn
CY07e Old Estimates
CY08e
New Estimates
Chg (%)
Old Estimates
CY09e
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
Key forecasts Net sales
56,648
58,244
2.8
60,812
69,670
14.6
62,206
67,982
9.3
(35,374)
(34,203)
(3.3)
(39,454)
(37,821)
(4.1)
(44,027)
(42,005)
(4.6)
EBITDA
22,232
24,998
12.4
22,314
32,806
47.0
19,136
26,934
40.7
Depreciation
(3,108)
(3,108)
-
(3,572)
(3,572)
-
(4,036)
(4,036)
-
(524)
(550)
5.0
(400)
(515)
28.6
(339)
(515)
52.1
PBT
18,599
21,339
14.7
18,342
28,719
56.6
14,761
22,383
51.6
Tax
(4,681)
(6,006)
28.3
(4,616)
(8,646)
87.3
(3,721)
(7,641)
105.3
PAT
13,919
15,333
10.2
13,726
20,072
46.2
11,040
14,742
33.5
9.2
10.1
10.2
9.0
13.2
46.2
7.3
9.7
33.5
Expenditure
Interest
EPS (INR) Ratios EBITDA/tonne (INR)
28
31
10.4
26
37
44.3
20
28
38.2
EV/tonne (USD)
249
212
(14.9)
242
194
(20.3)
156
175
12.1
ROE (%) (#)
32.6
35.6
299
27.3
38.5
1,074
19.4
23.7
432
RoCE (%) (#)
24.7
26.6
197
21.1
28.5
715
15.8
18.5
272
Source: Deutsche Bank, # indicates change in bps
Page 32
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Based on our assumptions, Figure 43 presents a financial snapshot of the company. Our revised estimates based on higher price and volume estimates show earnings estimates rising by 8.6% for CY07 and 57.6% for CY08 over our earlier estimates. We forecast a net sales growth of 17% CAGR over CY06-08E and a net profit growth of 34% CAGR over CY0608E. Based on our revised forecast, we believe Ambuja Cements is likely to record a significant improvement in its operational performance due to better prices and lower costs. The key contributors being:
Rise in cement prices in line with assumptions of cyclical upturn
Shift towards blended cement to rise from current 70% to 92% in the next two years
Less power cost as the company commissions the thermal power captive sets in Gujarat
The EBITDA is estimated to register a CAGR of 21% over CY06-09E. Further, the operating margins too are likely to move up from 35% in CY06 to around ~46% in CY08E. In addition, the lower interest cost would further boost the net margins even after factoring in higher tax rates for CY07E and CY08E. We expect the net profit to record a 34% CAGR over CY06-08E.
Deutsche Bank Securities Inc.
Page 33
12 July 2007
Construction Materials Indian Cement Sector
Multiple options for cash use Company is generating huge free cash Ambuja Cements is likely to generate a cash of Rs44bn in CY07E from a combination of: (1) Strong free cash generation from operations, (2) Cash generation from sale of non-core assets, and (3) Cash generation from sale of stake in the holding company Figure 44: Free cash flow vs. capex INR mn 25,000 20,000 15,000 10,000 5,000 0 CY 06
CY 07e
Free Cash flow post capex
CY 08e
CY 09e Capex
Source: Company data, Deutsche Bank
The cash flows can be used to: 1.
Enhance the dividend pay-out ratio: Historically, Ambuja Cements had a pay-out of 4050%. The management could enhance it. If the pay-out ratio is increased to 100% the dividend yield rises to 8%.
2.
Make an open offer by parent: Holcim can also, technically, further increase the stake in the company through an open offer. This looks the least probable of events as not many open offers have been successful in India
3.
Buy-back of shares: Based on existing provisions available in the Companies Act, the company can buy back 2% of shares in CY07 and 2.4% of shares in CY08. Buy-back of shares could result in Holcim´s holding rising from 32% in March 07 to potentially 36.4% by December 08.
Figure 45 gives a snapshot of the on the possible holding of Holcim in Ambuja Cements, in case Holcim goes for a buyback. This has assumed under the following constraints
Page 34
1.
Cash availability: Major sources of cash available for buyback will be post-capex free cash flow, marketable investments, sale of stake in ACIL and cash from sale of real estate.
2.
Sec 77A restrictions: Section 77A of the Companies Act puts the upper limit as 25% of paid-up share capital + free reserves
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Our analysis shows that Holcim could potentially enhance the stake to 39%by CY09 if it were to buy back shares. The key constraint being the net worth of the company post the buyback. Figure 45: What can be Holcim’s effective stake after buyback? Particulars in INR bn Cash in balance sheet Add investments that are marketable Add ACIL stake sales in GACL Add cash from real estate at Kalina sale Add free cash pre-capex Less capex Total cash for buy-back or dividends Number of shares (mn) at start of the year CMP( Assuming constant stock price) M- Cap (mn) Number of shares that can be bought back (minimum of a and b) (mn)
CY07e
CY08e
CY09e
11
21
21
3
3
3
11
5
0
3
-
-
19
26
16
4
8
8
44
47
33
1,517
1,428
1,333
125
125
125
189,638
178,454
166,576
89
93
94
374
342
272
25
24
20
89
95
98
6
7
7
Net shares at the end of the year (mn)
1,428
1,335
1,241
Holcim holding at the start of the year (%)
32.0%
34.0%
36.4%
485
485
485
34.0%
36.4%
39.1%
a) Cash constraint % of total shares b) Limit set by companies act (Sec 77A) % of total shares
Holcim holding at the start of the year (mn shares) Holism’s probable holding at the end of the year (%) Source: Company data, Deutsche Bank
Deutsche Bank Securities Inc.
Page 35
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Conglomerates
11 July 2007
Grasim Bloomberg: GRASIM IN
Growth with cost synergies
2,819.55 3,320.00 2,894.75 - 1,873.25 14,911
Key changes
Volume and cost benefits also flowing through Grasim is expanding the cement capacity by 15m tonnes in total over the next two years (by ~50%) - the maximum expected by any cement producer in India over the next two years. In addition, improving gas availability would keep drive up utilisation rates of sponge iron plant until 2HFY09. Additionally, ~300+MW of captive power plant would reduce overall cost of power by INR2.5bn and reduce tax for the company. Current VSF cycle also leaves room for surprise on the upside. Grasim will benefit from synergies from group company UltraTech Cement. Earnings being revised – but leave room for upside Overall, our EPS forecast for FY08 is Rs295/share; Rs394/share for FY09 (up 27% vs. our earlier forecast). This assumes the price and volumes in cement as per our sector forecast. However, we have not factored in the latest 5% rise in VSF realisations into our numbers and would wait for a couple of quarters to see whether the market absorbs the price hikes. Raising target price to INR3,320 (+20% upside) Our target price is based on a sum of parts (10% conglomerate discount) wherein we have assumed PE multiple of 14x FY08E for cement and less than 6x FY08E for non-cement divisions. We note that our target PE multiples are at discount to the region despite the fact that the growth is likely to be significantly higher. Key risks are volatility in cement and fuel prices. Our sensitivity analysis shows that a 1% drop in realisations over our estimates can result in a 2.5% drop in earnings in FY08E.
Ç Ç È Ç
24.8% 3.2% -4.7% 3.6%
Price/price relative 200
4000
150
3000
100
2000
50
1000
0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Raising the target price to Rs3,320/share (+20% upside) Grasim, a diversified company, is also likely to post strong earnings in line with pure cement plays as the VSF division (largest non-cement business in company) is also likely to benefit from better realisations of VSF. Our assumptions are 41% above the street for FY08E and 65% for FY09E. Reiterate Buy
Price target 2,660.00 to 3,320.00 Sales (FYE) 147,682 to 152,353 Op prof margin (FYE) 28.6 to 27.2 Net profit (FYE) 26,894.2 to 27,870.6
7/ 05 10 /0 5
Reuters: GRAS.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) Grasim (R.H. Scale)
Performance (%) Absolute BSE 30
1m 18.2 5.5
3m 24.8 13.7
12m 41.2 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
258,477 6,397 91.7 – 75 2.3
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
35.3 30.1 996.71 2.8 13.8 27.2
Forecasts and ratios Year End Mar 31 Sales (INRm)
2006A
2007A
2008E
2009E
2010E
102,239.4
140,951.5
152,353.2
181,674.4
202,339.0
EBITDA (INRm)
20,686.2
39,723.4
48,162.7
63,455.0
61,103.9
Reported NPAT (INRm)
12,033.0
19,679.0
27,870.6
37,754.7
51,240.1
Reported EPS FD (INR)
131.22
214.60
303.93
411.71
558.77
DB EPS FD (INR)
131.22
214.60
303.93
411.71
558.77
OLD DB EPS FD (INR)
125.86
215.10
293.28
308.02
0.00
4.3%
-0.2%
3.6%
33.7%
–
DB EPS growth (%)
25.9
63.5
41.6
35.5
35.7
PER (x)
5.0
% Change
10.2
10.9
9.3
6.8
EV/EBITDA (x)
7.2
6.2
5.6
3.9
3.9
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 36
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' () "
#
India
Reuters Code
GRAS.BO
Price as of 12 July
INR 2,819.55
Price Target
INR 3,320.00
Web Site n/a Grasim Industries Limited operates a diversified manufacturing company. The Group's products include cement, synthetic yarn and fabric textiles, steel, rayon wood pulp, caustic soda, viscose staple fiber, chlorine and ancillary chemicals. Grasim also offers a range of engineering, consultancy, software, international marketing and shipping services.
!
" # $ +91 22 6658 4811
[email protected]
*++-
*++.
*++/
*++0'
*++1'
*+)+'
83.59 8.6 ¯ 83.59 8.6 186.26 -173.81 3.9 0.00 0.0 393.18 2.7 92 66,064 84,735 1.6 6.7 8.6 1.5
104.23 11.1 24.7 104.23 11.1 -14.34 -48.69 NM 0.00 0.0 472.00 2.6 92 106,089 130,541 1.5 6.8 9.3 1.8
131.22 10.2 25.9 131.22 10.2 173.64 73.03 7.7 0.00 0.0 527.53 3.9 92 122,285 148,344 1.5 7.2 9.8 1.9
214.60 10.9 63.5 214.60 10.9 286.79 -3.99 8.2 0.00 0.0 724.07 2.9 92 215,342 246,241 1.7 6.2 7.3 2.5
303.93 9.3 41.6 303.93 9.3 378.08 322.12 7.5 0.00 0.0 996.71 2.8 92 258,477 268,089 1.8 5.6 6.5 2.6
411.71 6.8 35.5 411.71 6.8 559.64 331.51 5.0 0.00 0.0 1,369.51 2.1 92 258,477 250,566 1.4 3.9 4.5 2.1
558.77 5.0 35.7 558.77 5.0 491.77 251.86 5.7 0.00 0.0 1,713.99 1.6 92 258,477 240,330 1.2 3.9 4.6 1.7
52,135 12,589 2,738 0 9,851 -1,539 0 2,263 0 2,910 0 7,665
89,305 19,316 5,337 0 13,980 -2,481 0 2,312 0 4,510 -258 9,558
102,239 20,686 5,552 0 15,134 -2,183 0 4,269 0 4,027 1,160 12,033
140,952 39,723 6,100 0 33,624 -2,286 0 3,177 0 10,921 3,915 19,679
152,353 48,163 6,693 0 41,470 -3,014 800 3,108 0 8,529 5,964 27,871
181,674 63,455 7,798 0 55,657 -4,597 1,500 4,870 0 10,867 8,808 37,755
202,339 61,104 8,885 0 52,219 -5,496 0 5,270 0 9,544 -8,791 51,240
17,080 0 -33,019 -15,939 2,441 -53 -1,571 15,554 1,926 15,856 2,358 13,196
-1,315 0 -3,149 -4,465 5,976 53 -2,393 -851 -3 -3,194 -1,683 831
15,923 0 -9,226 6,697 -3,992 2 -2,586 1,370 1,228 14 2,718 -1,349
26,299 0 -26,665 -366 -9,191 0 -1,089 11,898 5,608 16,416 6,858 5,040
34,670 0 -5,132 29,539 -6,636 -1 -2,069 4,301 -6,548 -4,317 18,586 -14,285
51,320 0 -20,920 30,400 -1,500 0 -3,103 10,000 -7,943 -1,046 27,854 -17,854
45,096 0 -22,000 23,096 -1,501 0 -3,102 -6,000 0 -9,102 12,493 -18,493
2,723 62,669 0 0 15,519 18,225 99,136 36,315 26,168 62,482 36,055 598 36,653 2,507 33,592 70,245
1,469 60,481 0 0 9,543 34,913 106,406 35,463 27,659 63,122 43,284 0 43,284 4,436 33,995 77,278
2,374 64,156 0 0 13,535 41,525 121,590 36,833 31,245 68,078 48,376 5,136 53,511 1,168 34,459 87,970
3,692 84,721 0 0 22,726 48,734 159,874 48,731 36,157 84,888 66,399 8,587 74,986 -729 45,039 120,024
23,029 83,160 0 0 28,562 55,857 190,607 53,032 38,003 91,035 91,401 8,172 99,573 5,055 30,003 129,576
50,553 96,282 0 0 28,562 62,603 238,000 63,032 41,209 104,240 125,587 8,172 133,759 6,609 12,479 146,238
54,788 109,397 0 0 28,562 74,367 267,115 57,032 44,734 101,766 157,177 8,172 165,349 8,507 2,243 167,592
NM 24.1 18.9 0.0 23.3 17.5 15.9 63.3 12.1 91.6 6.4
71.3 21.6 15.7 0.0 24.1 15.3 15.3 3.5 0.6 78.5 5.6
14.5 20.2 14.8 0.0 26.3 16.4 14.3 9.0 1.7 64.4 6.9
37.9 28.2 23.9 0.0 34.3 20.5 26.6 18.9 4.4 60.1 14.7
8.1 31.6 27.2 0.0 35.3 24.0 28.6 3.4 0.8 30.1 13.8
19.2 34.9 30.6 0.0 34.8 29.7 34.6 11.5 2.7 9.3 12.1
11.4 30.2 25.8 0.0 36.2 35.1 27.7 10.9 2.5 1.4 9.5
# 23 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
4 5 # 23
+91 22-6658-4824
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
*++,
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 23 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
18.2%
23.3%
41.2%
INR 1,873.25 - 2,894.75 INR 258,477 m USD 6,397 m
Company Identifiers Bloomberg Cusip SEDOL
GRASIM IN ¯ 6099927
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 37
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We expect Grasim’s VSF and cement businesses (together contributing 90% to the top line) to be the key earnings drivers. The company is expanding cement capacity by 15m tonnes in total over the next two years](by ~50%) - the maximum expected by any cement producer in India over the next two years. It is also expanding its VSF capacity by ~95,000 tonnes through both greenfield and brownfield expansion. In addition, improving gas availability is driving up utilization rates of the sponge iron plant which would also drive up significant volume growth in FY09. Further, there is a possibility of consolidating 6m tonnes of cement capacity of the group company Century Textiles. An additional 300MW+ of captive power plant would also reduce the overall cost of power by INR1.5bn and reduce the tax outgo for the company. Consequently we expect the company to report a 21.6% CAGR in earnings over FY07-10E.We note that our assumptions are 41% above the street for FY08E and 65% for FY09E. Indian cement prices have begun to show gradual improvement driven by tight demandsupply scenario. We have revised our pan-India cement price forecast for FY08 to Rs235/50kg bag (8% higher than our previous assumption) and FY09 forecast to Rs245/50kg bag (19.0% higher than our earlier assumption). We have assumed a 5% dip in cement realizations in FY10E to Rs232/50kg bag. Current VSF cycle also leaves room for surprise on the upside.
Valuation For a conglomerate like Grasim, we believe the sum of parts is the correct method of valuation. For cement (drives 88% of total value), we have used an average PE multiple of 14x. It must be mentioned that we have factored in a potential value of 14x for the cement division - a premium to the sector average as Grasim has benefits flowing in from volume growth, cost savings and from synergies from group company UltraTech Cement. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. As seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. We note that our target multiples are at the bottom of 10-year price bands and are also lower than the current valuations of the regional peers. Despite the recent run-up, Grasim is trading at 9x PER on FY08E and 5.7x EV/EBIDTA on FY08E. Figure 46: 12-month forward rolling P/E band (x) Price (INR)
5
10
15
Figure 47: 12-month forward rolling EV/EBITDA band (x) Price (INR)
20
6,000
4
7
10
13
8,000 7,000
5,000
6,000 4,000
5,000
3,000
4,000 3,000
2,000
2,000 1,000
1,000
0
Source: Bloomberg, Deutsche Bank
Page 38
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
0
Source: Bloomberg, Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
As seen in following sum of parts table, the target PE multiple for VSF is 6x FY08E while the sponge iron business is assumed at 1x FY08E earnings. The valuation of Grasim´s holdings in IDEA are in line with the view of our telecom analyst Srinivas Rao. Figure 48: Sum of Parts EPS in FY08E ( Rs/share)
Target PE(x)
231
14
3,238 Valued in line with peers in India
53
6
320 Assume peak cycle multiples
Sponge Iron
4
1
D
Textiles
0
1
E
Caustic soda
4
8
F
Others
2
2
G
Telecom business
Sr No
Business
A
Cement
B
VSF
C
8
Equity Value (A)+(B)+(C)+(D)+(E) +(G)
Value/share Rationale
4 Assume not much improvement in o/p 0 At a discount to peers 28 Assume mid-cycle multiples 5 At cost of investments 91 Idea valued at 25% discount to Bharti 3,685.6
Less Conglomerate Discount
10%
Value (Rs/share)
295
11.3
3,317
Source: Deutsche Bank
Risks The key risk to Grasim’s earnings comes from lower-than-expected commodity prices in cement and VSF businesses. Our positive bias on the cement sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E. Our stand-alone estimates drop by 12% if cement realizations are 5% lower than expected One other company-specific risk is the lack of availability of natural gas disrupting operations of the sponge iron division. In our forecast, we have factored in some improvement in supply of natural gas in FY09E. Figure 49 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. Figure 49: Sensitivity of stand-alone numbers to change in prices Sensitivity analysis
FY08e
FY09e
FY10e
Base case estimates EPS (INR/share)
181
230
202
If cement prices are 5% higher than estimates
203
259
235
Chg with respect to base case estimates (%)
12.3
12.5
16.4
If cement prices are 5% lower than estimates Chg with respect to base case estimates (%)
158
201
169
(12.3)
(12.5)
(16.4)
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 39
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts Figure 50 highlights our key assumptions for Grasim. Based on our regional price forecasts, we expect Grasim’s cement price to be higher by 11% in FY08 over March 07 levels and another 8% higher in FY09. We have factored in some gains in VSF prices as shown in the figure. As regards the sponge iron division, we assume utilization rates to pick up in FY10.. Figure 50: Key assumptions All in INR/t
FY05
FY06
FY07
FY08e
FY09e
FY10e
Cement Sales in Mn tonnes Average realisation in Rs
27
30
32
35
42
46
2,313
2,551
3,325
3,765
3,828
3,637
VSF Sales in Mn tonnes Average realisation in Rs
0.23
0.24
0.25
0.29
0.30
0.31
89,126
80,367
85,729
99,857
103,851
108,005
0.77
0.48
0.57
0.54
0.63
0.86
14,252
14,335
14,693
13,639
13,639
13,639
Sponge iron Sales in Mn tonnes Average realisation in Rs Caustic Soda Sales in Mn tonnes Average realisation in Rs
0.19
0.19
0.26
0.26
0.26
0.26
18,768
20,594
19,444
18,838
18,838
18,838
Source: Company data, Deutsche Bank
Based on our assumptions, we expect Grasim’s net sales on a stand-alone basis to rise by 19% CAGR over FY07-09, driving a 31% EPS CAGR. Figure 51: Key financials at a glance (stand-alone) Key financials at a glance (INR mn) Net sales
FY06
FY07
FY08e
FY09e
FY10e
62,295
66,527
86,036
94,446
111,186
(46,328)
(52,755)
(62,673)
(66,083)
(75,546)
EBITDA
17,839
16,841
25,380
30,972
39,260
Depreciation
(2,852)
(2,916)
(3,179)
(3,945)
(4,661)
Interest
(1,388)
(1,034)
(1,118)
(1,942)
(2,636)
PBT
13,599
12,932
22,254
25,085
31,963
Tax
(4,510)
(3,428)
(6,906)
(8,529)
(10,867)
PAT
9,089
9,504
15,349
16,556
21,096
RoE (%)
23
20
25
24
24
RoCE (%)
17
15
20
17
18
Net Debt:/ Equity (%)
46
40
47
46
43
Total expenditure
Source: Company data, Deutsche Bank
Page 40
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
India Cements Reuters: ICMN.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Bloomberg: ICEM IN
South Indian giant
220.20 300.00 250.00 - 151.30 14,911
Key changes Price target 198.00 to 300.00 Sales (FYE) 27,570 to 29,389 Op prof margin (FYE) 32.1 to 34.0 Net profit (FYE) 6,874.6 to 7,521.0
Big beneficiary of rise in cement prices in south India The average cement realization in south India has risen by ~10% q-o-q versus allIndia cement price rise of 5% q-o-q. The demand growth in south India has also been robust with demand rise of ~16% in FY07 versus pan-India demand rise of 11%. Accordingly, India Cements, the largest player in south India, should benefit greatly from upside due to operating leverage. Note that the Debt/EBITDA of India Cements is 2x implying that entire debt can be pre-paid if required. TP of Rs300 based on 3-year average PE and EV/EBITDA multiples Our target price assumes an average PE multiple of 12x FY09e and EV/EBITDA of 7.5x FY09E. Our target PE and EV/EBITDA multiples are based on the average PE and EV/EBITDA of the last three years and are in the lower quartile of the longterm forward valuation bands. Key risks are lower-than-expected utilization levels resulting in lower-than-expected cement prices and higher-than-expected energy costs. Note that a 5% rise in energy costs over our estimates cuts our earnings by 3%. Also, a lower-than-expected realization of 5% can result in a 15.7% drop in earnings over the forecast period.
300 250 200 150 100 50 0
200 150 100 50 0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Earnings to benefit from tight supply-demand scenario Based on our sectoral assumptions for demand and supply we forecast India Cements´ realization to rise by ~17% in FY08 and a further 2% in FY09. Accordingly we estimate that India Cement to report a CAGR of ~26% in sales over FY06-08, driving a core earnings (net of gains from tax benefits) CAGR of 25% over the same period. ROE is estimated to rise to 33% in FY08.
51.5% 6.6% 5.8% 9.4%
Price/price relative
7/ 05 10 /0 5
Raise TP to Rs300 (+37% upside) Our new EPS estimates for India Cements are Rs29/share (+11.4% vs. previous estimate) for FY08 and Rs.27/share (+38.2% vs. previous estimate.) for FY09. Our estimates for FY08 (+32%) and FY09 (+35%) are higher than the consensus. Our new target price of Rs300 implies a PE of 11x core FY09E of Rs27/share and is reasonable considering an EPS CAGR of 25% over the next two years. We reiterate Buy on the stock.
Ç Ç Ç Ç
Rel. to BSE 30 (L.H. Scale) India Cements (R.H. Scale)
Performance (%) Absolute BSE 30
1m 27.1 5.5
3m 38.1 13.7
12m 23.2 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
45,500 1,126 260.4 – 71 2.5
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
32.7 20.2 99.84 2.21 12.1 34.0
Forecasts and ratios Year End Mar 31 Sales (INRm)
2006A
2007A
2008E
2009E
2010E
15,294.0
20,497.4
29,389.2
32,291.9
32,220.0
2,527.0
6,617.3
10,894.8
11,371.9
8,989.7
Reported NPAT (INRm)
327.6
4,495.0
7,521.0
7,025.3
5,264.2
Reported EPS FD(INR)
2.10
20.76
28.91
26.98
20.22
DB EPS FD(INR)
2.10
20.76
28.91
26.98
20.22
OLD DB EPS FD(INR)
1.59
16.76
25.37
19.07
0.00
32.2%
23.9%
14.0%
41.5%
–
–
890.5
39.3
-6.7
-25.1
PER (x)
48.4
9.5
7.6
8.2
10.9
EV/EBITDA (x)
12.6
8.4
4.6
3.9
4.4
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
EBITDA (INRm)
% Change DB EPS growth (%)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Deutsche Bank Securities Inc.
Page 41
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
$%& '(
"
India
Reuters Code
ICMN.BO
Price as of 12 July
INR 220.20
Price Target
INR 300.00
Web Site http://www.indiacements.co.in South India`s largest cement producer, It is a diversified company with interests in shipping, real estate development and a wind energy farm.
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
)**+
)**,
)**-
)**.
)**/&
)**0&
)*(*&
-9.52 NM ¯ -9.52 NM 3.00 -73.73 10.1 0.00 0.0 97.51 0.4 140 4,231 24,145 2.4 22.7 96.8 0.7
-4.52 NM 52.5 -4.52 NM -0.89 -0.89 NM 0.00 0.0 91.39 0.7 140 6,257 25,593 2.2 18.7 44.2 0.8
2.10 48.4 ¯ 2.10 48.4 -6.46 -10.93 NM 0.00 0.0 75.93 2.2 173 17,574 31,773 2.1 12.6 18.3 1.1
20.76 9.5 890.5 20.76 9.5 8.41 4.57 23.5 0.00 0.0 76.73 2.1 234 46,130 55,677 2.7 8.4 9.5 1.9
28.91 7.6 39.3 28.91 7.6 23.68 8.31 9.3 0.00 0.0 99.84 2.2 260 45,500 50,387 1.7 4.6 5.0 1.6
26.98 8.2 -6.7 26.98 8.2 32.69 28.85 6.7 0.00 0.0 121.42 1.8 260 45,500 44,280 1.4 3.9 4.3 1.4
20.22 10.9 -25.1 20.22 10.9 0.00 0.00 NM 0.00 0.0 141.64 1.6 260 45,500 39,575 1.2 4.4 5.1 1.3
10,185 1,065 815 0 250 -1,617 0 39 0 0 0 -1,328
11,638 1,366 788 0 579 -1,335 0 125 0 0 0 -631
15,294 2,527 790 0 1,737 -1,489 0 127 0 47 0 328
20,497 6,617 777 0 5,841 -1,430 0 102 0 17 0 4,495
29,389 10,895 910 0 9,984 -824 0 241 0 1,880 0 7,521
32,292 11,372 1,071 0 10,301 -624 0 360 0 3,011 0 7,025
32,220 8,990 1,205 0 7,785 -624 0 360 0 2,256 0 5,264
419 0 -10,708 -10,289 1 0 0 -483 0 -483 -10,771 10,289
-124 0 0 379 501 0 0 -162 0 -162 215 -377
-1,118 0 -774 -1,892 -245 912 0 -59 0 852 -1,284 1,225
1,965 0 -898 1,067 245 0 0 -1,219 0 -1,219 93 -1,311
6,165 0 -4,000 2,165 0 0 0 0 0 0 2,165 -2,165
8,512 0 -1,000 7,512 0 0 0 0 0 0 7,512 -7,512
0 0 0 0 0 0 0 0 0 0 0 0
37 23,339 0 0 365 15,351 39,093 20,316 5,169 25,485 13,607 0 13,607 10,676 20,279 33,886
29 22,049 0 0 366 15,750 38,194 19,731 5,710 25,441 12,753 0 12,753 10,535 19,702 32,455
443 22,032 0 0 611 12,088 35,173 15,253 4,230 19,483 15,690 0 15,690 8,344 14,810 30,500
329 22,153 0 0 366 14,946 37,794 10,243 7,574 17,816 19,978 0 19,978 8,068 9,914 29,892
989 25,243 0 0 366 13,392 39,990 6,243 7,753 13,995 25,995 0 25,995 6,435 5,253 31,248
7,096 25,172 0 0 366 13,369 46,003 6,243 8,145 14,388 31,615 0 31,615 6,019 -853 30,762
11,802 25,967 0 0 366 13,123 51,258 6,243 8,136 14,378 36,880 0 36,880 5,782 -5,559 31,320
NM 10.5 2.4 NM -14.9 -1.0 0.9 105.1 13.1 149.0 0.2
14.3 11.7 5.0 NM -4.8 0.9 1.2 0.0 0.0 154.5 0.4
31.4 16.5 11.4 0.0 2.3 4.4 3.9 5.1 1.0 94.4 1.2
34.0 32.3 28.5 0.0 25.2 18.2 13.7 4.4 1.2 49.6 4.1
43.4 37.1 34.0 0.0 32.7 26.5 22.9 13.6 4.4 20.2 12.1
9.9 35.2 31.9 0.0 24.4 24.1 23.3 3.1 0.9 -2.7 16.5
-0.2 27.9 24.2 0.0 15.4 18.4 17.6 0.0 0.0 -15.1 12.5
" 1 2
!
" # +91 22 6658 4811
[email protected]
+91 22-6658-4824
Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
[email protected]
3 4 " 1 2 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
" 1 2 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
27.1%
31.7%
23.1%
INR 151.30 - 250.00 INR 45,500 m USD 1,126 m
Company Identifiers Bloomberg Cusip SEDOL
ICEM IN ¯ 6150062
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Page 42
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate India Cements a Buy due to the following: (1) We expect the company to report earnings CAGR of 25% over FY07-09. (2) Our estimates for FY08 are (+32%) and FY09 (+35%) are higher than the consensus and we expect the consensus earnings upgrade to drive the stock outperformance. (3) Benefits flowing in from superior bargaining power driven by our forecast of tight utilisation levels over FY07-10. (5) Our revised target price of Rs300 per share gives a potential +37 upside. Note that our new estimates are based on revision of our pan-India cement price forecast for CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (9.6% YoY). Note that south India is leading the price rise with cement prices increasing by 10% q-o-q versus 5% for the country as a whole. Consequently, India Cements Ltd, which is the largest player in south India, is likely to reap benefits due to its operating leverage.
Valuation We have thus used an average PE multiple of 12x core earnings (earlier assumed 10x FY08E) and 7.5x EV/EBITDA FY09E (earlier assumed 7x FY08E) to arrive at the target price of INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The forward valuation multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands (Figures 52 and 53) the stock is trading virtually at the bottom – an anomaly which we expect the market to correct.
Source: Bloomberg, Company Data, Deutsche Bank
Deutsche Bank Securities Inc.
Jun-07
Mar-07
Dec-06
10
Sep-06
8
Jun-06
7
Mar-06
6
Dec-05
Mar-04
Jun-07
Mar-07
-100 Dec-06
-100 Sep-06
0
Jun-06
0
Mar-06
100
Dec-05
100
Sep-05
200
Jun-05
200
Mar-05
300
Dec-04
300
Sep-04
400
Jun-04
400
Mar-04
500
Sep-05
Price (INR)
12
Mar-05
10
Dec-04
8
Sep-04
6
500
Jun-04
Price (INR)
Figure 53: 12-month forward rolling EV/EBIDTA band
Jun-05
Figure 52: 12-month forward rolling P/E bands
Source: : Bloomberg, Company Data, Deutsche Bank
Page 43
12 July 2007
Construction Materials Indian Cement Sector
Risks India Cements is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lowerthan-expected price realization reduces our estimates by ~5% each in FY07 and FY08. International coal prices have shot up by 20% y-o-y over the last six months. The company is confident that the impact of coal cost would not be much due to its long-term contracts. We have assumed 10% CAGR in coal cost for the next three years. Any increase greater than 5% over and above our base case estimates would have an impact on the company’s earnings. Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~2% each in FY07 and FY08. Similarly, a 1% increase in cement prices increases our EBITDA estimates by 4% for FY08 and 5% for FY09. A 5% rise/drop in coal prices reduces/increases earnings by ~2% and 4% respectively. Figure 54: Sensitivity analysis FY08e
FY09e
FY10e
Base case EPS estimate (INR/share)
28.9
27.0
20.2
If cement prices are 5% higher than estimates
33.4
31.4
24.7
Chg with respect to base case estimates (%)
15.7
16.5
22.0
If cement prices are5% lower than estimates
24.4
22.5
15.8
Chg with respect to base case estimates (%)
(15.7)
(16.5)
(22.0)
If fuel prices are 5% higher than estimates
28.0
26.0
19.1
Chg with respect to base case estimates (%)
(3.1)
(3.5)
(5.5)
Source: Company data, Deutsche Bank
Page 44
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts Based on our revised price forecasts, we expect the average realisation to be higher by 7.7% (vs earlier estimates) for FY08 and by 18.8% (vs earlier estimates) for FY09. We have also marginally increased our sales volume expectations The increase in sales volume is on account of additional output to the extent of 0.6m tonnes in FY08E (modernization of the Shankaridurg plant) and 0.8m tonnes in FY09E (expansion of the Vishnudurg plant). However, we have not factored in the full impact expected from capacity expansions in the next two years. Figure 55 underlines our main assumptions. Figure 55: Key assumptions INR/tonne
--------------------------FY08E-----------------------------
Particulars
Old Estimates
-------------------------------FY09E-------------------------Old Estimates
New Estimates
9.0
9.2
1.5
9.4
10.0
6.0
3,434
3,724
8.4
3,321
3,797
14.3
Raw material
440
491
11.6
463
517
11.7
Freight
456
456
-
470
470
-
Power and fuel
725
747
3.1
911
806
(11.5)
Sales volume (m tonnes) Average realisation (INR/tonne)
New Estimates Change (%)
Change (%)
Cost (INR/tonne)**
** Cost/tonne figures do not include Visaka Cements Source: Deutsche Bank
Based on our assumptions we forecast a net sales growth of 26% CAGR for FY07-09E, driving net profit growth of 25% CAGR for FY07-09E. Figure 56: Key financials at a glance --------------------------FY08E----------------------------Particulars (INR mn) Net sales
Old Estimates
-------------------------------FY09E--------------------------
New Estimates Change (%)
Old Estimates
New Estimates
Change (%) 15.9
27,570
29,390
6.6
27,854
32,293
(17,718)
(18,494)
4.4
(19,063)
(20,920)
9.7
EBITDA
10,093
11,137
10.3
9,151
11,733
28.2
Depreciation
(1,002)
(910)
(9.1)
(1,165)
(1,071)
(8.1)
(824)
(824)
-
(424)
(624)
47.1
Expenditure
Interest PBT
8,267
9,402
13.7
7,561
10,037
32.7
Tax
(1,240)
(1,880)
51.6
(2,268)
(3,011)
32.7
PAT
7,027
7,522
7.0
5,293
7,026
32.7
25.9
28.9
11.4
19.5
27.0
38.2
EPS (INR) Ratios EBITDA/tonne (INR)
1,118
1,215
8.7
972
1,175
21.0
ROE (%) (#)
30.8
32.7
189
19.1
24.4
530
RoCE (%) (#)
29.7
31.4
170
18.3
23.6
528
# indicates change in bps Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 45
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
Shree Cements Reuters: SHCM.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Bloomberg: SRCM IN
80% + RoE –highest in sector
1,335.20 1,750.00 1,524.90 - 806.55 14,911
Key changes Price target 1,240.00 to 1,750.00 Sales (FYE) 18,248 to 19,733 Op prof margin (FYE) 41.3 to 27.1 Net profit (FYE) 5,270.0 to 4,573.7
Highest ROE in the cement sector Based on our new price and revised volume forecast, we have reduced our EPS to Rs131/share (down 14%) for FY08E, Rs213/share (up 26%) for FY09E. Our estimates are above consensus by 10% for FY08 and by 61% for FY09. Escalation in raw material costs by 74% in FY08E and by 86% in FY09E has offset the benefit from higher realizations. The RoE at 88% in FY08E is likely to be the one of the best in the sector globally. Raising target price to Rs1,790 Following the revision in estimates and more clarity on cement prices, we have revised our target price to Rs1,790/share (31% upside) driven by the uptick in target P/E to 12x FY08E (earlier 8x FY08E) and target EV/E to 7.5x FY08E (earlier 5x FY08E). These multiples are the same as those used by us prior to the risk to long-term earnings emerging from threats from government intervention. Key risks are volatility in cement prices and rise in fuel prices. Our sensitivity analysis shows that a 1% rise/drop in realisation can result in an 8% rise/drop in FY08E earnings. A 5% rise in fuel costs can result in a ~2% reduction in FY08 E earnings.
250
2000
200
1500
150 100
1000 500
50 0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Cash earnings a better proxy for valuation The cash EPS of the company is Rs234 for FY08E - 78% higher than recurring EPS- This is on account of a unique policy of depreciating fixed assets at the higher of the rates prescribed by the Companies Act and the Income Tax Act, on WDV basis. Moreover, the ROE at 88% in FY08eE and 84% in FY09E is one of the best in the industry.
41.1% 8.1% -34.3% -13.2%
Price/price relative
7/ 05 10 /0 5
Volume growth when it matters the most We are upgrading our FY09 estimates for Shree Cement due to the rise in cement prices across India, significant capacity addition and its excellent operating efficiency. Our FY08 estimates factor in the impact of higher provisions for depreciation. Cash EPS for FY08E is Rs234; Rs300 for FY09E.
Ç Ç È È
Rel. to BSE 30 (L.H. Scale) Shree Cements (R.H. Scale)
Performance (%) Absolute BSE 30
1m 23.1 5.5
3m 50.6 13.7
12m 47.4 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
46,465 1,150 34.8 – 36 0.3
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
88.0 10.3 188.66 7.08 11.6 27.1
Forecasts and ratios Year End Mar 31
2006A
2007A
2008E
2009E
2010E
Sales (INRm)
6,948.3
13,679.0
19,732.8
26,952.0
35,820.3
EBITDA (INRm)
2,198.8
6,117.0
8,951.3
12,845.4
13,635.9
Reported NPAT (INRm)
184.0
1,770.4
4,573.7
7,446.8
9,052.3
Reported EPS FD(INR)
5.28
50.82
131.29
213.76
259.84
DB EPS FD(INR)
5.28
50.82
131.29
213.76
259.84
OLD DB EPS FD(INR)
5.28
112.36
151.27
167.24
0.00
-0.0%
-54.8%
-13.2%
27.8%
–
DB EPS growth (%)
-35.9
862.1
158.4
62.8
21.6
PER (x)
% Change
89.6
21.6
10.2
6.2
5.1
EV/EBITDA (x)
9.1
6.5
5.3
3.5
3.2
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 46
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
India
Reuters Code
SHCM.BO
Price as of 12 July
INR 1,335.20
Price Target
INR 1,750.00
Web Site http://www.shreecementltd.com Is one of the largest cement producers in Rajasthan, has Largest Cement Plant In Northern India at Single location.
! +91 22 6658 4811
[email protected]
())&
())*
())+
()),
())-
()).%
())/%
()')%
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
1.11 43.3 ¯ 1.11 43.3 30.09 2.95 1.6 0.00 0.0 97.23 0.5 35 1,681 5,242 1.1 5.1 12.7 0.7
5.57 17.7 400.0 5.57 17.7 11.84 0.67 8.3 0.00 0.0 97.59 1.4 35 3,432 6,842 1.4 5.1 11.4 1.0
8.23 26.6 47.9 8.23 26.6 50.72 12.22 4.3 0.00 0.0 101.30 3.3 35 7,620 10,461 1.7 6.1 21.2 1.6
5.28 89.6 -35.9 5.28 89.6 80.33 6.73 5.9 0.00 0.0 100.75 8.9 35 16,492 20,028 2.9 9.1 35.8 2.7
50.82 21.6 862.1 50.82 21.6 151.30 121.95 7.3 0.00 0.0 109.88 8.4 35 38,303 39,817 2.9 6.5 22.3 6.9
131.29 10.2 158.4 131.29 10.2 263.02 133.85 5.1 0.00 0.0 188.66 7.1 35 46,465 47,145 2.4 5.3 8.8 6.1
213.76 6.2 62.8 213.76 6.2 317.27 196.71 4.2 0.00 0.0 316.91 4.2 35 46,465 45,271 1.7 3.5 4.6 4.4
259.84 5.1 21.6 259.84 5.1 0.00 0.00 NM 0.00 0.0 472.82 2.8 35 46,465 43,613 1.2 3.2 3.7 3.1
4,843 1,021 608 0 412 -349 0 31 0 56 0 39
4,943 1,334 734 0 600 -333 0 14 0 87 0 194
6,022 1,724 1,230 0 495 -205 0 21 0 24 0 287
6,948 2,199 1,640 0 559 -128 0 -159 0 87 0 184
13,679 6,117 4,330 0 1,787 -104 0 212 0 124 0 1,770
19,733 8,951 3,600 0 5,351 -463 0 492 0 807 0 4,574
26,952 12,845 3,000 0 9,845 -680 0 763 0 2,482 0 7,447
35,820 13,636 2,000 0 11,636 -585 0 1,019 0 3,017 0 9,052
1,049 0 -946 103 4 -150 -98 433 0 185 292 141
413 0 -389 23 1 0 -118 -112 0 -230 -206 94
1,767 0 -1,341 426 8 0 -159 16 0 -143 291 -275
2,798 0 -2,564 234 0 0 -37 -209 0 -245 -11 -198
5,271 0 -1,022 4,248 0 0 -905 1,209 0 303 4,552 -3,343
9,163 0 -4,500 4,663 0 0 -1,829 0 0 -1,829 2,833 -2,833
11,053 0 -4,200 6,853 0 0 -2,979 0 0 -2,979 3,874 -3,874
0 0 0 0 0 0 0 0 0 0 0 0
345 6,587 0 0 9 1,692 8,632 3,914 1,330 5,245 3,388 0 3,388 1,025 3,569 6,957
76 6,242 0 0 8 1,802 8,128 3,494 1,233 4,728 3,400 0 3,400 1,378 3,418 6,818
368 6,353 0 0 0 1,396 8,118 3,209 1,379 4,588 3,529 0 3,529 885 2,841 6,370
191 7,277 0 0 0 1,991 9,459 3,727 2,222 5,949 3,510 0 3,510 718 3,537 7,047
4,196 3,970 0 0 0 3,948 12,113 5,709 2,576 8,285 3,828 0 3,828 2,599 1,514 5,342
7,029 4,870 0 0 0 5,673 17,571 7,709 3,290 10,999 6,572 0 6,572 3,810 680 7,252
10,904 6,070 0 0 0 7,680 24,653 9,709 3,903 13,612 11,040 0 11,040 5,253 -1,194 9,846
14,561 8,070 0 0 0 10,305 32,935 11,709 4,754 16,464 16,472 0 16,472 7,027 -2,852 13,620
45.2 21.1 8.5 0.0 1.1 4.2 4.2 19.5 1.6 105.4 1.2
2.1 27.0 12.1 0.0 5.7 6.2 6.0 7.9 0.5 100.5 1.8
21.8 28.6 8.2 0.0 8.3 6.5 5.1 22.3 1.1 80.5 2.4
15.4 31.6 8.0 0.0 5.2 4.1 5.6 36.9 1.6 100.8 4.4
96.9 44.7 13.1 0.0 48.3 29.8 19.1 7.5 0.2 39.5 17.2
44.3 45.4 27.1 0.0 88.0 77.8 55.2 22.8 1.3 10.3 11.6
36.6 47.7 36.5 0.0 84.6 92.7 75.9 15.6 1.4 -10.8 14.5
32.9 38.1 32.5 0.0 65.8 80.6 66.4 0.0 0.0 -17.3 19.9
0 102 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
3 4 102
"" +91 22-6658-4824
#$% &'
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
102 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
23.1%
45.3%
47.4%
INR 806.55 - 1,524.90 INR 46,465 m USD 1,150 m
Company Identifiers Bloomberg Cusip SEDOL
SRCM IN ¯ 6100357
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 47
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We reiterate Buy on Shree Cement with a revised target price of Rs1,790/share (+31% upside). Based on our assumptions, we forecast a net sales growth of 38% CAGR for FY0710E, driving net profit growth of 72% CAGR over the same period. Our earning estimates are 10% higher than consensus for FY08E and 61% higher than the consensus for FY09E. We expect the Indian cement industry to operate at peak utilisation levels as new capacity commissioning is likely to be delayed and demand likely to continue to grow at 9-10% annually. The cement companies are expected to report higher average realisations due to tight demand-supply scenario expected to persist till 1HFY10/CY09. Accordingly we have revised our pan-India cement price forecast for FY07 to Rs235/50kg bag (7.7% higher than our previous assumption) and FY08 forecast to Rs245/50kg bag (18.8% higher than our earlier assumption).
Valuation The Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Following this, we believe the overhang of pressure on price realizations by cement companies stands abated. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the following trading bands the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. Figure 57: 12-month forward rolling P/E bands Price (INR)
6
10
14
Figure 58: 12-month forward rolling EV/EBITDA band Price (INR)
18
3,000
3,500
2,500
3,000
4
6
8
10
2,500
2,000
2,000
1,500
1,500 1,000
1,000
500
500
0
Source: Bloomberg, Company Data, Deutsche Bank
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
-500
Mar-94
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
0
Source: : Bloomberg, Company Data, Deutsche Bank
We have thus used an average PE multiple of 12x FY08E (earlier assumed 8x FY08E) and 7.5x EV/EBITDA FY08E (earlier assumed 5x FY08E) to arrive at the target price of INR1,790/share. It is important to note that these multiples are the same as we used prior to reducing our multiples due to the risk to long-term earnings emerging from threats from government intervention in pricing cement in India. Our target multiples are at the low-end of P/E and EV/EBIDTA bands and at a discount to the region. Moreover, these multiples are at the lowest range of the respective bands over the last 15 years. We note that EV/t at our target price is USD209 on FY08E, which is reasonable considering the position of the cycle. Page 48
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 59: 12-month forward EV/ton (x) and EBITDA/ton (x) EV/Ton
Ebitda/Ton
200
40 35
150
30 25
100
20 15
50
10 Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
5 Mar-94
0
Source: Company data, Bloomberg, Deutsche Bank
Risks Shree Cement is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on the expectation of a deficit till 1HFY09/CY08. A slowdown in the demand growth and/or higher capacity commissioning may lead to lower-than-expected realisations. Figure 60 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. If cement prices are higher by 1% then our earnings estimates for FY08 will be higher by 7.6% and vice versa. Also, the EBIDTA will be higher by 4% for FY08E and vice versa. A 5% rise in coal prices would reduce FY08 EPS estimates by 1.8% and EBITDA estimates by 1%. Figure 60: Sensitivity analysis Sensitivity analysis
FY08e
FY09e
FY010e
Base case estimates – EPS (INR)
130.9
212.9
258.3
If cement prices are 1% higher than estimates
140.7
224.7
273.5
Chg with respect to base case estimates(%) If cement prices are 1% lower than estimates Chg with respect to base case estimates (%)
7.6
5.6
5.9
121.1
201.2
243.2
(7.5)
(5.5)
(5.8)
128.5
206.8
243.8
(1.8)
(2.9)
(5.6)
Base case estimates-EBITDA ( INR mn)
9,426
13,567
14,581
If cement prices are 1% higher than estimates
9,831
14,117
15,288
4
4
5
9,025
13,023
13,883
(4)
(4)
(5)
9,329
13,285
13,908
(1.0)
(2.1)
(4.6)
If coal prices are 5% higher than estimates Chg with respect to base case estimates (%)
Chg with respect to base case estimates (%) If cement prices are 1% lower than estimates Chg with respect to base case estimates (%) If coal prices are 5% higher than estimates Chg with respect to base case estimates (%) Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 49
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Higher average realization undone by likely cost overruns in FY08 Based on our revised price forecasts, we expect average realization to be higher by 7.7% in FY08 and 18.8% in FY09 over our earlier estimates. We have not factored in the full impact of capacity expansions in next two years. Figure 61 underlines our main assumptions. Figure 61: Key assumptions Particulars INR/tonne
-----------------FY08e -------------Old Estimates
------------------ FY09e --------------
New Variance Estimates (%)
FY10e
Old Estimates
New Estimates
Variance (%)
Key Assumptions Sales Volume (mn tonnes)
6.2
6.6
6
8.5
8.5
-
12.0
3,345
3,555
6
3,192
3,722
17
3,536
Raw Material
243
422.2
74
234
434.8
86
448.0
Freight
400
420
5
450
450
-
450
Power
334
261
(22)
410
232
(43)
Average realisation (INR/tonne) Cost (INR/tonne)
Source: Deutsche Bank
Our revised estimates based on higher price estimates show earning estimates declining by a 14% in FY08 and rising by 26% in FY09 (over the earlier estimates). Based on our assumptions we forecast a net sales growth CAGR of 38% for FY07-10E, driving net profit growth of 71% CAGR over the same period. This is considering the aggressive depreciation policy the company has adopted. Figure 62: Key financials at a glance Particulars INR mn Net Sales
---------------- FY08e-------------Old Estimates
------------------- FY09e ------------
New Variance Estimates (%)
FY10e
Old Estimates
New Estimates
Variance (%)
8
23,723
26,952
14
35,820
18,248
19,733
EBITDA
9,290
9,426
1
10,375
13,567
31
14,581
PAT
5,306
4,559
(14)
5,862
7,416
26
8,997
EPS (INR)
152.3
130.9
(14)
168.3
212.9
26
258.3
Ratios EBITDA/tonne (INR)
33
32
(4)
27
35
31
27
178
209
17
107
157
47
109
ROE (%) (#)
116.7
87.7
(2,893)
76.1
84.4
833
66
RoCE (%) (#)
71.1
58.8
(1,230)
55.1
65.7
1,059
EV/tonne (USD)
# indicates change in bps Source: Deutsche Bank
Cash earnings represent Shree Cement’s true potential Shree Cements follows an aggressive depreciation policy, wherein it charges depreciation on its plant and machinery at the higher of the rates prescribed by the Companies Act and the Income Tax Act. This consequently deflates reported earnings of the company to a considerable extent since the income tax rates are ~6 times those prescribed by the Companies Act.
Page 50
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
The cash flow EPS of the company is 3.4x and 1.8x the reported EPS for FY07E and FY08E respectively. We expect this trend to continue till FY12 on account of significant capacity additions to be made by the company over the next 3-4 years. Figure 63: Cash EPS versus reported EPS
(INR)
Cash EPS
Reported EPS
350 300 250 200 150 100 50 FY05
FY06
FY07
FY08e
FY09e
FY010e
Source: Deutsche Bank,
Deutsche Bank Securities Inc.
Page 51
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
UltraTech Cement Limited Bloomberg: UTCEM IN
Benefits from south Indian presence
899.30 1,140.00 1,163.85 - 620.95 14,911
Key changes
Upgrade to Buy with a TP of Rs.1,140 UltraTech Cemco is likely to benefit from its markets in South and West both of which have seen superior realization growth. Cost-inflation risk is coming down as domestic lignite-based captive power plant gets commissioned this year. Our new earnings estimate for FY09 is up 65% over our previous estimate and 103% above the consensus. Despite recent run-up, the stock is trading at lower end of valuation range. We upgrade our recommendation to Buy. Party re-starts, price-freeze called off As highlighted in our sector note, we are now more sanguine on tight supply scenario in the Indian cement sector lasting till CY09. Accordingly, in line with our sector price outlook, we have revised the cement price forecast by 7.7% for FY08E and 18.8% for FY09E. Large benefits to kick in from FY09 Based on our new price and revised volume forecasts, we have revised our EPS estimate for FY08 to Rs98/share and sharply revised our FY09 EPS estimate to Rs144/share (up 65%). Our FY08 and FY09 estimates are above the consensus by 38% and 103%, respectively. Raising target price to Rs1,140 In line with the sectoral valuations, we have estimated our target price at Rs1,140/share (26% upside) assuming an average of the target PER multiple of 12x FY08E and EV/EBITDA multiple of 7.5x FY08E. These multiples are at the lower end of valuation bands and also at a discount to regional peers. We believe that this is reasonable as the RoE and EPS growth of UltraTech is in the highest quartile in the region. Key risks are volatility in cement prices and rise in fuel prices. Our sensitivity analysis shows that a 5% rise/drop in realizations can result in a 25% rise/drop in FY08E earnings. A 10% rise in fuel cost can result in 9% drop in FY08E earnings.
Rating Hold to Buy 795.00 to 1,140.00 Price target Sales (FYE) 55,602 to 57,907 Op prof margin (FYE) 29.8 to 29.4 Net profit (FYE) 10,599.5 to 12,171.4
Ç Ç Ç È Ç
43.4% 4.1% -1.2% 14.8%
Price/price relative 200
1500
150
1000
100 500
50 0
0
7/ 05 10 /0 5 1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Reuters: ULTC.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) UltraTech Cement Lim (R.H. Scale)
Performance (%) Absolute BSE 30
1m 12.9 5.5
3m 24.7 13.7
12m 20.5 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
111,513 2,760 124.5 – 48 0.8
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
55.5 46.5 210.48 4.27 15.9 29.4
Forecasts and ratios Year End Mar 31
2006A
2007A
2008E
2009E
2010E
33,839.5
49,687.0
57,907.0
70,488.2
78,896.4
EBITDA (INRm)
5,345.6
14,619.9
19,799.2
27,814.3
28,220.0
Reported NPAT (INRm)
2,283.0
7,884.1
12,171.4
17,975.2
17,942.1
Reported EPS FD(INR)
18.35
63.34
97.77
144.40
144.13
DB EPS FD(INR)
18.35
63.34
97.77
144.40
144.13
OLD DB EPS FD(INR)
18.46
62.83
85.15
87.56
0.00
% Change
-0.6%
0.8%
14.8%
64.9%
–
DB EPS growth (%)
752.7
245.2
54.4
47.7
-0.2
PER (x)
23.6
13.2
9.2
6.2
6.2
EV/EBITDA (x)
12.4
7.8
5.9
3.9
3.7
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Sales (INRm)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 52
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' ()
# !
India
Reuters Code
ULTC.BO
! Price as of 12 July
INR 899.30
Price Target
INR 1,140.00
Web Site http://www.ultratechcement.com/ " ! " Cement business of Larsen & Toubro Limited demerged and vested in company in 2004, Grasim Industries hold 51% sake in Ultratech.
# $ +91 22 6658 4811
[email protected]
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
*++,
*++-
*++.
*++/
*++0'
*++1'
*+)+'
2.80 ¯ ¯ 2.80 ¯ 325.27 267.78 ¯ 0.00 ¯ 84.72 ¯ 62 ¯ ¯ NM NM NM NM
2.15 146.5 -23.2 2.15 146.5 13.94 11.90 22.6 0.00 0.0 78.27 4.5 124 39,227 51,429 1.9 15.4 59.5 2.1
18.35 23.6 752.7 18.35 23.6 36.24 29.15 12.0 0.00 0.0 83.65 8.2 124 53,981 66,383 2.0 12.4 21.8 2.9
63.34 13.2 245.2 63.34 13.2 77.54 16.44 10.7 0.00 0.0 142.04 5.4 124 103,738 113,984 2.3 7.8 9.2 4.1
97.77 9.2 54.4 97.77 9.2 98.89 78.74 9.1 0.00 0.0 210.48 4.3 124 111,513 117,608 2.0 5.9 6.9 3.6
144.40 6.2 47.7 144.40 6.2 202.81 155.26 4.4 0.00 0.0 311.56 2.9 124 111,513 107,673 1.5 3.9 4.4 3.1
144.13 6.2 -0.2 144.13 6.2 129.93 73.70 6.9 0.00 0.0 412.45 2.2 124 111,513 103,882 1.3 3.7 4.2 2.4
22,920 3,231 2,475 0 757 -1,185 0 443 0 -158 -1 174
27,010 3,350 2,485 0 865 -1,093 0 440 0 -44 -13 268
33,840 5,346 2,306 0 3,040 -901 0 721 0 593 -16 2,283
49,687 14,620 2,287 0 12,333 -868 0 288 0 3,887 -18 7,884
57,907 19,799 2,748 0 17,052 -1,072 0 499 0 4,307 0 12,171
70,488 27,814 3,138 0 24,677 -1,961 0 1,251 0 5,992 0 17,975
78,896 28,220 3,509 0 24,711 -2,179 0 1,390 0 5,981 0 17,942
20,232 0 -3,576 16,656 0 1,249 -70 3,091 9,392 13,662 30,318 -27,227
1,734 0 -254 1,480 0 -5 -107 -310 -768 -1,190 290 -600
4,509 0 -881 3,628 -1,482 1 -450 -481 -2,128 -3,059 -912 431
9,653 0 -7,607 2,046 -3,111 0 -2,355 1,975 1,750 1,370 306 1,669
12,311 0 -2,508 9,802 -1,500 0 -3,651 0 0 -3,651 4,651 -4,651
25,247 0 -5,920 19,327 0 0 -5,393 0 0 -5,393 13,935 -13,935
16,174 0 -7,000 9,174 0 0 -5,383 0 0 -5,383 3,792 -3,792
448 30,765 0 0 0 5,366 36,580 15,662 10,379 26,041 10,539 0 10,539 1,222 15,214 25,753
602 28,534 0 0 0 6,605 35,741 15,380 10,584 25,964 9,737 41 9,778 2,085 14,778 24,556
684 27,110 0 0 1,482 7,077 36,352 14,520 11,370 25,890 10,414 48 10,461 1,889 13,836 24,297
1,001 32,429 0 0 4,592 8,693 46,716 15,786 13,195 28,981 17,682 53 17,735 1,305 14,785 32,520
5,599 32,190 0 0 6,092 15,132 59,013 17,786 15,025 32,811 26,202 0 26,202 5,464 12,187 38,389
19,534 34,972 0 0 6,092 16,428 77,026 21,786 16,455 38,241 38,785 0 38,785 4,879 2,252 41,037
23,326 38,464 0 0 6,092 22,710 90,592 21,786 17,461 39,247 51,344 0 51,344 9,656 -1,539 49,805
NM 14.1 3.3 0.0 1.7 3.9 2.0 15.6 1.4 144.4 0.6
17.8 12.4 3.2 0.0 2.6 4.1 2.4 0.9 0.1 151.1 0.8
25.3 15.8 9.0 0.0 22.7 11.9 8.9 2.6 0.4 132.3 3.4
46.8 29.4 24.8 0.0 56.1 29.9 33.6 15.3 3.3 83.4 14.2
16.5 34.2 29.4 0.0 55.5 36.4 39.3 4.3 0.9 46.5 15.9
21.7 39.5 35.0 0.0 55.3 48.7 50.9 8.4 1.9 5.8 12.6
11.9 35.8 31.3 0.0 39.8 42.9 43.7 8.9 2.0 -3.0 11.3
2 # 324 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
+91 22-6658-4824
[email protected]
5 6 # 324 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 324 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
! Absolute Price Return 52-week Range Market Cap
1m
3m
12m
12.9%
20.0%
20.4%
INR 620.95 - 1,163.85 INR 111,513 m USD 2,760 m
Company Identifiers Bloomberg Cusip SEDOL
UTCEM IN ¯ B01GZF6
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 53
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate Ultra tech Cement as a buy due to the following. (1) We expect the company to report earnings CAGR of 51% over the period FY07-09e (2) Our estimates for FY08e are (+38 and for FY09e are (+103% ) higher than consensus and we expect the consensus earnings upgrade to drive the stock performance (3)Benefits flowing from superior bargaining power driven by our forecast of tight utilisation levels over FY07-10e.(4) Our revised target price of Rs 1140per share gives a potential ( +26% upside). Note our new estimates are based on revision our all India cement price forecast we have revised our all India cement price forecast for FY08 to Rs235/bag (7.7% higher than our previous assumption) and FY09 forecast to Rs249/bag (18.8% higher than our earlier assumption). Ultra tech Cemco is also likely to benefit from the 92 MW power plant coming up for commissioning
Valuation We have thus used an average PE multiple of 12x core earnings FY08E (earlier assumed 10x FY08E) and 7.5xEV/EBITDA FY08E (earlier assumed 7xFY08E ) to arrive at the target price of INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The forward valuation multiples are similar to those used by us prior to the risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users. (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. Figure 64: 12-month forward rolling P/E band Price (INR)
8
10
12
Figure 65: 12-month forward rolling EV/EBIDTA band Price (INR)
14
5
7
9
11
2,000
1,600 1,400
1,600
1,200 1,000
1,200
800 800
600 400
400
200 0
Source: Bloomberg, Company Data, Deutsche Bank
Page 54
Mar-07
Mar-06
Mar-05
Mar-04
Mar-07
Mar-06
Mar-05
Mar-04
0
Source: : Bloomberg, Company Data, Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Risks UltraTech Cement is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lowerthan-expected price realization reduces our estimates by ~5.0% for FY08 and 3.3% for FY09, and vice versa. International coal prices have risen up sharply We have assumed a 13% CAGR in coal cost for the next three years. Any increase greater than 5% would have an impact on the company’s earnings. Based on our sensitivity analysis, we estimate that a 10% increase in fuel cost over our estimates would depress the earnings by ~9.3% FY08E and ~5.0% FY09E. Figure 66 shows the sensitivity of earnings and EBITDA to cement prices and fuel costs. If cement prices are higher by 5%, then our earnings estimates will be higher by 25% for FY08 and vice versa. Also, the EBITDA will be higher by 15% for FY08E and vice versa. A 10% rise in coal prices would reduce EPS estimates for FY08 by 9.3% and EBITDA estimates for FY08 by 5.6%. Figure 66: Sensitivity analysis Base Case estimate (INR/share)
FY08e
FY09e
FY10e 144
98
144
If cement prices are 5% higher than estimates
122
168
172
Chg with respect to base case estimates (%)
25.0
16.6
19.3
If cement prices are 5% lower than estimates Chg with respect to base case estimates (%) If fuel prices are 10% higher than estimates Chg with respect to base case estimates (%)
73
120
117
(25.0)
(16.6)
(19.3)
89
137
135
(9.3)
(5.0)
(6.3)
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 55
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Higher average realization undone by cost overrun in FY08E Based on our revised price forecasts, we expect average realization per 50kg bag to be higher by 7.7% for FY08E and by 18.8% for FY09E over our earlier estimates. We have not taken the full impact of capacity expansions in the next two years. The following table underlines the changes in main assumptions. Figure 67: Key assumptions ---------------------FY08E-------------INR/tonne
------------------FY09-------------
Old Estimates
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
18
18.4
2
22
20.5
(9)
3,269
3,815
17
3,037
4,066
34
Raw Material
164
269
65
141
267
89
Freight
804
927
15
836
900
8
Power and fuel
710
828
17
622
692
11
Key assumptions Sales volume (m tonnes) Average realisation (INR/tonne) Cost (INR/tonne)**
Source: Deutsche Bank
Our revised estimates based on higher price estimates show earning estimates rising by a marginal 4% for FY08e and 13% in FY09e over earlier estimates. Based on our assumptions we forecast a net sales growth of 19% CAGR for FY07-09E, driving net profit growth of 51% CAGR for FY07-09E. Figure 68: Key financials at a glance ------------------------FY08E--------------INR mn
---------------------------FY09E--------------
Old Estimates
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
Net sales
55,602
57,907
4
62,195
70,488
13
EBITDA
19,495
20,298
4
19,145
29,065
52
PAT
10,599
12,171
15
10,900
17,975
65
85.1
97.8
15
87.6
144.4
65 80
EPS (INR) Ratios EBITDA/tonne (INR)
1,079
1,279
19
853
1,533
EV/tonne (USD)
153
175
15
105
136
30
ROE (%) (#)
54.2
55.4
123
40.2
55.3
1,509
RoCE (%) (#)
41.3
40.4
(89)
34
45.9
1,174
# indicates change in bps Source: Deutsche Bank
Page 56
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Appendix A Capacity ordered In the following table, we give the details of 73m tonnes of the capacity that has been ordered by various companies in the sector. Figure 69: Capacity Ordered Particulars ( mn tonne)
Region
Cement Capacity(mn t)
Commissioning Date
Gujarat Ambuja
North
0.88
Dec-07
Binani Cements
North
2.57
Jun-07
Groups
By March-08
Shree Cements-V JP Associates - Rewa- MP Madras Cements- Jayanthipuram
Others
North
1.34
Jun-07
Shree
Central
2.01
Mar-08
Jaiprakash
South
1.70
Dec-07
MadrasCements
Sub-total
8.50
BY March-09 Ambuja Eastern
East
3.2
JP Associates
North
4.55
Jun-08
Rain commodities
South
1.6
May-08
Others
JP Associates - UP
Central
3.35
May-08
Jaiprakash
Murli Industries
West
2.77
Sep-08
Others
Lafarge-Sonadih
North
2.68
Sep-08
Lafarge
Grasim-Kothputali-Rajasthan
North
4.00
Sep-08
AdityaBirla
Grasim-Aditya-Rajasthan
North
4.00
Sep-08
AdityaBirla
Shree Cements-VI
North
1.34
Dec-08
Shree
India Cement-Sankaridurg
South
1.1
Jun-08
India cement
JK Cement
South
2.07
Sep-08
Others
Madras Cements -Alathiyur
South
1.74
Mar-09
Madras Cements
UltraTech Cemco
South
4.00
Sep-08
AdityaBirla
Zuari Cements
South
1.98
Nov-08
Italicementi
Kesoram- Vasvadatta (Line IV)
South
1.63
Mar-09
Other-Birla
2.01
May-09
Others
Sub-total
Mar-09 Jaiprakash
40.00
By March-10 OCL
East
ACC Wadi
South
3
May-09
ACC
Chettinad
South
1.82
Jun-09
Others
Sagar cement
South
1.72
Jun-09
Others
Penna Cement
South
1.55
Dec-09
Others
Ambuja Cements
North
3.9
Jun-09
Holcim
Dalmia Cement
South
5.2
Jun-09
Others
Sanghi Cement
South
1.7
Jun-09
Others
Sanghi Cement
West
4.29
Jun-09
Sub-total
25.22
Total in India over the next 36 months
73.72
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 57
12 July 2007
Construction Materials Indian Cement Sector
Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Manish Saxena
Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of 10% or worse over a 12-month period
Page 58
Equity rating dispersion and banking relationships
500
58%
400
31%
300 200 100
10%
14%
10%
4%
0 Buy
Hold
Companies Covered
Sell
Cos. w/ Banking Relationship
Asia-Pacific Universe
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Regulatory Disclosures SOLAR Disclosure For select companies, Deutsche Bank equity research analysts may identify shorter-term trade opportunities that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. This information is made available only to Deutsche Bank clients, who may access it through the SOLAR stock list, which can be found at http://gm.db.com
Disclosures required by United States laws and regulations See company-specific disclosures above for any of the following disclosures required for covered companies referred to in this report: acting as a financial advisor, manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; market making and/or specialist role.
The following are additional required disclosures: Ownership and Material Conflicts of Interest: DBSI prohibits its analysts, persons reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of DBSI, which includes investment banking revenues. Analyst as Officer or Director: DBSI policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price Chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the DBSI website at http://gm.db.com.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, in addition to those already made pursuant to United States laws and regulations. Analyst compensation: Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU: A general description of how Deutsche Bank AG identifies and manages conflicts of interest in Europe is contained in our public facing policy for managing conflicts of interest in connection with investment research. Germany: See company-specific disclosures above for (i) any net short position, (ii) any trading positions (iii) holdings of five percent or more of the share capital. In order to prevent or deal with conflicts of interests Deutsche Bank AG has implemented the necessary organisational procedures to comply with legal requirements and regulatory decrees. Adherence to these procedures is monitored by the Compliance-Department. Hong Kong: See http://gm.db.com for company-specific disclosures required under Hong Kong regulations in connection with this research report. Disclosure #5 includes an associate of the research analyst. Disclosure #6, satisfies the disclosure of financial interests for the purposes of paragraph 16.5(a) of the SFC's Code of Conduct (the "Code"). The 1% or more interests is calculated as of the previous month end. Disclosures #7 and #8 combined satisfy the SFC requirement under paragraph 16.5(d) of the Code to disclose an investment banking relationship. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a licence in the Russian Federation. South Africa: Publisher: Deutsche Securities (Pty) Ltd, 3 Exchange Square, 87 Maude Street, Sandton, 2196, South Africa. Author: As referred to on the front cover. All rights reserved. When quoting, please cite Deutsche Securities Research as the source. Turkey: The information, interpretation and advice submitted herein are not in the context of an investment consultancy service. Investment consultancy services are provided by brokerage firms, portfolio management companies and banks that are not authorized to accept deposits through an investment consultancy agreement to be entered into such corporations and their clients. The interpretation and advices herein are submitted on the basis of personal opinion of the relevant interpreters Deutsche Bank Securities Inc.
Page 59
12 July 2007
Construction Materials Indian Cement Sector
and consultants. Such opinion may not fit your financial situation and your profit/risk preferences. Accordingly, investment decisions solely based on the information herein may not result in expected outcomes. United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Deutsche Bank AG research on the companies which are the subject of this research.
Page 60
Deutsche Bank Securities Inc.
Deutsche Bank Securities Inc. Asia-Pacific locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Fax: (61) 2 8258 1400 Deutsche Bank (Malaysia) Berhad Level 18-20 Menara IMC 8 Jalan Sultan Ismail Kuala Lumpur 50250 Malaysia Tel: (60) 3 2053 6760 Fax: (60) 3 2026 3906 Deutsche Securities Asia Ltd Taiwan Branch Level 6 296 Jen-Ai Road, Sec 4 Taipei 106 Taiwan Tel: (886) 2 2192 2888 Fax: (886) 2 3707 8450
Deutsche Bank AG Level 55 Cheung Kong Center 2 Queen’s Road Central Hong Kong Tel: (852) 2203 8888 Fax: (852) 2203 6921
Deutsche Equities India Pte Ltd DB House, Ground Floor Hazarimal Somani Marg Fort, Mumbai 400 001 India Tel: (91) 22 5658 4600 Fax: (91) 22 2201 9094
Deutsche Securities Inc. Level 20, 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701 Fax: (81) 3 5156 6700
In association with Deutsche Regis Partners, Inc. Level 23, Tower One Ayala Triangle, Ayala Avenue Makati City, Philippines Tel: (63) 2 894 6600 Fax: (63) 2 894 6638
Deutsche Securities Korea Co. 17th Floor, YoungPoong Bldg., 33 SeoRin-Dong, Chongro-Ku, Seoul (110-752) Republic of Korea Tel: (82) 2 316 8888 Fax: (82) 2 316 8998
Deutsche Securities Asia Ltd. Singapore Branch One Raffles Quay #18-00 South Tower Singapore 048583 Tel: (65) 6423 8001 Fax: (65) 6837 2167
In association with TISCO Securities Co., Ltd TISCO Tower 48/8 North Sathorn Road Bangkok 10500 Thailand Tel: (66) 2 633 6470 Fax: (66) 2 633 6490
In association with PT Deutsche Verdhana Indonesia Deutsche Bank Building, 6th Floor, Jl. Imam Bonjol No.80, Central Jakarta, Indonesia Tel: (62 21) 318 9541 Fax: (62 21) 318 9560
International locations Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500
Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Fax: (44) 20 7545 6155
Deutsche Bank AG Level 55 Cheung Kong Center 2 Queen’s Road Central Hong Kong Tel: (852) 2203 8888 Fax: (852) 2203 6921
Deutsche Securities Inc. Level 20, 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701 Fax: (81) 3 5156 6700
Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 41339
Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Fax: (61) 2 8258 1400
Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information. This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report. For select companies, Deutsche Bank equity research analysts may identify shorter-term opportunities that are consistent or inconsistent with Deutsche Bank's existing, longer-term Buy or Sell recommendations. This information is made available on the SOLAR stock list, which can be found at http://gm.db.com. Deutsche Bank may trade for its own account as a result of the short term trading suggestions of analysts and may also engage in securities transactions in a manner inconsistent with this research report and with respect to securities covered by this report, will sell to or buy from customers on a principal basis. Disclosures of conflicts of interest, if any, are discussed at the end of the text of this report or on the Deutsche Bank website at http://gm.db.com. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, except if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction or as an advertisement of any financial instruments. Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options," at http://www.optionsclearing.com/publications/risks/riskchap1.jsp. If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a copy of this important document. Furthermore, past performance is not necessarily indicative of future results. Please note that multi-leg options strategies will incur multiple commissions. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction . In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10) Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2007 Deutsche Bank AG 01/2007
GRCM2007PROD010796
Global Markets Research
GEMS: Asia India Resources Construction Materials
12 July 2007
Indian Cement Sector We’re in the midst of a supercycle – staying bullish
FITT Research Fundamental, Industry, Thematic, Thought Leading Deutsche Bank Company Research's Investment Policy Committee has deemed this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing market opinion, we believe the Indian cement sector will experience a sustained upcycle lasting a few years. Street concerns on oversupply, demand slowdown, pricing and valuations are overdone, representing a buying opportunity in our view. Our FY09 (Mar) EPS estimates are 30-100% above consensus. Fundamental – Analyzing the economic attractiveness of the sector Industry – Sector earnings to grow at a 22% CAGR over the next three years Thematic – Demand-supply mismatch may well extend much beyond 2010 Thought leading – Entering a sustainable earnings era Top large-cap picks: ACC and Ambuja; top mid-cap pick: India Cements
`
Manish Saxena Research Analyst (91) 22 6658 4034 [email protected]
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
GEMS: Asia India Resources Construction Materials
12 July 2007
Indian Cement Sector We’re in the midst of a supercycle – staying bullish
FITT Research Top picks ACC (ACC.BO),INR1,072.40 Grasim (GRAS.BO),INR2,819.55 Ambuja Cements Ltd (ACEM.BO),INR127.80 India Cements (ICMN.BO),INR220.20 Shree Cements (SHCM.BO),INR1,335.20
Buy Buy Buy Buy Buy
UltraTech Cement Limited (ULTC.BO),INR899.30
Buy
Manish Saxena
Research Analyst (91) 22 6658 4034 [email protected]
Fundamental, Industry, Thematic, Thought Leading Deutsche Bank Company Research's Investment Policy Committee has deemed this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing market opinion, we believe the Indian cement sector will experience a sustained upcycle lasting a few years. Street concerns on oversupply, demand slowdown, pricing and valuations are overdone, representing a buying opportunity in our view. Our FY09 (Mar) EPS estimates are 30-100% above consensus. – Analyzing the economic attractiveness of the sector Fundamental In this report, we analyze the industry utilization of the sector, the bargaining
power of players and their relative margin/return attractiveness. Our analysis suggests that (1) utilization rates in the sector are likely to remain at 90% over FY07-10E, resulting in five continuous years of peak operating rates – the first-time ever in the last 100 years, and (2) the companies which are integrated and lowcost producers enjoy RoCE/RoE profiles that are among the best globally.
– Sector earnings to grow at a 22% CAGR over the next three years Industry We believe the sharp increase in India’s infrastructure capex alone can sustain
10% annual cement volume growth. Real estate growth and pre-election spending should also help. Consequently, we prefer companies that (1) are expanding capacity and have the ability to bring capacities on stream, (2) are less vulnerable to energy cost inflation, and (3) are in attractive regional markets within India.
– Demand-supply mismatch may well extend much beyond 2010 Thematic We have performed a comprehensive review of new capacities being
implemented in India. Our analysis shows that only 51m tonnes, i.e. 67% of the ordered capacity and 47% of the announced capacity, will get commissioned till FY2010 (Mar). Imports are unlikely to pose a threat due to tight regional demandsupply and port bottlenecks. Even though our demand-supply scenario assumes all the ordered capacity will come through, India would have only a minor surplus in FY10. Our estimate of cement prices increasing by 3% in FY08 from the current levels and a further 4% in FY09 may end up being overly conservative. leading – Entering a sustainable earnings era Thought Longer term, we expect Indian cement prices to increase in line with inflation –
note that India’s low per capita consumption is near an inflection point and the industry is gradually consolidating. Energy cost inflation and scalability of output at limestone mines would be the key challenges.
Top large-cap picks: ACC and Ambuja; top mid-cap pick: India Cements We believe ACC is the most integrated direct cement play that will also benefit from local sourcing of coal. India Cements and UltraTech also look attractive due to their greater exposure in the more attractive south India. We maintain our Buy on Ambuja Cements, Grasim and Shree Cement.
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to request that a copy of the IR be sent to them. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
12 July 2007
Construction Materials Indian Cement Sector
Table of Contents
Look beyond the obvious ................................................................. 3 Multiple constraints in capacity addition!.................................................................................. 3 Equipment orders placed for 68% of announced capacity ....................................................... 3 Regulatory approvals for 21% of announced capacity pending ................................................ 4 Financial closure seems difficult for 27% of announced capacity ............................................ 4 Project delays add a different twist to likely capacity additions ................................................ 5 Supplies to India from other regions are unlikely ...................................................................... 6
Demand growth in top gear ............................................................. 8 Despite strong historical growth, per capita consumption is low ............................................. 8 Indian cement demand skewed towards housing .................................................................... 8 Infrastructure to give demand a big boost ................................................................................ 9 Infrastructure spending to propel the growth in medium term............................................... 10 Pre-election spends can spice up demand growth ................................................................. 10 Pan-India cement demand to grow at 10% CAGR over FY07-10............................................ 11
Deficit to continue till 1HFY10........................................................ 13 Estimates corroborate deficit forecasts till H1FY10/CY09....................................................... 13
Cement prices on a roll again......................................................... 15 Data-points suggest strong price momentum to continue ..................................................... 15 Steady rise in consolidation .................................................................................................... 15 Price estimates lower than landed cost of imports................................................................. 17
Asymmetric margin improvement ................................................. 18 Cost pressures to differentiate companies’ earnings.............................................................. 18
Valuations are attractive................................................................. 20 Stocks yet to touch Jan-07 levels ........................................................................................... 20 Our estimates for FY09e are now 30-100% higher than consensus....................................... 21 Valuations at discount to the region........................................................................................ 21 Target multiples assumed at discount to region and historical band ...................................... 22
ACC ................................................................................................... 23 Ambuja Cements Ltd....................................................................... 28 Grasim .............................................................................................. 36 India Cements .................................................................................. 41 Shree Cements................................................................................. 46 UltraTech Cement Limited.............................................................. 52 Appendix A....................................................................................... 57 Capacity ordered..................................................................................................................... 57
Page 2
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Look beyond the obvious Multiple constraints in capacity addition! Cement prices spiraling to a decadal high have left most Indian cement producers scrambling for new capacity additions at a frenzied pace for the first time in the last two decades. But in our opinion, most Indian producers have found the going tough. As in any project implementation, there are multiple constraints in expanding capacities. The actual capacity addition that can be realized would be the one fulfilling all of the multiple constraints that need to be met. Considering only three constraints, i.e. ordering, financial and regulatory approval, of the five possible ones, the maximum realizable new cement capacity that could come up in India during FY07-FY10E
Figure 1 shows that even considering only three constraints - ordering, financial and regulatory approval - of the five possible ones, the maximum realizable new cement capacity that could come up in India during FY07-FY10 is 51MTPA. Also, the maximum realizable clinker capacity addition based on our analysis can be no more than 39MTPA. This implies that only less than 50% of the announced capacity additions in India of 108m tonnes could see the light of day over FY07-10. Figure 1: Multiple constraints on realizing announced capacity
Realizable capacity, 51.3 MTPA
is 51 MTPA
Financial closure possible, 146.4MTPA
Regulatory approved, 81.1 MTPA
Ordered, 73.7 MTPA Source Ministry of Forest, Ministry of environment, CMA, Deutsche Bank
The three quantifiable constraints which overlap are:
Equipment orders placed for 68% of announced capacity Actual placement of orders with equipment suppliers should be taken as confirmed with the first advance payment or letter of intent. While almost all equipment suppliers recognise a letter of intent as a confirmation of new orders, we believe that the first advance payment received by them is a better metric to measure equipment orders. Be that as it may, letters of intent received by cement equipment suppliers point to a total of 73.7MTPA of cement capacities to be commissioned over FY07-10. Appendix A (page 60) gives the details of orders for capacity additions by the cement manufacturers.
Deutsche Bank Securities Inc.
Page 3
12 July 2007
Construction Materials Indian Cement Sector
Regulatory approvals for 21% of announced capacity pending Environmental and forest clearance in India is through an open hearing system and, at times, results in delays of more than 10 years (e.g. Sanghi Industries). Our correspondence with the Ministry of Environment and Forests revealed that 81.1MTPA of capacity has been approved. We are surprised that few companies have even placed orders without first obtaining regulatory clearances. Figure 2 shows that clearances for 23MTPA of capacity (21% of announced capacity) are still pending. Surprisingly, a few
Figure 2: Regulatory clearances
companies have placed
MTPA
orders without obtaining regulatory clearances
Approved
120
Not approved Not Ordered
Announced
100 80
Ordered
60 40 20 Source: Ministry of Forest, environment, CMA, Deutsche Bank
Financial closure seems difficult for 27% of announced capacity Cement capacity orders (unlike the power sector) in recent times have redefined the point at which ordering is recognized by equipment suppliers. Figure 3: Funding constraints
MTPA
Financial closure possible
120
Not Ordered
Financial closure not possible Announced
100 80
Ordered
60 40 20 Source: Prowess, CMA, Deutsche Bank
Page 4
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
As our bottom-up analysis of the financials of each company in the sector reveals, there have been many instances of companies ordering capacity that cannot be financed even assuming 20% equity dilution and raising debt to 1.5x equity. Figure 3 shows that approximately 29MTPA of capacity orders (27% of announced capacity) may not be commissioned due to difficulties in financial closure.
Project delays add a different twist to likely capacity additions Equipment suppliers have manufacturing capability of 15-18MT for supplies in India and Middle East
Effective incremental capacity addition will be far less than headline capacity addition numbers
Project delays are primarily due to the manufacturing constraints of equipment suppliers and inadequate availability of civil contractors at the site. 1.
Capacity constraint with equipment suppliers: This is contingent on workshop and vendors´ scalability of equipment suppliers. Our discussions with equipment suppliers suggest that the maximum cement capacity in India for all suppliers taken together is 1518 MTPA. Hence equipment suppliers may prioritize supplies to players in India in a manner that suits their long-term interests.
2.
Availability of contractors to carry out civil and erection works. This depends on construction and infrastructure work and the experience of a contractor. We have not been able to quantify the impact of this constraint. Our talks with Indian cement companies suggest that they are running cost over-runs to an extent of 40-50% on the civil construction side.
Finally, even assuming that Indian companies are able to meet the above two challenges and 74m tonnes of capacity is commissioned, incremental production may be only 51m tonnes over FY07-10E. Capacity addition does not become effective spot on April 1st of each year, but is dependent on the handover of the plant. This implies that effective capacity addition in each year is lower than name plate capacity addition. Figure 4: Effective capacity addition is different from name plate capacity addition
(mn tonnes)
Incremental cement capacity Effective incremental cement capacity Incremental production
45 40 35 30 25 20 15 10 5 0 FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Ban, CMAk
Stabilization of new units
Finally, the cement output from new units is subject to two conditions:
has taken 5-6 months in recent times
Deutsche Bank Securities Inc.
Stabilization of new units: This takes 5-6 months. We note that Kesoram and Binani Cement have yet to reach peak utilisation levels despite commissioning of capacities about 3-6 months ago.
Page 5
12 July 2007
Construction Materials Indian Cement Sector
Rise in blending ratio: This is subject to stabilization of chemical composition of clinker output. Unless this happens, the blending ratio cannot be increased.
Supplies to India from other regions are unlikely Global trade of cement at less than 4% of total production is limited by the extremely low shelf life of the product. With the shelf life of cement at less than 90 days, its fast consumption is imperative; else the material is at risk of losing its basic properties. If India were to buy 2m tonnes of cement in global spot cement market, there is a possibility that spot prices could rise by 20-30%
More importantly, the spot trade of cement is in the range of 25-35m tonnes currently, which is less than 2% of global production. If India were to buy 2m tonnes of cement in the spot market (i.e., 10% of total spot trade), spot prices may rise by 20-30%, making the buying completely unviable. Figure 5: Global cement trade is 3-4% of production Clinker
Cement
(mn tonnes)
120 100 80 60 40 20 0
1998
1999
2000
2001
2002
2003
2004
2005
Source: Deutsche Bank, Ocean Shipping Consultant
Regional demand –supply scenario is tight as well The Middle East is one of the fastest growing regions in the world with a demand increase of ~18% in FY07. Key centers of demand growth are the UAE, Saudi Arabia, Iran and Iraq. While Saudi Arabia is balanced in terms of demand–supply, the problem seems to be in the UAE following the breakdown of the Gulf Cement and Union Cement plants. In addition, new capacities in Iran have got delayed while reconstruction demand in Iraq is quite high, resulting in a tight demand–supply scenario. The only surplus region for supplies to India is Thailand. Pakistani cement players, in our opinion, may look at the Middle East market which is quite lucrative at this juncture. Figure 6: Regional demand-supply scenario (in m tonnes) Country
Region
Demand
Supply
Thailand
SE Asia
27
40
13
-
Indonesia
SE Asia
34
42
8
-
India
Indian Subcontinent
149
156
5
1
Pakistan
Indian Subcontinent
27
33
6
-
Middle East
120
100
-
(20)
The Middle East
Exports Surplus/Deficit
Source: CMA, Ocean freight liners
Page 6
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Port capacity for cement imports is limited in India
Deutsche Bank Securities Inc.
Port capacity in India acts as a big bottleneck for imports Cement unloading on ports in India can be done only by existing cement producers as others do not have the equipment with a discharge rate greater than 1000 tonnes. So a demurrage cost of USD10-15/t may have to be paid by importers of cement – other than existing players.
Page 7
12 July 2007
Construction Materials Indian Cement Sector
Demand growth in top gear Despite strong historical growth, per capita consumption is low Over the last twenty-five years, Indian cement demand growth (Figure 7) has been on average 7.6%. The growth rate has shown a steady improvement in each five-year plan period. Despite the long-term strong growth, the per capita consumption in India (Figure 8) is quite low. With per capita income levels rising at a ~ 10% for the economy – the income levels currently at USD 700/per person should cross USD 1000 in the next 3 years. Note in South East Asia cement consumption showed a J-curve in demand at a level where the percapita income crossed USD 1000/person Figure 7: Demand growth on a rise (mn t)
India consumption
250
Figure 8: But per capita cons is low ((%))
% annual grwth(RHS)
12 10
200
8
150
6
100
900 700
4
500
50
2
300
0
FY92
FY97
FY02
FY07
FY12 E
Source: Deutsche Bank
100 -100
China
Japan Europe World Per capita consumption
US
Asia (ex China)
India
Source: Deutsche Bank
Indian cement demand skewed towards housing The demand from the housing sector is ~53% of the total Indian cement demand. Figure 9: Housing is the major driver… Defense 4%
Infrastructure 15% Roads 5%
Housing 53%
Irrigation 23%
Source: Deutsche Bank, NCAER
Fear of collapse of real estate prices has had virtually no impact on
There are fears of a slowdown in the demand from the housing sector due to a drop in real estate prices in the country. The worry is that builders may postpone construction of new buildings if the property prices were to correct.
cement demand
Page 8
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 10: …but not property prices (% Change YoY)
Cement demand growth - RHS
Housing Prices
(% Change YoY)
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
0%
0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10%
-5%
-20%
-10%
-30%
-15%
Source: Deutsche Bank, Builders Association, CMA
Proportion of cement demand from housing sector is estimated to come down
As Figure 10 shows, historically real estate prices have had little correlation with the cement demand growth. The cement demand growth in housing is more dependent on the number of new houses being built and repairs to houses. Even assuming a 7% growth in new houses (lower than the GDP growth), we get incremental cement demand to be about 4-5m tonnes .per year for the next three years.
Figure 11: New house builds in India assumed to grow at 7%, a rate lower than GDP growth Particulars
FY05
FY06
FY07e
FY08e
FY09e
FY10e
Urban pucca houses built per year (A)- mn
1.7
1.8
2.0
2.1
2.2
2.4
Cement consumption norm per house (B)-t
28.0
28.0
28.0
28.0
28.0
29.0
Cement consumed in Urban pucca houses (C)=A*B - mnt
47.6
51.4
55.5
59.4
63.0
69.1
2.2
2.3
2.5
2.6
2.8
2.9
Rural pucca houses built per year (D)-mn Cement consumption norm per house (E)-t Cement consumed in rural pucca houses (F)=D*E- mn t Repair Demand (H) Sub-total G= C+F +H As a proportion of total demand
6.0
6.0
6.0
6.0
6.0
7.0
13.2
14.0
14.8
15.7
16.7
20.6
3
3
5
7
9
10
60.8
65.4
70.4
75.1
79.6
89.7
52
51
51
50
49
48
Source: Deutsche Bank, National Housing
Infrastructure to give demand a big boost Assuming 10% cement intensity in projects, the top eight engineering companies in India would incrementally add 4-
Our analysis shows that Infrastructure should be the biggest growth driver for cement demand in the country. If we were to look only at order books of the top eight construction and manufacturing equipment companies in India, we find that their combined order book has virtually doubled over the last two years from INR1,000bn (USD25bn) to INR1,950bn (USD48.75bn) for completion over the next 24-30 months.
6mtonnes of demand per annum
Deutsche Bank Securities Inc.
Page 9
12 July 2007
Construction Materials Indian Cement Sector
Figure 12: Total order book of top 8 Indian engineering and construction companies (Rs. Bn) 2,500 2,000 1,500 1,000 500 FY05
FY06
FY07
Source: Deutsche Bank, BHEL, L&T, Siemens, ABB, IVRCL, Gammon, Punj Lloyd, Nagurjana,
Assuming 10% cement intensity in structures, the order book of these 8 engineering companies would incrementally add 4-6m tonnes of demand annually.
Infrastructure spending to propel the growth in medium term Infrastructure spending can drive an incremental cement demand of 46m tonnes over FY07-12E
As seen from Figure 13, India is likely to spend ~USD211bn on infrastructure over the next five years. These investments are much lower than the government’s estimate of USD320bn of spends over the same period. Our analysis, based on the bottom-up approach, suggests that the projects are likely to kick off on time. Therefore, the infrastructure investments could drive an incremental cement demand of 46m tonnes over FY07-12E.
Figure 13: Infrastructure demand growth buoys up cement demand (Rs billion)
Cement component of
Infrastructure investment
Demand of cement
Investment (%)
FY97-02
FY03-07
FY07-12e
FY97-02
FY03-07
4.2
66
103
250
1
2
4
Irrigation
6
574
1,452
2100
12
31
45
Ports
5
50
100
300
1
2
5
Power
-
866
1452
2400
13
19
36
Thermal
2
475
820
1100
3
6
8
Hydel
7
351
432
1000
9
11
25
Nuclear
3
40
200
300
0
2
3
Railways
4.2
464
606
800
7
9
12
Telecom
1
801
870
870
3
3
3
Tourism
5.5
6
29
30
0
1
1
6
586
1,379
1700
13
30
36
3,413
5,991
8,450
49
96
142
Airports
Urban infrastructure Total
FY07-12e
Source: Deutsche Bank, Planning Commission, NICMR
Pre-election spends can spice up demand growth As seen in Figure 14, the ´Election effect´ has by and large pushed cement demand ahead of the trend line. National elections are scheduled for September 2009 and several state
Page 10
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
assembly elections are lined up for the next two years. This could spice up the total demand growth in India. Figure 14: ´Election effect´ to boost cement demand
(% YoY)
Average growth in last 3 years
Election year growth
25 Growth can be
20
higher in FY10 than estimated
Higher base in
15
2003
10 5 0 2002
2003
2004
assembly assembly assembly
2004
2005
2006
2009e
national
assembly
assembly
national
Source: Deutsche Bank
Pan-India cement demand to grow at 10% CAGR over FY07-10 Based on our sectoral outlook, we have marginally revised our demand growth assumptions in India to 10% from 9%. The key reasons are: (1) Stronger-than-expected order book of Indian construction and engineering companies (2) No slowdown seen in construction of houses at important consumption centers Figure 15: Robust demand growth to continue (Mn tonnes)
Domestic demand
Demand growth rate - RHS
(%)
220
11%
200
10%
180
9%
160 8%
140
7%
120 100
6% FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA
On a regional basis we expect North and West to lead the demand growth trends in India. While South could also do well, the skewed nature of projects in North and West makes us believe that demand growth in South could be a shade lower than other regions.
Deutsche Bank Securities Inc.
Page 11
12 July 2007
Construction Materials Indian Cement Sector
Figure 16: Regional demand growth assumptions Regions
FY06
FY07
FY08e
FY09e
North
27.1
29.9
33.4
37.0
41.1
11
Infrastructure projects like Delhi Airport, 15000MW hydro projects to drive demand growth
East
22.6
23.9
26.2
28.8
31.6
10
Recent pick –up in infrastructure projects to drive growth
West
25.7
28.7
31.8
35.2
39.0
11
Urban infrastructure and state spends driving demand
South
37.6
43.5
47.9
52.7
57.9
10
Demand driven mainly by high income levels of population
Central
20.6
22.4
24.2
26.1
28.2
8
Elections, irrigations would act as triggers for demand
133.9
148.9
163.8
180.3
198.3
10
9%
11%
10%
10%
10%
All India y-o-y chg (%)
FY10e CAGR (%) FY07-10e
Remarks
Source: CMA, Deutsche Bank
Page 12
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Deficit to continue till 1HFY10 Estimates corroborate deficit forecasts till H1FY10/CY09 Our estimates show that the Indian cement sector will face a deficit scenario till 1HFY10/CY09. Figure 17 summarizes our estimates for cement demand and supply, and utilization for the next three years. Figure 17: Cement deficit till CY09 Year
Net Clinker capacity at start of year (mnt)
Additions in Clinker Clinker year (mnt) Utilisation Utilisation existing new units (%) units (%)
Cement : Clinker Ratio(x)
Cement Domestic Production Demand (mnt) (mnt)
Exports cements (mnt)
Exports clinker (mnt)
Surplus / (Deficit)
FY99
81
7
84
40
1.19
81.7
79.2
2.06
1.5
0.4
FY00
87
2
97
40
1.11
94.2
91.3
1.95
1.2
1.0
FY01
89
5
89
40
1.16
93.6
88.5
3.14
2.0
1.9
FY02
95
12
83
40
1.27
102.4
96.0
3.38
1.8
3.1
FY03
107
5
88
40
1.17
111.4
107.2
3.47
3.5
0.7
FY04
112
5
93
40
1.12
117.5
112.8
3.38
5.6
1.3
FY05
117
6
93
40
1.16
127.6
122.9
4.07
5.92
0.6
FY06
123
5
95
40
1.22
141.8
135.6
6.00
3.15
0.3
FY07
127
4
92
60
1.28
155.7
149.0
5.87
3.15
0.8
FY08e
131
6
91
60
1.29
162.0
163.9
5.57
3.15
(7.4)
FY09e
138
30
94
40
1.26
176.5
180.3
5.57
3.15
(9.3)
FY10e
167
18
90
40
1.30
206.8
198.3
5.57
3.96
3.0
Source: Deutsche Bank, CMA
Lack of planned maintenance has resulted in forced plant outages, risking utilization levels of existing plants
While deriving our estimates for utilization levels, we are faced with the daunting task of trying to figure out the threat of forced outages faced by existing cement capacities. Figure 18 shows that the cement companies, except in South and East India, have skipped the required one-month shutdowns for planned maintenance. Figure 18: Plants skip desired maintenance shutdowns (%)
FY06
FY07
110% 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% North
South
East
West
Central
Source: Deutsche Bank, CMA
Deutsche Bank Securities Inc.
Page 13
12 July 2007
Construction Materials Indian Cement Sector
So we believe that existing plants may find it difficult to keep pace with demand growth. While it is difficult to pinpoint the exact impact of such problems, the following can happen 1.
Have more forced outages of clinker units :Since almost all units are skipping the required shut-downs for maintenance schedules, there have been increasing instances of shut-downs due to breakdowns
2.
Grinding units working at 22 hours/day versus 16 hours/day stated by norms. We do not know how long this would continue before outages become widespread.
3.
Lack of contractors to undertake O&M as labor force has been shifted to greenfield capacities.
Based on our demand-supply analysis, cement companies will have to work at 90%+ utilisation levels for the next three years. Our worry is that if things aggravate, the demand itself could slow down due to lack of supplies unless supplies from the Asian countries help meet at least some cement demand in India.
Page 14
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Cement prices on a roll again Data-points suggest strong price momentum to continue Cement companies have demonstrated their ability to pass hike in state levies to end-users
Notwithstanding the government intervention, we are pleased that Indian cement producers have demonstrated their ability to pass hike in state levies to end-users. This is akin to the cigarette industry which has time and again demonstrated its ability to pass on the state levies. Importantly, the cement industry did not pass on the full benefit of excise reduction to end-users thus demonstrating the current bargaining power. We believe cement prices in India would be governed largely by the demand-supply gap and consolidation levels in Indian markets. As seen in Figure 19, India is likely to see a deficit scenario in cement for the next two years and a marginal surplus in FY10E. Figure 19: Deficit to continue (Mn tonnes)
Total Despatches
Production
220
Deficit ~ 5% of production
200 180 160 140 120 100 FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA
Steady rise in consolidation On an all India level, one would find that India has a lot to do in terms of M&A for reaching a threshold level – wherein they could enjoy long-term sustained buying power. Currently, the top two groups i.e. Grasim-Cemco and Holcim (ACC-Ambuja) control 45% of the country’s cement capacity. The next largest player is India Cements, with 9.2m tonnes of capacity. These five companies control about 48% of the effective capacity and close to 46% of the total production. But cement being a regional business and if we were to look at the regional level of consolidation, it is only a shade below that of Far East Asia and Europe. We have divided the country into four regions i.e. North, South, East and West. As seen from Figure 20the market share of the top six players in almost all regions of the country is above 70%. In fact, the North, where the top six players hold 80% of the market, looks best placed in terms of progress on gradual consolidation. The current consolidation in the sector is only likely to increase as most of smaller units in India may see delays in commissioning.
Deutsche Bank Securities Inc.
Page 15
12 July 2007
Construction Materials Indian Cement Sector
Figure 20: Gradual rise in consolidation Market share of top 3
Market share of next 3
(% market share)
90 80 70 60 50 40 30 20 FY02
FY04
FY07
FY02
North
FY04
FY07
FY02
East
FY04
FY07
FY02
West
FY04
FY07
South
Source: CMA,Deutsche Bank
Consolidation in the sector to rise as small cement players find difficulty in
Our estimates are based on the assumption that the pan-India average price will be Rs235 per 50kg bag in FY08E and Rs245 per 50 kg bag in FY09E.
ramping up production from new units
Figure 21: Our assumptions factor in price increase lesser than inflation Rs /50 kg bag
All India cement prices(INR/bag)
290 270 250 230 210
Current and forecasted price range
190 170 150 Historical price range 130
Mar-10e
Mar-09e
Q4FY08e
Q3FY08e
Q2FY08e
Q1FY08e
Q4FY07
Q3FY07
H1FY07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
110
Source: Deutsche Bank, CMA
Page 16
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Price estimates lower than landed cost of imports Our estimates for cement prices look realistic as we assume cement prices are at a discount to landed cost of imports. Historically in India, we have seen that commodity need not always be priced lower than landed cost of imports. In times of tight utilization, commodity prices can trade at a premium to landed cost of imports. Figure 22: Domestic prices have been lower than landed cost of imported cement Landed cost of imported cement
Domstic prices
(Rs. per tonne)
6,000
5,000 4,000
3,000 2,000 FY04
FY05
FY06
FY07
FY08e
FY09e
FY10e
Source: Deutsche Bank, CMA, Company
Deutsche Bank Securities Inc.
Page 17
12 July 2007
Construction Materials Indian Cement Sector
Asymmetric margin improvement Cost pressures to differentiate companies’ earnings International coal prices have hit a 10-year high though domestic coal prices have hardly moved up. Figure 23: Rising international coal prices Imported Coal - SA
Baltic Dry Index
(INR/t)
1HCY07
2HCY06
1HCY06
2HCY05
1HCY05
2HCY04
1HCY04
2HCY03
1HCY03
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
Source: Deutsche Bank, Bloomberg
As seen in Figure 23, the players who have used international coal got a double-whammy due to the coal and freight costs. Currently, the domestic coal prices are at a 40-45% discount to landed cost of imported coal (adjusted for the calorific value). The usage pattern of domestic and international coal is mainly driven by plant locations and coal mine linkage. Figure 24: Coal usage pattern Companies
Proportion of International coal use (%) Prop. of Domestic coal/lignite use (%)
Pet coke usage (%)
Associated Cement Cos. Ltd.
15
85
Ambuja Cements Ltd.
40
60
0 0
Grasim Industries Ltd.
30
30
40
India Cements Ltd.
70
30
0
Shree Cement Ltd.
20
30
50
UltraTech Cement Ltd.
40
60
0
Source: Deutsche Bank, Company
At this juncture, companies with domestic coal linkages would be at an advantage vis-à-vis those tied up with supplies of imported coal. ACC, with the highest proportion of usage of domestic coal, is also likely to report the maximum increase in EBITDA margins.
Page 18
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 25: EBITDA margins (FY05- FY10E) Company
FY08e YoY Change (bps)
FY09e YoY Change (bps)
FY10e YoY Change (bps)
FY05
FY06
FY07
Associated Cement Cos. Ltd.#
16.9
18.2
29.4
38.5
912
41.2
264
36.7
(449)
Ambuja Cements Ltd.#
30.3
34.9
41.6
666
47.1
554
39.6
(747)
Grasim Industries Ltd.
24.2
24.4
30.4
32.9
249
36.7
379
31.8
(488)
India Cements Ltd.
12.8
17.4
32.8
37.9
511
36.3
(156)
29.0
(731)
Shree Cement Ltd.
29.0
29.4
46.3
47.8
150
50.3
257
40.7
(963)
UltraTech Cement Ltd.
14.0
17.9
30.0
35.1
505
41.2
618
37.6
(363)
Source: Deutsche Bank, Company, #Dec year ending, CY06=Mar 07
Grasim and Shree Cement Limited will be in a relatively advantageous position as both the companies use pet coke, which is insulated from global freight cost movements and is more dependent on crude oil prices. There could be cost savings accruing to players who are investing in lignite/coal-based power plants in lieu of furnace oil based DG sets. UltraTech Cemco is implementing a 92MW lignitebased power plant, while Grasim is commissioning a 95MW thermal power plant. Apart from the energy cost savings, companies are also looking at improving their distribution efficiencies. The lead distance for most cement players would also shrink as most cement players start looking at regional markets for better profitability. These savings could reduce the freight costs. Finally, the discount between trade sale and non-trade sale would also come down. Broadly, for the industry, this is as important as the price rise.
Deutsche Bank Securities Inc.
Page 19
12 July 2007
Construction Materials Indian Cement Sector
Valuations are attractive Stocks yet to touch Jan-07 levels Indian cement stocks have rebounded sharply after the Indian finance minister stated that there was no price freeze in the sector. The stocks have risen by 20-25% over the last two weeks; but are still below the Jan-07 levels. Figure 26: Performance of cement stocks vs BSE Sensex ACC
Ambuja Cem
Grasim
India Cem
Shree Cem
Sensex
Ultratech
320 290 260 230 200 170 140 110 80 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Source: Deutsche Bank, Bloomberg
Figure 27 shows that the impact of the government’s statements on stock prices has lessened. Figure 27: Government statements have increasingly lesser impact on stock performance Date
Event
Abs Perf of DB cement Index (%)
Rel perf of DB cement Index (%)
One day
Three days
One day
Three days
Remarks
22nd Jan 07
Imports duties on cement cut to zero from 12.5%
(5.5)
(5.0)
(4.3)
(5.6)
Biggest single-day correction
28th Feb 07
Govt raises excise duty on higher priced cement
(2.6)
(6.2)
(4.3)
(2.2)
Biggest three-day correction
2nd March 07
Cement prices rise higher than incremental excise duties
(2.3)
(4.7)
1.4
(2.3)
Cement stocks o/p market
6th March 07
Industry Minister (IM) asks manufacturers to cut prices
(4.3)
(5.2)
(3.4)
(6.7)
Pains seen in sector
7th March 07
First meeting of cement manufactures and FM
5.1
(4.6)
1.4
(7.1)
Expectations of agreement brings relief
9th March 07
IM and manufactures agree for a one-year price freeze
(3.7)
(2.7)
(3.8)
0.0
Fears of earnings downgrades
19th March 07
FM asks cement industry to reduce prices
3.3
1.3
2.8
(3.9)
Surprisingly stocks end positive
22nd March 07
Second meeting of FM and cement manufactures
(0.7)
(2.8)
(0.5)
0.4
Deadlock remains
25th March 07
Second meeting of industry minister and cement manufactures
(1.0)
(2.0)
0.2
0.3
Both sides ask for concessions
3rd April 07
FM exempts domestic levies on imported cement
(1.4)
3.7
(2.7)
(0.7)
Few stocks end positive
6th April 07
Manufacturers say one-year price freeze no longer valid
3.7
3.4
1.2
0.8
Stocks react positively
7th April 07
Press reports of imports of cement from Pakistan
3.7
3.4
1.2
0.8
Stocks react positively
3rd May 07
Introduction of three-tier excise duty structure
(0.2)
(0.8)
0.79
0.22
Few stocks end positive
27th June 07
FM clarifies that there is no price freeze
6.9
7.6
6.4
6.0
Biggest single-day gains
Source: Deutsche Bank, Bloomberg * Bench –marked the DB cement index to BSE_30
Page 20
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Our estimates for FY09e are now 30-100% higher than consensus Based on our new price and volume estimates, our earnings estimates are significantly above the consensus. We believe our forecasts are realistic and factor in inflationary impact of coal and freight costs. Also, our pan-India cement prices for FY08E are estimated at 14% higher than FY07 and 3-4% higher for FY09E over FY08E cement prices. This looks conservative in view of the tight demand–supply scenario in the country. Figure 28: DB vs Consensus estimates Company
ACC#
---Consensus EPS*----
----DB EPS-----
--------Variance (%) -------
FY08
FY09
FY08
FY09
FY08
FY09
70.3
67.5
93.6
114.1
33
69
GACL#
9.8
9.4
10.1
13.2
3
41
Grasim
209.1
239.1
294.8
394.2
41
65
India Cement
22.0
19.9
28.9
27.0
32
35
Shree Cement
119.5
132.1
130.9
212.9
10
61
Shree Cement Cash EPS
183.3
223.8
234.2
299.0
28
34
70.8
71.2
97.8
144.4
38
103
UltraTech
Source: Deutsche Bank, # Dec year ending, CY06=FY07, *w.e.f 1st April 07
Valuations at discount to the region Indian companies are trading at a discount to global peers. We believe that cement stocks will see superior earnings growth and RoE, resulting in a re-rating of stocks. Figure 29: Comparative valuations of Indian companies vs global peers 9-Jul-07 Company
Currency Price (INR)
------EPS (INR)-----
-------P/E (x)--------
---EV/Ebitda (x)----
--EPS Growth (%)--
FY08e
FY09e
FY08e
FY09e
FY08e
FY09e
FY08e
FY09e
Indian Companies Associated Cement Cos. Ltd.
INR
1,046
92
112
11
9
7
5
63
26
Grasim Industries Ltd.
INR
2,765
304
412
9
7
6
4
37
34
Ambuja Cements
INR
132
10
13
13
10
8
6
19
41
India Cements Ltd.
INR
222
29
27
8
8
5
4
37
-7
Shree Cement Ltd.
INR
1,334
131
213
10
6
5
3
158
63
UltraTech Cement Ltd.
INR
893
98
144
34
53
Average of Indian Companies
9
7
7
4
11
8
6
4
Global Companies Adelaide Brighton
AUD
4
0.2
0.2
17
15
10
9
11
13
Anhui Conch Cement
HKD
52
2
3
30
20
17
13
40
48
Cimsa
TRY
10
1
1
8
8
6
5
16
4
CRH PLC
EUR
38
2
3
15
14
9
8
10
10
Holcim
PHP
8
0
1
22
14
10
7
91
55
Holcim Ltd
CHF
137
9
10
15
13
7
6
7
9
Indocement
IDR
6,300
277
422
23
15
11
8
72
53
EUR
135
9
11
15
13
8
7
12
20
Semen Gresik
IDR
51,300
2,743
3,617
19
14
10
7
26
32
Siam Cement
THB
292
22
22
13
13
9
9
-14
-1
16
13
9
8
Lafarge
Average of Global Companies
Source: Deutsche Bank estimates, Company, #Dec 06 considered as Mar 07, Global companies year ending is Dec; these companies are not covered by the author of this report, for further details please see https://gm.db.com/Equities
Deutsche Bank Securities Inc.
Page 21
12 July 2007
Construction Materials Indian Cement Sector
We believe that these advantages will unfold in the next two years, leading to accelerated earnings growth.
Target multiples assumed at discount to region and historical band As shown in Figure 30, EPS growth rates of Indian cement companies are forecasted to be better than those in the region and across the globe. Despite such high growth in earnings and higher RoE/RoCE, we have assumed that Indian cement companies would trade at 1214X PER and 7-8x EV/EBIDTA one-year forward, which is a marginal discount to that of international peers. This is also at the lower end of 12-year trading bands of the stocks. Figure 30: Target price summary Company Name
Target Price Recommendation
Target PER (x)
Target EV/E (x)
EV/Ton USD Prices as on 9th July
Upside / Downside (%)
1,350
BUY
14.0
8.0
283
1,046
29
158
BUY
14.0
8.0
212
132
20
3,320
BUY
14.0
NA
161
2,765
20
300
BUY
12.0
7.5
225
222
35
Shree Cement
1,750
BUY
12.0
7.5
209
1,334
31
Ultratech
1,140
BUY
12.0
7.5
189
893
28
ACC# Ambuja Cements# Grasim India Cement
Source: Deutsche Bank, Dec year ending, CY06=FY07
Top picks are ACC and Ambuja Cement in large caps and Shree Cement and India Cement among mid-caps. Figure 31 gives a snapshot of key financials of cement companies under our coverage. Shree Cement and Grasim will likely have the highest volume growth. Ambuja Cements and UltraTech will have the highest growth in realisations. Figure 31: Key financial metrics Company Name
Volume Growth
Avg. Realization ----EBITDA Margin (%) ----
EBITDA/t
----------RoE (%) ----------
----------RoCE (%) --------
FY08 CAGR-FY07-09e ACC#
CAGR-FY07-09e
FY07
FY08e
FY09e
USD
FY07 FY08e
FY09e
FY07
FY08e FY09e
8
9
29
39
41
34
41
47
42
33
37
35
Ambuja Cements#
13
21
43
47
40
34
36
38
24
27
29
18
Grasim
16
7
30
33
37
36
31
31
31
22
25
27
India Cement
7
9
33
38
36
30
22
29
22
17
28
25
Shree Cement
33
14
46
48
50
35
46
69
67
22
45
60
Ultratech
14
17
30
35
41
31
56
55
55
36
40
46
Source: Deutsche Bank, #Dec year ending, CY06=FY07
Page 22
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
ACC Bloomberg: ACC IN
Top pick in the sector
1,072.40 1,350.00 1,172.60 - 704.65 14,911
Key changes
Earnings to benefit from tight cement supply scenario We forecast realizations for ACC to rise by 8.5% YoY in CY07e and a further 13% YoY in CY08e. Accordingly, ACC could report net sales CAGR of 21% in CY06-08E driving earnings CAGR of 32% over the same period. ROE is estimated to rise to 47% in CY07E. ACC’s margin expansion could be the best in Indian cement industry We estimate ACC to report 1,176bps expansion in margins for CY06-08E which is amongst the highest in India driven by an insignificant impact from the rise in imported coal prices as ACC’s proportion of purchase of imported coal versus domestic coal is amongst the lowest in peer group. In addition, the margin expansion could be even better if the following were to pan out: (1) Further narrowing of the differential between retail and wholesale prices and (2)Further decline in landed cost of coal as freight cost for coal shipments could decline. TP of Rs1,350 based on 3-year average PE and EV/EBITDA multiples Our target price assumes an average PE multiple of 14x FY08E and EV/EBITDA of 8.0x FY08E. Our target PE and EV/EBITDA multiples are based on the average PE and EV/EBITDA of the last three years and are in the lower quartile of the 10-year forward valuation band. At our target price, the implied EV/t of USD232 is reasonable considering that the stock traded in the USD250-450/t range in the previous up-cycle. Key risks are lower-than-expected utilization levels and higherthan-expected energy costs. Note that a 5% rise in energy cost could lower earnings by ~1%. Also, a 5% lower-than-expected realization can result in a 13% drop in earnings.
Ç Ç Ç Ç
52.4% 8.6% 7.7% 6.9%
Price/price relative 1500
200 150
1000
100 500
50 0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Raising TP to Rs1,350(+30% upside) Our new EPS estimates for ACC are Rs93.6/share (+8% vs previous estimate) in CY07 and Rs114/share (+18% vs previous estimate) in CY08. These are 33% (CY07E) and 69% (CY08E) higher than consensus. We assume cement prices in CY08 would be higher by ~9.6% than those in CY07. Despite, the recent run-up, the stock is trading at the bottom of its historical valuation band. We reiterate Buy with a new TP of Rs1,350 which implies a CY08E PE of 11.8x.
Price target 886.00 to 1,350.00 Sales (FYE) 68,232 to 74,099 Op prof margin (FYE) 31.3 to 33.7 Net profit (FYE) 16,008.8 to 17,116.0
7/ 05 10 /0 5
Reuters: ACC.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) ACC (R.H. Scale)
Performance (%) Absolute BSE 30
1m 32.9 5.5
3m 47.7 13.7
12m 28.4 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
199,894 4,947 186.6 – 65 6.6
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
47.4 -12.9 228.84 4.69 34.7 33.7
Forecasts and ratios Year End Dec 31
2005A
2006A
2007E
2008E
2009E
32,207.0
58,034.8
74,099.0
84,465.5
86,725.0
EBITDA (INRm)
5,356.8
16,233.5
27,508.0
33,625.2
30,550.2
Reported NPAT (INRm)
2,168.3
10,119.7
17,116.0
20,932.4
18,687.0
Reported EPS FD(INR)
11.84
55.02
91.73
112.18
100.15
DB EPS FD(INR)
11.84
55.02
91.73
112.18
100.15
OLD DB EPS FD(INR)
11.56
56.91
83.72
93.17
0.00
% Change
2.4%
-3.3%
9.6%
20.4%
–
DB EPS growth (%)
-32.5
364.7
66.7
22.3
-10.7
PER (x)
35.5
15.4
11.7
9.6
10.7
EV/EBITDA (x)
16.2
9.1
6.9
5.4
5.9
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Sales (INRm)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Deutsche Bank Securities Inc.
Page 23
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
#$% &'
India
Reuters Code
ACC.BO
Price as of 12 July
INR 1,072.40
Price Target
INR 1,350.00
Web Site http://www.acclimited.com Associated Cement Companies (ACC) is one of the oldest cement companies in India. ACC`s main businesses comprise manufacturing and marketing of cement, ready-mixed concrete, bulk cement and refractory products.
! +91 22 6658 4811
[email protected]
())*
())+
()),
())-%
()).%
())/%
10.13 17.5 ¯ 10.13 17.5 25.79 14.79 6.9 0.00 0.0 64.79 3.8 176 31,103 42,649 1.3 11.3 21.2 1.7
17.53 15.1 73.0 17.53 15.1 10.73 -19.84 24.6 0.00 0.0 78.95 4.3 183 48,224 60,435 1.5 9.9 14.3 2.1
11.84 35.5 -32.5 11.84 35.5 30.73 6.52 13.7 0.00 0.0 108.56 4.9 183 77,067 87,010 2.7 16.2 23.4 2.7
55.02 15.4 364.7 55.02 15.4 127.18 98.47 6.7 0.00 0.0 158.35 6.9 184 156,182 148,343 2.6 9.1 10.8 5.8
91.73 11.7 66.7 91.73 11.7 72.83 44.44 14.7 0.00 0.0 228.84 4.7 187 199,894 188,963 2.6 6.9 7.6 5.3
112.18 9.6 22.3 112.18 9.6 124.43 59.96 8.6 0.00 0.0 310.81 3.5 187 199,894 181,886 2.2 5.4 5.9 4.0
100.15 10.7 -10.7 100.15 10.7 126.11 45.56 8.5 0.00 0.0 368.72 2.9 187 199,894 179,738 2.1 5.9 6.7 3.2
32,845 3,777 1,769 0 2,008 -929 0 1,224 0 536 0 1,767
39,021 6,103 1,869 0 4,235 -882 0 480 0 657 0 3,175
32,207 5,357 1,644 0 3,713 -638 0 492 0 1,399 0 2,168
58,035 16,234 2,543 0 13,691 -520 0 826 0 3,877 0 10,120
74,099 27,508 2,529 0 24,979 -720 0 1,032 0 8,175 0 17,116
84,465 33,625 2,995 0 30,630 -720 0 1,140 0 10,118 0 20,932
86,725 30,550 3,618 0 26,932 -720 0 1,248 0 8,773 0 18,687
4,535 0 -1,934 2,600 -2,542 240 -433 3,593 0 3,401 3,459 134
1,958 0 -5,579 -3,622 553 142 -275 4,229 0 4,096 1,028 3,201
5,627 0 -4,433 1,195 -71 76 -855 -4,861 663 -4,977 -3,853 -1,007
23,392 0 -5,281 18,110 -2,093 22 -733 -3,003 -217 -3,930 12,087 -15,090
13,589 0 -5,296 8,293 0 -252 -3,203 288 -1,247 -4,413 3,880 -3,592
23,218 0 -12,030 11,188 0 -2 -2,816 0 -1,292 -4,110 7,078 -7,078
23,532 0 -15,030 8,502 0 -2 -4,694 0 -1,658 -6,354 2,148 -2,148
3,807 24,721 0 0 3,820 9,751 42,099 19,173 11,264 30,437 11,662 0 11,662 -1,173 15,366 27,028
4,835 28,431 0 0 3,267 11,564 48,097 20,312 13,178 33,491 14,606 0 14,606 -366 15,478 30,084
981 31,220 0 0 3,338 13,184 48,723 14,262 14,786 29,048 19,675 0 19,675 -818 13,281 32,956
13,068 33,959 0 0 5,431 13,861 66,319 10,660 26,112 36,771 29,547 0 29,547 -9,588 -2,408 27,139
16,948 36,726 0 0 5,431 19,296 78,401 11,448 24,253 35,701 42,700 0 42,700 -3,012 -5,500 37,200
24,026 45,762 0 0 5,431 21,241 96,459 11,448 27,016 38,465 57,995 0 57,995 -1,874 -12,577 45,417
26,173 57,173 0 0 5,431 21,665 110,442 11,448 30,194 41,642 68,801 0 68,801 -2,660 -14,725 54,076
NM 11.5 6.1 0.0 16.7 13.3 8.2 5.9 1.1 131.8 2.2
18.8 15.6 10.9 0.0 24.2 13.3 11.0 14.3 3.0 106.0 4.8
-17.5 16.6 11.5 0.0 12.7 8.3 8.5 13.8 2.7 67.5 5.8
80.2 28.0 23.6 0.0 41.1 34.9 33.3 9.1 2.1 -8.2 26.3
27.7 37.1 33.7 0.0 47.4 54.8 57.4 7.1 2.1 -12.9 34.7
14.0 39.8 36.3 0.0 41.6 51.9 53.0 14.2 4.0 -21.7 42.5
2.7 35.2 31.1 0.0 29.5 38.6 37.1 17.3 4.2 -21.4 37.4
0 102 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
3 4 102
"" +91 22-6658-4824
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
())&
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
102 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
32.9%
43.4%
28.4%
INR 704.65 - 1,172.60 INR 199,894 m USD 4,947 m
Company Identifiers Bloomberg Cusip SEDOL
ACC IN ¯ 6155915
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Page 24
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate ACC a Buy due to the following: (1) We expect the company to report earnings CAGR of 32% over CY06-08E and ROE of 47% in CY07E. (2) Net cash balance sheet with CY07E RoE at 47% and free cash flow yield of ~6-10% in the forecast period. (3) Our estimates are 33% (CY07) and 69% (CY08) higher than consensus and we expect the consensus earnings upgrade to drive the stock outperformance. (4) Benefits flowing from superior bargaining power driven by our forecast of tight utilization levels over FY07-10E. (5) Our revised target price of Rs1,350 per share offers 30%upside potential. Note our new estimates are based on revision our pan-India cement price forecast for CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (+9.6% YoY). ACC could also report the maximum jump in margins as its proportion of use of Indian coal is the highest amongst peers. Indian coal is at a 35-40% discount to landed cost of imported coal.
Valuation We have thus used an average PE multiple of 14x (earlier assumed 10xCY07E) FY08E (Mar) and 8.0xEV/EBITDA (earlier assumed 7xCY07E) FY08E (Mar) to arrive at the target price of INR1,350/share. It is important to note that these multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. This concern stands reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users and (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. We note that our target multiples are at the bottom of quartile of 10-year price bands and are also lower than the current valuations of the regional peers. Figure 32: 12-month forward rolling P/E bands Price (INR)
10
12
15
Figure 33: 12-month forward rolling EV/EBITDA band Price (INR)
17
6
9
12
15
2,700
1,800
2,400
Source: Deutsche Bank
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
0 Mar-94
Jun-07
Mar-07
Dec-06
Jun-06
Sep-06
Mar-06
300
Dec-05
600
200 0 Sep-05
900
400
Jun-05
1,200
600
Mar-05
1,500
800
Dec-04
1,800
1,000
Sep-04
1,200
Jun-04
2,100
Mar-04
1,400
Mar-95
1,600
Source: Deutsche Bank
We note that EV/t at our target price of Rs1,350 is USD232 in CY08E. This looks reasonable vis-à-vis the position of the cycle. In the previous up-cycle (in 1994-1996), the stock traded in Deutsche Bank Securities Inc.
Page 25
12 July 2007
Construction Materials Indian Cement Sector
the range of USD250-450/t when the EBITDA/t was 10-16USD/t. In the current up-cycle, the EBITDA/t is likely to be in the region of USD 30-34/t. Note that post-capex free cash for the next three years is 33% of the market capitalization. This could be used for a higher dividend payout. In such a case, dividend yield can go up to ~4%. Also the ROE at 47% should be amongst the best in the industry. Figure 34: 12-month forward EV/t (x) and EBITDA/t (x) 250
EV/Ton - LHS
35
Ebitda/Ton - RHS
30
200
25 150
20 15
100
10 50
5
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
0 Mar-94
0
Source: Bloomberg company data, Deutsche Bank
Risks ACC is a high-beta stock and any risk on the liquidity front would impact stock returns. The key variables impacting the earnings are: (1) Assumptions on cement realizations: Our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E In case the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis on our earnings models indicates that a 5% lower-than-expected price realization reduces our earnings estimates by ~13%. On the positive side, 92% of ACC’s cement sales are that of blended cement. The price of blended cement is about 3-5% lower than that of ordinary cement. As utilization rates pick up, difference between the two categories of cement would dip and ACC would stand to gain the most. (2) Assumptions on coal prices: Indian base coal prices have not been revised for the last two years. There is a possibility of the revision of coal prices sooner than later. We have assumed 11% CAGR rise in coal cost for the next three years. Any increase over and above and our base case estimates would impact the company’s earnings. Based on our sensitivity analysis we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~1% in CY07E and ~2% in CY08E. Figure 35: Sensitivity analysis CY2007e
CY2008e
CY2009e
Base case estimates-EPS(Rs/share)
93.6.0
114.1
102.0
If cement prices are 5% higher than estimates
105.9
128.1
116.5
13.1
12.3
14.2
If cement prices are 5% lower than estimates
81.4
100.0
87.6
Chg with respect to base case estimates (%)
(13.1)
(12.3)
(14.2)
If fuel prices are 5% higher than estimates
92.5
112.2
99.9
Chg with respect to base case estimates (%)
(1.2)
(1.7)
(2.1)
Chg with respect to base case estimates (%)
Source: Deutsche Bank
Page 26
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions Based on our revised price forecasts, we expect average realisation to be higher by 8.5% for CY07E and by 13% for CY08E over our earlier estimates. It is important to note that we have not changed our sales volume assumptions for the next two years. Figure 36 underlines our main assumptions. We have increased our cost estimates on the raw material front as ACC has enhanced the blending ratio from 84% to 92% in FY07E. Figure 36: Key assumptions ------------------------CY07E---------------------------Particulars
Old Estimates
New Estimates
-------------------------CY08E-----------------------
Change (%)
Old Estimates
New Estimates
Change (%)
Sales volume (m tonnes)
20.52
20.52
-
21.75
21.75
-
Average realisation (INR/tonne)
3,157
3,427
8.5
3,276
3,709
13.2
Raw Material
332
382
14.9
336
397
18.1
Freight
550
500
(9.1)
578
525
(9.1)-
Power and fuel
552
537
(2.6)
565
551
(2.4)
Cost (INR/tonne)
Source: Deutsche Bank
Forecast strong earnings ahead Our revised earnings estimates, based on higher price realizations, are 8% and 18.8% higher than previous estimates for CY07E and CY08E respectively. We thus forecast a net sales growth of 21% CAGR for CY06-08E, driving net profit growth of 32% CAGR over the same period. Figure 37: Key financials at a glance ---------------------CY07E-------------------------Particulars (INR mn)
Old Estimates
New Estimates
------------------------CY08E----------------------
Change (%)
Old Estimates
New Estimates
Change (%)
Net sales
69,590
74,099
6.5
76,128
84,465
11.0
Expenditure
45,430
46,591
2.6
49,214
50,840
3.3
EBITDA
25,191
28,540
13.3
28,054
34,765
23.9
2,529
2,529
-
2,785
2,785
-
400
720
80.0
400
720
80.0
22,613
25,642
13.4
25,220
31,611
25.3
Depreciation Interest PBT Tax
6,456
8,175
26.6
7,212
10,189
41.3
PAT
16,157
17,467
8.1
18,008
21,422
19.0
86.7
93.6
8.0
96.6
114.8
18.8
EPS (INR) Ratios EBITDA/tonne (INR)
1,158
1,391
20.1
1,217
1,427
17.3
ROE (%) (#)
44
47
345
35
42
631
RoCE (%) (#)
35
37
193
31
35
396
# indicates change in bps Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 27
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
Ambuja Cements Ltd Bloomberg: ACEM IN
Huge FCF- Buy
127.80 158.00 148.40 - 99.55 14,911
Key changes
It’s official – the price-freeze was just a mirage As highlighted in our sector note, we are now more sanguine on Indian tight supply scenario lasting till CY09E and accordingly in line with our sector price outlook, we have revised the cement price forecast for Ambuja by ~4% for CY07 and 21% for CY08. We note that despite fears of price-freeze, net average India price has moved up by 5% over that of March 07 with about 2-3% gains coming in the current month. Accordingly, we forecast an EPS of INR10.1 (up 10.2%) for CY07E and INR13.2 (up 46.2%) for CY08E. Our estimates are in line with consensus for CY07E but 38% above consensus for CY08E. Stock is trading at bottom of trading band Despite the recent run-up in the stock price, the stock is trading at the lower end of the valuation band. Our new target price is derived by using an average of target P/E to 14x FY08E and target EV/E to 8x FY08E. Note these multiples are same as those used by us prior to risk to long-term earnings emerging from fears of effects of government intervention on long-term profitability. With cement companies demonstrating their ability to pass on cost inflation etc to end-users, we believe that these concerns have mitigated. Key risks Key risks are volatility in the cement prices and rise in fuel prices. Our sensitivity analysis shows that a rise of 5% in power and fuel costs would impact earnings by ~2%. Also a 5% rise/drop in cement prices would result in ~15% rise/drop in earnings in CY07E.
128.00 to 158.00 Ç 56,648 to 58,244 Ç
23.4% 2.8%
Price/price relative 150
200 150
100
100 50
50
0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Revising target price upwards to INR158/share (+20% upside) Our new estimates for CY08 are 46% higher than our earlier estimates and 41% higher than the consensus. Ambuja Cements has a strong balance sheet with CY07E net cash of INR3.5bn. While operating free cash flow post-capex for next three years is 23% of the market capitalization, the total free cash flow to be generated in CY07E alone would be INR.44bn. This cash can be used by the company either for a buyback or a special dividends. Also even if the parent decides to make an open offer, the cost of open offer would stand greatly reduced. Reiterate Buy with a target price of Rs158/share.
Price target Sales (FYE)
7/ 05 10 /0 5
Reuters: ACEM.BO
Buy Price at 11 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) Ambuja Cements Ltd (R.H. Scale)
Performance (%) Absolute BSE 30
1m 17.0 5.9
3m 18.5 13.1
12m 20.9 40.5
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
173,664 4,298 1,517.1 – 76 4.9
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
35.6 -7.2 31.16 4.00 38.0 35.9
Forecasts and ratios Year End Jun 30
2005A
2006A
2007E
2008E
2009E
25,970.5
63,931.3
58,243.8
69,669.5
67,981.9
EBITDA (INRm)
7,124.0
21,348.0
24,041.0
31,848.6
25,976.7
Reported NPAT (INRm)
4,565.5
14,829.7
15,333.4
20,072.1
14,741.6
Reported EPS FD(INR)
3.50
10.66
10.39
13.23
9.72
DB EPS FD(INR)
3.50
10.66
10.39
13.23
9.72
DB EPS growth (%)
48.7
204.5
-2.5
27.3
-26.6
PER (x)
13.2
Sales (INRm)
15.0
7.9
12.3
9.7
EV/EBITDA (x)
9.6
5.2
6.4
4.5
5.5
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 28
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' () * #
India
Reuters Code
ACEM.BO
Price as of 11 July
INR 127.80
Price Target
INR 158.00
Web Site http://www.gujaratambuja.com/ ! ! GACL is Indias third largest cement company with a capacity of 12.5 mn tons, Holcim, the second largest cement manufacturer in the world, bought 14.8 per cent promoters stake in the GACL for Rs 21.4 billion
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
+)),
+))-
+)).
+))/'
+))0'
+))1'
2.35 15.9 ¯ 2.35 15.9 8.09 2.89 4.6 0.00 0.0 14.91 2.5 1,259 47,163 49,062 2.5 9.1 13.3 2.2
3.50 15.0 48.7 3.50 15.0 4.76 4.31 11.0 0.00 0.0 17.11 3.4 1,350 70,901 68,678 2.6 9.6 13.3 3.3
10.66 7.9 204.5 10.66 7.9 14.73 7.03 5.7 0.00 0.0 25.66 3.9 1,434 121,108 110,681 1.7 5.2 6.1 3.9
10.39 12.3 -2.5 10.39 12.3 12.47 10.07 10.2 0.00 0.0 31.16 4.0 1,517 173,664 153,910 2.6 6.4 7.4 5.6
13.23 9.7 27.3 13.23 9.7 17.26 11.99 7.4 0.00 0.0 38.35 3.3 1,517 173,664 144,872 2.1 4.5 5.1 4.9
9.72 13.2 -26.6 9.72 13.2 10.64 5.37 12.0 0.00 0.0 43.64 2.9 1,517 173,664 143,455 2.1 5.5 6.5 4.0
19,621 5,365 1,686 0 3,679 -784 0 428 0 467 0 2,856
25,971 7,124 1,954 0 5,170 -848 0 746 0 503 0 4,566
63,931 21,348 3,280 0 18,069 -802 0 957 0 3,394 0 14,830
58,244 24,041 3,108 0 20,933 -550 0 957 0 6,006 0 15,333
69,670 31,849 3,572 0 28,276 -515 0 957 0 8,646 0 20,072
67,982 25,977 4,036 0 21,940 -515 0 957 0 7,641 0 14,742
10,192 0 -6,549 3,643 907 196 -1,179 -4,816 1,627 -4,172 379 -5,195
6,420 0 -606 5,815 -1,141 934 -2,273 -1,422 -354 -3,116 1,558 -2,981
21,116 0 -11,041 10,075 -2,229 318 -5,259 -3,670 2,281 -6,331 1,515 -5,186
18,916 0 -3,645 15,271 -1,033 0 -6,994 0 1 -6,993 7,245 -7,245
26,192 0 -8,000 18,192 0 0 -9,155 0 1 -9,154 9,038 -9,038
16,140 0 -8,000 8,140 0 0 -6,724 0 1 -6,723 1,417 -1,417
688 24,982 0 0 10,110 4,227 40,007 12,697 7,181 19,878 20,129 0 20,129 217 12,009 32,137
2,247 23,634 0 0 11,251 5,013 42,144 11,275 7,768 19,043 23,101 0 23,101 757 9,028 32,129
3,780 31,396 0 0 15,301 7,994 58,470 8,654 10,886 19,540 38,930 0 38,930 -320 4,874 43,804
11,025 31,932 0 0 16,334 10,137 69,428 7,604 14,554 22,158 47,270 0 47,270 3,467 -3,421 43,850
20,063 36,360 0 0 16,334 10,178 82,934 7,604 17,141 24,746 58,188 0 58,188 3,081 -12,458 45,729
21,479 40,323 0 0 16,334 10,901 89,037 7,604 15,227 22,831 66,206 0 66,206 3,288 -13,875 52,331
NM 27.3 18.7 0.0 15.8 14.1 13.5 33.4 3.9 59.7 4.7
32.4 27.4 19.9 0.0 21.1 16.1 16.9 2.3 0.3 39.1 6.1
146.2 33.4 28.3 0.0 47.8 40.5 51.2 17.3 3.4 12.5 22.5
-8.9 41.3 35.9 0.0 35.6 35.9 52.3 6.3 1.2 -7.2 38.0
19.6 45.7 40.6 0.0 38.1 45.6 69.6 11.5 2.2 -21.4 54.9
-2.4 38.2 32.3 0.0 23.7 30.8 47.0 11.8 2.0 -21.0 42.6
2 # 324
"
# $ +91 22 6658 4811
[email protected]
+91 22-6658-4824
Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
[email protected]
5 6 # 324 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 324 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
16.1%
17.7%
17.1%
INR 99.55 - 148.40 INR 173,664 m USD 4,298 m
Company Identifiers Bloomberg Cusip SEDOL
ACEM IN ¯ B09QQ11
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 29
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We reiterate Buy on Ambuja Cements with a revised target price of Rs158 per share (+20% upside). We expect the company to report earnings CAGR of ~34%over CY06-08E and ROE of 33% and 38% in CY07E and CY08E respectively. Our earnings estimates are in line with consensus for CY07E and 38% higher than consensus for CY08E. We expect the Indian cement industry to operate at peak utilisation levels as new capacity commissioning is delayed and demand continues to grow at 9-10% annually. The cement companies are expected to report higher average realisations due to tight demand-supply scenario expected to persist till 1HFY10/CY09. We further note that cement sales have moved from 30 days credit to an upfront payment for next 30 days delivery. Accordingly, we have revised our panIndia cement price forecast for CY07 to Rs227/50kg bag (4% higher than our previous assumption) and CY08 forecast to Rs249/50kg bag (21% higher than our earlier assumption). Note that Holcim is looking to enhance its stake in the company through all possible options.
Valuation We have thus used an average PE multiple of 14x FY08E (earlier assumed 10x CY07E) and 8.0x FY08E EV/EBITDA (earlier assumed 7x CY07E) to arrive at the target price of INR152/share. It is important to note that these multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users and (2) Indian finance minister has stated that there will be no price freeze and the prices of cement will be dictated purely by demand and supply forces. Following this, we believe the overhang of government influence on long-term profitability stands largely abated. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct.
Page 30
Jun-07
Jun-06
Jun-05
12
Jun-04
10
Jun-03
8
Jun-02
6
Jun-01
Jun-94
Jun-07
Jun-06
Jun-05
0 Jun-04
0 Jun-03
50
Jun-02
50
Jun-01
100
Jun-00
100
Jun-99
150
Jun-98
150
Jun-97
200
Jun-96
200
Jun-95
250
Jun-94
250
Source: Deutsche Bank
Price (INR)
300
Jun-00
22
Jun-99
18
Jun-98
14
Jun-96
10
Jun-95
Price (INR)
300
Figure 39: 12-month forward rolling EV/EBITDA band
Jun-97
Figure 38: 12-month forward rolling P/E bands
Source: Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Ambuja cement has historically traded at EV/t of above USD250 (1994-96) at the time when EBITDA/t was above USD23 (1994-96). Recent concerns on long-term profitability have impacted stock performance. We expect the EBITDA/t to be above USD34. for the next three years. Hence EV/t of USD 212 at our target price of Rs158/share looks reasonable considering the position of the cycle. Figure 40: 12-month forward EV/ton (x) and EBITDA/ton (x) EV/Ton
Ebitda/Ton
550
38
450
33 28
350
23 250
18
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
8 Jun-96
50 Jun-95
13
Jun-94
150
Source: Bloomberg, company data, Deutsche Bank
Risks Ambuja Cements is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 5% lower-than-expected price realization reduces our estimates by ~15% in CY07E and ~13.4% in CY08E and vice versa. We have assumed a 10% CAGR in coal cost for the next three years. Any increase greater than 10% would have an impact on company’s earnings. Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~2% both in CY07E and CY08E. Figure 41: Sensitivity analysis CY07
CY08
Base case estimates-EPS
10.1
13.2
9.7
If cement prices are 5% higher than estimates
11.6
15.0
11.4
Chg with respect to base case estimates (%)
15.0
13.4
17.1
If cement prices are 5% lower than estimates
8.6
11.5
8.1
(15.0)
(13.4)
(17.1)
9.9
13.0
9.5
(2.0)
(1.7)
(2.7)
Chg with respect to base case estimates (%) If fuel prices are 5% higher than estimates Chg with respect to base case estimates (%)
CY09
Source: Company data, Deutsche Bank
Deutsche Bank Securities Inc.
Page 31
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts As stated earlier, we expect Ambuja Cements to report a 13% CAGR in sales volume over CY06-09E. This is higher than the industry growth rate assumption of 9% pa. In case of GACL the domestic realizations are in line with sectoral assumptions. Note that we have revised our pan-India cement price forecast for CY07 to Rs227/50kg bag (2.3% higher than our previous assumption) and CY08 forecast to Rs249/50kg bag (17% higher than our earlier assumption). Based on our revised price forecasts, we expect average realisation to be higher by 3% for CY07E and by ~16% for CY08E over our earlier estimates. We have made only minor changes to our sales volume assumptions. For cement exports, we have increased our assumption of FOB price to USD55/t from USD48/t for CY07E. Our assumptions for export prices factors in appreciation of the rupee. Figure 42: Key assumptions Particulars
CY07e Old Estimates
CY08e
New Old Chg (%) Estimates Estimates
CY09e
New Estimates
Old Estimates
Chg (%)
New Estimates
Chg (%)
Key Assumptions Sales volume (mn tonnes)
17.6
17.9
1.9
19.4
19.7
1.9
21.3
21.7
1.9
Average realisation (INR/tonne)
3,577
3,759
5.1
3,509
4,052
15.5
3,294
3,658
11.1
Domestic realisation (INR/tonne)
3,740
3,876
3.6
3,646
4,158
14.0
3,400
3,726
9.6
Export realisation
2,146
2,255
5.1
1,878
2,255
20.1
1,788
2,255
26.1
45
41
(8.3)
45
41
(8.3)
45
41
(8.3)
Raw material
193
120
(38.0)
188
119
(36.8)
182
112
(38.7)
Freight
604
564
(6.5)
619
580
(6.3)
637
597
(6.3)
Power
168
175
3.9
170
170
(0.2)
176
176
(0.2)
3,857
4,040
4.7
4,040
4,444
10
4,233
4,888
15.5
USD : INR Cost (INR/tonne)
Coal Prices( INR/t) Source: Deutsche Bank
Figure 43: Key forecasts Particulars INR mn
CY07e Old Estimates
CY08e
New Estimates
Chg (%)
Old Estimates
CY09e
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
Key forecasts Net sales
56,648
58,244
2.8
60,812
69,670
14.6
62,206
67,982
9.3
(35,374)
(34,203)
(3.3)
(39,454)
(37,821)
(4.1)
(44,027)
(42,005)
(4.6)
EBITDA
22,232
24,998
12.4
22,314
32,806
47.0
19,136
26,934
40.7
Depreciation
(3,108)
(3,108)
-
(3,572)
(3,572)
-
(4,036)
(4,036)
-
(524)
(550)
5.0
(400)
(515)
28.6
(339)
(515)
52.1
PBT
18,599
21,339
14.7
18,342
28,719
56.6
14,761
22,383
51.6
Tax
(4,681)
(6,006)
28.3
(4,616)
(8,646)
87.3
(3,721)
(7,641)
105.3
PAT
13,919
15,333
10.2
13,726
20,072
46.2
11,040
14,742
33.5
9.2
10.1
10.2
9.0
13.2
46.2
7.3
9.7
33.5
Expenditure
Interest
EPS (INR) Ratios EBITDA/tonne (INR)
28
31
10.4
26
37
44.3
20
28
38.2
EV/tonne (USD)
249
212
(14.9)
242
194
(20.3)
156
175
12.1
ROE (%) (#)
32.6
35.6
299
27.3
38.5
1,074
19.4
23.7
432
RoCE (%) (#)
24.7
26.6
197
21.1
28.5
715
15.8
18.5
272
Source: Deutsche Bank, # indicates change in bps
Page 32
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Based on our assumptions, Figure 43 presents a financial snapshot of the company. Our revised estimates based on higher price and volume estimates show earnings estimates rising by 8.6% for CY07 and 57.6% for CY08 over our earlier estimates. We forecast a net sales growth of 17% CAGR over CY06-08E and a net profit growth of 34% CAGR over CY0608E. Based on our revised forecast, we believe Ambuja Cements is likely to record a significant improvement in its operational performance due to better prices and lower costs. The key contributors being:
Rise in cement prices in line with assumptions of cyclical upturn
Shift towards blended cement to rise from current 70% to 92% in the next two years
Less power cost as the company commissions the thermal power captive sets in Gujarat
The EBITDA is estimated to register a CAGR of 21% over CY06-09E. Further, the operating margins too are likely to move up from 35% in CY06 to around ~46% in CY08E. In addition, the lower interest cost would further boost the net margins even after factoring in higher tax rates for CY07E and CY08E. We expect the net profit to record a 34% CAGR over CY06-08E.
Deutsche Bank Securities Inc.
Page 33
12 July 2007
Construction Materials Indian Cement Sector
Multiple options for cash use Company is generating huge free cash Ambuja Cements is likely to generate a cash of Rs44bn in CY07E from a combination of: (1) Strong free cash generation from operations, (2) Cash generation from sale of non-core assets, and (3) Cash generation from sale of stake in the holding company Figure 44: Free cash flow vs. capex INR mn 25,000 20,000 15,000 10,000 5,000 0 CY 06
CY 07e
Free Cash flow post capex
CY 08e
CY 09e Capex
Source: Company data, Deutsche Bank
The cash flows can be used to: 1.
Enhance the dividend pay-out ratio: Historically, Ambuja Cements had a pay-out of 4050%. The management could enhance it. If the pay-out ratio is increased to 100% the dividend yield rises to 8%.
2.
Make an open offer by parent: Holcim can also, technically, further increase the stake in the company through an open offer. This looks the least probable of events as not many open offers have been successful in India
3.
Buy-back of shares: Based on existing provisions available in the Companies Act, the company can buy back 2% of shares in CY07 and 2.4% of shares in CY08. Buy-back of shares could result in Holcim´s holding rising from 32% in March 07 to potentially 36.4% by December 08.
Figure 45 gives a snapshot of the on the possible holding of Holcim in Ambuja Cements, in case Holcim goes for a buyback. This has assumed under the following constraints
Page 34
1.
Cash availability: Major sources of cash available for buyback will be post-capex free cash flow, marketable investments, sale of stake in ACIL and cash from sale of real estate.
2.
Sec 77A restrictions: Section 77A of the Companies Act puts the upper limit as 25% of paid-up share capital + free reserves
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Our analysis shows that Holcim could potentially enhance the stake to 39%by CY09 if it were to buy back shares. The key constraint being the net worth of the company post the buyback. Figure 45: What can be Holcim’s effective stake after buyback? Particulars in INR bn Cash in balance sheet Add investments that are marketable Add ACIL stake sales in GACL Add cash from real estate at Kalina sale Add free cash pre-capex Less capex Total cash for buy-back or dividends Number of shares (mn) at start of the year CMP( Assuming constant stock price) M- Cap (mn) Number of shares that can be bought back (minimum of a and b) (mn)
CY07e
CY08e
CY09e
11
21
21
3
3
3
11
5
0
3
-
-
19
26
16
4
8
8
44
47
33
1,517
1,428
1,333
125
125
125
189,638
178,454
166,576
89
93
94
374
342
272
25
24
20
89
95
98
6
7
7
Net shares at the end of the year (mn)
1,428
1,335
1,241
Holcim holding at the start of the year (%)
32.0%
34.0%
36.4%
485
485
485
34.0%
36.4%
39.1%
a) Cash constraint % of total shares b) Limit set by companies act (Sec 77A) % of total shares
Holcim holding at the start of the year (mn shares) Holism’s probable holding at the end of the year (%) Source: Company data, Deutsche Bank
Deutsche Bank Securities Inc.
Page 35
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Conglomerates
11 July 2007
Grasim Bloomberg: GRASIM IN
Growth with cost synergies
2,819.55 3,320.00 2,894.75 - 1,873.25 14,911
Key changes
Volume and cost benefits also flowing through Grasim is expanding the cement capacity by 15m tonnes in total over the next two years (by ~50%) - the maximum expected by any cement producer in India over the next two years. In addition, improving gas availability would keep drive up utilisation rates of sponge iron plant until 2HFY09. Additionally, ~300+MW of captive power plant would reduce overall cost of power by INR2.5bn and reduce tax for the company. Current VSF cycle also leaves room for surprise on the upside. Grasim will benefit from synergies from group company UltraTech Cement. Earnings being revised – but leave room for upside Overall, our EPS forecast for FY08 is Rs295/share; Rs394/share for FY09 (up 27% vs. our earlier forecast). This assumes the price and volumes in cement as per our sector forecast. However, we have not factored in the latest 5% rise in VSF realisations into our numbers and would wait for a couple of quarters to see whether the market absorbs the price hikes. Raising target price to INR3,320 (+20% upside) Our target price is based on a sum of parts (10% conglomerate discount) wherein we have assumed PE multiple of 14x FY08E for cement and less than 6x FY08E for non-cement divisions. We note that our target PE multiples are at discount to the region despite the fact that the growth is likely to be significantly higher. Key risks are volatility in cement and fuel prices. Our sensitivity analysis shows that a 1% drop in realisations over our estimates can result in a 2.5% drop in earnings in FY08E.
Ç Ç È Ç
24.8% 3.2% -4.7% 3.6%
Price/price relative 200
4000
150
3000
100
2000
50
1000
0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Raising the target price to Rs3,320/share (+20% upside) Grasim, a diversified company, is also likely to post strong earnings in line with pure cement plays as the VSF division (largest non-cement business in company) is also likely to benefit from better realisations of VSF. Our assumptions are 41% above the street for FY08E and 65% for FY09E. Reiterate Buy
Price target 2,660.00 to 3,320.00 Sales (FYE) 147,682 to 152,353 Op prof margin (FYE) 28.6 to 27.2 Net profit (FYE) 26,894.2 to 27,870.6
7/ 05 10 /0 5
Reuters: GRAS.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) Grasim (R.H. Scale)
Performance (%) Absolute BSE 30
1m 18.2 5.5
3m 24.8 13.7
12m 41.2 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
258,477 6,397 91.7 – 75 2.3
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
35.3 30.1 996.71 2.8 13.8 27.2
Forecasts and ratios Year End Mar 31 Sales (INRm)
2006A
2007A
2008E
2009E
2010E
102,239.4
140,951.5
152,353.2
181,674.4
202,339.0
EBITDA (INRm)
20,686.2
39,723.4
48,162.7
63,455.0
61,103.9
Reported NPAT (INRm)
12,033.0
19,679.0
27,870.6
37,754.7
51,240.1
Reported EPS FD (INR)
131.22
214.60
303.93
411.71
558.77
DB EPS FD (INR)
131.22
214.60
303.93
411.71
558.77
OLD DB EPS FD (INR)
125.86
215.10
293.28
308.02
0.00
4.3%
-0.2%
3.6%
33.7%
–
DB EPS growth (%)
25.9
63.5
41.6
35.5
35.7
PER (x)
5.0
% Change
10.2
10.9
9.3
6.8
EV/EBITDA (x)
7.2
6.2
5.6
3.9
3.9
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 36
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' () "
#
India
Reuters Code
GRAS.BO
Price as of 12 July
INR 2,819.55
Price Target
INR 3,320.00
Web Site n/a Grasim Industries Limited operates a diversified manufacturing company. The Group's products include cement, synthetic yarn and fabric textiles, steel, rayon wood pulp, caustic soda, viscose staple fiber, chlorine and ancillary chemicals. Grasim also offers a range of engineering, consultancy, software, international marketing and shipping services.
!
" # $ +91 22 6658 4811
[email protected]
*++-
*++.
*++/
*++0'
*++1'
*+)+'
83.59 8.6 ¯ 83.59 8.6 186.26 -173.81 3.9 0.00 0.0 393.18 2.7 92 66,064 84,735 1.6 6.7 8.6 1.5
104.23 11.1 24.7 104.23 11.1 -14.34 -48.69 NM 0.00 0.0 472.00 2.6 92 106,089 130,541 1.5 6.8 9.3 1.8
131.22 10.2 25.9 131.22 10.2 173.64 73.03 7.7 0.00 0.0 527.53 3.9 92 122,285 148,344 1.5 7.2 9.8 1.9
214.60 10.9 63.5 214.60 10.9 286.79 -3.99 8.2 0.00 0.0 724.07 2.9 92 215,342 246,241 1.7 6.2 7.3 2.5
303.93 9.3 41.6 303.93 9.3 378.08 322.12 7.5 0.00 0.0 996.71 2.8 92 258,477 268,089 1.8 5.6 6.5 2.6
411.71 6.8 35.5 411.71 6.8 559.64 331.51 5.0 0.00 0.0 1,369.51 2.1 92 258,477 250,566 1.4 3.9 4.5 2.1
558.77 5.0 35.7 558.77 5.0 491.77 251.86 5.7 0.00 0.0 1,713.99 1.6 92 258,477 240,330 1.2 3.9 4.6 1.7
52,135 12,589 2,738 0 9,851 -1,539 0 2,263 0 2,910 0 7,665
89,305 19,316 5,337 0 13,980 -2,481 0 2,312 0 4,510 -258 9,558
102,239 20,686 5,552 0 15,134 -2,183 0 4,269 0 4,027 1,160 12,033
140,952 39,723 6,100 0 33,624 -2,286 0 3,177 0 10,921 3,915 19,679
152,353 48,163 6,693 0 41,470 -3,014 800 3,108 0 8,529 5,964 27,871
181,674 63,455 7,798 0 55,657 -4,597 1,500 4,870 0 10,867 8,808 37,755
202,339 61,104 8,885 0 52,219 -5,496 0 5,270 0 9,544 -8,791 51,240
17,080 0 -33,019 -15,939 2,441 -53 -1,571 15,554 1,926 15,856 2,358 13,196
-1,315 0 -3,149 -4,465 5,976 53 -2,393 -851 -3 -3,194 -1,683 831
15,923 0 -9,226 6,697 -3,992 2 -2,586 1,370 1,228 14 2,718 -1,349
26,299 0 -26,665 -366 -9,191 0 -1,089 11,898 5,608 16,416 6,858 5,040
34,670 0 -5,132 29,539 -6,636 -1 -2,069 4,301 -6,548 -4,317 18,586 -14,285
51,320 0 -20,920 30,400 -1,500 0 -3,103 10,000 -7,943 -1,046 27,854 -17,854
45,096 0 -22,000 23,096 -1,501 0 -3,102 -6,000 0 -9,102 12,493 -18,493
2,723 62,669 0 0 15,519 18,225 99,136 36,315 26,168 62,482 36,055 598 36,653 2,507 33,592 70,245
1,469 60,481 0 0 9,543 34,913 106,406 35,463 27,659 63,122 43,284 0 43,284 4,436 33,995 77,278
2,374 64,156 0 0 13,535 41,525 121,590 36,833 31,245 68,078 48,376 5,136 53,511 1,168 34,459 87,970
3,692 84,721 0 0 22,726 48,734 159,874 48,731 36,157 84,888 66,399 8,587 74,986 -729 45,039 120,024
23,029 83,160 0 0 28,562 55,857 190,607 53,032 38,003 91,035 91,401 8,172 99,573 5,055 30,003 129,576
50,553 96,282 0 0 28,562 62,603 238,000 63,032 41,209 104,240 125,587 8,172 133,759 6,609 12,479 146,238
54,788 109,397 0 0 28,562 74,367 267,115 57,032 44,734 101,766 157,177 8,172 165,349 8,507 2,243 167,592
NM 24.1 18.9 0.0 23.3 17.5 15.9 63.3 12.1 91.6 6.4
71.3 21.6 15.7 0.0 24.1 15.3 15.3 3.5 0.6 78.5 5.6
14.5 20.2 14.8 0.0 26.3 16.4 14.3 9.0 1.7 64.4 6.9
37.9 28.2 23.9 0.0 34.3 20.5 26.6 18.9 4.4 60.1 14.7
8.1 31.6 27.2 0.0 35.3 24.0 28.6 3.4 0.8 30.1 13.8
19.2 34.9 30.6 0.0 34.8 29.7 34.6 11.5 2.7 9.3 12.1
11.4 30.2 25.8 0.0 36.2 35.1 27.7 10.9 2.5 1.4 9.5
# 23 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
4 5 # 23
+91 22-6658-4824
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
*++,
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 23 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
18.2%
23.3%
41.2%
INR 1,873.25 - 2,894.75 INR 258,477 m USD 6,397 m
Company Identifiers Bloomberg Cusip SEDOL
GRASIM IN ¯ 6099927
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 37
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We expect Grasim’s VSF and cement businesses (together contributing 90% to the top line) to be the key earnings drivers. The company is expanding cement capacity by 15m tonnes in total over the next two years](by ~50%) - the maximum expected by any cement producer in India over the next two years. It is also expanding its VSF capacity by ~95,000 tonnes through both greenfield and brownfield expansion. In addition, improving gas availability is driving up utilization rates of the sponge iron plant which would also drive up significant volume growth in FY09. Further, there is a possibility of consolidating 6m tonnes of cement capacity of the group company Century Textiles. An additional 300MW+ of captive power plant would also reduce the overall cost of power by INR1.5bn and reduce the tax outgo for the company. Consequently we expect the company to report a 21.6% CAGR in earnings over FY07-10E.We note that our assumptions are 41% above the street for FY08E and 65% for FY09E. Indian cement prices have begun to show gradual improvement driven by tight demandsupply scenario. We have revised our pan-India cement price forecast for FY08 to Rs235/50kg bag (8% higher than our previous assumption) and FY09 forecast to Rs245/50kg bag (19.0% higher than our earlier assumption). We have assumed a 5% dip in cement realizations in FY10E to Rs232/50kg bag. Current VSF cycle also leaves room for surprise on the upside.
Valuation For a conglomerate like Grasim, we believe the sum of parts is the correct method of valuation. For cement (drives 88% of total value), we have used an average PE multiple of 14x. It must be mentioned that we have factored in a potential value of 14x for the cement division - a premium to the sector average as Grasim has benefits flowing in from volume growth, cost savings and from synergies from group company UltraTech Cement. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. As seen from the trading bands below, the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. We note that our target multiples are at the bottom of 10-year price bands and are also lower than the current valuations of the regional peers. Despite the recent run-up, Grasim is trading at 9x PER on FY08E and 5.7x EV/EBIDTA on FY08E. Figure 46: 12-month forward rolling P/E band (x) Price (INR)
5
10
15
Figure 47: 12-month forward rolling EV/EBITDA band (x) Price (INR)
20
6,000
4
7
10
13
8,000 7,000
5,000
6,000 4,000
5,000
3,000
4,000 3,000
2,000
2,000 1,000
1,000
0
Source: Bloomberg, Deutsche Bank
Page 38
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
0
Source: Bloomberg, Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
As seen in following sum of parts table, the target PE multiple for VSF is 6x FY08E while the sponge iron business is assumed at 1x FY08E earnings. The valuation of Grasim´s holdings in IDEA are in line with the view of our telecom analyst Srinivas Rao. Figure 48: Sum of Parts EPS in FY08E ( Rs/share)
Target PE(x)
231
14
3,238 Valued in line with peers in India
53
6
320 Assume peak cycle multiples
Sponge Iron
4
1
D
Textiles
0
1
E
Caustic soda
4
8
F
Others
2
2
G
Telecom business
Sr No
Business
A
Cement
B
VSF
C
8
Equity Value (A)+(B)+(C)+(D)+(E) +(G)
Value/share Rationale
4 Assume not much improvement in o/p 0 At a discount to peers 28 Assume mid-cycle multiples 5 At cost of investments 91 Idea valued at 25% discount to Bharti 3,685.6
Less Conglomerate Discount
10%
Value (Rs/share)
295
11.3
3,317
Source: Deutsche Bank
Risks The key risk to Grasim’s earnings comes from lower-than-expected commodity prices in cement and VSF businesses. Our positive bias on the cement sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E. Our stand-alone estimates drop by 12% if cement realizations are 5% lower than expected One other company-specific risk is the lack of availability of natural gas disrupting operations of the sponge iron division. In our forecast, we have factored in some improvement in supply of natural gas in FY09E. Figure 49 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. Figure 49: Sensitivity of stand-alone numbers to change in prices Sensitivity analysis
FY08e
FY09e
FY10e
Base case estimates EPS (INR/share)
181
230
202
If cement prices are 5% higher than estimates
203
259
235
Chg with respect to base case estimates (%)
12.3
12.5
16.4
If cement prices are 5% lower than estimates Chg with respect to base case estimates (%)
158
201
169
(12.3)
(12.5)
(16.4)
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 39
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts Figure 50 highlights our key assumptions for Grasim. Based on our regional price forecasts, we expect Grasim’s cement price to be higher by 11% in FY08 over March 07 levels and another 8% higher in FY09. We have factored in some gains in VSF prices as shown in the figure. As regards the sponge iron division, we assume utilization rates to pick up in FY10.. Figure 50: Key assumptions All in INR/t
FY05
FY06
FY07
FY08e
FY09e
FY10e
Cement Sales in Mn tonnes Average realisation in Rs
27
30
32
35
42
46
2,313
2,551
3,325
3,765
3,828
3,637
VSF Sales in Mn tonnes Average realisation in Rs
0.23
0.24
0.25
0.29
0.30
0.31
89,126
80,367
85,729
99,857
103,851
108,005
0.77
0.48
0.57
0.54
0.63
0.86
14,252
14,335
14,693
13,639
13,639
13,639
Sponge iron Sales in Mn tonnes Average realisation in Rs Caustic Soda Sales in Mn tonnes Average realisation in Rs
0.19
0.19
0.26
0.26
0.26
0.26
18,768
20,594
19,444
18,838
18,838
18,838
Source: Company data, Deutsche Bank
Based on our assumptions, we expect Grasim’s net sales on a stand-alone basis to rise by 19% CAGR over FY07-09, driving a 31% EPS CAGR. Figure 51: Key financials at a glance (stand-alone) Key financials at a glance (INR mn) Net sales
FY06
FY07
FY08e
FY09e
FY10e
62,295
66,527
86,036
94,446
111,186
(46,328)
(52,755)
(62,673)
(66,083)
(75,546)
EBITDA
17,839
16,841
25,380
30,972
39,260
Depreciation
(2,852)
(2,916)
(3,179)
(3,945)
(4,661)
Interest
(1,388)
(1,034)
(1,118)
(1,942)
(2,636)
PBT
13,599
12,932
22,254
25,085
31,963
Tax
(4,510)
(3,428)
(6,906)
(8,529)
(10,867)
PAT
9,089
9,504
15,349
16,556
21,096
RoE (%)
23
20
25
24
24
RoCE (%)
17
15
20
17
18
Net Debt:/ Equity (%)
46
40
47
46
43
Total expenditure
Source: Company data, Deutsche Bank
Page 40
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
India Cements Reuters: ICMN.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Bloomberg: ICEM IN
South Indian giant
220.20 300.00 250.00 - 151.30 14,911
Key changes Price target 198.00 to 300.00 Sales (FYE) 27,570 to 29,389 Op prof margin (FYE) 32.1 to 34.0 Net profit (FYE) 6,874.6 to 7,521.0
Big beneficiary of rise in cement prices in south India The average cement realization in south India has risen by ~10% q-o-q versus allIndia cement price rise of 5% q-o-q. The demand growth in south India has also been robust with demand rise of ~16% in FY07 versus pan-India demand rise of 11%. Accordingly, India Cements, the largest player in south India, should benefit greatly from upside due to operating leverage. Note that the Debt/EBITDA of India Cements is 2x implying that entire debt can be pre-paid if required. TP of Rs300 based on 3-year average PE and EV/EBITDA multiples Our target price assumes an average PE multiple of 12x FY09e and EV/EBITDA of 7.5x FY09E. Our target PE and EV/EBITDA multiples are based on the average PE and EV/EBITDA of the last three years and are in the lower quartile of the longterm forward valuation bands. Key risks are lower-than-expected utilization levels resulting in lower-than-expected cement prices and higher-than-expected energy costs. Note that a 5% rise in energy costs over our estimates cuts our earnings by 3%. Also, a lower-than-expected realization of 5% can result in a 15.7% drop in earnings over the forecast period.
300 250 200 150 100 50 0
200 150 100 50 0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Earnings to benefit from tight supply-demand scenario Based on our sectoral assumptions for demand and supply we forecast India Cements´ realization to rise by ~17% in FY08 and a further 2% in FY09. Accordingly we estimate that India Cement to report a CAGR of ~26% in sales over FY06-08, driving a core earnings (net of gains from tax benefits) CAGR of 25% over the same period. ROE is estimated to rise to 33% in FY08.
51.5% 6.6% 5.8% 9.4%
Price/price relative
7/ 05 10 /0 5
Raise TP to Rs300 (+37% upside) Our new EPS estimates for India Cements are Rs29/share (+11.4% vs. previous estimate) for FY08 and Rs.27/share (+38.2% vs. previous estimate.) for FY09. Our estimates for FY08 (+32%) and FY09 (+35%) are higher than the consensus. Our new target price of Rs300 implies a PE of 11x core FY09E of Rs27/share and is reasonable considering an EPS CAGR of 25% over the next two years. We reiterate Buy on the stock.
Ç Ç Ç Ç
Rel. to BSE 30 (L.H. Scale) India Cements (R.H. Scale)
Performance (%) Absolute BSE 30
1m 27.1 5.5
3m 38.1 13.7
12m 23.2 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
45,500 1,126 260.4 – 71 2.5
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
32.7 20.2 99.84 2.21 12.1 34.0
Forecasts and ratios Year End Mar 31 Sales (INRm)
2006A
2007A
2008E
2009E
2010E
15,294.0
20,497.4
29,389.2
32,291.9
32,220.0
2,527.0
6,617.3
10,894.8
11,371.9
8,989.7
Reported NPAT (INRm)
327.6
4,495.0
7,521.0
7,025.3
5,264.2
Reported EPS FD(INR)
2.10
20.76
28.91
26.98
20.22
DB EPS FD(INR)
2.10
20.76
28.91
26.98
20.22
OLD DB EPS FD(INR)
1.59
16.76
25.37
19.07
0.00
32.2%
23.9%
14.0%
41.5%
–
–
890.5
39.3
-6.7
-25.1
PER (x)
48.4
9.5
7.6
8.2
10.9
EV/EBITDA (x)
12.6
8.4
4.6
3.9
4.4
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
EBITDA (INRm)
% Change DB EPS growth (%)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Deutsche Bank Securities Inc.
Page 41
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
$%& '(
"
India
Reuters Code
ICMN.BO
Price as of 12 July
INR 220.20
Price Target
INR 300.00
Web Site http://www.indiacements.co.in South India`s largest cement producer, It is a diversified company with interests in shipping, real estate development and a wind energy farm.
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
)**+
)**,
)**-
)**.
)**/&
)**0&
)*(*&
-9.52 NM ¯ -9.52 NM 3.00 -73.73 10.1 0.00 0.0 97.51 0.4 140 4,231 24,145 2.4 22.7 96.8 0.7
-4.52 NM 52.5 -4.52 NM -0.89 -0.89 NM 0.00 0.0 91.39 0.7 140 6,257 25,593 2.2 18.7 44.2 0.8
2.10 48.4 ¯ 2.10 48.4 -6.46 -10.93 NM 0.00 0.0 75.93 2.2 173 17,574 31,773 2.1 12.6 18.3 1.1
20.76 9.5 890.5 20.76 9.5 8.41 4.57 23.5 0.00 0.0 76.73 2.1 234 46,130 55,677 2.7 8.4 9.5 1.9
28.91 7.6 39.3 28.91 7.6 23.68 8.31 9.3 0.00 0.0 99.84 2.2 260 45,500 50,387 1.7 4.6 5.0 1.6
26.98 8.2 -6.7 26.98 8.2 32.69 28.85 6.7 0.00 0.0 121.42 1.8 260 45,500 44,280 1.4 3.9 4.3 1.4
20.22 10.9 -25.1 20.22 10.9 0.00 0.00 NM 0.00 0.0 141.64 1.6 260 45,500 39,575 1.2 4.4 5.1 1.3
10,185 1,065 815 0 250 -1,617 0 39 0 0 0 -1,328
11,638 1,366 788 0 579 -1,335 0 125 0 0 0 -631
15,294 2,527 790 0 1,737 -1,489 0 127 0 47 0 328
20,497 6,617 777 0 5,841 -1,430 0 102 0 17 0 4,495
29,389 10,895 910 0 9,984 -824 0 241 0 1,880 0 7,521
32,292 11,372 1,071 0 10,301 -624 0 360 0 3,011 0 7,025
32,220 8,990 1,205 0 7,785 -624 0 360 0 2,256 0 5,264
419 0 -10,708 -10,289 1 0 0 -483 0 -483 -10,771 10,289
-124 0 0 379 501 0 0 -162 0 -162 215 -377
-1,118 0 -774 -1,892 -245 912 0 -59 0 852 -1,284 1,225
1,965 0 -898 1,067 245 0 0 -1,219 0 -1,219 93 -1,311
6,165 0 -4,000 2,165 0 0 0 0 0 0 2,165 -2,165
8,512 0 -1,000 7,512 0 0 0 0 0 0 7,512 -7,512
0 0 0 0 0 0 0 0 0 0 0 0
37 23,339 0 0 365 15,351 39,093 20,316 5,169 25,485 13,607 0 13,607 10,676 20,279 33,886
29 22,049 0 0 366 15,750 38,194 19,731 5,710 25,441 12,753 0 12,753 10,535 19,702 32,455
443 22,032 0 0 611 12,088 35,173 15,253 4,230 19,483 15,690 0 15,690 8,344 14,810 30,500
329 22,153 0 0 366 14,946 37,794 10,243 7,574 17,816 19,978 0 19,978 8,068 9,914 29,892
989 25,243 0 0 366 13,392 39,990 6,243 7,753 13,995 25,995 0 25,995 6,435 5,253 31,248
7,096 25,172 0 0 366 13,369 46,003 6,243 8,145 14,388 31,615 0 31,615 6,019 -853 30,762
11,802 25,967 0 0 366 13,123 51,258 6,243 8,136 14,378 36,880 0 36,880 5,782 -5,559 31,320
NM 10.5 2.4 NM -14.9 -1.0 0.9 105.1 13.1 149.0 0.2
14.3 11.7 5.0 NM -4.8 0.9 1.2 0.0 0.0 154.5 0.4
31.4 16.5 11.4 0.0 2.3 4.4 3.9 5.1 1.0 94.4 1.2
34.0 32.3 28.5 0.0 25.2 18.2 13.7 4.4 1.2 49.6 4.1
43.4 37.1 34.0 0.0 32.7 26.5 22.9 13.6 4.4 20.2 12.1
9.9 35.2 31.9 0.0 24.4 24.1 23.3 3.1 0.9 -2.7 16.5
-0.2 27.9 24.2 0.0 15.4 18.4 17.6 0.0 0.0 -15.1 12.5
" 1 2
!
" # +91 22 6658 4811
[email protected]
+91 22-6658-4824
Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
[email protected]
3 4 " 1 2 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
" 1 2 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
27.1%
31.7%
23.1%
INR 151.30 - 250.00 INR 45,500 m USD 1,126 m
Company Identifiers Bloomberg Cusip SEDOL
ICEM IN ¯ 6150062
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Page 42
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate India Cements a Buy due to the following: (1) We expect the company to report earnings CAGR of 25% over FY07-09. (2) Our estimates for FY08 are (+32%) and FY09 (+35%) are higher than the consensus and we expect the consensus earnings upgrade to drive the stock outperformance. (3) Benefits flowing in from superior bargaining power driven by our forecast of tight utilisation levels over FY07-10. (5) Our revised target price of Rs300 per share gives a potential +37 upside. Note that our new estimates are based on revision of our pan-India cement price forecast for CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (9.6% YoY). Note that south India is leading the price rise with cement prices increasing by 10% q-o-q versus 5% for the country as a whole. Consequently, India Cements Ltd, which is the largest player in south India, is likely to reap benefits due to its operating leverage.
Valuation We have thus used an average PE multiple of 12x core earnings (earlier assumed 10x FY08E) and 7.5x EV/EBITDA FY09E (earlier assumed 7x FY08E) to arrive at the target price of INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The forward valuation multiples are similar to those used by us prior to risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands (Figures 52 and 53) the stock is trading virtually at the bottom – an anomaly which we expect the market to correct.
Source: Bloomberg, Company Data, Deutsche Bank
Deutsche Bank Securities Inc.
Jun-07
Mar-07
Dec-06
10
Sep-06
8
Jun-06
7
Mar-06
6
Dec-05
Mar-04
Jun-07
Mar-07
-100 Dec-06
-100 Sep-06
0
Jun-06
0
Mar-06
100
Dec-05
100
Sep-05
200
Jun-05
200
Mar-05
300
Dec-04
300
Sep-04
400
Jun-04
400
Mar-04
500
Sep-05
Price (INR)
12
Mar-05
10
Dec-04
8
Sep-04
6
500
Jun-04
Price (INR)
Figure 53: 12-month forward rolling EV/EBIDTA band
Jun-05
Figure 52: 12-month forward rolling P/E bands
Source: : Bloomberg, Company Data, Deutsche Bank
Page 43
12 July 2007
Construction Materials Indian Cement Sector
Risks India Cements is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lowerthan-expected price realization reduces our estimates by ~5% each in FY07 and FY08. International coal prices have shot up by 20% y-o-y over the last six months. The company is confident that the impact of coal cost would not be much due to its long-term contracts. We have assumed 10% CAGR in coal cost for the next three years. Any increase greater than 5% over and above our base case estimates would have an impact on the company’s earnings. Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our estimates would depress the earnings by ~2% each in FY07 and FY08. Similarly, a 1% increase in cement prices increases our EBITDA estimates by 4% for FY08 and 5% for FY09. A 5% rise/drop in coal prices reduces/increases earnings by ~2% and 4% respectively. Figure 54: Sensitivity analysis FY08e
FY09e
FY10e
Base case EPS estimate (INR/share)
28.9
27.0
20.2
If cement prices are 5% higher than estimates
33.4
31.4
24.7
Chg with respect to base case estimates (%)
15.7
16.5
22.0
If cement prices are5% lower than estimates
24.4
22.5
15.8
Chg with respect to base case estimates (%)
(15.7)
(16.5)
(22.0)
If fuel prices are 5% higher than estimates
28.0
26.0
19.1
Chg with respect to base case estimates (%)
(3.1)
(3.5)
(5.5)
Source: Company data, Deutsche Bank
Page 44
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Key assumptions and forecasts Based on our revised price forecasts, we expect the average realisation to be higher by 7.7% (vs earlier estimates) for FY08 and by 18.8% (vs earlier estimates) for FY09. We have also marginally increased our sales volume expectations The increase in sales volume is on account of additional output to the extent of 0.6m tonnes in FY08E (modernization of the Shankaridurg plant) and 0.8m tonnes in FY09E (expansion of the Vishnudurg plant). However, we have not factored in the full impact expected from capacity expansions in the next two years. Figure 55 underlines our main assumptions. Figure 55: Key assumptions INR/tonne
--------------------------FY08E-----------------------------
Particulars
Old Estimates
-------------------------------FY09E-------------------------Old Estimates
New Estimates
9.0
9.2
1.5
9.4
10.0
6.0
3,434
3,724
8.4
3,321
3,797
14.3
Raw material
440
491
11.6
463
517
11.7
Freight
456
456
-
470
470
-
Power and fuel
725
747
3.1
911
806
(11.5)
Sales volume (m tonnes) Average realisation (INR/tonne)
New Estimates Change (%)
Change (%)
Cost (INR/tonne)**
** Cost/tonne figures do not include Visaka Cements Source: Deutsche Bank
Based on our assumptions we forecast a net sales growth of 26% CAGR for FY07-09E, driving net profit growth of 25% CAGR for FY07-09E. Figure 56: Key financials at a glance --------------------------FY08E----------------------------Particulars (INR mn) Net sales
Old Estimates
-------------------------------FY09E--------------------------
New Estimates Change (%)
Old Estimates
New Estimates
Change (%) 15.9
27,570
29,390
6.6
27,854
32,293
(17,718)
(18,494)
4.4
(19,063)
(20,920)
9.7
EBITDA
10,093
11,137
10.3
9,151
11,733
28.2
Depreciation
(1,002)
(910)
(9.1)
(1,165)
(1,071)
(8.1)
(824)
(824)
-
(424)
(624)
47.1
Expenditure
Interest PBT
8,267
9,402
13.7
7,561
10,037
32.7
Tax
(1,240)
(1,880)
51.6
(2,268)
(3,011)
32.7
PAT
7,027
7,522
7.0
5,293
7,026
32.7
25.9
28.9
11.4
19.5
27.0
38.2
EPS (INR) Ratios EBITDA/tonne (INR)
1,118
1,215
8.7
972
1,175
21.0
ROE (%) (#)
30.8
32.7
189
19.1
24.4
530
RoCE (%) (#)
29.7
31.4
170
18.3
23.6
528
# indicates change in bps Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 45
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
Shree Cements Reuters: SHCM.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Bloomberg: SRCM IN
80% + RoE –highest in sector
1,335.20 1,750.00 1,524.90 - 806.55 14,911
Key changes Price target 1,240.00 to 1,750.00 Sales (FYE) 18,248 to 19,733 Op prof margin (FYE) 41.3 to 27.1 Net profit (FYE) 5,270.0 to 4,573.7
Highest ROE in the cement sector Based on our new price and revised volume forecast, we have reduced our EPS to Rs131/share (down 14%) for FY08E, Rs213/share (up 26%) for FY09E. Our estimates are above consensus by 10% for FY08 and by 61% for FY09. Escalation in raw material costs by 74% in FY08E and by 86% in FY09E has offset the benefit from higher realizations. The RoE at 88% in FY08E is likely to be the one of the best in the sector globally. Raising target price to Rs1,790 Following the revision in estimates and more clarity on cement prices, we have revised our target price to Rs1,790/share (31% upside) driven by the uptick in target P/E to 12x FY08E (earlier 8x FY08E) and target EV/E to 7.5x FY08E (earlier 5x FY08E). These multiples are the same as those used by us prior to the risk to long-term earnings emerging from threats from government intervention. Key risks are volatility in cement prices and rise in fuel prices. Our sensitivity analysis shows that a 1% rise/drop in realisation can result in an 8% rise/drop in FY08E earnings. A 5% rise in fuel costs can result in a ~2% reduction in FY08 E earnings.
250
2000
200
1500
150 100
1000 500
50 0
0
1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Cash earnings a better proxy for valuation The cash EPS of the company is Rs234 for FY08E - 78% higher than recurring EPS- This is on account of a unique policy of depreciating fixed assets at the higher of the rates prescribed by the Companies Act and the Income Tax Act, on WDV basis. Moreover, the ROE at 88% in FY08eE and 84% in FY09E is one of the best in the industry.
41.1% 8.1% -34.3% -13.2%
Price/price relative
7/ 05 10 /0 5
Volume growth when it matters the most We are upgrading our FY09 estimates for Shree Cement due to the rise in cement prices across India, significant capacity addition and its excellent operating efficiency. Our FY08 estimates factor in the impact of higher provisions for depreciation. Cash EPS for FY08E is Rs234; Rs300 for FY09E.
Ç Ç È È
Rel. to BSE 30 (L.H. Scale) Shree Cements (R.H. Scale)
Performance (%) Absolute BSE 30
1m 23.1 5.5
3m 50.6 13.7
12m 47.4 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
46,465 1,150 34.8 – 36 0.3
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
88.0 10.3 188.66 7.08 11.6 27.1
Forecasts and ratios Year End Mar 31
2006A
2007A
2008E
2009E
2010E
Sales (INRm)
6,948.3
13,679.0
19,732.8
26,952.0
35,820.3
EBITDA (INRm)
2,198.8
6,117.0
8,951.3
12,845.4
13,635.9
Reported NPAT (INRm)
184.0
1,770.4
4,573.7
7,446.8
9,052.3
Reported EPS FD(INR)
5.28
50.82
131.29
213.76
259.84
DB EPS FD(INR)
5.28
50.82
131.29
213.76
259.84
OLD DB EPS FD(INR)
5.28
112.36
151.27
167.24
0.00
-0.0%
-54.8%
-13.2%
27.8%
–
DB EPS growth (%)
-35.9
862.1
158.4
62.8
21.6
PER (x)
% Change
89.6
21.6
10.2
6.2
5.1
EV/EBITDA (x)
9.1
6.5
5.3
3.5
3.2
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 46
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
India
Reuters Code
SHCM.BO
Price as of 12 July
INR 1,335.20
Price Target
INR 1,750.00
Web Site http://www.shreecementltd.com Is one of the largest cement producers in Rajasthan, has Largest Cement Plant In Northern India at Single location.
! +91 22 6658 4811
[email protected]
())&
())*
())+
()),
())-
()).%
())/%
()')%
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
1.11 43.3 ¯ 1.11 43.3 30.09 2.95 1.6 0.00 0.0 97.23 0.5 35 1,681 5,242 1.1 5.1 12.7 0.7
5.57 17.7 400.0 5.57 17.7 11.84 0.67 8.3 0.00 0.0 97.59 1.4 35 3,432 6,842 1.4 5.1 11.4 1.0
8.23 26.6 47.9 8.23 26.6 50.72 12.22 4.3 0.00 0.0 101.30 3.3 35 7,620 10,461 1.7 6.1 21.2 1.6
5.28 89.6 -35.9 5.28 89.6 80.33 6.73 5.9 0.00 0.0 100.75 8.9 35 16,492 20,028 2.9 9.1 35.8 2.7
50.82 21.6 862.1 50.82 21.6 151.30 121.95 7.3 0.00 0.0 109.88 8.4 35 38,303 39,817 2.9 6.5 22.3 6.9
131.29 10.2 158.4 131.29 10.2 263.02 133.85 5.1 0.00 0.0 188.66 7.1 35 46,465 47,145 2.4 5.3 8.8 6.1
213.76 6.2 62.8 213.76 6.2 317.27 196.71 4.2 0.00 0.0 316.91 4.2 35 46,465 45,271 1.7 3.5 4.6 4.4
259.84 5.1 21.6 259.84 5.1 0.00 0.00 NM 0.00 0.0 472.82 2.8 35 46,465 43,613 1.2 3.2 3.7 3.1
4,843 1,021 608 0 412 -349 0 31 0 56 0 39
4,943 1,334 734 0 600 -333 0 14 0 87 0 194
6,022 1,724 1,230 0 495 -205 0 21 0 24 0 287
6,948 2,199 1,640 0 559 -128 0 -159 0 87 0 184
13,679 6,117 4,330 0 1,787 -104 0 212 0 124 0 1,770
19,733 8,951 3,600 0 5,351 -463 0 492 0 807 0 4,574
26,952 12,845 3,000 0 9,845 -680 0 763 0 2,482 0 7,447
35,820 13,636 2,000 0 11,636 -585 0 1,019 0 3,017 0 9,052
1,049 0 -946 103 4 -150 -98 433 0 185 292 141
413 0 -389 23 1 0 -118 -112 0 -230 -206 94
1,767 0 -1,341 426 8 0 -159 16 0 -143 291 -275
2,798 0 -2,564 234 0 0 -37 -209 0 -245 -11 -198
5,271 0 -1,022 4,248 0 0 -905 1,209 0 303 4,552 -3,343
9,163 0 -4,500 4,663 0 0 -1,829 0 0 -1,829 2,833 -2,833
11,053 0 -4,200 6,853 0 0 -2,979 0 0 -2,979 3,874 -3,874
0 0 0 0 0 0 0 0 0 0 0 0
345 6,587 0 0 9 1,692 8,632 3,914 1,330 5,245 3,388 0 3,388 1,025 3,569 6,957
76 6,242 0 0 8 1,802 8,128 3,494 1,233 4,728 3,400 0 3,400 1,378 3,418 6,818
368 6,353 0 0 0 1,396 8,118 3,209 1,379 4,588 3,529 0 3,529 885 2,841 6,370
191 7,277 0 0 0 1,991 9,459 3,727 2,222 5,949 3,510 0 3,510 718 3,537 7,047
4,196 3,970 0 0 0 3,948 12,113 5,709 2,576 8,285 3,828 0 3,828 2,599 1,514 5,342
7,029 4,870 0 0 0 5,673 17,571 7,709 3,290 10,999 6,572 0 6,572 3,810 680 7,252
10,904 6,070 0 0 0 7,680 24,653 9,709 3,903 13,612 11,040 0 11,040 5,253 -1,194 9,846
14,561 8,070 0 0 0 10,305 32,935 11,709 4,754 16,464 16,472 0 16,472 7,027 -2,852 13,620
45.2 21.1 8.5 0.0 1.1 4.2 4.2 19.5 1.6 105.4 1.2
2.1 27.0 12.1 0.0 5.7 6.2 6.0 7.9 0.5 100.5 1.8
21.8 28.6 8.2 0.0 8.3 6.5 5.1 22.3 1.1 80.5 2.4
15.4 31.6 8.0 0.0 5.2 4.1 5.6 36.9 1.6 100.8 4.4
96.9 44.7 13.1 0.0 48.3 29.8 19.1 7.5 0.2 39.5 17.2
44.3 45.4 27.1 0.0 88.0 77.8 55.2 22.8 1.3 10.3 11.6
36.6 47.7 36.5 0.0 84.6 92.7 75.9 15.6 1.4 -10.8 14.5
32.9 38.1 32.5 0.0 65.8 80.6 66.4 0.0 0.0 -17.3 19.9
0 102 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
3 4 102
"" +91 22-6658-4824
#$% &'
[email protected]
Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
102 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
Absolute Price Return 52-week Range Market Cap
1m
3m
12m
23.1%
45.3%
47.4%
INR 806.55 - 1,524.90 INR 46,465 m USD 1,150 m
Company Identifiers Bloomberg Cusip SEDOL
SRCM IN ¯ 6100357
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 47
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We reiterate Buy on Shree Cement with a revised target price of Rs1,790/share (+31% upside). Based on our assumptions, we forecast a net sales growth of 38% CAGR for FY0710E, driving net profit growth of 72% CAGR over the same period. Our earning estimates are 10% higher than consensus for FY08E and 61% higher than the consensus for FY09E. We expect the Indian cement industry to operate at peak utilisation levels as new capacity commissioning is likely to be delayed and demand likely to continue to grow at 9-10% annually. The cement companies are expected to report higher average realisations due to tight demand-supply scenario expected to persist till 1HFY10/CY09. Accordingly we have revised our pan-India cement price forecast for FY07 to Rs235/50kg bag (7.7% higher than our previous assumption) and FY08 forecast to Rs245/50kg bag (18.8% higher than our earlier assumption).
Valuation The Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Following this, we believe the overhang of pressure on price realizations by cement companies stands abated. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the following trading bands the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. Figure 57: 12-month forward rolling P/E bands Price (INR)
6
10
14
Figure 58: 12-month forward rolling EV/EBITDA band Price (INR)
18
3,000
3,500
2,500
3,000
4
6
8
10
2,500
2,000
2,000
1,500
1,500 1,000
1,000
500
500
0
Source: Bloomberg, Company Data, Deutsche Bank
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
-500
Mar-94
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
0
Source: : Bloomberg, Company Data, Deutsche Bank
We have thus used an average PE multiple of 12x FY08E (earlier assumed 8x FY08E) and 7.5x EV/EBITDA FY08E (earlier assumed 5x FY08E) to arrive at the target price of INR1,790/share. It is important to note that these multiples are the same as we used prior to reducing our multiples due to the risk to long-term earnings emerging from threats from government intervention in pricing cement in India. Our target multiples are at the low-end of P/E and EV/EBIDTA bands and at a discount to the region. Moreover, these multiples are at the lowest range of the respective bands over the last 15 years. We note that EV/t at our target price is USD209 on FY08E, which is reasonable considering the position of the cycle. Page 48
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Figure 59: 12-month forward EV/ton (x) and EBITDA/ton (x) EV/Ton
Ebitda/Ton
200
40 35
150
30 25
100
20 15
50
10 Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
5 Mar-94
0
Source: Company data, Bloomberg, Deutsche Bank
Risks Shree Cement is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on the expectation of a deficit till 1HFY09/CY08. A slowdown in the demand growth and/or higher capacity commissioning may lead to lower-than-expected realisations. Figure 60 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. If cement prices are higher by 1% then our earnings estimates for FY08 will be higher by 7.6% and vice versa. Also, the EBIDTA will be higher by 4% for FY08E and vice versa. A 5% rise in coal prices would reduce FY08 EPS estimates by 1.8% and EBITDA estimates by 1%. Figure 60: Sensitivity analysis Sensitivity analysis
FY08e
FY09e
FY010e
Base case estimates – EPS (INR)
130.9
212.9
258.3
If cement prices are 1% higher than estimates
140.7
224.7
273.5
Chg with respect to base case estimates(%) If cement prices are 1% lower than estimates Chg with respect to base case estimates (%)
7.6
5.6
5.9
121.1
201.2
243.2
(7.5)
(5.5)
(5.8)
128.5
206.8
243.8
(1.8)
(2.9)
(5.6)
Base case estimates-EBITDA ( INR mn)
9,426
13,567
14,581
If cement prices are 1% higher than estimates
9,831
14,117
15,288
4
4
5
9,025
13,023
13,883
(4)
(4)
(5)
9,329
13,285
13,908
(1.0)
(2.1)
(4.6)
If coal prices are 5% higher than estimates Chg with respect to base case estimates (%)
Chg with respect to base case estimates (%) If cement prices are 1% lower than estimates Chg with respect to base case estimates (%) If coal prices are 5% higher than estimates Chg with respect to base case estimates (%) Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 49
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Higher average realization undone by likely cost overruns in FY08 Based on our revised price forecasts, we expect average realization to be higher by 7.7% in FY08 and 18.8% in FY09 over our earlier estimates. We have not factored in the full impact of capacity expansions in next two years. Figure 61 underlines our main assumptions. Figure 61: Key assumptions Particulars INR/tonne
-----------------FY08e -------------Old Estimates
------------------ FY09e --------------
New Variance Estimates (%)
FY10e
Old Estimates
New Estimates
Variance (%)
Key Assumptions Sales Volume (mn tonnes)
6.2
6.6
6
8.5
8.5
-
12.0
3,345
3,555
6
3,192
3,722
17
3,536
Raw Material
243
422.2
74
234
434.8
86
448.0
Freight
400
420
5
450
450
-
450
Power
334
261
(22)
410
232
(43)
Average realisation (INR/tonne) Cost (INR/tonne)
Source: Deutsche Bank
Our revised estimates based on higher price estimates show earning estimates declining by a 14% in FY08 and rising by 26% in FY09 (over the earlier estimates). Based on our assumptions we forecast a net sales growth CAGR of 38% for FY07-10E, driving net profit growth of 71% CAGR over the same period. This is considering the aggressive depreciation policy the company has adopted. Figure 62: Key financials at a glance Particulars INR mn Net Sales
---------------- FY08e-------------Old Estimates
------------------- FY09e ------------
New Variance Estimates (%)
FY10e
Old Estimates
New Estimates
Variance (%)
8
23,723
26,952
14
35,820
18,248
19,733
EBITDA
9,290
9,426
1
10,375
13,567
31
14,581
PAT
5,306
4,559
(14)
5,862
7,416
26
8,997
EPS (INR)
152.3
130.9
(14)
168.3
212.9
26
258.3
Ratios EBITDA/tonne (INR)
33
32
(4)
27
35
31
27
178
209
17
107
157
47
109
ROE (%) (#)
116.7
87.7
(2,893)
76.1
84.4
833
66
RoCE (%) (#)
71.1
58.8
(1,230)
55.1
65.7
1,059
EV/tonne (USD)
# indicates change in bps Source: Deutsche Bank
Cash earnings represent Shree Cement’s true potential Shree Cements follows an aggressive depreciation policy, wherein it charges depreciation on its plant and machinery at the higher of the rates prescribed by the Companies Act and the Income Tax Act. This consequently deflates reported earnings of the company to a considerable extent since the income tax rates are ~6 times those prescribed by the Companies Act.
Page 50
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
The cash flow EPS of the company is 3.4x and 1.8x the reported EPS for FY07E and FY08E respectively. We expect this trend to continue till FY12 on account of significant capacity additions to be made by the company over the next 3-4 years. Figure 63: Cash EPS versus reported EPS
(INR)
Cash EPS
Reported EPS
350 300 250 200 150 100 50 FY05
FY06
FY07
FY08e
FY09e
FY010e
Source: Deutsche Bank,
Deutsche Bank Securities Inc.
Page 51
12 July 2007
Construction Materials Indian Cement Sector
GEMS: Asia India Resources Construction Materials
11 July 2007
UltraTech Cement Limited Bloomberg: UTCEM IN
Benefits from south Indian presence
899.30 1,140.00 1,163.85 - 620.95 14,911
Key changes
Upgrade to Buy with a TP of Rs.1,140 UltraTech Cemco is likely to benefit from its markets in South and West both of which have seen superior realization growth. Cost-inflation risk is coming down as domestic lignite-based captive power plant gets commissioned this year. Our new earnings estimate for FY09 is up 65% over our previous estimate and 103% above the consensus. Despite recent run-up, the stock is trading at lower end of valuation range. We upgrade our recommendation to Buy. Party re-starts, price-freeze called off As highlighted in our sector note, we are now more sanguine on tight supply scenario in the Indian cement sector lasting till CY09. Accordingly, in line with our sector price outlook, we have revised the cement price forecast by 7.7% for FY08E and 18.8% for FY09E. Large benefits to kick in from FY09 Based on our new price and revised volume forecasts, we have revised our EPS estimate for FY08 to Rs98/share and sharply revised our FY09 EPS estimate to Rs144/share (up 65%). Our FY08 and FY09 estimates are above the consensus by 38% and 103%, respectively. Raising target price to Rs1,140 In line with the sectoral valuations, we have estimated our target price at Rs1,140/share (26% upside) assuming an average of the target PER multiple of 12x FY08E and EV/EBITDA multiple of 7.5x FY08E. These multiples are at the lower end of valuation bands and also at a discount to regional peers. We believe that this is reasonable as the RoE and EPS growth of UltraTech is in the highest quartile in the region. Key risks are volatility in cement prices and rise in fuel prices. Our sensitivity analysis shows that a 5% rise/drop in realizations can result in a 25% rise/drop in FY08E earnings. A 10% rise in fuel cost can result in 9% drop in FY08E earnings.
Rating Hold to Buy 795.00 to 1,140.00 Price target Sales (FYE) 55,602 to 57,907 Op prof margin (FYE) 29.8 to 29.4 Net profit (FYE) 10,599.5 to 12,171.4
Ç Ç Ç È Ç
43.4% 4.1% -1.2% 14.8%
Price/price relative 200
1500
150
1000
100 500
50 0
0
7/ 05 10 /0 5 1/ 06 4/ 06 7/ 06 10 /0 6 1/ 07 4/ 07
Reuters: ULTC.BO
Buy Price at 12 Jul 2007 (INR) Price target - 12mth (INR) 52-week range (INR) BSE 30
Rel. to BSE 30 (L.H. Scale) UltraTech Cement Lim (R.H. Scale)
Performance (%) Absolute BSE 30
1m 12.9 5.5
3m 24.7 13.7
12m 20.5 36.4
Stock data Market cap (INRm) Market cap (USDm) Shares outstanding (m) Major shareholders Free float (%) Avg daily value traded (USDm)
111,513 2,760 124.5 – 48 0.8
Key indicators (FY1) ROE (%) Net debt/equity (%) Book value/share (INR) Price/book (x) Net interest cover (x) Operating profit margin (%)
55.5 46.5 210.48 4.27 15.9 29.4
Forecasts and ratios Year End Mar 31
2006A
2007A
2008E
2009E
2010E
33,839.5
49,687.0
57,907.0
70,488.2
78,896.4
EBITDA (INRm)
5,345.6
14,619.9
19,799.2
27,814.3
28,220.0
Reported NPAT (INRm)
2,283.0
7,884.1
12,171.4
17,975.2
17,942.1
Reported EPS FD(INR)
18.35
63.34
97.77
144.40
144.13
DB EPS FD(INR)
18.35
63.34
97.77
144.40
144.13
OLD DB EPS FD(INR)
18.46
62.83
85.15
87.56
0.00
% Change
-0.6%
0.8%
14.8%
64.9%
–
DB EPS growth (%)
752.7
245.2
54.4
47.7
-0.2
PER (x)
23.6
13.2
9.2
6.2
6.2
EV/EBITDA (x)
12.4
7.8
5.9
3.9
3.7
DPS (net) (INR)
0.00
0.00
0.00
0.00
0.00
Yield (net) (%)
0.0
0.0
0.0
0.0
0.0
Sales (INRm)
Source: Deutsche Bank estimates, company data 1
DB EPS is fully diluted and excludes non-recurring items Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
2
Page 52
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Model updated:11 July 2007
%&' ()
# !
India
Reuters Code
ULTC.BO
! Price as of 12 July
INR 899.30
Price Target
INR 1,140.00
Web Site http://www.ultratechcement.com/ " ! " Cement business of Larsen & Toubro Limited demerged and vested in company in 2004, Grasim Industries hold 51% sake in Ultratech.
# $ +91 22 6658 4811
[email protected]
DB EPS (INR) P/E (x) DB EPS growth (%) EPS FD (INR) P/E FD (x) CFPS (INR) Free CFPS (INR) P/CFPS (x) DPS (INR) Dividend yield (%) BV/Share (INR) Price/BV (x) Weighted average shares (m) Average market cap (INRm) Enterprise value (INRm) EV/Sales (x) EV/EBITDA EV/EBIT EV/Op. Capital (x)
*++,
*++-
*++.
*++/
*++0'
*++1'
*+)+'
2.80 ¯ ¯ 2.80 ¯ 325.27 267.78 ¯ 0.00 ¯ 84.72 ¯ 62 ¯ ¯ NM NM NM NM
2.15 146.5 -23.2 2.15 146.5 13.94 11.90 22.6 0.00 0.0 78.27 4.5 124 39,227 51,429 1.9 15.4 59.5 2.1
18.35 23.6 752.7 18.35 23.6 36.24 29.15 12.0 0.00 0.0 83.65 8.2 124 53,981 66,383 2.0 12.4 21.8 2.9
63.34 13.2 245.2 63.34 13.2 77.54 16.44 10.7 0.00 0.0 142.04 5.4 124 103,738 113,984 2.3 7.8 9.2 4.1
97.77 9.2 54.4 97.77 9.2 98.89 78.74 9.1 0.00 0.0 210.48 4.3 124 111,513 117,608 2.0 5.9 6.9 3.6
144.40 6.2 47.7 144.40 6.2 202.81 155.26 4.4 0.00 0.0 311.56 2.9 124 111,513 107,673 1.5 3.9 4.4 3.1
144.13 6.2 -0.2 144.13 6.2 129.93 73.70 6.9 0.00 0.0 412.45 2.2 124 111,513 103,882 1.3 3.7 4.2 2.4
22,920 3,231 2,475 0 757 -1,185 0 443 0 -158 -1 174
27,010 3,350 2,485 0 865 -1,093 0 440 0 -44 -13 268
33,840 5,346 2,306 0 3,040 -901 0 721 0 593 -16 2,283
49,687 14,620 2,287 0 12,333 -868 0 288 0 3,887 -18 7,884
57,907 19,799 2,748 0 17,052 -1,072 0 499 0 4,307 0 12,171
70,488 27,814 3,138 0 24,677 -1,961 0 1,251 0 5,992 0 17,975
78,896 28,220 3,509 0 24,711 -2,179 0 1,390 0 5,981 0 17,942
20,232 0 -3,576 16,656 0 1,249 -70 3,091 9,392 13,662 30,318 -27,227
1,734 0 -254 1,480 0 -5 -107 -310 -768 -1,190 290 -600
4,509 0 -881 3,628 -1,482 1 -450 -481 -2,128 -3,059 -912 431
9,653 0 -7,607 2,046 -3,111 0 -2,355 1,975 1,750 1,370 306 1,669
12,311 0 -2,508 9,802 -1,500 0 -3,651 0 0 -3,651 4,651 -4,651
25,247 0 -5,920 19,327 0 0 -5,393 0 0 -5,393 13,935 -13,935
16,174 0 -7,000 9,174 0 0 -5,383 0 0 -5,383 3,792 -3,792
448 30,765 0 0 0 5,366 36,580 15,662 10,379 26,041 10,539 0 10,539 1,222 15,214 25,753
602 28,534 0 0 0 6,605 35,741 15,380 10,584 25,964 9,737 41 9,778 2,085 14,778 24,556
684 27,110 0 0 1,482 7,077 36,352 14,520 11,370 25,890 10,414 48 10,461 1,889 13,836 24,297
1,001 32,429 0 0 4,592 8,693 46,716 15,786 13,195 28,981 17,682 53 17,735 1,305 14,785 32,520
5,599 32,190 0 0 6,092 15,132 59,013 17,786 15,025 32,811 26,202 0 26,202 5,464 12,187 38,389
19,534 34,972 0 0 6,092 16,428 77,026 21,786 16,455 38,241 38,785 0 38,785 4,879 2,252 41,037
23,326 38,464 0 0 6,092 22,710 90,592 21,786 17,461 39,247 51,344 0 51,344 9,656 -1,539 49,805
NM 14.1 3.3 0.0 1.7 3.9 2.0 15.6 1.4 144.4 0.6
17.8 12.4 3.2 0.0 2.6 4.1 2.4 0.9 0.1 151.1 0.8
25.3 15.8 9.0 0.0 22.7 11.9 8.9 2.6 0.4 132.3 3.4
46.8 29.4 24.8 0.0 56.1 29.9 33.6 15.3 3.3 83.4 14.2
16.5 34.2 29.4 0.0 55.5 36.4 39.3 4.3 0.9 46.5 15.9
21.7 39.5 35.0 0.0 55.3 48.7 50.9 8.4 1.9 5.8 12.6
11.9 35.8 31.3 0.0 39.8 42.9 43.7 8.9 2.0 -3.0 11.3
2 # 324 Sales revenue Operating EBITDA Depreciation Amortization Operating EBIT Net interest income (expense) Associates/affiliates Investment and other income/expense Exceptionals/extraordinaries Income tax expense Minorities/preference dividends Net income
+91 22-6658-4824
[email protected]
5 6 # 324 Cash flow from operations Movement in Net Working Capital Capex Free cash flow Other investing activities Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other financing cash flows Total cash flows from financing Net cash flow Movement in net debt/(cash)
# 324 Cash and other liquid assets Tangible fixed assets Goodwill Other intangible assets Associates/investments Other assets Total assets Interest bearing debt Other liabilities Total liabilities Shareholders' equity Minorities Total shareholders' equity Net working capital Net debt/(cash) Capital
! Absolute Price Return 52-week Range Market Cap
1m
3m
12m
12.9%
20.0%
20.4%
INR 620.95 - 1,163.85 INR 111,513 m USD 2,760 m
Company Identifiers Bloomberg Cusip SEDOL
UTCEM IN ¯ B01GZF6
Sales growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Return on capital (%) Operating return on capital (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x)
Source: Deutsche Bank estimates, company data
Deutsche Bank Securities Inc.
Page 53
12 July 2007
Construction Materials Indian Cement Sector
Investment thesis Outlook We rate Ultra tech Cement as a buy due to the following. (1) We expect the company to report earnings CAGR of 51% over the period FY07-09e (2) Our estimates for FY08e are (+38 and for FY09e are (+103% ) higher than consensus and we expect the consensus earnings upgrade to drive the stock performance (3)Benefits flowing from superior bargaining power driven by our forecast of tight utilisation levels over FY07-10e.(4) Our revised target price of Rs 1140per share gives a potential ( +26% upside). Note our new estimates are based on revision our all India cement price forecast we have revised our all India cement price forecast for FY08 to Rs235/bag (7.7% higher than our previous assumption) and FY09 forecast to Rs249/bag (18.8% higher than our earlier assumption). Ultra tech Cemco is also likely to benefit from the 92 MW power plant coming up for commissioning
Valuation We have thus used an average PE multiple of 12x core earnings FY08E (earlier assumed 10x FY08E) and 7.5xEV/EBITDA FY08E (earlier assumed 7xFY08E ) to arrive at the target price of INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The forward valuation multiples are similar to those used by us prior to the risk to long-term earnings emerging from threats from government intervention in pricing cement in India. The concerns stand reduced due to the following: (1) Indian cement companies were successful in demonstrating that they can pass on government levies to end-users. (2) Indian finance minister has stated that there is no price-freeze and the prices of cement will be dictated purely by demand and supply forces. Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement prices. However, as seen from the trading bands below the stock is trading virtually at the bottom – an anomaly which we expect the market to correct. Figure 64: 12-month forward rolling P/E band Price (INR)
8
10
12
Figure 65: 12-month forward rolling EV/EBIDTA band Price (INR)
14
5
7
9
11
2,000
1,600 1,400
1,600
1,200 1,000
1,200
800 800
600 400
400
200 0
Source: Bloomberg, Company Data, Deutsche Bank
Page 54
Mar-07
Mar-06
Mar-05
Mar-04
Mar-07
Mar-06
Mar-05
Mar-04
0
Source: : Bloomberg, Company Data, Deutsche Bank
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Risks UltraTech Cement is a high-beta stock and any risk on the liquidity front would impact the stock returns. In addition, our positive bias on the sector is based on expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual demand is lower than estimates and supply greater than estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lowerthan-expected price realization reduces our estimates by ~5.0% for FY08 and 3.3% for FY09, and vice versa. International coal prices have risen up sharply We have assumed a 13% CAGR in coal cost for the next three years. Any increase greater than 5% would have an impact on the company’s earnings. Based on our sensitivity analysis, we estimate that a 10% increase in fuel cost over our estimates would depress the earnings by ~9.3% FY08E and ~5.0% FY09E. Figure 66 shows the sensitivity of earnings and EBITDA to cement prices and fuel costs. If cement prices are higher by 5%, then our earnings estimates will be higher by 25% for FY08 and vice versa. Also, the EBITDA will be higher by 15% for FY08E and vice versa. A 10% rise in coal prices would reduce EPS estimates for FY08 by 9.3% and EBITDA estimates for FY08 by 5.6%. Figure 66: Sensitivity analysis Base Case estimate (INR/share)
FY08e
FY09e
FY10e 144
98
144
If cement prices are 5% higher than estimates
122
168
172
Chg with respect to base case estimates (%)
25.0
16.6
19.3
If cement prices are 5% lower than estimates Chg with respect to base case estimates (%) If fuel prices are 10% higher than estimates Chg with respect to base case estimates (%)
73
120
117
(25.0)
(16.6)
(19.3)
89
137
135
(9.3)
(5.0)
(6.3)
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 55
12 July 2007
Construction Materials Indian Cement Sector
Assumptions and forecasts Higher average realization undone by cost overrun in FY08E Based on our revised price forecasts, we expect average realization per 50kg bag to be higher by 7.7% for FY08E and by 18.8% for FY09E over our earlier estimates. We have not taken the full impact of capacity expansions in the next two years. The following table underlines the changes in main assumptions. Figure 67: Key assumptions ---------------------FY08E-------------INR/tonne
------------------FY09-------------
Old Estimates
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
18
18.4
2
22
20.5
(9)
3,269
3,815
17
3,037
4,066
34
Raw Material
164
269
65
141
267
89
Freight
804
927
15
836
900
8
Power and fuel
710
828
17
622
692
11
Key assumptions Sales volume (m tonnes) Average realisation (INR/tonne) Cost (INR/tonne)**
Source: Deutsche Bank
Our revised estimates based on higher price estimates show earning estimates rising by a marginal 4% for FY08e and 13% in FY09e over earlier estimates. Based on our assumptions we forecast a net sales growth of 19% CAGR for FY07-09E, driving net profit growth of 51% CAGR for FY07-09E. Figure 68: Key financials at a glance ------------------------FY08E--------------INR mn
---------------------------FY09E--------------
Old Estimates
New Estimates
Chg (%)
Old Estimates
New Estimates
Chg (%)
Net sales
55,602
57,907
4
62,195
70,488
13
EBITDA
19,495
20,298
4
19,145
29,065
52
PAT
10,599
12,171
15
10,900
17,975
65
85.1
97.8
15
87.6
144.4
65 80
EPS (INR) Ratios EBITDA/tonne (INR)
1,079
1,279
19
853
1,533
EV/tonne (USD)
153
175
15
105
136
30
ROE (%) (#)
54.2
55.4
123
40.2
55.3
1,509
RoCE (%) (#)
41.3
40.4
(89)
34
45.9
1,174
# indicates change in bps Source: Deutsche Bank
Page 56
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Appendix A Capacity ordered In the following table, we give the details of 73m tonnes of the capacity that has been ordered by various companies in the sector. Figure 69: Capacity Ordered Particulars ( mn tonne)
Region
Cement Capacity(mn t)
Commissioning Date
Gujarat Ambuja
North
0.88
Dec-07
Binani Cements
North
2.57
Jun-07
Groups
By March-08
Shree Cements-V JP Associates - Rewa- MP Madras Cements- Jayanthipuram
Others
North
1.34
Jun-07
Shree
Central
2.01
Mar-08
Jaiprakash
South
1.70
Dec-07
MadrasCements
Sub-total
8.50
BY March-09 Ambuja Eastern
East
3.2
JP Associates
North
4.55
Jun-08
Rain commodities
South
1.6
May-08
Others
JP Associates - UP
Central
3.35
May-08
Jaiprakash
Murli Industries
West
2.77
Sep-08
Others
Lafarge-Sonadih
North
2.68
Sep-08
Lafarge
Grasim-Kothputali-Rajasthan
North
4.00
Sep-08
AdityaBirla
Grasim-Aditya-Rajasthan
North
4.00
Sep-08
AdityaBirla
Shree Cements-VI
North
1.34
Dec-08
Shree
India Cement-Sankaridurg
South
1.1
Jun-08
India cement
JK Cement
South
2.07
Sep-08
Others
Madras Cements -Alathiyur
South
1.74
Mar-09
Madras Cements
UltraTech Cemco
South
4.00
Sep-08
AdityaBirla
Zuari Cements
South
1.98
Nov-08
Italicementi
Kesoram- Vasvadatta (Line IV)
South
1.63
Mar-09
Other-Birla
2.01
May-09
Others
Sub-total
Mar-09 Jaiprakash
40.00
By March-10 OCL
East
ACC Wadi
South
3
May-09
ACC
Chettinad
South
1.82
Jun-09
Others
Sagar cement
South
1.72
Jun-09
Others
Penna Cement
South
1.55
Dec-09
Others
Ambuja Cements
North
3.9
Jun-09
Holcim
Dalmia Cement
South
5.2
Jun-09
Others
Sanghi Cement
South
1.7
Jun-09
Others
Sanghi Cement
West
4.29
Jun-09
Sub-total
25.22
Total in India over the next 36 months
73.72
Source: Deutsche Bank
Deutsche Bank Securities Inc.
Page 57
12 July 2007
Construction Materials Indian Cement Sector
Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Manish Saxena
Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of 10% or worse over a 12-month period
Page 58
Equity rating dispersion and banking relationships
500
58%
400
31%
300 200 100
10%
14%
10%
4%
0 Buy
Hold
Companies Covered
Sell
Cos. w/ Banking Relationship
Asia-Pacific Universe
Deutsche Bank Securities Inc.
12 July 2007
Construction Materials Indian Cement Sector
Regulatory Disclosures SOLAR Disclosure For select companies, Deutsche Bank equity research analysts may identify shorter-term trade opportunities that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. This information is made available only to Deutsche Bank clients, who may access it through the SOLAR stock list, which can be found at http://gm.db.com
Disclosures required by United States laws and regulations See company-specific disclosures above for any of the following disclosures required for covered companies referred to in this report: acting as a financial advisor, manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; market making and/or specialist role.
The following are additional required disclosures: Ownership and Material Conflicts of Interest: DBSI prohibits its analysts, persons reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of DBSI, which includes investment banking revenues. Analyst as Officer or Director: DBSI policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price Chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the DBSI website at http://gm.db.com.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, in addition to those already made pursuant to United States laws and regulations. Analyst compensation: Analysts are paid in part based on the profitability of Deutsche Bank AG and its affiliates, which includes investment banking revenues Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU: A general description of how Deutsche Bank AG identifies and manages conflicts of interest in Europe is contained in our public facing policy for managing conflicts of interest in connection with investment research. Germany: See company-specific disclosures above for (i) any net short position, (ii) any trading positions (iii) holdings of five percent or more of the share capital. In order to prevent or deal with conflicts of interests Deutsche Bank AG has implemented the necessary organisational procedures to comply with legal requirements and regulatory decrees. Adherence to these procedures is monitored by the Compliance-Department. Hong Kong: See http://gm.db.com for company-specific disclosures required under Hong Kong regulations in connection with this research report. Disclosure #5 includes an associate of the research analyst. Disclosure #6, satisfies the disclosure of financial interests for the purposes of paragraph 16.5(a) of the SFC's Code of Conduct (the "Code"). The 1% or more interests is calculated as of the previous month end. Disclosures #7 and #8 combined satisfy the SFC requirement under paragraph 16.5(d) of the Code to disclose an investment banking relationship. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Russia: The information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a licence in the Russian Federation. South Africa: Publisher: Deutsche Securities (Pty) Ltd, 3 Exchange Square, 87 Maude Street, Sandton, 2196, South Africa. Author: As referred to on the front cover. All rights reserved. When quoting, please cite Deutsche Securities Research as the source. Turkey: The information, interpretation and advice submitted herein are not in the context of an investment consultancy service. Investment consultancy services are provided by brokerage firms, portfolio management companies and banks that are not authorized to accept deposits through an investment consultancy agreement to be entered into such corporations and their clients. The interpretation and advices herein are submitted on the basis of personal opinion of the relevant interpreters Deutsche Bank Securities Inc.
Page 59
12 July 2007
Construction Materials Indian Cement Sector
and consultants. Such opinion may not fit your financial situation and your profit/risk preferences. Accordingly, investment decisions solely based on the information herein may not result in expected outcomes. United Kingdom: Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Deutsche Bank AG research on the companies which are the subject of this research.
Page 60
Deutsche Bank Securities Inc.
Deutsche Bank Securities Inc. Asia-Pacific locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Fax: (61) 2 8258 1400 Deutsche Bank (Malaysia) Berhad Level 18-20 Menara IMC 8 Jalan Sultan Ismail Kuala Lumpur 50250 Malaysia Tel: (60) 3 2053 6760 Fax: (60) 3 2026 3906 Deutsche Securities Asia Ltd Taiwan Branch Level 6 296 Jen-Ai Road, Sec 4 Taipei 106 Taiwan Tel: (886) 2 2192 2888 Fax: (886) 2 3707 8450
Deutsche Bank AG Level 55 Cheung Kong Center 2 Queen’s Road Central Hong Kong Tel: (852) 2203 8888 Fax: (852) 2203 6921
Deutsche Equities India Pte Ltd DB House, Ground Floor Hazarimal Somani Marg Fort, Mumbai 400 001 India Tel: (91) 22 5658 4600 Fax: (91) 22 2201 9094
Deutsche Securities Inc. Level 20, 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701 Fax: (81) 3 5156 6700
In association with Deutsche Regis Partners, Inc. Level 23, Tower One Ayala Triangle, Ayala Avenue Makati City, Philippines Tel: (63) 2 894 6600 Fax: (63) 2 894 6638
Deutsche Securities Korea Co. 17th Floor, YoungPoong Bldg., 33 SeoRin-Dong, Chongro-Ku, Seoul (110-752) Republic of Korea Tel: (82) 2 316 8888 Fax: (82) 2 316 8998
Deutsche Securities Asia Ltd. Singapore Branch One Raffles Quay #18-00 South Tower Singapore 048583 Tel: (65) 6423 8001 Fax: (65) 6837 2167
In association with TISCO Securities Co., Ltd TISCO Tower 48/8 North Sathorn Road Bangkok 10500 Thailand Tel: (66) 2 633 6470 Fax: (66) 2 633 6490
In association with PT Deutsche Verdhana Indonesia Deutsche Bank Building, 6th Floor, Jl. Imam Bonjol No.80, Central Jakarta, Indonesia Tel: (62 21) 318 9541 Fax: (62 21) 318 9560
International locations Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500
Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Fax: (44) 20 7545 6155
Deutsche Bank AG Level 55 Cheung Kong Center 2 Queen’s Road Central Hong Kong Tel: (852) 2203 8888 Fax: (852) 2203 6921
Deutsche Securities Inc. Level 20, 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701 Fax: (81) 3 5156 6700
Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 41339
Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Fax: (61) 2 8258 1400
Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). The information herein is believed by Deutsche Bank to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about Deutsche Bank, Deutsche Bank makes no representation as to the accuracy or completeness of such information. This published research report may be considered by Deutsche Bank when Deutsche Bank is deciding to buy or sell proprietary positions in the securities mentioned in this report. For select companies, Deutsche Bank equity research analysts may identify shorter-term opportunities that are consistent or inconsistent with Deutsche Bank's existing, longer-term Buy or Sell recommendations. This information is made available on the SOLAR stock list, which can be found at http://gm.db.com. Deutsche Bank may trade for its own account as a result of the short term trading suggestions of analysts and may also engage in securities transactions in a manner inconsistent with this research report and with respect to securities covered by this report, will sell to or buy from customers on a principal basis. Disclosures of conflicts of interest, if any, are discussed at the end of the text of this report or on the Deutsche Bank website at http://gm.db.com. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, except if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction or as an advertisement of any financial instruments. Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options," at http://www.optionsclearing.com/publications/risks/riskchap1.jsp. If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a copy of this important document. Furthermore, past performance is not necessarily indicative of future results. Please note that multi-leg options strategies will incur multiple commissions. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction . In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10) Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting. Copyright © 2007 Deutsche Bank AG 01/2007
GRCM2007PROD010796
Related Documents
Db - Indian Cement Sector
November 2019 30
Indian Cement Industry
November 2019 29
Cement Sector Analysis-microeconomic Outlook
June 2020 15
Indian Banking Sector Reforms
May 2020 21
Indian Banking Sector Report
April 2020 25