Edel Cement 03dec08

Cement Underweight on the sector; but selective long–term value emerges

Revathi Myneni +91-22-6623 3316 [email protected] Archana Khemka +91-22-6623 3488 [email protected]

December 2008

Summary Current liquidity crunch is elongating project timelines Yet, surplus in FY10E and FY11E to remain g PAT sensitivity y remains skewed towards While costs could be the silver lining; realisations Balance sheets are much stronger than in the previous downcycle and our coverage will make cash profit even with ~20% price correction (our base assumption is 10%) However, current discount to replacement cost (20 (20-52%) 52%) is higher than the previous down cycle Accordingly, long-term value is emerging for select stocks. Grasim, UltraTech and Ambuja are likely to be sector outperformers; upgrade to ‘ACCUMULATE’ from ‘REDUCE’. We maintain ‘Reduce’ on ACC and ‘SELL’ on India Cements and Madras Cement

2

Current liquidity crunch elongating project timelines Domestic projects are getting delayed/deferred by ~6 months due to liquidity crunch, as per equipment vendors. ~15 mtpa ordered in CY08, of the total ~40 mtpa, has been postponed to the next year; ~3 mpta has been cancelled (however, these will impact additions only post FY11E). Corporates p are willing g to forego g the advance money y ((15-25% of p project j cost)) due to difficulties in arranging finance. Low visibility on capacities scheduled to come on-stream in FY11E. Equipment vendors are concerned about payment receipts and honouring of LCs by banks. Capacity addition delays (available basis) (mn tonnes)

FY09E

FY10E

FY11E

Cumulative

Original capacity addition

33

45

34

112

Revised capacity addition

27

39

34

100

% of capacities delayed

18

15

(3)

11

Source: Edelweiss research

Some global cement majors have postponed all projects scheduled to come on- stream post CY09E, for which, equipments have not been ordered as yet. Ease in vendor workload, however, is compressing timelines by 3-4 months. Strained liquidity situation is compounding delays witnessed due to land acquisition & civil contractor difficulties. 3

Yet, surplus in FY10E and FY11E to remain…

Accordingly, utilisation rate expected to drop to 85% in FY10E & 80% in FY11E. FY11E

60

55

54

50 41 (m n tonnes)

vis-à-vis Lower demand growth of 8% factored vis à vis 10% earlier, in line with the downward GDP revision to 7.4% in FY09E and 6% in FY10E.

40

35

30 20 10 0 FY10E

FY11E

Original Surplus

Revised Surplus

Demand-suppy projections Million tonnes

FY08

Effective capacity

166

193

232

266

Capacity addition

7

27

39

34

4.4

16.1

20.0

14.8

166

193

232

266

163

177

191

206

9.8

8.3

8.0

8.0

6

6

6

6

169

183

197

212

10

35

54

94.6

85.0

79.7

Increase in effective capacity (%) Total supply 1

Domestic demand growth (%)

2

Exports Total demand (1+2) Absolute surplus/(Deficit) Capacity utilisation (%)

(3) 101.7

FY09E

FY10E

FY11E

Source: Edelweiss research Our supply timelines factor in 50% utilisation level for a new capacity for the first two quarters post commissioning.

Surplus, though lower, remains significant at 15% in FY10E (19% earlier) and 20% in FY11E (20% earlier). 4

…With downside risk of lower demand growth With 6% demand growth growth, surplus could increase to 22% in FY10E vis-à-vis vis à vis 17% at 8% demand growth FY10E/11E continues to look unfavourable with further downside risk Demand g growth

6%

7%

8%

9%

10%

FY10E

42

39

35

32

28

FY11E

66

60

54

49

43

82 75

83 77

85 80

86 82

88 84

Surplus / (deficit)

Utilisation level FY10E FY11E

Source: Edelweiss research Note: Housing accounts for ~55% of total domestic demand.

Domestic demand grew only by 7.6% in FY09 YTD (10.9% YTD in FY08).

5

How can the cycle turnaround? When will utilisation levels improve? The DEMAND story p y Demand/capacity (%)

Demand growth (%)

Turnaround year

FY10E

FY11E

FY12E

FY13E

(85%+)

8

85

80

80

86

FY13

10

85

81

83

91

FY13

12

85

83

86

96

FY12

15

85

85

90

104

FY11 Source: Edelweiss research

Only with 15% demand growth, utilisation levels could stabilise/improve post FY10E.

How will the surplus be absorbed? The SUPPLY story Supply reduction ((mt))

Demand/capacity (%)

Turnaround year

FY10E

FY11E

FY12E

FY13E

(85%+) ( )

0

85

80

80

86

FY13

15

90

84

84

91

FY10

30

95

89

89

96

FY10 Source: Edelweiss research N t D Note: Demand d growth th implicitly i li itl assumed d is i 8%

Supply needs to reduce by 15 mt in FY10E to maintain ~85% utilisation levels post FY10E. This is possible if 40% of FY10E projects get postponed (unlikely) or supply is curtailed through lower blending/utilisation.

Oversupply could continue till FY12E, unless supply is controlled through lower utilisation / blending. 6

However, consolidation level is not too different than before Capacity share of the top 8 groups is likely to be 62% in FY10E compared with ~60% 60% in FY03; realisations corrected up to ~13% in FY03. 80%

73%

69% 62%

60%

54%

47%

67% 67%

62% 60%

52%

40%

20%

0% North

South

East FY03

West

All India

FY10E Source: CMA, Edelweiss research

In North, No th consolidation is expected e pected to increase inc ease to 73% in FY10E vis-à-vis is à is 54% in FY03. However, price corrections in this market have already begun.

7

Cut-back on blending has not happened so far 1 33x from 1.2x 1 2x in FY05, FY05 driven by shortage of cement. cement Blending levels have risen to 1.33x Surplus in FY10E can be avoided, if blending is reduced to FY05 levels.

1.40

105

1.34

96

1.28

87

1.22

78

1 16 1.16

69

1.10

60 FY03

FY04

FY05

Bl di Blending ratio ti

FY06

FY07

FY08

(%)

(x)

It is unclear whether blending will be curtailed; consolidation levels in the industry has not changed significantly and there are cost implications as well

FY09 (YTD)

D Demand-capacity d it ratio ti (%) Source: CMA

Till date, blending has remained unchanged, despite demand-capacity ratio correcting ~10% in H1FY09 H1FY09.

8

Costs could be the silver lining

FoB imported coal rate (South Africa) has corrected 48% from its peak in July; the Baltic Freight Index has come down to the 1999 levels.

180

12,000

144

9,600

108

7,200

72

4,800

36

2,400

(US D)

Power and fuel costs (~30% of total cost) could positively surprise

(USD/ttonne)

Imported coal rates sliding

0

Richards Bay, South Africa

Oct-08 8

Aug-08 8

Jun-08 8

Apr-08 8

Feb-08 8

Oct-07 7

Dec-07 7

Jun-07 7

Aug-07 7

Apr-07 7

Feb-07 7

Dec-06 6

Oct-06 6

0

Baltic Dry Freight Index Source: Bloomberg

Imported p coal cost assumptions p Indonesia

South Africa

Peak rate Coal prices at peak-FoB

105

178

35

45

140

223

Current coal rate - FoB

72

92

Current freight cost to India

11

18

CIF

83

110

93

116

Freight cost to India at peak CIF Current rates

A 5% change in imported coal rates will impact FY10E PAT by 0.6-2.7%

For our FY10 projections we have assumed CIF

Source: Bloomberg, Edelweiss research

9

Costs could be the silver lining Freight rates ( (~22% of total cost) g ) could soften too Softer international diesel prices leave scope for reduction in domestic rates

Current diesel rate- ex Delhi (INR/litre)

However, actual reduction could be lower, as

At current prices, implied international diesel rate for no under/over recovery (INR/bbl)

Scope for theoritical reduction in diesel rates 34.8 3,828

Domestic prices do not move in tandem with international rates.

Current exchange C h rate ((USD/INR) S / ) Implied international parity price for INR 34.8/ltr (USD/bbl)

76.7

Pressure of past under-recoveries.

Current int'l diesel rate (USD/bbl)

64.7

Significant past under recoveries in petrol and diesel 29.0 24.0

Cement freight cost could decline by ~4-6%

19.0

9.0 4.0 0 (1.0)

Gasoline

Oct-08

Aug-08 A

JJun-08

Apr-08 A

Feb-08

Dec-07 D

Oct-07

Aug-07 A

(6.0) JJun-07

We have assumed freight rates to decline by ~ 3% in FY10E. A 1% change in freight cost will impact FY10E PAT by ~0.6-1%

14.0

Apr-07 A

(share of road to total cement despatches is ~60%).

(INR/ltr)

(fuel accounts for ~60% of total road freight cost)

Feb-07

Railway freight rates by ~ 5-10%

Dec-06 D

Road freight rates by ~6%

Source: Edelweiss research

Oct-06

10% reduction in diesel prices along with slow demand is likely to lower

49.9 99

Diesel Source: Edelweiss research

10

But sensitivity of PAT remains skewed towards realisation 1% realisation decline impacts PAT by (4-6.5)%

1% volume decline impacts PAT by (1-3)%

0.0

0.0

(1.0)

(0.5) (1.0) (1.5)

(3.0)

(% %)

(% %)

(2.0)

(4.0)

(2 0) (2.0) (2.5)

(5.0)

(3.0)

(6.0)

(3.5)

(7 0) (7.0)

(4 0) (4.0) ACC

Ambuja India Madras Ultratech Grasim Cement Cement Cement

1% decline in power and fuel cost impacts PAT by 0.5-1.5%, and 5% decrease in imported coal prices impacts PAT by 0.6- 2.7%

ACC

Ambuja India Madras Ultratech Grasim Cement Cement Cement

1% decline in freight cost impacts PAT by 0.4-1%

3.0

1.8

2.5 1.5 1.2

1.5

(%))

((%)

2.0

1.0

0.9 0.6

0.5 0.3

0.0 ACC

Ambuja India Madras Ultratech Grasim Cement Cement Cement

Power and fuel

Imported coal

00 0.0 ACC

Ambuja India Madras Ultratech Grasim Cement Cement Cement Source: Edelweiss research

11

Earnings likely to decline in FY10E due to price corrections Price correction appears inevitable… ...utilization ili i llevels l are set to correct going ahead

107.5

3,100 Realisations peaked in line with utilization tili ti up ti tick... k

(%)

92 5 92.5

2 700 2,700

Realisation/tonne

FY11E

FY10E

FY08

FY07

FY06

FY05

FY09E

Capacity Utilisation %

FY04

FY03

FY02

FY01

FY00

FY99

FY98

1,500 FY97

70.0 FY96

1,900

FY95

77.5

FY94

2,300

FY93

85.0

(INR/tonn ne)

100.0

3,500

Source: Edelweiss research

... leading to ~20% Y-o-Y earnings decline in FY10E, despite benign cost assumptions Change in Company (INR mn)

PAT (%)

Realisation/tonne (%)

ACC

(37.8)

(1.6)

4.4

Ambuja Cement

(22.4)

(5.0)

(3.4)

India Cement

(24.2)

(6.8)

(1.1)

(6.1)

(5.3)

Madras Cement

5.8

Cost/tonne change (%)

Ultratech

(14.0)

(5.1)

(2.2)

Grasim Industries

(26.2)

(5.2)

(0.8)

(19.8)

(5.0)

(1.4)

Average

Source: Edelweiss research Note: We have assumed prices will correct by ~ INR 25/bag or 10% in FY10E (in Q2 and Q3) from current levels

12

Balance sheets however, stronger in current downcycle vs earlier Cycle comparison FY03

FY10E

Industry Demand growth (%) Utilisation level (%) R li ti Realisation correction ti (%) Capacity share of top 10 players (%)

8.7

8.0

81.0

85.0

(14 6) (14.6)

(5 0) (5.0)

60.3

61.9

309.4

896.8

Profitability EBITDA (INR/tonne) EBITDAM (%)

18.2

26.1

NPM (%)

5.7

11.8

ROE (%)

13.7

18.0

4.9

9.0

Debt:Equity (x)

1.3

0.3

Interest coverage (x)

1.5

10.0

Replacement cost (including CPP) (INR/tonne)

2,500

4,410

Replacement cost (excluding CPP) (INR/tonne)

2,500

3,600

ROCE (%)

During FY06-09E (upturn), realisations increased 71% visà-vis 39% cost increase. Thus, in this downcycle (FY10E), profitability is likely to be higher, despite assumption of ~10% fall in prices.

Balance sheet Balance sheets are with ith lower l l leverage.

stronger

Valuation

(Discount)/ Premium to replacement cost (INR/tonne)

22% to (53%)

(20-52%)

However, valuations have corrected higher than the previous downcycle.

Source: CMA, Edelweiss research Profitability, balance sheet and valuation are considered for coverage Note: In FY03, projects did not include captive power plant (CPP) facilities. Hence, replacement cost of INR 2500/tonne is ex CPP.

13

Stocks are trading at 23-55% discount to the replacement cost

15,000

110

12,500

100

10,000

90

7,500

80

5 000 5,000

70

2,500

60

-

(%)

(INR/tonne)

In a downcycle, stocks can trade below replacement cost for an extended period

Jun-93 N Nov-93 Apr-94 A Sep-94 S Feb-95 Jul-95 Dec-95 D May-96 M Oct-96 Mar-97 Aug-97 A Jan-98 Jun-98 Nov-98 N Apr-99 A Sep-99 S Feb-00 Jul-00 Dec-00 D May-01 M Oct-01 Mar-02 Aug-02 A Jan-03 Jun-03 Nov-03 N Apr-04 A Sep-04 S Feb-05 Jul-05 Dec-05 D May-06 M Oct-06 Mar-07 Aug-07 A Jan-08 Jun-08 Nov-08 N

50

India Cement Madras Cement Capacity utilisation

Ambuja Cement Ultratech Cement

ACC Indicative replacement cost Source: Edelweiss research

Valuation comparison p across cycle y CMP INR/share ACC

406

Ambuja Cements

Current Valuations (EV/tonne) FY09E USD/tonne 61

Current discount to replacement cost

FY10E USD/tonne 65

FY09E (%)

FY10E (%)

FY02 (%)

FY03 (%)

(32 5) (32.5)

(27 1) (27.1)

(26 4) (26.4)

(37 7) (37.7)

64.1

22.4

54

66

72

(26.8)

(20.3)

265

44

41

(51.5)

(52.0)

India Cements

87

50

52

(29.7)

(27.7)

Madras Cement

59

79

66

(12.1)

(26.6)

UltraTech

Historical discount to replacement cost

NA 5.2 (40.3)

NA (1.2) (53.5)

Source: Edelweiss research Note: India Cements’ replacement valuations in the previous downcycle are not indicative due to high share of debt in EV (up to 96% from ~31% in FY09-10E). Also, for arriving at current discount , we consider replacement cost ex-CPP Likewise, Ambuja Cement’s premium to replacement cost in last cycle was partly due to sales tax benefits enjoyed on ~ 85% of its despatches which is reduced to ~ 15% currently.

14

And offers long term value even at stress valuations Even with a ~20% correction in cement prices, we do not expect our coverage to enter into cash losses in FY10E Base case assuming 10% price correction FY10E

ACC

EBITDA (INR/tonne) Cash profit (PAT+ depreciation)

736

Ambuja Cement 1,013

India Cements 1,057

Madras Cement 1,295

UltraTech 808

Grasim 853

Avg. of 6 cos 960

554

762

739

831

623

735

708

EBITDAM

21.4

30.1

30.6

35.6

24.5

19.0

26.9

NPM (%)

11.0

16.4

14.7

17.1

12.7

9.9

13.6

ROE (%)

13.7

15.6

15.4

32.1

21.5

18.1

19.4

ROCE (%)

18.7

23.1

16.1

24.6

20.0

17.1

19.9

EPS (INR/share) (INR/ h )

39 0 39.0

61 6.1

18 8 18.8

19 0 19.0

70 0 70.0

204 0 204.0

Debt:Equity (x) Interest coverage (x) EV/tonne (USD/tonne) EV/EBITDA (x)

0.1

0.1

0.5

0.9

0.4

0.3

0.4

16.9

45.7

8.0

7.1

9.2

10.4

16.2

65

72

52

66

41

45

5.6

4.4

3.3

3.5

2.8

2.9

S Stress case assuming i 20% price i correction i FY10E

ACC

EBITDA (INR/tonne) Cash profit (PAT+ depreciation) (INR/tonne)

510

EBITDAM (%)

Ambuja Cement 791

India Cements 735

Madras Cement 969

UltraTech 484

Grasim 530

Avg. of 6 cos 670

394

612

521

610

381

558

513

15 9 15.9

25 2 25.2

23 5 23.5

29 3 29.3

16 3 16.3

12 7 12.7

20 5 20.5

NPM (%)

6.8

12.8

9.3

12.1

5.9

6.5

8.9

ROE (%)

8.1

11.5

9.1

21.8

9.8

10.7

11.8

ROCE (%)

11.2

16.8

9.9

17.2

9.2

10.0

12.4

EPS (INR/share)

22.5

4.5

10.7

11.6

29.5

123.0

Debt:Equity (x)

0.2

0.1

0.6

1.0

0.6

0.3

0.5

Interest coverage (x)

85 8.5

28 3 28.3

45 4.5

47 4.7

36 3.6

55 5.5

92 9.2

EV/tonne (USD/tonne)

67

73

55

69

45

50

8.3

5.7

5.0

4.9

5.2

5.1

EV/EBITDA (x)

Source: Edelweiss research

15

Selective value emerges

Grasim- Correction overdone Investment Rationale: Strong balance sheet: Balance sheet is healthy with cash and liquid investments expected to be INR 14.6 bn in FY10E (INR 160/share or 18% of current market cap). Leverage levels remain comfortable with D/E of 0.5x for FY09E and 0.3x for FY10E. Maintain market share in a downcycle: We expect the company to maintain market share in a do tu (a a ab e capac ty s a e likely e y to increase c ease to 9 5% in FY10E 0 from o 8 6% in FY08). 08) downturn (available capacity share 9.5% 8.6% With the full benefit of increase in capacity from 34 mtpa to 49 mtpa likely in FY10E, we expect FY10E cement volumes to grow 16% vis-à-vis 8% growth expected for the entire industry. Attractive valuations with limited downsides: Assigning 2x FY10E EV/EBITDA for the VSF business, we arrive at an implied EV/tonne of USD 45 for cement, which is ~50% discount to the current replacement cost. cost This discount is the highest amongst it it’s s peers in the sector, sector despite Grasim’s pan-India presence and healthy operating performance. The stock is trading at P/B of 0.7x FY09E and 0.6x FY10E. Outlook and valuations: Current valuations favourable; upgrade to ‘ACCUMULATE’ Factoring F t i i the in th concerns off lower l offtake fft k and d price i corrections ti i the in th VSF segment, t we are assuming i fl t flat volumes in FY10E (72% capacity utilization vis-à-vis higher than 90% maintained since FY03) and ~18% Y-o-Y realization correction in FY10E (FY06 levels– pre-uptick). Accordingly, we are reducing our earnings by 1.4% in FY09E and 15.6% for FY10E. At CMP INR 905, the stock is trading at an EV/EBITDA of 2.7x FY09E and 2.8x FY10E and P/E of 3.3x FY09E and 4.4x FY10E. Even on reduced estimates, we believe Grasim is the most favourable bet on the cement sector and current valuations provide an entry opportunity for longer term horizon. Accordingly, we upgrade our recommendation on the stock from ‘REDUCE’ to ‘ACCUMULATE’. Key risks Risk of sharper price correction or slower demand growth. growth Sharp upward revision of international coal prices. 17

UltraTech- In the value zone Investment rationale: FY10E volume growth to exceed industry average: Volumes expected to grow by 11% Y-o-Y, compared to industry growth of ~8% led by 4.9mtpa capacity expansion (27% of current capacity). Savings from CPP to support margins: A total of 192 MW of CPP will cushion EBITDA margins at 24.5% in FY10E. 45% exposure to imported coal will provide Y-o-Y earnings support due to sharp correction in international coal prices. Accordingly, we expect FY10E profit to de-grow by 14% compared to ~14-50% for our coverage universe. Valuations attractive, attractive correction overdone: The stock is trading at FY10E EV/tonne of USD 41, 41 steep discount of ~52% to current replacement cost. FY10E P/B of 0.8x provides an opportunity to buy business and not only earnings. Outlook and valuations: current valuations favourable, upgrade to ‘ACCUMULATE’ At CMP INR 265, the stock is trading at FY10E EV/EBITDA of 2.8x and EV/tonne of USD 41. We believe that while near-term stock performance (one year) could be impacted by over-supply concerns in the sector, the current valuations limit downside and provide a long term investment opportunity. Accordingly, we upgrade our recommendation on the stock from ‘REDUCE’ to ‘ACCUMULATE’. Key risks Risk of sharper price correction or slower demand growth. Sharp upward revision of international coal prices.

18

Ambuja Cements- Efficient player Investment rationale: Superior profitability: High EBITDAM: Expected at 30% in CY09E vis-à-vis average FY10E margin of ~27% for our coverage. At stress valuations (assuming 20% price cut vis-à-vis 10% assumed by us for our FY10E estimates), EBITDAM is expected to be ~25%. Future cost efficiencies expected under Holcim, Holcim a global leader in Alternate Fuel Technology. Technology Superior RoCEs: CY09E RoCE at 23% is high compared to peer average of 20.0%. Lower sensitivity to realizations: ~4% impact on FY10E PAT for ~1% change in realization compared to 4-6.5% for others. Strong g balance sheet with comfortable leverage: g D/E / at 0.1x in CY08E,, lowest among g peers (ranges between 0.3x to 2.7x) provides comfort in the current liquidity constrained environment. Strong brand coupled with Holcim patronage: Holcim, global cement major acquired the company in 2005 and currently owns 46.5% stake. 5% creeping acquisition limit for the stock for FY09E was unexhausted till September p 2008 which if utilized,, will p provide support pp to the stock. Outlook and valuations: Limited downside, upgrade to ‘ACCUMULATE’ At INR 54, the stock trades at CY09E EV/EBITDA of 4.4x and EV/tonne of USD 72, ~20% discount to replacement p cost. We believe that the stock can trade at a discount to replacement p cost in the current downcycle unlike ~22% premium that it commanded in the last downturn (earlier premium was supported by sales tax incentives which stand reduced now to 15% of total sales compared to 85% earlier) and higher EBITDA margin vis-à-vis it’s peers (32% compared to ~15-25% for others in FY03 ). However, we believe downside from current levels is limited. Hence, upgrade our recommendation from ‘REDUCE’ to ‘ACCUMULATE’ Key risks - Risk of sharper price correction or slower demand growth. 19

ACC- Current valuations fair, upside doubtful Investment rationale: Profitability lower than others: We expect ACC’s EBITDA margin to be 21.4% in FY10E, which while healthy, is lower than 25-30% which we expect for the rest of our coverage universe. RoE too, is muted at 13.7% for FY10E due to low NPM. (11% vis-à-vis 13-17% for others). Earning upside limited: Limited volume gains: 6 mtpa addition (Wadi and Chanda) expected only by H2CY10E. We expect volumes to de-grow by ~7% Y-o-Y in CY09E. Pace of additions at 4% CAGR (CY0709E) much slower than industry average of ~18%. High sensitivity to realization: ~6.5% impact on FY10E PAT for ~1% change in realization which increases the risk to earnings versus 4 5% for others. 4-5% others Least benefited by imported coal price correction: Only 15% exposure to imported coal (upto 75% for remaining coverage) to limit earnings upside from sliding international coal prices. Upside from current levels limited: The stock is trading at 27% discount to current replacement cost vis-à-vis ~38% discount that the stock traded at in the previous downcycle (ROE of 11.9% in FY03 and 11.2% in CY09E). Proportion of cash and equivalents in CY09E remain low ~5% of current market cap. Also, the stock is trading at CY09E book of 1.3x compared to 0.7x for Grasim (FY10E) Outlook and valuations: Cautious; maintain ‘REDUCE’ At CMP INR 406, the stock is trading at an CY09E EV/EBITDA of 5.6x and EV/tonne of USD 65 (current replacement cost of USD 90. We maintain our ‘REDUCE’ recommendation on the stock. Key risks: Risk of lower than 10% price correction in FY10E. Consolidation in the sector. Fuel efficiencies due to Alternate Fuel Technology 20

India Cements- Regional risk Investment rationale: Regional risk: ~92% of current sales and 80% of the 4.9mtpa capacity addition is in south. We expect south will account for ~52% of all India capacity addition between FY09-11E with the demand-capacity ratio likely to correct by ~21% in the same period (vis-à-vis ~15% for the sector as a whole). This exposes the company to the risk of any sharp correction in cement prices in the region (we have assumed 10% price correction in FY10E). Valuations do not provide comfort of limited downside risk: The stock trades at EV/tonne of USD 52, 28% discount to current replacement cost ex-CPP (~USD 72/tonne). While current valuations appear pp reasonable,, they y do not alleviate our concerns of sharper p price correction. p Also, comparable companies like Madras Cement had traded at a discount of upto 50% in the previous downcycle (discount for India Cement is not indicative as 97% of the company’s EV comprised of debt). O l k and Outlook d valuations: l i C Cautious; i maintain i i ‘REDUCE’ ‘ C ’ At CMP INR 87, the stock is trading at a FY10E EV/EBITDA of 3.3x and EV/tonne of USD 52. In view of the over supply concerns in the sector, we believe stock performance can be impacted in the near term. Accordingly, we maintain our ‘REDUCE’ recommendation on the stock. Key risks: Risk of lower than 10% price correction in FY10E. Consolidation in the sector

21

Annexure At a glance Financials (INR mn) Company ACC

Ambuja Cement

India Cements

Madras Cement

UltraTech

Grasim Industries

Price

Mkt cap

Mkt cap

(INR)

(INR bn)

US bn

406

54

87

59

265

909

76.0

81.4

24.4

07 0.7

32.9

83.4

1.5163

1.6231

0.4877

0 0143 0.0143

0.6571

1.6629

Reco

Revenue

EBITDA

profit Reduce

Accumulate

Sell

Sell

Accumulate

Accumulate

Growth (%)

Net Annualised

Revenue

EBITDA

EPS

Valuations (X)

Net Annualised profit

EPS

EV/tonne

EV/

(USD)

EBITDA

PE

CY05

31,602

5,192

5,442

14.1

8.4

11.3

(8.6)

(11.4)

87

15.9

CY06

57,170

16,459

12,318

57.5

35.7

137.7

69.8

307.3

74

4.5

7.1

CY07

68 780 68,780

19 193 19,193

14 386 14,386

65 2 65.2

20 3 20.3

16 6 16.6

16 8 16.8

13 5 13.5

58

34 3.4

62 6.2

CY08E

73,162

18,969

12,276

62.7

CY09E

66,765

14,285

7,331

39

6.4 (8.7)

28.8

(1.2)

(14.7)

(3.8)

61

3.7

6.5

(24.7)

(40.3)

(37.8)

65

5.6

10.4

FY05

26,247

7,517

4,683

3.5

32.7

35.5

39.0

36.3

120

10.6

15.4

CY06

63,400

22,048

15,033

9.6

61.0

95.6

114.0

176.6

102

3.8

5.6

CY07

57,424

20,827

17,691

7.8

35.9

41.7

76.5

71

3.1

6.9

CY08E

61,868

19,141

14,756

7.9

7.7

66

3.4

6.8

CY09E

57,149

17,200

9,364

6.1

(7.6)

(22.4)

72

4.4

8.7

FY06

15,433

2,684

453

1.9

31.1

70.1

NM

81

11.7

46.4

FY07

22,566

7,467

4,788

18.4

46.2

178.3

956.7

881.5

94

5.4

4.7

FY08

30,622

11,107

6,375

24.3

35.7

48.7

33.1

32.3

84

3.3

3.6

FY09E

37,668

13,028

6,493

24.9

23.0

FY10E

36,096

11,050

5,309

18.8

(4.2)

FY06

10 085 10,085

2 126 2,126

790

33 3.3

36 3 36.3

35 4 35.4

38 2 38.2

FY07

15,742

5,560

3,078

12.9

56.1

161.6

289.5

FY08

20,119

7,523

4,080

17.1

27.8

35.3

32.6

FY09E

25,526

9,287

4,283

18.0

26.9

23.4

FY10E

29,004

10,322

4,532

19.0

13.6

11.1

(8.1)

(16.6)

(10.1)

(36.5)

17.3 (15.2)

NM

1.8

(18.9) 1.9

50

2.7

3.5

(24.2)

52

3.3

4.6

(93 0) (93.0)

62

88 8.8

17 7 17.7

286.3

65

3.5

4.6

32.5

73

3.9

3.5

5.0

5.0

79

3.8

3.3

5.8

5.8

66

3.5

3.1 14.6

(18.2)

FY06

32,200

5,873

2,251

18.1

19.0

58.5

54

7.8

FY07

47,863

14,317

7,849

63.1

48.6

143.8

248.7

248.4

51

3.1

4.2

FY08

56,238

17,320

10,101

81.1

17.5

21.0

28.7

28.7

53

2.8

3.3

FY09E

65,406

17,758

10,174

81.7

16.3

FY10E

68,673

16,825

8,709

70.0

5.0

2.5 (5.3)

NM

2.2

0.7

NM

44

2.9

3.2

(14.4)

(14.4)

0.7

41

2.8

3.8

FY06

102,240

20,687

10,365

113.0

5.2

8.0

FY07

140,952

39,723

19,683

214.7

37.9

92.0

89.9

89.9

NM

2.8

4.2

FY08

169,739

49,598

26,091

284.6

20.4

24.9

32.6

32.6

NM

2.6

3.2

FY09E

186 060 186,060

48 891 48,891

25 334 25,334

276 3 276.3

96 9.6

(1 4) (1.4)

(2 9) (2.9)

(2 9) (2.9)

NM

27 2.7

33 3.3

FY10E

188,275

43,804

18,707

204.0

1.2

(10.4)

(26.2)

(26.2)

NM

2.8

4.4

Note: Ambuja Cement Eastern merged with Gujarat Ambuja wef January 2006. Figures for India Cement include Visaka Cement Prises as on 02, December 2008

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