You are on page 1of 57



Submitted By Kashyap Desai MMS IV Finance Roll No 13 Batch 2003-2005

Project Guide Prof. Ranjani

In partial fulfillment of the requirements for the degree of MASTERS OF MANAGEMENT STUDIES



This is to certify that the project entitled Cement Sector Overview (with special focus on valuation of ACC Ltd.) is submitted in March 2005 to K.J. Somaiya Institute of Management Studies and Research, Mumbai, by Mr. Kashyap Desai bearing Roll No. 13 in partial fulfillment of the requirements for the award of the degree of Masters of Management Studies (M.M.S) affiliated to the University of Mumbai for the batch 20032005.

Prof. Ranjani (Project Guide)

Prof. P.V. Narasimham (Director General)


Firstly, I would like to thank Prof. Ranjani for giving me such an interesting and learning project. I would also like to thank her for her valuable guidance and help throughout the project.

I would also like to thank my friends who have helped me in my project work.

Last, but not the least, I would like to thank the library staff of my college for all their patience and helping me find the required materials and books.

In 1824, Joseph Aspdin, a bricklayer and mason in Leeds, England, took out a patent on hydraulic cement that he called Portland cement because its color resembled the stone quarried on the Isle of Portland off the British coast. Aspdin's method involved the careful proportioning of limestone and clay, pulverizing them, and burning the mixture into clinker, which was then ground into finished cement. Portland cement today, as in Aspdin's day, is a predetermined and carefully proportioned chemical combination of calcium, silicon, iron, and aluminum. Cement is the most widely used building material on this planet. Everything from roads to buildings, sewer systems to dams rely on cement as the key ingredient. If steel is the edifice that builds an economy, cement is the key that supports this edifice. The consumption of cement per capita directly indicates how fast infrastructure within a country is coming up. Over the years, developing countries such as China and India have seen massive increases in production capacity but the consumption has not been very encouraging. But with these Asian giants now clocking 8% GDP growth, the global cement scenario is about to see some vibrant activity. India is the second largest producer of cement in the world. The cement sector in India is highly fragmented with more than 50 plants accounting for the 110 million tons of cement that is produced every year. The major players in the sector are ACC, GACL, Grasim Industries, Ultratech Cemco and India Cements.

Chapter Title Page 1 HISTORY OF CEMENT 2 GLOBAL CEMENT MARKETS Introduction Main Cement Markets 3 CHINA & CEMENT Building Market Cement Market Market Breakdown Exports, Imports & Tariffs The Future 4 UNITED STATES & CEMENT Overview Slow & Steady Cement Intensities Home Prices Construction 5 DOMESTIC CEMENT INDUSTRY Demand Growth Export Demand Supply Situation Domestic Prices Huge Opportunity Roads: Growth Momentum 6 ASSOCIATED CEMENT Cos. Ltd. Investment Highlights Pan-India Presence Operating Leverage Strong Market Share Volume Growth Modernization Efforts Investment Concerns Valuations Financial Summary 7 HOLCIM: THE INDIA CONNECTION Second Largest Producer In Asia-Pacific Largest Country Presence Sales The Challenge Keys Steps in Acquisition of ACC

No. 1 2 2 4 6 6 7 9 13 13 14 14 17 17 18 19 20 20 22 23 24 25 26 27 27 27 28 29 30 31 33 34 38 42 42 43 44 45 46 47


49 51

Ever since civilizations first started to build, we've sought a material that would bind stones into a solid, formed mass. The Assyrians and Babylonians used clay for this purpose, and the Egyptians advanced to the discovery of lime and gypsum mortar as a binding agent for building such structures as the Pyramids. The Greeks made further improvements and finally the Romans developed a cement that produced structures of remarkable durability. Most of the building foundations in the Roman Forum were constructed of a form of concrete, placed in some locations to a depth of 12 feet. The great Roman baths built about 27 B.C., the Coliseum, and the huge Basilica of Constantine are examples of early Roman architecture in which cement mortar was used. Roman Formula. This process produced a cement capable of hardening under water. During the Middle Ages this art was lost and it was not until the scientific spirit of inquiry revived that we rediscovered the secret of hydraulic cement -- cement that will harden under water. Repeated structural failure of the Eddystone Lighthouse off the coast of Cornwall, England, led John Smeaton, a British engineer, to conduct experiments with mortars in both fresh and salt water. In 1756, these tests led to the discovery that cement made from limestone containing a considerable proportion of clay would harden under water. Making use of this discovery, he rebuilt the Eddystone Lighthouse in 1759. It stood for 126 years before replacement was necessary. Before Portland cement was discovered and for some years after its discovery, large quantities of natural cement were used. Natural cement was produced by burning a naturally occurring mixture of lime and clay. Because the ingredients of natural cement were mixed by nature, its properties varied as widely as the natural resources from which it was made. ` 7


With the economic prospects looking more positive since late 2003, there is a likely-hood that the construction sector would continue the growth it has observed since the end of 2001. Even while there was a slowdown in the global economy in 2001, the global construction activity has not shown significant signs of slowdown. But with the recent economic recovery being observed in various parts of the world and particularly in USA which has led to the talk of implementing a tighter monetary policy has led to the investors being apprehensive of the future of the construction sector given its close linkage with the prevailing interest rate. The fact that there has not been any significant slowdown in the construction activity despite the slowdown in the global economy raises the fear that with the current economic recovery the potential upside for the global cement market could be restrictive.

Cement demand growth

Region Volume(2002) 2003% 2004% 2005E% 2006E% 2007E% Western Europe 197 2.8 0 0.2 0.3 0.1 Eastern Europe 85 7.7 -0.7 2.1 2.8 3.1 North America 118 0.2 2.9 1.8 1.4 0.9 Latin America 115 1.4 -2.5 -0.8 -0.5 0.1 Middle East & South Asia 233 5.5 4.7 6.6 7.1 6.8 China 567 0.6 6.7 5.9 5.8 5.2 Japan 70 -1.1 -0.7 -1.1 -0.8 -0.9 Asia Pacific 154 8 1.5 1.4 1.9 1.2 Oceania 9 3.5 -9.6 0.8 1.1 0.9 Africa 82 2.3 4.9 5.9 6.1 5.9 WORLD 1630 2.6 2.7 3.1 3.3 2.9

The world cement demand growth is depicted in the above table. Overall for the last couple of years US market has been resilient, while in Europe due to the economic downturn the infrastructure works have not really picked up. At the same time with

strong population growth and prevailing high oil prices, the Middle East & South Asia have seen good growth and their economies seem to be relatively insulated from the happenings in the world economy. Most of the international research houses project a fairly positive outlook for the construction and cement industry for the year 2005. The global cement demand is expected to grow at a slightly better rate of 3.1% in 2005 compared to last years estimated 2.7%. Taking into account the inter-regional importexport flows, nearly 111 million tons of cement was consumed in countries other than where they originated. Cement plants are the most saturated in North America, which takes in 28 million tons of cement produced around the world per year. Most of the global players are pursuing large scale modernization and de-bottlenecking programmes to extend their capacities. The greatest numbers of idle plants lie in the former Soviet Bloc countries. Continental isolation of this region limits its export capacity and also its contribution is not substantial to the world commerce. Asia Pacific region has the low capacity utilization rates (76%). It is partially sustained by a substantial flow of exports which was virtually non-existent several years ago. The bulk of these exports were created by multinationals those since 1998 have integrated their Asian acquisitions into their trading networks. The other regions have satisfactory capacity utilization rates. African countries import a substantial proportion of their cement requirements as they lack limestone in most parts of the region. Between now and 2007, it is projected that the production capacity of the world would increase at a modest 5.5%, while the world demand is projected to grow at twice that rate, resulting in an advance of 13.5% over the period. The overall capacity utilization rate is

also expected to gain six percentage points to reach 89% between now and 2007. Capacity utilization rates should increase everywhere, except in North America.

MAIN CEMENT MARKETS North America: The Canadian and the American markets, despite a slight recent decline, should continue to operate at full capacity. The nearly 26% increase in the production capacity in the region should be absorbed by persistently brisk growth in demand (2.1% annually) and a 20% reduction in the imports. With nearly 22 million tons to be imported per year, the region should continue to consume a significant portion of the worlds surplus production and therefore, it is expected that cement prices would remain at their current levels.

Western Europe and Japan: The utilization rate of the European and the Japanese producers are expected to remain high because of the withdrawal of capacity there. Because of their policy of regularly closing down excess capacity, the decline in cement demand, of roughly 0.5% to 1.0% per year, should have no meaningful impact on the profitability levels. Therefore, it is expected that the profitability of European and Japanese producers should remain high and they should continue to generate substantial surplus free cash flow.

Middle East, the Indian sub-continent and Africa: The main markets in which capacity expansion programmes are currently taking place include the Egypt, Bangladesh, India and Iran. The utilization rates in these countries are expected to remain high because of


the steady increase in local demands. Egypt, which is the second largest importer (5.2 million tons) in the world is expected to achieve a balance between supply and demand in 2004-05. At the same time the overall growth in demand in Africa should open other outlets for exporters.

Asia Pacific: Sharp increase in the capacity utilization rates in Asia Pacific is expected to provide a strong boost to the local players profitability levels, while the production capacity is to remain unchanged between now and 2005. As per the recent Deutsche Bank research dated April 2002, since the financial crisis, all plans to extend capacity have been cancelled and the debt levels of the local players have been left with no room for further development investment. In the meantime, demand has picked up again, suggesting that manufacturers could be back to full production capacity by the year 2005. Achieving the above would mean the manufacturers have to maintain the exports to other regions. Better coverage of fixed costs would enable the cement companies to improve their operating margins, as long as the local prices hold firm.



Hand in hand with the construction boom fed by a supersonic 8% economic expansion, the Chinese cement market is healthily galloping away at reaching new heights. As is usually the case in China, the top end of the market is plagued by a lack of high-quality products (rotary kiln cement) but it is only these high-quality products that are allowed to be used in the myriads of star-scrapers that are being erected on the mainland each year, opening vistas for foreign companies wanting to nab their share of the Chinese market. But potential investors beware, as many an obstacle lies ahead.

BUILDING MARKET During the next 5 years, China will see 1 billion square meters of new real estate built on its turf each year, with an estimated 1.6 billion square meters needing renovation, feeding Chinas ever-morphing construction sector, the 3rd largest in the country after industrial manufacturing and agriculture. To date an excess of 40 billion RMB of foreign capital has been pumped into domestic real estate development, with Hong Kong investors specializing in the development itself (for example making up more than 70% of the $9 billion in investments in Beijing since 1992) and Western companies bent on providing architectural design support (30% of residential housing has been designed by European and American companies). And the journey continues, as Beijing sets forth with injecting fiscal stimuli into infrastructure projects across the nation to keep the economy chugging along at above 7% growth this year.


CEMENT MARKET The story of the cement market resembles that of practically any other market on the Chinese mainland: low-quality but low-price products, churned out by the myriads of little township enterprises scattered across the nation - fed by cheap labor in excess flooding the market, resulting in chronic oversupply and environmental mayhem on account of the low technical efficiency of the equipment involved the basic overkill story. But on the top end of the market, things are bubbling away. With the government increasingly picky about which products to use for its infrastructure projects, higher quality cement will be in high demand in the future. That was the nutshell, now comes the nut and the numbers: At the onset of economic reforms in 1978, cement output on the Chinese mainland was 65.24 million tons. Barely 7 years later China overtook the lead to become the largest producer of cement on the planet. And in 2001, 652 million tons were churned out according to the China Statistical Yearbook. Growth over the years appears to have fluctuated drastically, largely dependent on the overall health of the economy. During the Asian Financial crisis, when real estate development and construction on the mainland was hardly hit, output growth stagnated. Overall GDP during this time also hit a low of below 5%. The 1989-90 property bubble bust also saw cement output growth evaporate in its entirety. According to the United States Geological Survey, Chinese cement output was 576 million tons in 2000, taking up more than a third of the global market (36%). By contrast, the United States, India, and Japan together take up less than 20% of the global pie. As for the future, widespread sector-intern restructuring is planned, with low-grade cement producers slowly being phased out of the market and high-grade producers taking


their place. For future considerations, it is interesting to note that the central government is pumping large wads of bucks into infrastructure, which currently accounts for about 40% of cement demand. Also interesting is the fact that China uses cement (instead of asphalt) in road construction. With this in mind, the future networking of Chinas transportation routes (especially roads) in the wake of the oncoming logistical challenges faced by the huge country will surely offer some room for growth in the cement industry. Ready-mix concrete manufacturers in China will be the strongest market for cement, climbing at an annual pace of 12.9% to reach 194 million metric tons in 2008. Growth will be driven by the government's 2004 ban on onsite concrete production, enacted to help reduce environmental damage from onsite cement operations and improve the overall quality of concrete used in construction. Demand for cement used in non-building construction increased nearly 10% annually between 1993 and 2003, benefiting from growth in government-funded infrastructure projects such as Three Gorges. Cement demand in non-building projects is projected to rise 7.3% annually through 2008.


MARKET BREAKDOWN In 1999, Beijing announced plans to close thousands of the 8,000 odd existing cement plants on the mainland, weeding out the small ones and those relying on backward technology. Closures have affected only those plants producing low-quality #325 and lower grade cements, those having vertical kiln diameters smaller than 2.2 meters and/or produce less than 30,000 tons per annum, as well as those using wet process kilns. To get an idea of what kind of impact this will have, consider the following numbers: half of the 8,000 plants operating in 2001 had annual capacity of less than 30,000 tons; at the same time, vertical kilns accounted for 75% of production; and in 2000, 30% of Chinese output was made up by #325 and lower-grade cements. The WBCSD report puts the loss of production due to closures at roughly 100 million tons each year. At the same time the closures send ripples through the countrys productive base, a shift will take place towards new techniques and the production of higher-grade cements. In 2000, #425 cements made up 60% of output, whereas 10% went out to high-grade #525 cement. Both kinds will see an increase in output with the #325 phase out. The future will see higher-grade market share increase, which relies on energy-efficient dry rotary kiln and pre-calcinatory kiln technology, much of which is imported from abroad. China is expected to be the worlds largest market for cement machinery at least until 2010. Beijing plans to increase the countrys pre-disintegration kiln cement production capacity to 60 million tons by 2006, requiring an investment of 30 billion RMB, according to the Hong Kong Trade Development Council (TDCTrade). It is expected that demand for higher-grade #425 and #525 cements which was estimated at about 170 million tons in 2002 will reach 250 million tons by 2007. Given


the fact that total cement output in China was gauged by the WBCSD report to hit 660 million tons by 2005 - a figure nearly reached in 2001 according to official statistics. From the environmental point of view, Chinas technology shift can only be encouraged. Cement production is very energy-intensive, with energy eating up roughly 40% of production costs. With newer production technology, it is estimated that 15 million tons of coal can be saved each year, thereby reducing carbon dioxide emissions by about 30 million tons, sulfur dioxide by 250,000 tons, and solid waste and dust emissions by over 5 million tons each year. Prior to the phasing out efforts, cement plants made up over 40% of total industrial particulate and about 8% of carbon dioxide emissions in the country. With respect to geographical production breakdown across the country, it is important to understand that cement is a bulk commodity and transportation costs of the finished product (cement) as well as its inputs (coal for energy, and limestone as a product input) are significant given the overburdened and hitherto feebly networked national transportation system. Not surprisingly, cement production tracks well against population density. There is, however, some degree of concentration in the ship-fed coastal regions Players On the Dragons market, only a few dozen companies have an annual productive capacity exceeding 1 million tons. The 4,600+ companies with sales exceeding 5 million RMB in 2001 averaged an annual output of 130,000 tons - merely 15% of the productive capacity of most foreign firms. Most large players on the mainland are all domestically funded firms. According to the China Markets Yearbook, the largest one with respect to assets and revenue is by far the


Beijing Jinyu Group. The company employed 11,000 and had total assets of nearly 6 billion RMB ($825 million) in 2003, raking in revenue of 1.6 billion RMB and earning a profit of about 50 million RMB ranking it 14th in country along profit lines. With respect to profits, the two largest winners are the Tangshan Jidong Cement Co. (140 million RMB in profits and 1 billion RMB in sales) and the Anhui Ningguo Cement Factory (126 million RMB in profits with 569 million RMB in sales). Foreign investments are playing an increasingly important role in shaping up the Chinese market. In 1998, there were 287 foreign-invested enterprises in China, accounting for about 3% of all cement producers and 15% of national output. The largest foreign-funded player is the Taiwan-funded Chiahsin Jingyang Cement Co. ranking 8th nationally in terms of profits (67 million RMB), with 2.4 billion RMB in assets raking in 530 million RMB in revenue in 2003. Chiahsin was one of the earliest overseas investors on the mainland crossing the straits in 1995. By 2003, annual output had reached 2.56 million tons, and 2004 output is expected to have reached 4.8 million tons. Another large Taiwanese producer, Taiwan Asia Cement Company, set up operations on the mainland in 1997 via a 95% controlling stake in Yadong Cement Works in Jiangxi. According to TDCTrade, the company is rapidly expanding and hopes beef up output capacity to 3.6 million tons in the near future and to 15.75 million tons within the next tens years via 5 further cement works and 10 powder grinding plants. Hong Kongs Ruian Group has been investing heavily in the Chongqing area over the past years, with output of Ruian Construction in Chongqing having reached 3.5 million tons. If all expansion plans go over well, the company will be churning out 6.5 million


tons annually via its Chongqing operations and its new plant in Guizhou, slated to be finished within the end of 2005. Largest Western players in the field are the French Lafarge Group (sinking $400 million into 12 joint ventures which churn out more than 2 million tons annually) and Swiss Holderbank, which has invested in China by means of a controlling stake in a Singoporean cement company. Via its Asian ventures, Holderbank has a production capacity of 1.7 million tons and rakes in yearly revenues of roughly 500 million RMB. The companys products have been used in many key infrastructure projects, such as the Shanghai Nanpu Bridge, the Yangpu Bridge, the Shanghai-Nanjing Expressway, and the Jiangyin Bridge across the Yangtse River, reports TDCTrade. Moreover, a Holderbank subsidiary owns roughly a quarter of the shares of the Huaxin Cement Co. (Chinas 6th largest producer by revenue), which - together with the Gezhouba Cement Company supplies almost all the cement for Chinas ambitious Three Gorges Project.


EXPORTS, IMPORTS, TARIFFS China is the worlds 2nd largest cement exporter, accounting for about 17% of total global cement trade. Note that 5.5 million tons were exported in 2003, compared with imports of only 200,000 tons. According to the China Statistical Yearbook, 6.05 million tons of cement were exported in 2000 (worth $190 million), growing to 6.21 million tons in 2001 (worth $196 million). WTO shouldnt have much of an impact on the cement industry, as tariffs on cement rotary kilns dropped only from 12% to 10% last year and are not due to fall any further. Tariffs on limestone imports will remain intact with WTO. However, China already has more than 1,200 limestone mines feeding its cement market, with proved reserves of more than 50 billion tons the largest reserves being very close to Chinas main inland transportation vein, the Yangtze River.

THE FUTURE Demand for cement in China is expected to advance 5.4% annually and exceed 1 billion metric tons in 2008, driven by slowing but healthy growth in construction expenditures. Cement consumed in China will amount to 44% of global demand, and China will remain the world's largest national consumer of cement by a large margin.



At the start of 2004, some believed the construction industry's smooth sailing outlook for the coming years was too good to be true. Their caution was apparently warranted. Higher oil prices will slow overall economic activity in 2005, delaying a recovery in nonresidential and public construction. In addition, while a continuation of relatively low mortgage rates will prolong the boom in residential construction, inflation will run stronger, consumer spending will be partially compromised, job gains will be smaller, and sentiment in both the consumer and business areas will be more sedated. In retrospect, 2004 represented a year of transition for the U.S. construction market, according to Ed Sullivan, the chairman of Portland Cement Association in his latest economic forecast. The strengthening economy and an increase in interest rates have set the stage for a recovery in public and nonresidential activity. The wildcard in PCA's forecast is oil prices. For 2005, PCA believes construction spending will reach an inflation-adjusted level of $745 billion, or 2.9% growth compared to $724 billion in 2004. Given that the construction markets have been performing at near-historical peaks, these growth rates are impressive. Through 2008, nonresidential and public spending is expected to assume the mantel of growth leadership, as residential activity will step down to become the growth laggard while maintaining historically strong levels. The composition of construction activity during the 2005-08 period would be much different than the composition of construction activity during the 2001-04 period. Until 2004, the economy had been characterized by weak economic conditions, staggering job losses, and extremely low interest rates. These conditions led to declines in capacity ` 20

utilization, an increase in vacancy rates, reduced state revenue collections, mammoth state deficits, and favorable mortgage rates. These mortgage rates resulted in residential construction as the growth leader in construction led by single-family builds. Economic weakness and the corresponding run-up in industrial and office vacancy rates resulted in enormous declines in nonresidential activity. In retrospect, 2004 represented a year of transition for the U.S. construction market. It was a year that state deficits, utilization rates, and vacancy rates stabilized and began the healing process, setting the stage for public and nonresidential recoveries in 2005. 2004 also served to set the conditions for rising mortgage rates to materialize this year. Tight cement supply conditions now prevail in portions of 35 states. However, not all portions of each state are characterized by tight supplies. Where cement is in short supply, the reasons are typically twofold: cement demand due largely to strong residential building activity, and limited availability of ships to transport imported cement. PCA forecasts Portland cement consumption of 112 million metric tons in 2004, a 4.4% gain from 2003. Gains of 2.9% and 2.1% are forecast for 2005 and 2006, respectively. Of course, when Sullivan assembled his summer forecast, a scenario was presented where an easement in shortage conditions could potentially be achieved in 2004's fourth quarter, assuming mortgage rates rose. In the current forecast, PCA has lowered the projected near-term path of mortgage rates, suggesting that the vibrant single-family housing sector will show more strength that previously expected at least through the first quarter of 2005. Supply conditions hold the key to determining growth in the United States cement market for 2004 and beyond. Domestic production has been stretched to its limits and inventory


levels have been squeezed tight. Further increase from domestic operations is limited. According to PCA estimates of capacity expansions, operating rate and inventory assumptions, domestic supply is expected to increase by 2.3% in 2004, followed by 1.8% and 1.7% in 2005 and 2006, respectively. These estimates reflect operating rates in excess of 98% and, therefore, may contain modest downside risks. Overall, PCA expects public cement demand to grow 3.8% in 2005 and 4.1% in 2006. But this relatively optimistic outlook is tempered by supply conditions. Through the 2005-08 period, powder producers have announced plans to add roughly 11 million tons of capacity. Total U.S. cement supply is expected to grow 4.5% in 2004 and 3.0% in 2005. Beyond 2005, PCA has incorporated a higher TEA-21 reauthorization funding level. PCA's previous TEA amount assumption reflected an average of the Bush administration, Senate and House proposals, translating into a $280 billion bill beginning in FY2005. But with the administration's apparent willingness to support a higher level of highway funding, PCA raised its estimated level to $299 billion.


SLOW & STEADY According to most economic analysts, 2005 would be the beginning of an economic recovery that would continue and strengthen through 2007, despite increasing interest rates and sluggish job growth. It was forecasted that the next two years would not only provide an increasingly stronger economy, but also a positive upswing for several sectors of the building industry, including industrial, public and other nonresidential construction markets. The housing volume, which is one of the key driving forces in the economy, should stabilize over the next year as opposed to the remarkable growth seen in the past two years. A positive outlook for single-family starts currently at an all-time high and a sustained growth rate for multifamily housing, especially condominiums are now experiencing construction growth despite the current high vacancy rate. The current phenomenal national homeownership rate should continue to grow steady, but possibly slower, pace and will most definitely reach 70% by the end of the decade.

CEMENT INTENSITIES The favorable outlook for construction activity is expected to coincide with an ongoing increase in cement intensities, adding to overall cement demand strength. Aside from industry-wide promotional efforts, several other factors will shape the level of cement intensities in the near term. First, business cycles impact nonresidential cement intensities. During cyclical downturns, investors tend to be less committed to building large nonresidential products, thereby reducing the cement intensity per billion dollars of construction. Investor


retraction of the larger projects is tied to lower expected ROIs. During this period, small projects, with lower cement intensities, tend to account for a larger share of the nonresidential construction arena (almost 72%). As the economy recovers, the higher expected ROIs materialize yielding a return to larger-scale projects and a recovery in cement intensities. A second component factored into any forecast is the improving price competitiveness of concrete versus steel building products. Steel mill prices have increased 43.3% during the past year. Tied to scrap shortages largely induced by a dramatic increase in demand from China as the country undergoes a massive construction effort as it prepares for the 2008 Olympic games, these elevated steel prices are not expected to be reversed anytime soon. As a result of the run-up in steel prices, the relative price of concrete products to steel mill products has been cut roughly 50% of the relative price that existed in 2002. Given enough time lag, this will lead to a substitution of cement for steel in some construction projects. This switch is expected to be linked to smaller-sized projects with a bit more design flexibility and a higher sensitivity to cost changes. This phenomenon will encompass not only nonresidential activity but also public sector intensities as well.

HOME PRICES According to Portland Cement Association estimates, if the current relative prices between concrete and steel is sustained for a full year, nonresidential and public cement intensities will improve adding as much as 1.5 million metric tons to nonresidential cement demand and another 600,000 metric tons to public cement demand. Despite implications that arose from a July 2004 National Association of Homebuilders (NAHB)


survey, cement shortages or tight supply conditions and the resulting price hike of concrete represent only a small portion of overall material cost increases for singlefamily homes. The NAHB survey estimated that the cost of materials per new home had gone up $5,000 to $7,000, as compared to 2003. During the time period of 2003, concrete prices had increased 4.6%. Other building materials including lumber, steel, gypsum, copper tubing and plastic plumbing products all recorded double-digit annual increases compared to year-ago levels. In fact, lumber price escalation accounts for more than half of NAHB's estimated building material cost increase. Sullivan adds that concrete costs represent slightly more than 4.0% of estimated overall home construction costs and less than 2.5% of the $274,000 price of a new home as gauged by the Bureau of Census.

CONSTRUCTION The Associated General Contractors of America (AGC) commented on the value of construction put in place, which soared in December to an eleventh consecutive record $1.03 trillion at a seasonally adjusted annual rate, as reported in February by the Census Bureau. The preliminary full-year total for 2004 was $998 billion, a 9.0% increase for 2003. These numbers mark a real turnaround for nonresidential construction and show good acceleration at. After falling for three years, private nonresidential construction would up 4% higher than in the previous year, with December's total a solid 6 percent higher than in December 2003. Public construction was 3% higher for the full year and 9% ahead in December.



DEMAND GROWTH In FY04 the Indian GDP grew by 8%, but cement growth of only 5% was below expectation. It is normally observed that cement grows at a multiple of 1.5x GDP growths. The subdued growth could be attributed to factors like slowdown in public expenditure in infrastructure, as the government was in an election mode. Above normal monsoons resulted in a virtual slowdown in construction activity during the monsoon months from June-September 2004. The slowdown was partially, also due to the high base of the previous year, where cement industry grew by 8% against a GDP growth of 5%. In FY05 though cement demand trends have been good in most markets. Overall demand for the period April 2004 - January 2005 has grown by 7.5% Y-o-Y. We estimate that domestic demand growth for the full year is expected to be 6.5% Y-o-Y in FY05 and about 7% Y-o-Y in FY06. Housing demand continues to be strong due to low interest rates, affordable real estate and easy availability of finance. Infrastructure creation has slowed a little in the past few months, particularly in projects like the Golden Quadrilateral highway project, but is expected to accelerate in the coming months along with other infrastructure projects.


Monthly cement dispatches and prices

Cement price cycles caused by oversupply


EXPORT DEMAND In the last four years, cement exports have remained quite high at around 3 to 3.5 million tonnes per annum. This year is no exception, and based on current trends, exports from India could touch around 4 million tonnes in FY05, a growth of 19% Y-o-Y. Clinker exports on the other hand have grown quite rapidly from 1.8 million tonnes in FY02 to 5.6 million tonnes in FY04. Based on the current run-rate, clinker exports should grow by 4% Y-o-Y to 5.9 million tonnes in FY05. The additional piece of good news is that export prices have substantially improved in FY05. Average cement export prices are around 33% higher Y-o-Y at US$40/tonne, whereas clinker export prices are around 40% higher Y-o-Y at around US$28/tonne. India's key export markets are Nepal, Sri Lanka, Bangladesh and the Middle East, which is experiencing an oil price driven construction boom.

Cement & Clinker exports a rising trend


SUPPLY SITUATION Past boom periods for cement have been cut short due to rapid supply creation by a host of producers. This time around, although producers are now announcing new capacities, they are still few and far between. Our analysis shows that about 6 million tonnes of new capacity will be created in FY05 and about 8-9 million tonnes in FY06. Most o f the capacity creation has bee n announce d by larger producers. As Indias demand is growing by around 9-10 million tonnes every year and is estimated to reach about 121 million tpa in FY05, some amount of new capacity is required.

Supply is picking up


DOMESTICS PRICES Cement prices across the country recovered from January 2004 onwards and the price momentum is sustaining even today. We believe that pricing momentum was due to improved demand conditions in certain pockets like Gujarat, Uttar Pradesh and Rajasthan, which led to an appreciable price increase in these parts. Apart from this, in a number of regions, producers resorted to controlled dispatches in order to regulate supply and maintain prices; this was mostly viewed in the Southern parts. However, lack of demand growth at the end of FY04 put the price sustainability in question. In FY05, the combination of the above (strong demand & slow supply creation), has spelt good news for prices. Average prices have been particularly strong on a Y-o-Y basis in northern and western India during the April 2004 to January 2005 period. Prices have been quite steady in east India, and in south India, prices have begun to rise in recent weeks. Overall, we expect prices to rise gradually in almost all markets in the coming months.

Average Cement Prices (per 50kg bag)


HUGE OPPORTUNITY The infrastructure sector covers transportation, communication, electricity and other services such as water supply and sanitation and solid waste management. The lack of adequate infrastructure has not only constrained the countrys economic growth but also entailed significant costs in terms of welfare loss. The Government of India (GoI) has realized that high gross domestic product (GDP) growth (8% projected in the 10th fiveyear plan) is not possible without improving the countrys infrastructure. Accordingly, it has given a clear thrust to infrastructure development in its recent budgets. The 2004-05 budget also clearly accords high priority to infrastructure investments. After the brisk implementation of highway projects, the government has started emphasizing other core sectors such as power. We expect infrastructure investments to increase significantly in the coming years, which will translate into strong order flows for construction companies. In line with its commitment to boost infrastructure-spending, the government has also explored various routes to facilitate investments. According to industry estimates, the investment outlay for infrastructure will be close to Rs 3919 billion during 10th plan. The segment-wise break-up of this outlay is given below.
Investment (Rs. Bn) 129 169 278 606 859 29 1849 3919 Cement&Construction Component 42% 50% 70% 42% 100% 55% 60% 66%

Sector Airports Ports Hydel Power Railways Roads Tourism Urban Infrastructure Total


ROADS: GROWTH MOMENTUM TO ACCELERATE Roads carry 85% of the passenger traffic and 70% of the freight traffic in the country. While highways account for only 2% of the entire road network, they account for around 40% of the traffic. The government has taken a series of steps to set the stage for a quantum leap in Indias road system. These combine new institutional arrangements, adopting international standards in highway engineering, and a self-financing revenue model comprising tolls and a cess on fuel. Already, this segment has been a huge growth trigger for construction companies as the government has made considerable progress in implementing its plan to construct 13,146 km of national highway at a cost of Rs 540 billion (1999 estimate), 356 km of roads connecting the countrys ports, and 777 km of other important roads.
Golden Total Length Already 4-laned Under Implementation (kms) Contracts under Implementation Balance Length (kms) Quadrilateral 5846 3038 2808 76 --NS-EW Corridor 7300 638 425 21 6211 Port Connectivity 356 69 229 6 58 Others 777 194 121 3 462 Total by NHAI 14279 3939 3583 106 6731

In the last four years, the government has implemented the Golden Quadrilateral project as per schedule. The self-financing revenue model has ensured the smooth funding and timely execution of this and other road projects. With 6731 km of road projects still to be awarded, we expect orders inflows to accelerate, going forward. The road sector is likely to attract the second-highest investment of close to Rs 859 billion in the 10th Plan (200207). Moreover, the cement & construction component in investments in this sector is the highest (close to 100%), resulting is the largest flows to construction companies.



INVESTMENT HIGHLIGHTS ACC is India's largest cement company with an all India presence. Its key focus in the last few years has been to cut costs and modernize its assets. Holcim's expertise should help trim costs further. It is also expanding capacity at a low cost. All this will hold it in good stead with a buoyant outlook ahead for the cement sector. The recent share price performance has been driven by Holcims open offer and rumours that there could be a competing bid.

A PAN-INDIA PRESENCE ACC's plants are well distributed all over India, which gives it an advantage over most other cement companies which do not have adequate diversification and can be negatively impacted by adverse regional trends. For example, although prices and demand have been quite strong in other regions during April-December 2004, the south had been a laggard for most of the year. Several south-based companies reported losses during 3Q FY05, whereas ACC despite a southern presence posted a 241% jump in 3Q FY05 net profit at Rs536 million. The good news is that prices in South India have also begun to pick up since early 2005. ACCs top markets
State Uttar Pradesh Maharashtra Karnataka Punjab West Bengal Kerala Demand in Apr-Dec 04 10.51 11.17 5.57 3.99 4.38 4.46 % Y-o-Y change 7.0 5.1 -8.9 -0.5 6.6 4.5 Demand in FY04 13.40 14.69 8.23 5.40 5.78 5.82 % Y-o-Y change 5.2 3.7 2.5 2.8 12.0 30.4

(in million tonnes)

ACC sales 2.39 2.17 1.80 1.68 1.02 0.92 Market Share(% ) 17.8 14.7 21.8 31.1 17.6 15.8


Another way to look at ACC's markets is to see in which states it sells most of its cement. The figures below show that ACC sells 66% of its cement in 6 states which are well distributed geographically. These states are amongst the ten largest cement consuming states in India with highest potential for robust growth.

State-wise sales (FY04)

Kerala 6% West Bengal 7% Punjab 11%

Others 34%

Karnataka 12%

Uttar Pradesh 16%

Maharashtra 14%

OPERATING LEVERAGE IN BETTER PRICING ENVIRONMENT Cement prices have been quite strong this year and we believe the outlook for cement prices is promising. We expect cement prices to rise in the coming months based on the assumption that the current supply creation is inadequate to meet the robust growth in demand. For ACC it is estimated that average cement prices will rise by 8.5% in FY05 and 7.0% in FY06.


STRONG MARKET SHARE HELPS IN ROBUST PRICING ACC has a strong presence in several markets. Its own market share is around 18% in markets such as Uttar Pradesh and Bihar, 22% in Karnataka and 31% in Punjab. It has a close relationship with GACL, which owns 14% of ACC. This relationship should continue because even after Holcim acquires management control in ACC (assuming the open offer is successful), GACL will continue to be the part owner of ACC at least for the next 2-3 years. The combined market share with GACL is even stronger - 57% in Punjab, 85% in Himachal Pradesh and around 33% in Maharashtra and West Bengal. Less fragmented markets help in keeping prices robust, and also make it easier for prices to rise upwards. Presence in Key Markets
State Maharashtra Uttar Pradesh Karnataka Kerala West Bengal Madhya Pradesh Punjab Bihar Himachal Pradesh Uttaranchal Consumption (FY04) 14.69 13.40 8.23 5.82 5.78 5.57 5.40 3.13 1.38 1.36 ACC(% ) GACL(% ) Total(% ) 14.7 19.1 33.8 17.8 3.6 21.4 21.8 0.0 21.8 15.8 0.1 15.9 17.6 14.8 32.4 10.9 4.7 15.6 39.1 25.7 64.8 18.9 0.0 18.9 41.6 43.6 85.2 27.1 10.8 37.9


VOLUME GROWTH AT LOW CAPEX In addition to better prices it is also expected that there would be volume growth of 8.5% and 9% in FY06 and FY07 respectively to contribute to a 37% EPS growth in FY06 and 23% in FY07. However, it is possible for ACC to surpass this volume growth if domestic demand growth is stronger than estimated. ACC is currently expanding its facilities at two locations which are expected to be completed by April 2005. At its northern plant in Gagal (in Himachal Pradesh) it is expanding cement grinding capacity by 1 million t.p.a. at a cost of Rs700 million. This plant already has a freight advantage to markets where prices are quite robust. ACC also gets attractive tax benefits for this plant. Additionally, capacity is being enhanced by around 1 million t.p.a at its only remaining wet process plant in Chaibasa in eastern India. The Rs2.9 billion capex also involves setting up of a 15 MW captive power plant, which along with better economies of scale will mean lower production costs at this plant. Upon completion of both plants, ACC's consolidated capacity will rise by 11% to almost 20.2 million t.p.a. by April 2005. In the medium-term, ACC is also planning to de-bottleneck its capacity by 0.9 million t.p.a at Lakheri in north India. The capex of Rs2.6 billion also includes a 25 MW power plant and is expected to be completed in mid-2006. The new capacities are being set up at a low capex of approximately US$50/tonne.


MODERNIZATION EFFORTS In the three-year period from FY02 to FY04, ACC's capacity remained steady at 16 million tonnes and its focus was on cost cutting and restructuring. The benefits of this are now flowing through as can be seen in the below which shows average cement prices and ACC's quarterly PBT. Until FY01, sharp reduction in cement prices in some quarters resulted in losses by ACC at the PBT level. However, since then, even though cement prices have declined (as in mid-2002 and 2003), ACC managed to report quarterly profits at the PBT level. The graphs below give several examples of ACC's great progress in cutting costs. By FY04, ACC reduced its power consumption by 13% (to 89 kWh per tonne of cement) and coal consumption by 10% (to 775 kcal per kg of clinker) over a sixyear period. These figures are in line with the best in India. It has reduced its manpower by 30% during the same period to 9,115 with a substantial improvement in labour productivity. Another focus area is captive power. ACC already has 65 MW of diesel generating capacity and 155 MW of coal-based capacity. It recently got court approval to buy back a ` 37

75 MW plant from Tata Power (at Rs2.4 billion), thus taking its total coal-based capacity to 230 MW. All its current expansions include some amount of in-house coal-based power, which will help ACC cut costs in the coming years as it reduces its dependence on grid power. ACC should be able to benefit further once Holcim acquires management control of ACC. Holcim believes it can add value to ACC in areas such as use of alternative fuels, alternative raw materials and for improving plant fitness. Holcim has reiterated that it will focus on ACC's core cement business and plans to exit non-core investments such as Everest Industries, a producer of fibre cement products, in which ACC has a 76% stake.


INVESTMENT CONCERNS A key reason for the buoyancy in Indian stock prices has been substantial inflows by Foreign Institutional Investors (FIIs). In ACC's case the foreign investment level for shareholding of 24% has been reached. There can be no fur ther buying of the ACC stock by FIIs unless they can get RBI permission. This could slow down further stock price appreciation, unless the limit is increased. However, there is a possibility that once Holcim takes control of ACC they could raise the FII limit. In our view the current cement outlook is quite robust. Prices are expected to rise in a scenario of inadequate supply creation and demand growth of 7-8%. However, a sudden slowdown in domestic demand (due to a poor monsoon for instance) or lower exports, could mean increased supplies of cement in the domestic markets and lead to price weakness. ACC, which is relatively more sensitive to rising cement prices, would also suffer a relatively greater adverse impact in a scenario of falling prices.


In its public announcement to the shareholders of ACC, Holcim has stated that it has entered into various agreements with the objective of taking management control of ACC through Ambuja Cement India Ltd (ACIL). The acquisition of shares in ACC would be completed only if the composite FIPB approval is received. The agreement provides that if the said FIPB approval is not received by 30 April 2005, all agreements would stand terminated, unless extended by Holcim or GACL. In case the Holcim acquisition does not come through it could be a short-term negative for the company.

VALUATIONS ACC's relatively lower efficiency in the past has resulted in wide swings in its profitability and sometimes resulted in a loss. As a result there have been times when using PE as an indicator to buy ACC would not have been useful as the best time to buy the stock would be before the industry recovers and when it appears expensive on a P/E basis. Hence, we have examined ACC on other valuation parameters, although EV/EBITDA is our preferred metric. Even though the easy money in ACC has been made, we believe that a more efficient ACC, with expanding volumes and the best market mix, will show an upside from current levels, particularly in a scenario of rising cement prices.


EV/EBITDA OFFERS UPSIDE According to most analysts, EV/EBITDA is the best valuation parameter to get a perspective on ACC's valuation. It is better than P/E, because in the last 10 years, since April 1995, ACC has made losses or minimal profits on three occasions. The swings in profitability have been because of ACC's relatively lower efficiencies in the past. Also as an older company it has benefited less than some of its peers from sales tax incentives. Its increased focus on cement also meant it could not rely on diversified businesses to rescue it at times when the cement outlook was poor.


EV/EBITDA & EBITDA MARGINS The chart below shows the relationship of ACCs rolling 1-year forward EV/EBITDA and its EBITDA margin. EV/EBITDA has tended to move in line with ACCs EBITDA margin. In the period until March 2000, ACCs EV/EBITDA ranged from around 14x to 25x. With an improvement in its efficiency since April 2000, EV/EBITDA has settled in a range of 8x to 15x, which gives a mean 10.5x for the period April 2000 Jan 2005. For ACC, EV/EBITDA is a better valuation tool than P/E.


AVERAGE EV/EBITDA OVER THE PAST 10 YEARS HAS BEEN 13.4X ACC's average EV/EBITDA over the past ten years, which encompasses two cement cycles, has been 13.4x. More recent trends (since FY01) give a mean of 10.5x. At the current price of Rs363, it trades at 9.5x for FY06E. We expect valuations to trend up based on ACC's improving efficiencies, and the improving cement industry outlook. At our target price of Rs450, ACC's EV/EBITDA would be 11.4x for FY06E and 9.2x for FY07E. ACCs P/E in the last four years has been quite volatile ranging between 10x to more than 25x. More recently it has settled between 10x and 17x. On our target price of Rs450, ACC would trade at a consolidated P/E of 17x for FY06E. Rolling 1-year forward PCF should keep rising to reach close to its mean of 14x. At the target price of Rs450, PCF would be 12.7x.


Financial Summary: Profit & Loss Statement (Rs. MN)

Particulars Cement Cpacity (mn tpa) Cement Sales (mn tonnes) Rs/tonne % growth Cement-sales Other Sales Total Sales Net Sales Purchaseof cement Raw Materials Power&Fuel Freight Other Costs Total Expenditure EBITDA Other Income Depriciation Interest PBT Tax Tax Rate PAT Extraordinary Items Reported PAT EPS CFPS Dividend Payout(%) FY04 16.1 14.4 1890 4.6 27263 5582 32845 32733 1843 4861 7441 5381 9373 28899 3834 1505 1769 929 2642 536 20.3 2105 -103 2002 11.8 21.8 800 38.0 FY05E 16.7 15.4 2050 8.5 31551 7231 38782 38766 2311 5851 7833 5825 10327 32146 6620 800 1917 934 4569 1416 31 3153 180 3333 17.4 28 1326 42.0 FY06E 18.7 16.7 2194 7.0 36635 8094 44730 44713 2600 7091 9026 6632 11050 36398 8315 900 2061 889 6264 1942 31 4322 0 4322 23.9 35.3 1632 37.7 FY07E 19.6 18.2 2325 6.0 42321 8851 51172 51154 2700 8622 10226 7653 11966 41166 9988 900 2244 829 7815 2501 32 5314 0 5314 29.4 41.8 1836 34.5


Financial Summary: Balance Sheet (Rs. MN) Particulars Share Capital Reserves & Surplus Net Worth Secured Loans Unsecured Loans Total Debt Deferred Tax Liability Total Liabilities Gross Block Less: Depreciation Net Block WIP Fixed Assets Investment Inventories Sundry Debtors Cash & Bank Loans & Advances Total Current Assets Sundry Creditors Provision / Others Total Current Liabilities Net Current Assets Total Assets FY04 1779 11409 13188 10401 3771 14173 2752 30113 37898 -14141 23756 965 24721 3757 3780 1824 395 4131 10130 5327 3169 8495 1635 30113 FY05E 1808 13938 15746 8401 3771 12173 3346 31265 41452 -16058 25394 1000 26394 3757 4262 1913 648 4050 10873 5734 4026 9759 1114 31265 FY06E 1808 16629 18437 6901 3771 10673 3973 33082 45302 -18119 27183 1000 28183 3757 4639 2083 1108 4250 12080 6406 4532 10938 1142 33082 FY07E 1808 20107 21915 4901 3771 8673 4754 35342 48892 -20363 28529 1000 29529 3757 5253 2383 1956 4450 14042 7051 4936 11986 2056 35342


Cash Flow Statement (Rs. MN) Particulars PBIT Add: Depreciation Changes in working capital Tax Paid Cash Flow from Operations Change in Fixed Assets Change in Investments Cash Flow from Investments Change in Equity Capital Change in Borrowings Dividend Paid Interest Paid Others Cash Flow from Financing Net Change in Cash Opening Balance Closing Balance FY04 3,57 1 1,76 9 (15 3) (16 1) 5,02 5 (2,26 5) (2,48 0) (4,74 5) 1,58 5 (50 4) (48 2) (92 9) 9 7 (23 4) 4 7 34 8 39 5 FY05E 5,50 3 1,91 7 24 8 (82 2) 6,84 6 (3,59 0) (3,59 0) 55 1 (2,00 0) (80 0) (93 4) 18 0 (3,00 3) 25 3 39 5 64 8 FY06E 7,15 3 2,06 1 12 5 (1,31 6) 8,02 4 (3,85 0) (3,85 0) (1,50 0) (1,32 6) (88 9) 3,71 5 45 9 64 8 1,10 8 FY07E 8,64 4 2,24 4 (26 9) (1,71 9) 8,89 9 (3,59 0) (3,59 0) (2,00 0) (1,63 2) (82 9) (4,46 1) 84 9 1,10 8 1,10 8 1,95 6


Key Ratios
Particulars Growth(%) Cement volumes sales Total Sales EBITDA EPS Valuation (x) P/E P/CF EV/EBITDA Profitability (%) EBITDA Margin NPM RONW ROCE Turnover (days) Inventory Debtor Financial (x) Debt Equity Ratio Interest cover EBITDA/Interest FY04 8.4 14.7 30.8 67.6 FY05E 6.7 18.4 72.7 47.4 FY06E 8.5 15.3 25.6 37.1 FY07E 9.0 14.4 20.1 22.9

31.2 17.0 16.0

21.2 13.2 12.3

15.5 10.6 9.6

12.6 8.8 7.8

11.7 6.4 18.0 12.4

17.1 8.1 21.8 17.9

18.6 9.7 25.3 22.2

19.5 10.4 26.3 25.3

60 20

59 18

58 17

57 17

1.1 3.8 4.1

0.8 5.9 7.1

0.6 8.0 9.4

0.4 10.4 12.0


HOLCIM: THE INDIA CONNECTION India has long been a focus market for the global cement majors. Despite strong efforts to increase their presence in the last five to six years, they have a limited presence in the Indian markets. Only two global majors have a presence in India with a total domestic market share of around 5%. Lafarge has a capacity of 5 million t.p.a (3.2% market share) and Italcementi has a capacity 3.4 million tpa (2% market share). Assuming Holcim is successful in gaining control of ACC, the market share of global majors in India will rise to around 19%. Holcim's presence in ACC should bring about further focus in ACC on its core business and also further cost cutting. Holcim's deep pockets should make ACC more aggressive in its expansion and acquisition plans. Additionally, the presence of a strong global major would mean more stable cement prices in markets where Holcim has a presence, particularly as it would already have invested around US$800 million in India. Holcim is one of the largest cement traders in the world and could help ACC to hike its export revenues.

SECOND LARGEST PRODUCER WORLD-WIDE Holcim is the second largest cement producer in the world, its turnover for 2003 was about US$9.4 billion and current market capitalization is around US$12 billion. The group holds majority and minority interests in more than 70 countries in all continents. To put it in perspective Holcim's total capacity of 145 million tpa, even before getting management control over ACC/ACEL, is higher than Indias total expected consumption of 121 million tpa in FY05E.


HOLCIM IN ASIA-PACIFIC Holcim has a presence in 10 countries in the Asia-Pacific region, with sales of 29.3 million tonnes and an average market share of 24% in those countries. Its capacity in the region is 36 million tpa and after considering its merger with ACC and ACEL, the total capacity would be 56 million tonnes, i.e. an increase of about 56% in its pre-merger capacity in the Asia-Pacific region. Holcim continues to be positive on Asia-Pacific on the back of increased house building and construction activity, with major projects being triggered - such as construction of several bridges in Bangladesh and Malaysia, and the expansion of airports in Bangkok and Jakarta.

Cement Consumption in Asia-Pacific Countries

Country Azerbaijan Sri Lanka Bangladesh Thailand Malaysia Indonesia Vietnam Phillipines Australia New Zealand Comsumption 1.6 3.0 6.5 23.5 14.7 27.2 23.0 12.6 8.0 1.1

HOLCIM key figures for Asia-Pacific (US$ mn)

Particulars 2002 Capacity (mn tpa) 35.5 Net Sales 1236 Operating Profit 118 Personnel 13078 2003 36.0 1417 159 12118 %change 1.4 14.7 35.6 -7.3


HOLCIMS LARGEST COUNTRY PRESENCE IS INDIA The acquisition of ACC (18.2 million tpa) and ACEL (2 million tpa) will add 20.2 million tpa to Holcim's present total capacity of 145.2 million tpa. Holcims largest country presence in cement will now be in India, larger than its 16.7 million tpa of capacity in US, held through Holcim (US) Inc, a 100% subsidiary of Holcim. HOLCIM: Region-wise breakdown
Region Europe North America Latin America Africa Asia Pacific Total Capacity (post merger) 44.0 21.3 31.0 12.9 56.2 165.4 % 26.6 12.9 18.7 7.8 34.0 100

HOLCIMs cement capacity in its largest markets


SALES THE CONTRASTING PICTURE Asia-Pacific accounts for Holcims highest capacity of 44.9 million tpa (28%) but due to low capacity utilization (52%) of Holcims plants in the region, and small share of aggregates in its total sales, Asia-Pacific accounts for only 14% of total Holcim group sales. On the other hand, although Europe has a low capacity utilization of 60%, it accounts for the maximum sales contribution of about 34% (including aggregates). Holcim: Sales Breakdown before ACC acquisition

EBITDA margins in Holcims key markets


INDIA: HOLCIM READY TO MEET THE CHALLENGE ACC has a very high level of capacity utilization (89%) as compared with Holcim's other subsidiaries. But the EBITDA margin for ACC is about 15.5% (for 9M FY05), which is much lower than Holcim's overall EBITDA margin of 26%. Holcim's management has stated that they are committed to improve the EBITDA margin by using alternative fuels and raw materials. Holcim is satisfied with the current management and the current modern facilities of ACC. In the past, Holcim had successfully implemented the use of alternative fuels and raw materials at Philippines by implementing moulding compounds as an alternative raw material and thus expanded the range of quality cement. In Thailand, Holcims affiliate, Siam City Cement has improved its distribution and ability to service customers by selling cement directly to customers using its Web sales system.

Capacity Utilization in Various Markets


Holcim Overall sales compared with competitors


Step one: Holcim to acquire a 40% stake in ACIL Holcim will pay Rs8.97 billion (US$204 million) to acquire a 40% stake in Ambuja Cement India Ltd (ACIL) from affiliates of American International Group (AIG) and GIC Infrastructure Pte Ltd. ACIL is the holding company which currently holds 13.8% in Associated Cement Cos (ACC) and 94.1% in Ambuja Cement Eastern Ltd (ACEL).

Step two: Holcim to raise its stake in ACIL to 67% Holcim will invest a further Rs26.4 billion (US$605 million) in ACIL. Of this, Rs18.3 billion (US$420 million) will come in as equity and raise Holcim's stake in ACIL's expanded equity capital to 67%. Holcim will invest a further Rs8.1 billion (US$185 million) as 6% preference capital in ACIL. Under the terms of the agreement with GACL, Holcim will then have management control of ACIL and the right to nominate a majority of directors on its board as well as its CEO. ` 53

Step three: ACIL makes open offers for ACC and ACEL ACIL will then make two open offers. The first is an open offer for 36.9% of ACC, which if fully subscribed will take ACIL's stake in ACC to 50.01%, giving Holcim management control of ACC. Even if fewer shareholders participate in the Open Offer, Holcim is expected to get management control of ACC by virtue of ACIL (which already owns 13.8%) being the largest shareholder. In the event of ACIL acquiring control of ACC, two thirds of the ACIL directors on ACC's board would be proposed by Holcim, and the balance one-third by GACL. The second Open Offer will be to acquire the minority 5.9% stake in ACEL and take ACIL's holding in that company to 100% from the current level of 94.1%. Holcim will then have management control over 22.2 million tpa of capacity or about 14% of India's market share.

Step four: GACL exits from ACIL GACL, which will hold 33% of the post expanded equity share capital of ACIL, has a put option to sell all or part of the 33% shares held by it to Holcim on or after 30 June 2005. Partial puts or calls can only be in increments of 11% or more of the shares held by GACL in ACIL. In case GACL does not put all the shares then Holcim has the right to call the remaining shares anytime on or after 1 January 2008. This will result in a likely inflow of about Rs13 billion to GACL based on current valuations of Rs47/share of ACIL. Based on press statements given by GACL's management it is unlikely to exercise its put option in the near future. Delaying the exercise of the put option would help add value to the shares due to the buoyant outlook for the cement industry and because ACC and ACEL are likely to expand capacity in the next few years.


MONTH Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct-97 Nov-97 Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Volume 5543440 7056410 6429300 5761380 5531780 5579600 6431140 6245360 6481990 6943360 6657080 7807630 6273280 6997740 6610580 6107530 5870230 6300000 6201130 6437070 7358480 7421140 7424440 8737470 8110000 8110000 8180000 7370000 6680000 6680000 6850000 7550000 8060000 8540000 8130000 9530000 % -16.7 18.7 11.8 -3.4 -3.3 14.0 23.2 17.9 17.4 10.7 10.3 7.3 13.2 -0.8 2.8 6.0 6.1 -2.0 -3.6 3.1 13.5 6.9 11.5 11.9 29.3 15.9 23.7 20.7 17.2 6.0 10.5 17.3 9.5 15.1 9.5 9.1 MONTH Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Volume 8040000 8540000 8840000 7870000 6750000 6940000 7820000 7690000 7110000 7380000 7210000 9180000 8480000 9000000 8960000 7360000 7380000 8280000 8330000 8340000 8230000 8770000 8880000 10350000 9420000 9860000 9310000 9130000 8280000 8280000 8870000 8820000 9590000 9560000 9320000 10880000 % -0.9 5.3 8.1 6.8 -1.9 3.9 14.2 1.9 -11.8 -13.6 -11.3 -3.7 5.5 5.4 1.4 -6.5 9.3 19.3 6.5 8.5 15.8 18.8 23.2 12.7 11.1 9.6 3.9 24.0 12.2 0.2 6.5 5.8 16.5 9.0 5.0 5.1 MONTH Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Volume 9050000 10590000 10160000 9370000 8690000 8850000 9340000 9100000 10060000 10220000 10330000 11250000 10640000 10450000 9800000 10270000 8860000 9840000 10750000 10260000 10930000 % -3.9 7.4 9.1 2.6 5.0 6.6 5.3 3.2 4.9 6.9 10.8 3.4 17.6 -1.3 -3.5 9.6 2.0 11.2 15.1 12.7 8.6




Northern Region

Eastern Region

Southern Region

Western Region

Central Region

4-Dec 4-Nov 4-Oct 4-Sep 4-Aug 4-Jul 4-Jun 4-May 4-Apr 4-Mar 4-Feb 4-Jan 4-Dec

2,220,260 1,574,890 3,124,160 2,291,640 1,725,400 2,124,550 1,591,300 2,857,510 1,996,280 1,694,170 2,303,920 1,913,250 3,891,760 2,411,420 2,083,500 2,178,970 1,333,060 3,081,170 1,720,450 1,505,340 1,957,840 1,239,340 2,753,050 1,332,340 1,571,610 23,14,650 14,54,860 30,79,660 17,14,810 16,60,640 22,53,190 14,86,160 27,40,340 16,65,840 16,10,800 21,62,430 16,76,640 30,22,300 19,21,430 16,24,810 22,79,670 17,56,720 29,25,700 20,38,330 16,04,110 23,65,310 17,71,580 35,72,540 18,51,220 17,23,000 22,29,690 16,00,350 29,87,750 19,67,200 15,41,760 22,11,880 15,05,840 29,57,040 20,61,840 14,87,800 20,76,340 13,72,400 30,22,700 21,00,540 14,85,660

` 56

Journals & Magazines A Brochure Cement from India (CMA India) Indian Cement Industry at a Glance (CMA India)

News Articles and Press Releases Cement Shortage (Portland Cement Association dated 9 Feb 2005) International Builders Show 2005 (PCA dated 10 Jan 2005) Vibrant M&A Activity in India (Economic Times dated 26 Jan 2005)

Company Annual Reports and Releases ACC Holcim

Websites (Portland Cement Association) (Cement Manufacturers of India) (Associated Cement Co. Ltd) (Holcim) (Holcim USA) (The Economic Times)