Saurashtra Cement Limited| BSE Scrip Code: 502175

Cement & Cement Products September 17, 2012

Equity Statistics Current Market Price Rs. 20.0 52 Week High / Low Rs. 23.55/8.4 Market Capitalisation Rs. crores 102.4 Free Float Rs. crores 40.0 Dividend Yield % 5.0 0.4 One Year Regression Beta Times BSE Volumes Trend - Average = 76.16 Thousand
600 400 200 0
in '000s

Business Summary Saurashtra Cement Limited (SCL) is into manufacturing of cement and cement products like portland pozzolana cement (PPC), ordinary portland cement (OPC) and sulphate resisting portland cement (SRPC) at its manufacturing facilities located at Ranavav in Porbandar (Gujarat). The range of application for cement products is primarily in real estate, infrastructure and Industrial construction. SCL is ISO 9001:2008, EMS ISO 14001:2004 and OHSAS 18001:2007 certified. SCL is exporting its products in Sri Lankan and African markets as the products have already been approved by Sri Lankan standard, South African Business Standards besides Bureau of Indian Standard. In FY12, SCL reported net sales of Rs. 438.5 crore and incurred a net loss of Rs.20.5 crore. The Indian market continues to be the key market contributing to around 82% of net sales in FY12. The company is looking forward to market its products in new markets like Tanzania, Sudan and other East African countries etc, by offering competitive prices and better quality of goods and services. SCL sells its product under the brand name "Hathi Cement". SCL has upgraded its technology by installing a Medium Voltage VFD for power saving, replacement of old DC motors with AC motors and control desk of crusher with SCADA. SCL is currently trading at a trailing EV/EBITDA multiple of 5 times and 0.23 times FY12 net sales.

Relative Returns
150 125 100 75 50

Sensex

SCL

Returns (%) Absolute Relative to Sensex

100%

1M 3M 6M 1Yr 1% 21% 27% 30% 2% 8% 4% 17% Shareholding Pattern

50% 0% Sep '11 Dec '11 Promoter DII Mar '12 FII Jun '12 Others

Board of Directors Person Role M.N. Mehta NED & Chairman Jay M. Mehta ED & Vice Chairman Mr. M. S. Gilotra MD Hemang D. Mehta NED M. N. Rao NED S. V. S. Raghavan NED B. P. Deshmukh NED K. N. Bhandari NED Jayant N. Godbole NED Hemnabh Khatau NED Bimal Thakkar NED V. R. Mohnot Director (Finance) & CS Source: AR and CARE Research Note: MD: Managing Director, ED: Executive Director, NED: Non Executive Director, CS: Company Secretary

Source: BSE, Capitaline and CARE Research

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Background Saurashtra Cement Limited (SCL) is the flagship company of the Mehta Group, incorporated in 1956. SCL is engaged into manufacturing of cement and cement products like portland pozzolana cement (PPC), ordinary portland cement (OPC) and sulphate resisting portland cement (SRPC). SCL sells its product under the brand name "Hathi Cement". SCL has fully owned six subsidiary companies named Agrima Consultants International Limited, Pranay Holdings Limited, Prachit Holdings Limited, Ria Holdings Limited, Reeti Investments Limited and Concorde Cement Private Limited. SCL has plants at Ranavav in Porbandar (Gujarat), employing 482 people. Business overview SCL derives its revenue from one segment i.e. manufacturing of cement. Geographically, the Indian market continues to be the key market contributing around 82% of net sales in FY12. Sales from the Indian market grew by around 1% in FY12 y-oy, while the sales from overseas market exhibited a growth of around 87% y-o-y, albeit on a smaller base. Power & fuel is the major cost of cement production (formed around 40% of the total cost of sales in FY12) for SCL in the manufacturing of cement. Strengths and growth drivers Rich experience of the promoters supported by the Mehta group coupled with established brand image. Locational advantages as its presence in proximity to the Porbandar and Veraval/Okha ports, rail network and is close to highways. Thus, SCL has competitive access to the domestic markets as well as export markets in the Africa, Middle East countries, Sri Lanka etc. by the economical sea route. SCL has upgraded its technology by installing a Medium Voltage VFD for power saving, replacement of old DC motors with AC motors and control desk of crusher with SCADA. SCL has technical collaboration with many companies located in US, Europe and Austria. Risk and concerns Overcapacity of cement versus the demand coupled with the continued fragmentation of the industry results in the cyclical fluctuation in the profitability of cement business. Exposure to volatility in prices of power & fuel, freight cost and high rates of taxation can have negative effect on the profitability of SCL. A draft scheme of rehabilitation of the sick company has been circulated for comments and suggestions in Q4FY12. The scheme provides for restructuring of debts and reliefs and concessions from the Government of Gujarat in respect of waiver of interests and penal interests. Till the sanction of the rehabilitation scheme, the short tenure of a large part of debt and SCLs operations in these conditions expose the company to a default in servicing of its debts. Future strategy and expansion plans SCL has upgraded its existing mechanical packer, fly ash storage, handling & dosing system and cement mills SCADA system. The company plans to take action in R&D by using VFD in fan applications, improvement in efficiency of fans by reengineering and upgradation of PLC control system of main plant. The company is looking forward to market its products in new markets like Tanzania, Sudan and other East African countries etc, by offering competitive prices and better quality of goods and services. Industry outlook The Indian cement industry recorded a dismal growth of 6.5% in FY12 on account of slowdown in the real estate sector and delay in takeoff of the various infrastructural projects which owing to the spiralling cost of capital hit the cement industry. Long-term cement demand in the country is expected to remain stable driven by increased focus of the government on promotion of low-cost affordable housing and infrastructure development. The industry has been grappling with cost pressure due to rise in raw material cost and freight charges. CARE Research has estimated that the domestic Cement demand is expected to grow at a CAGR of 8.3% during the period FY 12-15. Cement demand would largely be driven by the low-cost housing segment in rural & semi-urban regions and governments focus on infrastructure development in the country. The countrys per-capita consumption of cement is abysmally low as compared to the levels in other countries which indicate that the long-term growth potential for the industry is intact. Also, cement as such does not have any direct substitute. Almost 55-60% of the domestic cement demand is derived from the real estate sector. So, further rise in the interest rates and slowdown in the economy can hamper the offtake of cement. Some of essential inputs for cement manufacturing are controlled by government like royalty on limestone, power tariffs, allocation of coal etc. Cement is an essential input for the infrastructure development in the country consequently; government provides enough support to the cement industry during the economic down-cycles like providing excise duty reduction, measures to boost housing demand etc. Government does not directly control cement prices. However, it can put an anchor on rising cement prices by tinkering the duty structure. SCL is well-placed in the industry by virtue of its long track record and established brand.

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Peer comparison Year ended March 31, 2012 Income statement (Rs. crore) SCL JLCL MCL GSCL Total income 442.7 1,780.9 618.5 444.2 Net sales 438.5 1,718.1 630.8 439.0 EBITDA 39.5 288.7 103.5 15.7 Ordinary PAT (20.5) 108.8 56.0 5.5 Adjusted PAT (20.7) 108.8 56.5 5.6 Per share data (Rs.) Adjusted BVPS NM 99.9 160.1 7.3 Diluted EPS 8.6 20.0 0.4 Growth (Y-o-Y) (%) Growth in total income 8.3 28.1 19.6 21.5 Growth in net sales 12.1 29.9 27.1 25.3 Growth in EBITDA 117.6 51.3 63.2 NM Growth in adjusted PAT NM 84.0 49.6 NM Growth in EPS* NM 85.3 49.7 NM Profitability ratio (%) EBITDA margin 9.0 16.8 16.4 3.6 Adjusted PAT margin NM 6.1 9.1 1.3 Valuation ratios (Times) Price/EPS (P/E) NM 11.5 6.9 22.3 Price/Book value (P/BV) NM 1.0 0.9 1.2 Enterprise value (EV)/EBITDA 5.0 6.9 3.4 6.0 Source: BSE, Capitaline and CARE Research Note: JLCL: JK Lakshmi Cement Ltd.,; MCL: Mangalam Cement Limited; GSCL: Gujarat Sidhee Cement Limited NM: Non Meaningful Quarterly financials Income statement (Rs. crore) Total income Net sales EBITDA Ordinary PAT Adjusted PAT Growth (Q-o-Q) (%) Growth in net sales Profitability ratio (%) EBITDA margin Adjusted PAT margin Q1FY13 303.1 141.6 54.4 148.4 16.6 12.6 38.4 5.5 Quarter ended June 30, 2012 Q4FY12 Q3FY12 Q2FY12 128.6 96.6 96.5 125.8 95.5 96.5 43.3 11.7 15.5 17.3 (15.3) (22.0) 17.3 (15.3) (22.0) 31.8 34.4 13.4 (1.1) 12.3 NM (20.4) 16.0 NM 32.5 0.8 Q1FY12 122.1 121.3 39.4 1.0 1.0

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Financial analysis In FY12, SCL reported net sales of Rs.438.5 crore up 12.1% y-o-y. Total income witnessed a growth of 8.3% during the same period. SCL reported EBITDA margins of 9% in FY12. However SCL incurred a net loss of 4.7% on account of high interest and depreciation cost in the same year. SCL reported a negative networth of Rs.38.4 crore as on March 31, 2012 owing to accumulated losses for the last five years. Interest coverage ratio also remained low at 0.4 times in FY12. The overall liquidity position of SCL remained stressed marked by current ratio of 0.3 times in the last two years. The company has not paid any dividend for the last five years. Annual financial statistics Income statement (Rs. crore) Total income Net sales EBITDA Depreciation and amortisation EBIT Interest PBT Ordinary PAT Adjusted PAT Balance sheet (Rs. crore) Adjusted networth Total debt Cash and bank Investments Net fixed assets (incl. CWIP) Net current assets (excl. cash, cash equivalents) Per share data (Rs.) Adjusted BVPS Diluted EPS* DPS Growth (Y-o-Y) (%) Growth in total income Growth in net sales Growth in EBITDA Growth in adjusted PAT Growth in EPS* Key financial ratio EBITDA margin (%) Adjusted PAT margin (%) RoCE (%) RoE (%) Gross debt - equity (times) Net debt - equity (times) Interest coverage (times) Current ratio (times) Inventory days Receivable days Source: BSE, Capitaline and CARE Research Financial Year (FY) refers to period from April, 1 to March, 31 NM: Non Meaningful FY07 12m 448.1 410.3 33.3 18.1 15.2 26.5 24.6 22.2 31.6 19.7 369.2 138.8 15.8 266.6 (81.4) 6.1 5.4 8.1 7.1 18.8 11.7 0.6 1.3 FY08 18m 748.0 712.7 5.1 27.3 (22.2) 59.0 (53.7) (47.7) (20.8) 6.8 337.3 17.1 8.0 350.4 (87.2) 2.1 66.9 73.7 (84.6) NM NM 0.7 NM NM NM 49.4 46.9 NM 0.6 27.5 10.7 FY10 15m 591.8 574.4 87.4 29.9 57.5 55.8 32.0 23.2 18.0 38.9 258.5 17.6 15.0 337.8 (120.4) 12.0 4.3 (20.9) (19.4) 1,611.0 NM NM 15.2 3.0 18.1 101.4 6.6 6.2 1.0 0.5 37.7 10.8 FY11 12m 408.8 391.1 18.1 24.0 (5.8) 42.8 (42.1) (57.1) (57.0) (17.9) 121.3 8.1 15.0 311.4 (268.2) NM (30.9) (31.9) (79.3) NM NM 4.6 NM NM NM NM NM NM 0.3 56.2 20.3 FY12 12m 442.7 438.5 39.5 22.0 17.4 44.7 (20.5) (20.5) (20.7) (38.4) 102.7 5.9 15.0 293.1 (285.9) NM 8.3 12.1 117.6 NM NM 9.0 NM 27.0 NM NM NM 0.4 0.3 62.1 18.0

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DISCLOSURES Each member of the team involved in the preparation of this grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company. This report has been sponsored by the BSE Investors Protection Fund.

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