INDIA CEMENTS

LIMITED

Submitted By – Vaibhav Arora

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Contents

MACRO ECONOMY AND INDUSTRY OUTLOOK......................................................................3

INDIAN ECONOMY – DEVELOPMENTS AND OUTLOOK...................................................3
INDUSTRY OVERVIEW...............................................................................................................3
Story in Charts….............................................................................................................................6
THE INDIA CEMENTS.....................................................................................................................7
COMPANY BACKGROUND.........................................................................................................7
INVESTMENT RATIONALE........................................................................................................7
RISKS...............................................................................................................................................7
FINANCIAL HIGHLIGHTS..........................................................................................................8
VALUATION.................................................................................................................................10

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MACRO ECONOMY AND INDUSTRY OUTLOOK

INDIAN ECONOMY – DEVELOPMENTS AND OUTLOOK

The financial year 2017-18 was marked by various structural reforms aimed at strengthening the
country’s macro-economic scenario for sustainable future developments. India maintained a stable
growth rate of 6.7%, majorly owing to disruptions like the Goods and Services Tax (GST).
The economy however has shown signs of revival. Disruptions caused by the two structural changes –
demonetization and the GST are wearing off and there is an optimism in domestic demand. The index
of industrial production has shown signs of increase since October 2017. Inflation is also under
control and is well within the target band of 4% (+/- 2%) set by the RBI.
With upgradation of India’s sovereign rating by Moody’s Investors Service and India’s improved
ranking in terms of ‘Ease of Doing Business’, India is emerging to be a major global investment
economy.
India’s GDP is expected to reach US$ 6 trillion by 2027, majorly due to globalisation, consistent
reforms, digitization and improving demographic conditions.
India’s industrial development is likely to bolster owing to Government initiatives focussing on smart
cities and affordable housing programmes.
Overall, the outlook of Indian economy for the coming years looks positive.

INDUSTRY OVERVIEW

India is the second largest producer of cement in the world. Since the deregulation in 1982, the Indian
cement industry has attracted huge investments, both from Indian as well as foreign investors. The
financial year 2017-18 saw a 6% growth in cement sector with increased infrastructure spending by
the Government and re-materialisation of demand from the private sector.
According to data released by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum
products attracted Foreign Direct Investment (FDI) worth US$ 5.26 billion between April 2000 and June 2018.

Government Initiatives
The Government of India has taken various initiatives in the recent past in order to bolster the private
sector companies in the industry. Some such initiatives are as follows

 Budget 2018-19 – Easing credit to homebuyers through ‘Affordable Housing Fund’ of INR
25000 crores under National Housing Bank. The move will boost the demand for cement in
housing segment
 Smart City project with an investment of INR 2.04 lacs crore
 Construction plan of 10 million houses in rural India and 20 million toilets under Pradhan
Mantri Awas Yojana and Swachh Bharat mission, respectively
 Introduction of Real Estate Regulatory Act (RERA) – Ensures accountability for real estate
projects and assures timely completion. This will boost buyer confidence and positively
impact the cement industry
 Construction of around 84,000 kilometers of roads by 2022 including the Bharatmala Project,
construction of rural roads under the Pradhan Mantri Gram Sadak Yozana by 2019

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 Demand Drivers

 Housing is the major driver of cement demand with 67% of the

contribution
Housing (67%)  Increase in rural incomes, Government initiatives of higher
allocation for rural, agricultural and allied sectors combined with
higher rural credit likely to increase rural housing demand

 Smart city project undertaken by the Government of India – About

Infrastructure 100 Smart cities planned
(13%)  Freight corridors, ports, roads construction and metro rail
projects under development

Urbanization  Urban Development Mission – 500 cities with population of

(20%) more than 10000

Besides the above drivers 2019 general election spending is likely to boost demand.

Industry Trends

 Increasing presence of small and mid-sized cement players diminishing market concentration
 Growing adoption of cement instead of bitumen in construction of roads
 Huge investments in infrastructure development by the government

As per IBEF Report, June 2018 India has a cement production capacity of 455 MT, of which almost
98% is dominated by the private sector. The top 20 companies account for 70% of the total
production. Cement is one of the most important building materials used in construction and
infrastructure activities. The rise in real estate sector, housing demand and infrastructure spending
will augment cement demand.

Industry Risks

 Inflation Rate – Inflation plays a pivotal role in Indian economy. In 2017-18, average
inflation dipped to a six-year low of 3.3%, however, it is expected to rise 4.40% during FY
2018-19. One of the major causes of inflation is overall increase in demand for goods and
services, which escalate their prices. Besides, in case normal monsoon is affected, inflation
may further rise making commodity prices dearer.
 Interest Rate – Reserve Bank of India has kept repo rate unchanged for the last year at 6.0%.
However, due to increasing cost of funds for banks, the marginal cost of lending rate has
started increasing. All banks have started lending on the basis of marginal cost of funds-based

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 lending rate (MCLR), leading to higher cost of borrowing for property buyers, resulting in
lower demand in the housing segment.
 Raw Material Risk – The cement industry depends on limestone and other raw materials.
However, availability of limestone is limited and thus, it is essential to promote the use of
blended cement, which uses alternative raw materials such as fly ash and slag. The increase in
the cost of these alternative materials — now fly ash is available on auction and slag on the
basis of prevailing market prices — may further increase production costs.
 Infrastructure Risk – Infrastructure sector drives overall development of the economy and
is a major focus of the Government of India. Any pull back by the government on its
initiatives will result in de-growth for the cement industry. Moreover, too many regulatory
approvals and compliances might be a hindrance to the segment’s progress.
 Competition Risk – India’s cement sector has become highly competitive with multiple large
players operating in the domestic market. While earlier most companies were catering to
specific parts of the country, now most players are expanding their reach pan-India, thus
creating greater market competition.
 Power and Fuel Risk – Cement industry is highly energy intensive and 23% of its total
expenditure consists of power and fuel costs. With rising crude oil prices, there might be an
adverse impact on prices of petcoke and operating costs of the company.

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Story in Charts…

Infrastructure spending as a % of GDP... Bank credit and housing loan growth…

Global Crude Oil Forecast… Road Construction/day on a rise…

Source: IBEF Website, Edelweiss research

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THE INDIA CEMENTS 20, December, 2018

Rating: BUY KEY HIGHLIGHTS

52-Week High/Low 205.90/80.05
Target Price: INR 121
Sensex/Nifty 36431.67/10951.70
Target Period: 12-15 Months Market Cap. INR 2989 (Cr.)
Shares Outstanding 30.81 (Cr.)
Share Price: INR 97

COMPANY BACKGROUND

India Cement is one of the leading cement company with an annual turnover of INR 5432.27 Crores.
The majority of revenue come from the southern region, where the company is currently operating
with an installed capacity of 13.1 MT. The Company has various plants across India, including
Malkapur, Vishnupuram, Chilamkur, Yerraguntla, Vallur, Sankari, Dalavoi, Sankarnagar, Banswara
and Parli. It sells cement under the brands ‘Sankar Super Power’, ‘Coromandel King’ and ‘Raasi
Gold’. The Company produces Blended Cement as well as Ordinary Portland Cement.

INVESTMENT RATIONALE

 India Cements has been able to maintain the capacity utilisation of 80%. The sales volume in
Andhra Pradesh and Telangana almost doubled from last financial year, indicating a healthy
demand
 Established a strong position is the southern region, India Cements can expect a significant
growth in the next financial year due to high demand of reconstruction activity in Kerala after
floods
 The company has recently entered into a purchase agreement to acquire Springway mining
for INR 183 Crores. Also, the company is expanding its business with 1.5 MT clinker in
Madhya Pradesh and 2.3 MT grinding unit in Uttar Pradesh

RISKS

 The cement industry has faced a negative and practically nil growth in the southern region for
the past 3 to 4 years due to various reasons such as poor economic growth in the region,
deficit rainfall and political changes. Although there is growing demand in the southern
region, it is still unknown whether the trend will continue in the coming years
 The company is highly dependent on natural resources of limestone and coal. In case of
limestone, the deposit concentration is only in few states and in other states the reserved
resources are fast depleting, which might cause a problem for the company to meet its day-to-
day requirements
 The non-availability of good quality gypsum at reasonable costs within the vicinity of the
plants is also a risk necessitating import of the same, the price of which is substantially higher
than the local gypsum

FINANCIAL HIGHLIGHTS

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INCOME STATEMENT (IN INR Millions)

Particulars 2015-16 2016-17 2017-18

Revenue from Operations 55,347.54 58,608.69 54,322.68
Other Income 246.93 192.89 245.04
Total Income 55,594.46 58,801.58 54,567.73

Expenses
Cost of Materials Consumed 8,587.98 9,311.15 9,406.66
Purchases of Stock-in-trade 58.89 84.80 119.14
Change in inventories -91.29 -181.24 283.60
Employee Costs 3,717.13 3,821.29 4,062.32
Other Expenses 34,351.35 36,690.32 33,361.00
Total Expenses 46,624.05 49,726.32 47,232.71

EBITDA 8,970.41 9,075.26 7,335.02

Depreciation & Amortization 2,905.30 2,760.11 2,790.03
EBIT 6,065.12 6,315.15 4,544.99
Finance Expenses 4,395.87 3,799.68 3,647.57
Profit before Exceptional Items
and Tax 1,669.25 2,515.47 897.42
Share in Profit / (Loss) of Associates 3.86 -65.18 -54.39
Exceptional Items – Gain 31.95 - -
PBT 1,641.15 2,450.29 843.03
Tax 474.22 940.02 192.42
PAT 1,166.93 1,510.27 650.61
Other Comprehensive Income -22.26 120.45 56.55
PAT for Equity Shareholders 1,144.67 1,630.72 707.16

BALANCE SHEET (In INR Millions)

Particulars 2015-16 2016-17 2017-18

Assets
Non-Current Assets
Property, Plant & Equipment 74,351.26 72,129.17 70,176.25
Capital-Work in Progress 987.79 1,342.55 1,757.26
Investment Property - - -
Goodwill 228.99 228.99 1,022.05
Other Intangible Assets 297.59 240.44 266.44
Intangible Assets under
development - - -
Investment in an Associate 3,543.07 3,553.18 3,562.77
Financial Assets-Loans 8,226.02 9,095.98 9,552.71
Financial Assets-Others 614.11 588.42 503.80
Deferred Tax Assets (Net) - - -
Other Non-Current Assets 2,812.16 2,836.14 3,251.95
Total Non-Current Assets 91,060.97 90,014.86 90,093.23
Current Assets
Inventories 6,264.08 7,736.29 6,946.53
Current Investments 30.95 25.47 21.25

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Trade Receivables 5,604.68 5,230.19 6,453.40
Cash, Bank & Cash Equivalents 357.20 379.83 535.43

Loans 488.44 663.07 379.98

Other Financial Assets - - -
Current Tax Assets (Net) 760.50 1,395.48 1,344.64
Other Current Assets 2,348.43 4,051.97 4,000.69
Total Current Assets 15,854.28 19,482.29 19,681.93
TOTAL ASSETS 1,06,915.26 1,09,497.15 1,09,775.16

Equity & Liabilities

Equity Share Capital 3,081.53 3,081.53 3,081.53
Other Equity 47,420.85 48,667.50 49,609.26
Total Equity 50,502.37 51,749.03 52,690.78
Non-Controlling Interest 265.57 355.78 399.72
Total Shareholders’ Funds 50,767.94 52,104.81 53,090.50

Non-Current Liabilities
Borrowings 21,265.22 24,514.89 28,991.53
Deferred Tax Liabilities 5,793.10 6,627.35 6,575.48
Other Financial Liabilities - - -
Other Non-Current Liabilities 823.35 280.63 334.16
Provisions 1,608.11 1,607.89 1,428.02
Total Non-Current Liabilities 29,489.78 33,030.76 37,329.19

Current Liabilities
Short Term Borrowings 5,589.09 3,595.51 1,559.81
Trade Payables 10,488.34 13,170.49 11,864.82
Other Financial Liabilities 9,510.46 6,597.47 4,795.33
Provisions 1.67 1.79 1.79
Current Tax Liabilities (Net) 237.81 249.18 8.21
Other Current Liabilities 830.18 747.15 1,125.51
Total Current Liabilities 26,657.54 24,361.59 19,355.47
TOTAL EQUITIES &
LIABILITIES 1,06,915.26 1,09,497.15 1,09,775.16

KEY FINANCIAL RATIOS

Profitability Ratios

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EBITDA Margin 16.21% 15.48% 13.50%
PAT Margin 2.11% 2.58% 1.20%
Leverage & Coverage Ratios
Debt / Equity 0.53 0.54 0.58
Net Debt / EBITDA 2.95 3.06 4.09
Interest Service Coverage Ratio 2.04 2.39 2.01
Liquidity & Turnover Ratio
Current Ratio 0.59 0.80 1.02
Trade Receivable Days 36.96 32.57 43.36
Inventory Days 49.04 56.79 53.68
Trade Payable Days 442.73 511.63 454.62
Fixed Asset Turnover Ratio 0.74 0.81 0.76
Return & Shareholders Ratios
ROE 2.25% 3.13% 1.33%
ROA 1.09% 1.38% 0.59%
EPS 3.73 5.31 2.29

DuPont Analysis
Net Margin 2.07% 2.78% 1.30%
Asset Turnover 0.52 0.54 0.49
Leverage Factor 2.11 2.10 2.07
ROE 2.25% 3.13% 1.33%

VALUATION

TRADING COMPARABLES

Consolidated
Financials EV/Sales EV/EBITDA EV / MT P/E P/S P/B
JK Lakshmi 77.8
Cement 1.58 11.82 543.16 9 0.90 2.34
45.9
India Cement 1.14 8.45 557.84 4 0.55 0.57
31.2
ACC 2.03 14.13 863.42 0 2.03 3.08
22.9
Ambuja Cement 1.72 10.39 1,464.94 7 1.77 2.16
54.7
Sagar Cement 1.74 11.83 966.57 7 1.33 1.85
Ultratech 49.9
Cement 4.01 19.27 1,344.00 6 3.44 4.21
43.9
Shree Cement 6.32 22.44 1,840.21 8 5.99 6.84
Heidelberg 27.0
Cement 3.15 16.10 1,142.84 5 1.84 3.44
18.4
JK Cement 1.59 8.74 761.97 1 1.05 2.66
Mangalam 54.1
Cement 0.87 8.86 354.79 8 0.55 1.20

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 13.0
Star Cement 2.99 9.28 1,134.35 9 2.70 2.98
Ramco Cement 1.35 5.39 494.05 9.17 1.12 1.25

37.3
Mean 2.37 12.23 955.68 8 1.94 2.72
37.5
Median 1.73 11.11 915 9 1.55 2.5

Adj.
Net Equity Minority
EV Equity Share Value Weight
Debt Value Interest
Valuation Methods Value
C =A– E=C– F = E/No. of
A B D B
B D shares
EV/Sales 9,915.0 3,171.3 6,743.7 40 6,703.7 218 10%
EV/EBITDA 7,932.4 3,171.3 4,761.2 40 4,721.2 153 45%
EV / MT 11,071.5 3,171.3 7,900.2 40 7,860.2 255 0%

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P/E 5,299.8 3,171.3 2,128.5 40 2,088.5 68 45%
P/S 12,062.2 3,171.3 8,890.9 40 8,850.9 287 0%
P/B 11,415.7 3,171.3 8,244.4 40 8,204.5 266 0%
Equity Value 3,734.7 121

Outlook and Valuation

India Cement Limited has been able to maintain a strong position in the southern region. As per ICICI
Direct Report, out of the total cement capacity of the company, 45% of the capacity is in Andhra
Pradesh and Telangana. With the revival of demand in the southern region, majorly in Andhra
Pradesh, Telangana, Kerala and Tamil Nadu, India Cements is expected be the key beneficiary. There
is a higher Government spending in housing, irrigation and other infrastructure projects in the
southern region in the current as well as coming years, which will certainly boost the cement demand.
Besides that, the company also has a good presence in non-southern regions and it has merged with
Trinetra Cement (Northern Region), which will further lead to sales growth for the company. It is also
expected that the company will be able to control its cost with the installation of new power plant in
Andhra Pradesh.

Source:
Moneycontrol
Taking into consideration the above factors, it is recommended to BUY the stock with the target price
of INR 121/share.

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