Beruflich Dokumente
Kultur Dokumente
FITT Research
12 July 2007
Fundamental, Industry, Thematic,
Indian Cement
Thought Leading
Deutsche Bank Company Research's
Global Markets Research
Sector
seeking differentiated ideas. Contrary to
prevailing market opinion, we believe the
Indian cement sector will experience a
sustained upcycle lasting a few years.
Street concerns on oversupply, demand
slowdown, pricing and valuations are
overdone, representing a buying
opportunity in our view. Our FY09 (Mar)
Manish Saxena
Research Analyst
(91) 22 6658 4034
manish.saxena@db.com
12 July 2007
FITT Research
Indian Cement Sector Top picks
Manish Saxena
Research Analyst
(91) 22 6658 4034
manish.saxena@db.com
Industry – Sector earnings to grow at a 22% CAGR over the next three years
We believe the sharp increase in India’s infrastructure capex alone can sustain
10% annual cement volume growth. Real estate growth and pre-election spending
should also help. Consequently, we prefer companies that (1) are expanding
capacity and have the ability to bring capacities on stream, (2) are less vulnerable
to energy cost inflation, and (3) are in attractive regional markets within India.
Table of Contents
ACC ................................................................................................... 23
Ambuja Cements Ltd....................................................................... 28
Grasim .............................................................................................. 36
India Cements .................................................................................. 41
Shree Cements................................................................................. 46
UltraTech Cement Limited.............................................................. 52
Appendix A....................................................................................... 57
Capacity ordered..................................................................................................................... 57
Considering only three Figure 1 shows that even considering only three constraints - ordering, financial and
constraints, i.e. ordering, regulatory approval - of the five possible ones, the maximum realizable new cement capacity
financial and regulatory that could come up in India during FY07-FY10 is 51MTPA. Also, the maximum realizable
approval, of the five possible clinker capacity addition based on our analysis can be no more than 39MTPA. This implies
ones, the maximum
that only less than 50% of the announced capacity additions in India of 108m tonnes could
see the light of day over FY07-10.
realizable new cement
capacity that could come up
Figure 1: Multiple constraints on realizing announced capacity
in India during FY07-FY10E
is 51 MTPA Realizable
capacity, 51.3 MTPA
Financial closure
possible, 146.4MTPA
Regulatory
approved, 81.1
MTPA
Ordered,
73.7 MTPA
Source Ministry of Forest, Ministry of environment, CMA, Deutsche Bank
100
80 Ordered
60
40
20
80 Ordered
60
40
20
As our bottom-up analysis of the financials of each company in the sector reveals, there have
been many instances of companies ordering capacity that cannot be financed even assuming
20% equity dilution and raising debt to 1.5x equity. Figure 3 shows that approximately
29MTPA of capacity orders (27% of announced capacity) may not be commissioned due to
difficulties in financial closure.
2. Availability of contractors to carry out civil and erection works. This depends on
construction and infrastructure work and the experience of a contractor. We have not
been able to quantify the impact of this constraint. Our talks with Indian cement
companies suggest that they are running cost over-runs to an extent of 40-50% on the
civil construction side.
Finally, even assuming that Indian companies are able to meet the above two challenges and
Effective incremental
74m tonnes of capacity is commissioned, incremental production may be only 51m tonnes
capacity addition will be far over FY07-10E. Capacity addition does not become effective spot on April 1st of each year,
less than headline capacity but is dependent on the handover of the plant. This implies that effective capacity addition in
addition numbers each year is lower than name plate capacity addition.
Figure 4: Effective capacity addition is different from name plate capacity addition
Stabilization of new units Finally, the cement output from new units is subject to two conditions:
has taken 5-6 months in
recent times Stabilization of new units: This takes 5-6 months. We note that Kesoram and Binani
Cement have yet to reach peak utilisation levels despite commissioning of capacities
about 3-6 months ago.
If India were to buy 2m More importantly, the spot trade of cement is in the range of 25-35m tonnes currently, which
tonnes of cement in global is less than 2% of global production. If India were to buy 2m tonnes of cement in the spot
spot cement market, there is market (i.e., 10% of total spot trade), spot prices may rise by 20-30%, making the buying
a possibility that spot prices completely unviable.
could rise by 20-30%
Figure 5: Global cement trade is 3-4% of production
Clinker Cement
(mn tonnes)
120
100
80
60
40
20
0
1998 1999 2000 2001 2002 2003 2004 2005
Source: Deutsche Bank, Ocean Shipping Consultant
Thailand SE Asia 27 40 13 -
Indonesia SE Asia 34 42 8 -
India Indian Subcontinent 149 156 5 1
Pakistan Indian Subcontinent 27 33 6 -
The Middle East Middle East 120 100 - (20)
Source: CMA, Ocean freight liners
Port capacity for cement Port capacity in India acts as a big bottleneck for imports
imports is limited in India Cement unloading on ports in India can be done only by existing cement producers as others
do not have the equipment with a discharge rate greater than 1000 tonnes. So a demurrage
cost of USD10-15/t may have to be paid by importers of cement – other than existing players.
Figure 7: Demand growth on a rise Figure 8: But per capita cons is low
(mn t) ((%))
India consumption % annual grwth(RHS)
250 12
200 10
900
8
150
700
6
100
4 500
50 2 300
0 - 100
FY92 FY97 FY02 FY07 FY12 E
-100
China Japan Europe World US Asia (ex India
Per capita consumption China)
Source: Deutsche Bank Source: Deutsche Bank
Roads
5%
Housing
Irrigation
53%
23%
Fear of collapse of real There are fears of a slowdown in the demand from the housing sector due to a drop in real
estate prices has had estate prices in the country. The worry is that builders may postpone construction of new
virtually no impact on buildings if the property prices were to correct.
cement demand
50% 25%
40% 20%
30% 15%
20% 10%
10% 5%
0% 0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10% -5%
-20% -10%
-30% -15%
Proportion of cement As Figure 10 shows, historically real estate prices have had little correlation with the cement
demand from housing sector demand growth. The cement demand growth in housing is more dependent on the number
is estimated to come down of new houses being built and repairs to houses. Even assuming a 7% growth in new houses
(lower than the GDP growth), we get incremental cement demand to be about 4-5m tonnes
.per year for the next three years.
Figure 11: New house builds in India assumed to grow at 7%, a rate lower than GDP growth
Particulars FY05 FY06 FY07e FY08e FY09e FY10e
Urban pucca houses built per year (A)- mn 1.7 1.8 2.0 2.1 2.2 2.4
Cement consumption norm per house (B)-t 28.0 28.0 28.0 28.0 28.0 29.0
Cement consumed in Urban pucca houses (C)=A*B - mnt 47.6 51.4 55.5 59.4 63.0 69.1
Rural pucca houses built per year (D)-mn 2.2 2.3 2.5 2.6 2.8 2.9
Cement consumption norm per house (E)-t 6.0 6.0 6.0 6.0 6.0 7.0
Cement consumed in rural pucca houses (F)=D*E- mn t 13.2 14.0 14.8 15.7 16.7 20.6
Repair Demand (H) 3 3 5 7 9 10
Sub-total G= C+F +H 60.8 65.4 70.4 75.1 79.6 89.7
As a proportion of total demand 52 51 51 50 49 48
Source: Deutsche Bank, National Housing
Figure 12: Total order book of top 8 Indian engineering and construction companies
(Rs. Bn)
2,500
2,000
1,500
1,000
500
-
FY05 FY06 FY07
Source: Deutsche Bank, BHEL, L&T, Siemens, ABB, IVRCL, Gammon, Punj Lloyd, Nagurjana,
Assuming 10% cement intensity in structures, the order book of these 8 engineering
companies would incrementally add 4-6m tonnes of demand annually.
assembly elections are lined up for the next two years. This could spice up the total demand
growth in India.
25
Growth can be
20 higher in FY10
Higher base in than estimated
15
2003
10
0
2002 2003 2004 2004 2005 2006 2009e
assembly assembly assembly national assembly assembly national
Source: Deutsche Bank
200
10%
180
9%
160
8%
140
7%
120
100 6%
FY05 FY06 FY07 FY08e FY09e FY10e
Source: Deutsche Bank, CMA
On a regional basis we expect North and West to lead the demand growth trends in India.
While South could also do well, the skewed nature of projects in North and West makes us
believe that demand growth in South could be a shade lower than other regions.
North 27.1 29.9 33.4 37.0 41.1 11 Infrastructure projects like Delhi Airport, 15000MW hydro
projects to drive demand growth
East 22.6 23.9 26.2 28.8 31.6 10 Recent pick –up in infrastructure projects to drive growth
West 25.7 28.7 31.8 35.2 39.0 11 Urban infrastructure and state spends driving demand
South 37.6 43.5 47.9 52.7 57.9 10 Demand driven mainly by high income levels of population
Central 20.6 22.4 24.2 26.1 28.2 8 Elections, irrigations would act as triggers for demand
All India 133.9 148.9 163.8 180.3 198.3 10
y-o-y chg (%) 9% 11% 10% 10% 10%
Source: CMA, Deutsche Bank
Lack of planned While deriving our estimates for utilization levels, we are faced with the daunting task of
maintenance has resulted in trying to figure out the threat of forced outages faced by existing cement capacities. Figure
forced plant outages, risking 18 shows that the cement companies, except in South and East India, have skipped the
utilization levels of existing required one-month shutdowns for planned maintenance.
plants
Figure 18: Plants skip desired maintenance shutdowns
(%)
FY06 FY07
110%
105%
100%
95%
90%
85%
80%
75%
70%
65%
60%
North South East West Central
Source: Deutsche Bank, CMA
So we believe that existing plants may find it difficult to keep pace with demand growth.
While it is difficult to pinpoint the exact impact of such problems, the following can happen -
1. Have more forced outages of clinker units :Since almost all units are skipping the
required shut-downs for maintenance schedules, there have been increasing instances
of shut-downs due to breakdowns
3. Lack of contractors to undertake O&M as labor force has been shifted to greenfield
capacities.
Based on our demand-supply analysis, cement companies will have to work at 90%+
utilisation levels for the next three years. Our worry is that if things aggravate, the demand
itself could slow down due to lack of supplies unless supplies from the Asian countries help
meet at least some cement demand in India.
We believe cement prices in India would be governed largely by the demand-supply gap and
consolidation levels in Indian markets. As seen in Figure 19, India is likely to see a deficit
scenario in cement for the next two years and a marginal surplus in FY10E.
220
Deficit ~ 5% of
200 production
180
160
140
120
100
FY05 FY06 FY07 FY08e FY09e FY10e
Source: Deutsche Bank, CMA
We have divided the country into four regions i.e. North, South, East and West. As seen from
Figure 20the market share of the top six players in almost all regions of the country is above
70%. In fact, the North, where the top six players hold 80% of the market, looks best placed
in terms of progress on gradual consolidation. The current consolidation in the sector is only
likely to increase as most of smaller units in India may see delays in commissioning.
90
80
70
60
50
40
30
20
FY02 FY04 FY07 FY02 FY04 FY07 FY02 FY04 FY07 FY02 FY04 FY07
290
270
250
230
170
150
Historical price range
130
110
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Q3FY07
Q4FY07
H1FY07
Q1FY08e
Q2FY08e
Q3FY08e
Q4FY08e
Mar-09e
Mar-10e
Figure 22: Domestic prices have been lower than landed cost of imported cement
6,000
5,000
4,000
3,000
2,000
FY04 FY05 FY06 FY07 FY08e FY09e FY10e
Source: Deutsche Bank, CMA, Company
Asymmetric margin
improvement
Cost pressures to differentiate companies’ earnings
International coal prices have hit a 10-year high though domestic coal prices have hardly
moved up.
2HCY03
1HCY04
2HCY04
1HCY05
2HCY05
1HCY06
2HCY06
1HCY07
Source: Deutsche Bank, Bloomberg
As seen in Figure 23, the players who have used international coal got a double-whammy due
to the coal and freight costs.
Currently, the domestic coal prices are at a 40-45% discount to landed cost of imported coal
(adjusted for the calorific value). The usage pattern of domestic and international coal is
mainly driven by plant locations and coal mine linkage.
At this juncture, companies with domestic coal linkages would be at an advantage vis-à-vis
those tied up with supplies of imported coal. ACC, with the highest proportion of usage of
domestic coal, is also likely to report the maximum increase in EBITDA margins.
Associated Cement Cos. Ltd.# 16.9 18.2 29.4 38.5 912 41.2 264 36.7 (449)
Ambuja Cements Ltd.# 30.3 34.9 41.6 666 47.1 554 39.6 (747)
Grasim Industries Ltd. 24.2 24.4 30.4 32.9 249 36.7 379 31.8 (488)
India Cements Ltd. 12.8 17.4 32.8 37.9 511 36.3 (156) 29.0 (731)
Shree Cement Ltd. 29.0 29.4 46.3 47.8 150 50.3 257 40.7 (963)
UltraTech Cement Ltd. 14.0 17.9 30.0 35.1 505 41.2 618 37.6 (363)
Source: Deutsche Bank, Company, #Dec year ending, CY06=Mar 07
Grasim and Shree Cement Limited will be in a relatively advantageous position as both the
companies use pet coke, which is insulated from global freight cost movements and is more
dependent on crude oil prices.
There could be cost savings accruing to players who are investing in lignite/coal-based power
plants in lieu of furnace oil based DG sets. UltraTech Cemco is implementing a 92MW lignite-
based power plant, while Grasim is commissioning a 95MW thermal power plant.
Apart from the energy cost savings, companies are also looking at improving their distribution
efficiencies. The lead distance for most cement players would also shrink as most cement
players start looking at regional markets for better profitability. These savings could reduce
the freight costs. Finally, the discount between trade sale and non-trade sale would also
come down. Broadly, for the industry, this is as important as the price rise.
320
290
260
230
200
170
140
110
80
Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07
Source: Deutsche Bank, Bloomberg
Figure 27 shows that the impact of the government’s statements on stock prices has
lessened.
Figure 27: Government statements have increasingly lesser impact on stock performance
Date Event Abs Perf of DB cement Rel perf of DB Remarks
Index (%) cement Index (%)
One day Three One day Three
days days
22nd Jan 07 Imports duties on cement cut to zero from 12.5% (5.5) (5.0) (4.3) (5.6) Biggest single-day correction
28th Feb 07 Govt raises excise duty on higher priced cement (2.6) (6.2) (4.3) (2.2) Biggest three-day correction
2nd March 07 Cement prices rise higher than incremental excise duties (2.3) (4.7) 1.4 (2.3) Cement stocks o/p market
6th March 07 Industry Minister (IM) asks manufacturers to cut prices (4.3) (5.2) (3.4) (6.7) Pains seen in sector
7th March 07 First meeting of cement manufactures and FM 5.1 (4.6) 1.4 (7.1) Expectations of agreement brings
relief
9th March 07 IM and manufactures agree for a one-year price freeze (3.7) (2.7) (3.8) 0.0 Fears of earnings downgrades
19th March 07 FM asks cement industry to reduce prices 3.3 1.3 2.8 (3.9) Surprisingly stocks end positive
22nd March 07 Second meeting of FM and cement manufactures (0.7) (2.8) (0.5) 0.4 Deadlock remains
25th March 07 Second meeting of industry minister and cement (1.0) (2.0) 0.2 0.3 Both sides ask for concessions
manufactures
3rd April 07 FM exempts domestic levies on imported cement (1.4) 3.7 (2.7) (0.7) Few stocks end positive
6th April 07 Manufacturers say one-year price freeze no longer valid 3.7 3.4 1.2 0.8 Stocks react positively
7th April 07 Press reports of imports of cement from Pakistan 3.7 3.4 1.2 0.8 Stocks react positively
3rd May 07 Introduction of three-tier excise duty structure (0.2) (0.8) 0.79 0.22 Few stocks end positive
27th June 07 FM clarifies that there is no price freeze 6.9 7.6 6.4 6.0 Biggest single-day gains
Source: Deutsche Bank, Bloomberg * Bench –marked the DB cement index to BSE_30
Our estimates for FY09e are now 30-100% higher than consensus
Based on our new price and volume estimates, our earnings estimates are significantly above
the consensus. We believe our forecasts are realistic and factor in inflationary impact of coal
and freight costs. Also, our pan-India cement prices for FY08E are estimated at 14% higher
than FY07 and 3-4% higher for FY09E over FY08E cement prices. This looks conservative in
view of the tight demand–supply scenario in the country.
We believe that these advantages will unfold in the next two years, leading to accelerated
earnings growth.
Top picks are ACC and Ambuja Cement in large caps and Shree Cement and India Cement
among mid-caps. Figure 31 gives a snapshot of key financials of cement companies under
our coverage. Shree Cement and Grasim will likely have the highest volume growth. Ambuja
Cements and UltraTech will have the highest growth in realisations.
ACC# 8 9 29 39 41 34 41 47 42 33 37 35
Ambuja Cements# 13 21 43 47 40 34 36 38 24 27 29 18
Grasim 16 7 30 33 37 36 31 31 31 22 25 27
India Cement 7 9 33 38 36 30 22 29 22 17 28 25
Shree Cement 33 14 46 48 50 35 46 69 67 22 45 60
Ultratech 14 17 30 35 41 31 56 55 55 36 40 46
Source: Deutsche Bank, #Dec year ending, CY06=FY07
11 July 2007
ACC Buy
Price at 12 Jul 2007 (INR) 1,072.40
Reuters: ACC.BO Bloomberg: ACC IN Price target - 12mth (INR) 1,350.00
52-week range (INR) 1,172.60 - 704.65
Key changes
14,911
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
driving earnings CAGR of 32% over the same period. ROE is estimated to rise to Rel. to BSE 30 (L.H. Scale)
47% in CY07E. ACC (R.H. Scale)
ACC’s margin expansion could be the best in Indian cement industry Performance (%) 1m 3m 12m
We estimate ACC to report 1,176bps expansion in margins for CY06-08E which is Absolute 32.9 47.7 28.4
BSE 30 5.5 13.7 36.4
amongst the highest in India driven by an insignificant impact from the rise in
imported coal prices as ACC’s proportion of purchase of imported coal versus Stock data
domestic coal is amongst the lowest in peer group. In addition, the margin Market cap (INRm) 199,894
expansion could be even better if the following were to pan out: (1) Further Market cap (USDm) 4,947
narrowing of the differential between retail and wholesale prices and (2)Further Shares outstanding (m) 186.6
decline in landed cost of coal as freight cost for coal shipments could decline. Major shareholders –
Free float (%) 65
TP of Rs1,350 based on 3-year average PE and EV/EBITDA multiples Avg daily value traded (USDm) 6.6
Our target price assumes an average PE multiple of 14x FY08E and EV/EBITDA of
8.0x FY08E. Our target PE and EV/EBITDA multiples are based on the average PE Key indicators (FY1)
ROE (%) 47.4
and EV/EBITDA of the last three years and are in the lower quartile of the 10-year Net debt/equity (%) -12.9
forward valuation band. At our target price, the implied EV/t of USD232 is Book value/share (INR) 228.84
reasonable considering that the stock traded in the USD250-450/t range in the Price/book (x) 4.69
previous up-cycle. Key risks are lower-than-expected utilization levels and higher- Net interest cover (x) 34.7
Operating profit margin (%) 33.7
than-expected energy costs. Note that a 5% rise in energy cost could lower
earnings by ~1%. Also, a 5% lower-than-expected realization can result in a 13%
drop in earnings.
Forecasts and ratios
Year End Dec 31 2005A 2006A 2007E 2008E 2009E
Sales (INRm) 32,207.0 58,034.8 74,099.0 84,465.5 86,725.0
EBITDA (INRm) 5,356.8 16,233.5 27,508.0 33,625.2 30,550.2
Reported NPAT (INRm) 2,168.3 10,119.7 17,116.0 20,932.4 18,687.0
Reported EPS FD(INR) 11.84 55.02 91.73 112.18 100.15
DB EPS FD(INR) 11.84 55.02 91.73 112.18 100.15
OLD DB EPS FD(INR) 11.56 56.91 83.72 93.17 0.00
% Change 2.4% -3.3% 9.6% 20.4% –
DB EPS growth (%) -32.5 364.7 66.7 22.3 -10.7
PER (x) 35.5 15.4 11.7 9.6 10.7
EV/EBITDA (x) 16.2 9.1 6.9 5.4 5.9
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
Source: Deutsche Bank estimates, company data
1
DB EPS is fully diluted and excludes non-recurring items
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the
year end close
""
34
102
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 4,535 1,958 5,627 23,392 13,589 23,218 23,532
Movement in Net Working Capital 0 0 0 0 0 0 0
Capex -1,934 -5,579 -4,433 -5,281 -5,296 -12,030 -15,030
Free cash flow 2,600 -3,622 1,195 18,110 8,293 11,188 8,502
Other investing activities -2,542 553 -71 -2,093 0 0 0
Equity raised/(bought back) 240 142 76 22 -252 -2 -2
Dividends paid -433 -275 -855 -733 -3,203 -2,816 -4,694
Net inc/(dec) in borrowings 3,593 4,229 -4,861 -3,003 288 0 0
Other financing cash flows 0 0 663 -217 -1,247 -1,292 -1,658
Total cash flows from financing 3,401 4,096 -4,977 -3,930 -4,413 -4,110 -6,354
Net cash flow 3,459 1,028 -3,853 12,087 3,880 7,078 2,148
Movement in net debt/(cash) 134 3,201 -1,007 -15,090 -3,592 -7,078 -2,148
102
Cash and other liquid assets 3,807 4,835 981 13,068 16,948 24,026 26,173
Tangible fixed assets 24,721 28,431 31,220 33,959 36,726 45,762 57,173
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Associates/investments 3,820 3,267 3,338 5,431 5,431 5,431 5,431
Other assets 9,751 11,564 13,184 13,861 19,296 21,241 21,665
Total assets 42,099 48,097 48,723 66,319 78,401 96,459 110,442
Interest bearing debt 19,173 20,312 14,262 10,660 11,448 11,448 11,448
Other liabilities 11,264 13,178 14,786 26,112 24,253 27,016 30,194
Total liabilities 30,437 33,491 29,048 36,771 35,701 38,465 41,642
Shareholders' equity 11,662 14,606 19,675 29,547 42,700 57,995 68,801
Minorities 0 0 0 0 0 0 0
Total shareholders' equity 11,662 14,606 19,675 29,547 42,700 57,995 68,801
Net working capital -1,173 -366 -818 -9,588 -3,012 -1,874 -2,660
Net debt/(cash) 15,366 15,478 13,281 -2,408 -5,500 -12,577 -14,725
Capital 27,028 30,084 32,956 27,139 37,200 45,417 54,076
Sales growth (%) NM 18.8 -17.5 80.2 27.7 14.0 2.7
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 11.5 15.6 16.6 28.0 37.1 39.8 35.2
32.9% 43.4% 28.4%
EBIT Margin (%) 6.1 10.9 11.5 23.6 33.7 36.3 31.1
52-week Range INR 704.65 - 1,172.60 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 199,894 m ROE (%) 16.7 24.2 12.7 41.1 47.4 41.6 29.5
USD 4,947 m Return on capital (%) 13.3 13.3 8.3 34.9 54.8 51.9 38.6
Operating return on capital (%) 8.2 11.0 8.5 33.3 57.4 53.0 37.1
Company Identifiers
Capex/sales (%) 5.9 14.3 13.8 9.1 7.1 14.2 17.3
Bloomberg ACC IN
Capex/depreciation (x) 1.1 3.0 2.7 2.1 2.1 4.0 4.2
Cusip ¯ Net debt/equity (%) 131.8 106.0 67.5 -8.2 -12.9 -21.7 -21.4
SEDOL 6155915 Net interest cover (x) 2.2 4.8 5.8 26.3 34.7 42.5 37.4
Investment thesis
Outlook
We rate ACC a Buy due to the following: (1) We expect the company to report earnings
CAGR of 32% over CY06-08E and ROE of 47% in CY07E. (2) Net cash balance sheet with
CY07E RoE at 47% and free cash flow yield of ~6-10% in the forecast period. (3) Our
estimates are 33% (CY07) and 69% (CY08) higher than consensus and we expect the
consensus earnings upgrade to drive the stock outperformance. (4) Benefits flowing from
superior bargaining power driven by our forecast of tight utilization levels over FY07-10E.
(5) Our revised target price of Rs1,350 per share offers 30%upside potential.
Note our new estimates are based on revision our pan-India cement price forecast for CY07
to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (+9.6% YoY). ACC
could also report the maximum jump in margins as its proportion of use of Indian coal is the
highest amongst peers. Indian coal is at a 35-40% discount to landed cost of imported coal.
Valuation
We have thus used an average PE multiple of 14x (earlier assumed 10xCY07E) FY08E (Mar)
and 8.0xEV/EBITDA (earlier assumed 7xCY07E) FY08E (Mar) to arrive at the target price of
INR1,350/share. It is important to note that these multiples are similar to those used by us
prior to risk to long-term earnings emerging from threats from government intervention in
pricing cement in India. This concern stands reduced due to the following: (1) Indian cement
companies were successful in demonstrating that they can pass on government levies to
end-users and (2) Indian finance minister has stated that there is no price-freeze and the
prices of cement will be dictated purely by demand and supply forces.
Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for
cement prices. However, as seen from the trading bands below, the stock is trading virtually
at the bottom – an anomaly which we expect the market to correct. We note that our target
multiples are at the bottom of quartile of 10-year price bands and are also lower than the
current valuations of the regional peers.
Figure 32: 12-month forward rolling P/E bands Figure 33: 12-month forward rolling EV/EBITDA band
Price (INR) 6 9 12 15
Price (INR) 10 12 15 17
2,700
1,800
2,400
1,600
2,100
1,400
1,200 1,800
1,000 1,500
800 1,200
600 900
400 600
200 300
0
0
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
We note that EV/t at our target price of Rs1,350 is USD232 in CY08E. This looks reasonable
vis-à-vis the position of the cycle. In the previous up-cycle (in 1994-1996), the stock traded in
the range of USD250-450/t when the EBITDA/t was 10-16USD/t. In the current up-cycle, the
EBITDA/t is likely to be in the region of USD 30-34/t. Note that post-capex free cash for the
next three years is 33% of the market capitalization. This could be used for a higher dividend
payout. In such a case, dividend yield can go up to ~4%. Also the ROE at 47% should be
amongst the best in the industry.
30
200
25
150
20
15
100
10
50
5
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Source: Bloomberg company data, Deutsche Bank
Risks
ACC is a high-beta stock and any risk on the liquidity front would impact stock returns. The
key variables impacting the earnings are:
(1) Assumptions on cement realizations: Our positive bias on the sector is based on
expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over
FY07-10E In case the actual demand is lower than estimates and supply greater than
estimates, utilization rates could be lower resulting in a risk to our target price. Our sensitivity
analysis on our earnings models indicates that a 5% lower-than-expected price realization
reduces our earnings estimates by ~13%. On the positive side, 92% of ACC’s cement sales
are that of blended cement. The price of blended cement is about 3-5% lower than that of
ordinary cement. As utilization rates pick up, difference between the two categories of
cement would dip and ACC would stand to gain the most.
(2) Assumptions on coal prices: Indian base coal prices have not been revised for the last
two years. There is a possibility of the revision of coal prices sooner than later. We have
assumed 11% CAGR rise in coal cost for the next three years. Any increase over and above
and our base case estimates would impact the company’s earnings. Based on our sensitivity
analysis we estimate that a 5% increase in fuel cost over our estimates would depress the
earnings by ~1% in CY07E and ~2% in CY08E.
11 July 2007
Key changes
Price target 128.00 to 158.00 Ç 23.4%
Sales (FYE) 56,648 to 58,244 Ç 2.8%
Revising target price upwards to INR158/share (+20% upside)
Our new estimates for CY08 are 46% higher than our earlier estimates and 41% Price/price relative
higher than the consensus. Ambuja Cements has a strong balance sheet with
150 200
CY07E net cash of INR3.5bn. While operating free cash flow post-capex for next
150
three years is 23% of the market capitalization, the total free cash flow to be 100
generated in CY07E alone would be INR.44bn. This cash can be used by the 100
50
company either for a buyback or a special dividends. Also even if the parent 50
decides to make an open offer, the cost of open offer would stand greatly 0 0
reduced. Reiterate Buy with a target price of Rs158/share.
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
It’s official – the price-freeze was just a mirage Rel. to BSE 30 (L.H. Scale)
As highlighted in our sector note, we are now more sanguine on Indian tight
Ambuja Cements Ltd (R.H. Scale)
supply scenario lasting till CY09E and accordingly in line with our sector price
outlook, we have revised the cement price forecast for Ambuja by ~4% for CY07 Performance (%) 1m 3m 12m
and 21% for CY08. We note that despite fears of price-freeze, net average India Absolute 17.0 18.5 20.9
BSE 30 5.9 13.1 40.5
price has moved up by 5% over that of March 07 with about 2-3% gains coming
in the current month. Accordingly, we forecast an EPS of INR10.1 (up 10.2%) for Stock data
CY07E and INR13.2 (up 46.2%) for CY08E. Our estimates are in line with Market cap (INRm) 173,664
consensus for CY07E but 38% above consensus for CY08E. Market cap (USDm) 4,298
Shares outstanding (m) 1,517.1
Stock is trading at bottom of trading band Major shareholders –
Despite the recent run-up in the stock price, the stock is trading at the lower end Free float (%) 76
of the valuation band. Our new target price is derived by using an average of Avg daily value traded (USDm) 4.9
target P/E to 14x FY08E and target EV/E to 8x FY08E. Note these multiples are
Key indicators (FY1)
same as those used by us prior to risk to long-term earnings emerging from fears
ROE (%) 35.6
of effects of government intervention on long-term profitability. With cement Net debt/equity (%) -7.2
companies demonstrating their ability to pass on cost inflation etc to end-users, Book value/share (INR) 31.16
we believe that these concerns have mitigated. Price/book (x) 4.00
Net interest cover (x) 38.0
Key risks Operating profit margin (%) 35.9
Key risks are volatility in the cement prices and rise in fuel prices. Our sensitivity
analysis shows that a rise of 5% in power and fuel costs would impact earnings
by ~2%. Also a 5% rise/drop in cement prices would result in ~15% rise/drop in
earnings in CY07E.
Forecasts and ratios
Year End Jun 30 2005A 2006A 2007E 2008E 2009E
Sales (INRm) 25,970.5 63,931.3 58,243.8 69,669.5 67,981.9
EBITDA (INRm) 7,124.0 21,348.0 24,041.0 31,848.6 25,976.7
Reported NPAT (INRm) 4,565.5 14,829.7 15,333.4 20,072.1 14,741.6
Reported EPS FD(INR) 3.50 10.66 10.39 13.23 9.72
DB EPS FD(INR) 3.50 10.66 10.39 13.23 9.72
DB EPS growth (%) 48.7 204.5 -2.5 27.3 -26.6
PER (x) 15.0 7.9 12.3 9.7 13.2
EV/EBITDA (x) 9.6 5.2 6.4 4.5 5.5
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
Source: Deutsche Bank estimates, company data
1
DB EPS is fully diluted and excludes non-recurring items
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the
year end close
#
324
Cash and other liquid assets 688 2,247 3,780 11,025 20,063 21,479
Tangible fixed assets 24,982 23,634 31,396 31,932 36,360 40,323
Goodwill 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0
Associates/investments 10,110 11,251 15,301 16,334 16,334 16,334
Other assets 4,227 5,013 7,994 10,137 10,178 10,901
Total assets 40,007 42,144 58,470 69,428 82,934 89,037
Interest bearing debt 12,697 11,275 8,654 7,604 7,604 7,604
Other liabilities 7,181 7,768 10,886 14,554 17,141 15,227
Total liabilities 19,878 19,043 19,540 22,158 24,746 22,831
Shareholders' equity 20,129 23,101 38,930 47,270 58,188 66,206
Minorities 0 0 0 0 0 0
Total shareholders' equity 20,129 23,101 38,930 47,270 58,188 66,206
Net working capital 217 757 -320 3,467 3,081 3,288
Net debt/(cash) 12,009 9,028 4,874 -3,421 -12,458 -13,875
Capital 32,137 32,129 43,804 43,850 45,729 52,331
Sales growth (%) NM 32.4 146.2 -8.9 19.6 -2.4
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 27.3 27.4 33.4 41.3 45.7 38.2
16.1% 17.7% 17.1%
EBIT Margin (%) 18.7 19.9 28.3 35.9 40.6 32.3
52-week Range INR 99.55 - 148.40 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 173,664 m ROE (%) 15.8 21.1 47.8 35.6 38.1 23.7
USD 4,298 m Return on capital (%) 14.1 16.1 40.5 35.9 45.6 30.8
Operating return on capital (%) 13.5 16.9 51.2 52.3 69.6 47.0
Company Identifiers
Capex/sales (%) 33.4 2.3 17.3 6.3 11.5 11.8
Bloomberg ACEM IN
Capex/depreciation (x) 3.9 0.3 3.4 1.2 2.2 2.0
Cusip ¯ Net debt/equity (%) 59.7 39.1 12.5 -7.2 -21.4 -21.0
SEDOL B09QQ11 Net interest cover (x) 4.7 6.1 22.5 38.0 54.9 42.6
Investment thesis
Outlook
We reiterate Buy on Ambuja Cements with a revised target price of Rs158 per share (+20%
upside). We expect the company to report earnings CAGR of ~34%over CY06-08E and ROE
of 33% and 38% in CY07E and CY08E respectively. Our earnings estimates are in line with
consensus for CY07E and 38% higher than consensus for CY08E. We expect the Indian
cement industry to operate at peak utilisation levels as new capacity commissioning is
delayed and demand continues to grow at 9-10% annually. The cement companies are
expected to report higher average realisations due to tight demand-supply scenario expected
to persist till 1HFY10/CY09. We further note that cement sales have moved from 30 days
credit to an upfront payment for next 30 days delivery. Accordingly, we have revised our pan-
India cement price forecast for CY07 to Rs227/50kg bag (4% higher than our previous
assumption) and CY08 forecast to Rs249/50kg bag (21% higher than our earlier assumption).
Note that Holcim is looking to enhance its stake in the company through all possible options.
Valuation
We have thus used an average PE multiple of 14x FY08E (earlier assumed 10x CY07E) and
8.0x FY08E EV/EBITDA (earlier assumed 7x CY07E) to arrive at the target price of
INR152/share. It is important to note that these multiples are similar to those used by us prior
to risk to long-term earnings emerging from threats from government intervention in pricing
cement in India. The concerns stand reduced due to the following: (1) Indian cement
companies were successful in demonstrating that they can pass on government levies to
end-users and (2) Indian finance minister has stated that there will be no price freeze and the
prices of cement will be dictated purely by demand and supply forces. Following this, we
believe the overhang of government influence on long-term profitability stands largely abated.
Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for
cement prices. However, as seen from the trading bands below, the stock is trading virtually
at the bottom – an anomaly which we expect the market to correct.
Figure 38: 12-month forward rolling P/E bands Figure 39: 12-month forward rolling EV/EBITDA band
250 250
200 200
150 150
100 100
50 50
0 0
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Ambuja cement has historically traded at EV/t of above USD250 (1994-96) at the time when
EBITDA/t was above USD23 (1994-96). Recent concerns on long-term profitability have
impacted stock performance. We expect the EBITDA/t to be above USD34. for the next three
years. Hence EV/t of USD 212 at our target price of Rs158/share looks reasonable
considering the position of the cycle.
EV/Ton Ebitda/Ton
550 38
450 33
28
350
23
250
18
150 13
50 8
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Source: Bloomberg, company data, Deutsche Bank
Risks
Ambuja Cements is a high-beta stock and any risk on the liquidity front would impact the
stock returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If actual
demand is lower than estimates and supply greater than estimates, utilization rates could be
lower resulting in a risk to our target price.
Our sensitivity analysis indicates that a 5% lower-than-expected price realization reduces our
estimates by ~15% in CY07E and ~13.4% in CY08E and vice versa. We have assumed a
10% CAGR in coal cost for the next three years. Any increase greater than 10% would have
an impact on company’s earnings. Based on our sensitivity analysis, we estimate that a 5%
increase in fuel cost over our estimates would depress the earnings by ~2% both in CY07E
and CY08E.
Based on our assumptions, Figure 43 presents a financial snapshot of the company. Our
revised estimates based on higher price and volume estimates show earnings estimates
rising by 8.6% for CY07 and 57.6% for CY08 over our earlier estimates. We forecast a net
sales growth of 17% CAGR over CY06-08E and a net profit growth of 34% CAGR over CY06-
08E.
Based on our revised forecast, we believe Ambuja Cements is likely to record a significant
improvement in its operational performance due to better prices and lower costs. The key
contributors being:
In addition, the lower interest cost would further boost the net margins even after factoring in
higher tax rates for CY07E and CY08E. We expect the net profit to record a 34% CAGR over
CY06-08E.
INR mn
25,000
20,000
15,000
10,000
5,000
0
CY 06 CY 07e CY 08e CY 09e
1. Enhance the dividend pay-out ratio: Historically, Ambuja Cements had a pay-out of 40-
50%. The management could enhance it. If the pay-out ratio is increased to 100% the
dividend yield rises to 8%.
2. Make an open offer by parent: Holcim can also, technically, further increase the stake in
the company through an open offer. This looks the least probable of events as not many
open offers have been successful in India
3. Buy-back of shares: Based on existing provisions available in the Companies Act, the
company can buy back 2% of shares in CY07 and 2.4% of shares in CY08. Buy-back of
shares could result in Holcim´s holding rising from 32% in March 07 to potentially 36.4%
by December 08.
Figure 45 gives a snapshot of the on the possible holding of Holcim in Ambuja Cements, in
case Holcim goes for a buyback. This has assumed under the following constraints
1. Cash availability: Major sources of cash available for buyback will be post-capex free
cash flow, marketable investments, sale of stake in ACIL and cash from sale of real
estate.
2. Sec 77A restrictions: Section 77A of the Companies Act puts the upper limit as 25% of
paid-up share capital + free reserves
Our analysis shows that Holcim could potentially enhance the stake to 39%by CY09 if it were
to buy back shares. The key constraint being the net worth of the company post the buy-
back.
11 July 2007
Grasim Buy
Price at 12 Jul 2007 (INR) 2,819.55
Reuters: GRAS.BO Bloomberg: GRASIM IN Price target - 12mth (INR) 3,320.00
52-week range (INR) 2,894.75 - 1,873.25
Key changes
14,911
Grasim, a diversified company, is also likely to post strong earnings in line with Price/price relative
pure cement plays as the VSF division (largest non-cement business in company)
is also likely to benefit from better realisations of VSF. Our assumptions are 41% 200 4000
above the street for FY08E and 65% for FY09E. Reiterate Buy 150 3000
100 2000
Volume and cost benefits also flowing through
50 1000
Grasim is expanding the cement capacity by 15m tonnes in total over the next
0 0
two years (by ~50%) - the maximum expected by any cement producer in India
over the next two years. In addition, improving gas availability would keep drive
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
up utilisation rates of sponge iron plant until 2HFY09. Additionally, ~300+MW of
10
10
Rel. to BSE 30 (L.H. Scale)
captive power plant would reduce overall cost of power by INR2.5bn and reduce
Grasim (R.H. Scale)
tax for the company. Current VSF cycle also leaves room for surprise on the
upside. Grasim will benefit from synergies from group company UltraTech Performance (%) 1m 3m 12m
Cement. Absolute 18.2 24.8 41.2
BSE 30 5.5 13.7 36.4
Earnings being revised – but leave room for upside
Overall, our EPS forecast for FY08 is Rs295/share; Rs394/share for FY09 (up 27% Stock data
vs. our earlier forecast). This assumes the price and volumes in cement as per our Market cap (INRm) 258,477
Market cap (USDm) 6,397
sector forecast. However, we have not factored in the latest 5% rise in VSF Shares outstanding (m) 91.7
realisations into our numbers and would wait for a couple of quarters to see Major shareholders –
whether the market absorbs the price hikes. Free float (%) 75
Avg daily value traded (USDm) 2.3
Raising target price to INR3,320 (+20% upside)
Our target price is based on a sum of parts (10% conglomerate discount) wherein Key indicators (FY1)
we have assumed PE multiple of 14x FY08E for cement and less than 6x FY08E ROE (%) 35.3
for non-cement divisions. We note that our target PE multiples are at discount to Net debt/equity (%) 30.1
Book value/share (INR) 996.71
the region despite the fact that the growth is likely to be significantly higher. Key Price/book (x) 2.8
risks are volatility in cement and fuel prices. Our sensitivity analysis shows that a Net interest cover (x) 13.8
1% drop in realisations over our estimates can result in a 2.5% drop in earnings in Operating profit margin (%) 27.2
FY08E.
45 #
23
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 17,080 -1,315 15,923 26,299 34,670 51,320 45,096
Movement in Net Working Capital 0 0 0 0 0 0 0
Capex -33,019 -3,149 -9,226 -26,665 -5,132 -20,920 -22,000
Free cash flow -15,939 -4,465 6,697 -366 29,539 30,400 23,096
Other investing activities 2,441 5,976 -3,992 -9,191 -6,636 -1,500 -1,501
Equity raised/(bought back) -53 53 2 0 -1 0 0
Dividends paid -1,571 -2,393 -2,586 -1,089 -2,069 -3,103 -3,102
Net inc/(dec) in borrowings 15,554 -851 1,370 11,898 4,301 10,000 -6,000
Other financing cash flows 1,926 -3 1,228 5,608 -6,548 -7,943 0
Total cash flows from financing 15,856 -3,194 14 16,416 -4,317 -1,046 -9,102
Net cash flow 2,358 -1,683 2,718 6,858 18,586 27,854 12,493
Movement in net debt/(cash) 13,196 831 -1,349 5,040 -14,285 -17,854 -18,493
#
23
Cash and other liquid assets 2,723 1,469 2,374 3,692 23,029 50,553 54,788
Tangible fixed assets 62,669 60,481 64,156 84,721 83,160 96,282 109,397
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Associates/investments 15,519 9,543 13,535 22,726 28,562 28,562 28,562
Other assets 18,225 34,913 41,525 48,734 55,857 62,603 74,367
Total assets 99,136 106,406 121,590 159,874 190,607 238,000 267,115
Interest bearing debt 36,315 35,463 36,833 48,731 53,032 63,032 57,032
Other liabilities 26,168 27,659 31,245 36,157 38,003 41,209 44,734
Total liabilities 62,482 63,122 68,078 84,888 91,035 104,240 101,766
Shareholders' equity 36,055 43,284 48,376 66,399 91,401 125,587 157,177
Minorities 598 0 5,136 8,587 8,172 8,172 8,172
Total shareholders' equity 36,653 43,284 53,511 74,986 99,573 133,759 165,349
Net working capital 2,507 4,436 1,168 -729 5,055 6,609 8,507
Net debt/(cash) 33,592 33,995 34,459 45,039 30,003 12,479 2,243
Capital 70,245 77,278 87,970 120,024 129,576 146,238 167,592
Sales growth (%) NM 71.3 14.5 37.9 8.1 19.2 11.4
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 24.1 21.6 20.2 28.2 31.6 34.9 30.2
18.2% 23.3% 41.2%
EBIT Margin (%) 18.9 15.7 14.8 23.9 27.2 30.6 25.8
52-week Range INR 1,873.25 - 2,894.75 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 258,477 m ROE (%) 23.3 24.1 26.3 34.3 35.3 34.8 36.2
USD 6,397 m Return on capital (%) 17.5 15.3 16.4 20.5 24.0 29.7 35.1
Operating return on capital (%) 15.9 15.3 14.3 26.6 28.6 34.6 27.7
Company Identifiers
Capex/sales (%) 63.3 3.5 9.0 18.9 3.4 11.5 10.9
Bloomberg GRASIM IN
Capex/depreciation (x) 12.1 0.6 1.7 4.4 0.8 2.7 2.5
Cusip ¯ Net debt/equity (%) 91.6 78.5 64.4 60.1 30.1 9.3 1.4
SEDOL 6099927 Net interest cover (x) 6.4 5.6 6.9 14.7 13.8 12.1 9.5
Investment thesis
Outlook
We expect Grasim’s VSF and cement businesses (together contributing 90% to the top line)
to be the key earnings drivers. The company is expanding cement capacity by 15m tonnes in
total over the next two years](by ~50%) - the maximum expected by any cement producer in
India over the next two years. It is also expanding its VSF capacity by ~95,000 tonnes
through both greenfield and brownfield expansion. In addition, improving gas availability is
driving up utilization rates of the sponge iron plant which would also drive up significant
volume growth in FY09. Further, there is a possibility of consolidating 6m tonnes of cement
capacity of the group company Century Textiles. An additional 300MW+ of captive power
plant would also reduce the overall cost of power by INR1.5bn and reduce the tax outgo for
the company. Consequently we expect the company to report a 21.6% CAGR in earnings
over FY07-10E.We note that our assumptions are 41% above the street for FY08E and 65%
for FY09E.
Indian cement prices have begun to show gradual improvement driven by tight demand-
supply scenario. We have revised our pan-India cement price forecast for FY08 to
Rs235/50kg bag (8% higher than our previous assumption) and FY09 forecast to Rs245/50kg
bag (19.0% higher than our earlier assumption). We have assumed a 5% dip in cement
realizations in FY10E to Rs232/50kg bag. Current VSF cycle also leaves room for surprise on
the upside.
Valuation
For a conglomerate like Grasim, we believe the sum of parts is the correct method of
valuation. For cement (drives 88% of total value), we have used an average PE multiple of
14x. It must be mentioned that we have factored in a potential value of 14x for the cement
division - a premium to the sector average as Grasim has benefits flowing in from volume
growth, cost savings and from synergies from group company UltraTech Cement. Based on
our sectoral assessment, we believe we are in the mid-cycle of an upward trend for cement
prices. As seen from the trading bands below, the stock is trading virtually at the bottom – an
anomaly which we expect the market to correct. We note that our target multiples are at the
bottom of 10-year price bands and are also lower than the current valuations of the regional
peers. Despite the recent run-up, Grasim is trading at 9x PER on FY08E and 5.7x EV/EBIDTA
on FY08E.
Figure 46: 12-month forward rolling P/E band (x) Figure 47: 12-month forward rolling EV/EBITDA band (x)
7,000
5,000
6,000
4,000
5,000
3,000 4,000
3,000
2,000
2,000
1,000
1,000
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
As seen in following sum of parts table, the target PE multiple for VSF is 6x FY08E while the
sponge iron business is assumed at 1x FY08E earnings. The valuation of Grasim´s holdings in
IDEA are in line with the view of our telecom analyst Srinivas Rao.
Risks
The key risk to Grasim’s earnings comes from lower-than-expected commodity prices in
cement and VSF businesses. Our positive bias on the cement sector is based on
expectations of demand growth of 10% CAGR and cement production at 9.8% CAGR over
FY07-10E. Our stand-alone estimates drop by 12% if cement realizations are 5% lower than
expected One other company-specific risk is the lack of availability of natural gas disrupting
operations of the sponge iron division. In our forecast, we have factored in some
improvement in supply of natural gas in FY09E. Figure 49 shows the sensitivity of earnings
and EBIDTA to cement prices and fuel costs.
Based on our assumptions, we expect Grasim’s net sales on a stand-alone basis to rise by
19% CAGR over FY07-09, driving a 31% EPS CAGR.
11 July 2007
Key changes
14,911
6
05
06
06
06
07
07
Based on our sectoral assumptions for demand and supply we forecast India
/0
/0
7/
1/
4/
7/
1/
4/
10
10
Cements´ realization to rise by ~17% in FY08 and a further 2% in FY09. Rel. to BSE 30 (L.H. Scale)
Accordingly we estimate that India Cement to report a CAGR of ~26% in sales India Cements (R.H. Scale)
over FY06-08, driving a core earnings (net of gains from tax benefits) CAGR of Performance (%) 1m 3m 12m
25% over the same period. ROE is estimated to rise to 33% in FY08. Absolute 27.1 38.1 23.2
BSE 30 5.5 13.7 36.4
Big beneficiary of rise in cement prices in south India
The average cement realization in south India has risen by ~10% q-o-q versus all- Stock data
India cement price rise of 5% q-o-q. The demand growth in south India has also Market cap (INRm) 45,500
been robust with demand rise of ~16% in FY07 versus pan-India demand rise of Market cap (USDm) 1,126
11%. Accordingly, India Cements, the largest player in south India, should benefit Shares outstanding (m) 260.4
Major shareholders –
greatly from upside due to operating leverage. Note that the Debt/EBITDA of India Free float (%) 71
Cements is 2x implying that entire debt can be pre-paid if required. Avg daily value traded (USDm) 2.5
TP of Rs300 based on 3-year average PE and EV/EBITDA multiples Key indicators (FY1)
Our target price assumes an average PE multiple of 12x FY09e and EV/EBITDA of ROE (%) 32.7
7.5x FY09E. Our target PE and EV/EBITDA multiples are based on the average PE Net debt/equity (%) 20.2
and EV/EBITDA of the last three years and are in the lower quartile of the long- Book value/share (INR) 99.84
term forward valuation bands. Key risks are lower-than-expected utilization levels Price/book (x) 2.21
Net interest cover (x) 12.1
resulting in lower-than-expected cement prices and higher-than-expected energy Operating profit margin (%) 34.0
costs. Note that a 5% rise in energy costs over our estimates cuts our earnings
by 3%. Also, a lower-than-expected realization of 5% can result in a 15.7% drop
in earnings over the forecast period.
Forecasts and ratios
Year End Mar 31 2006A 2007A 2008E 2009E 2010E
Sales (INRm) 15,294.0 20,497.4 29,389.2 32,291.9 32,220.0
EBITDA (INRm) 2,527.0 6,617.3 10,894.8 11,371.9 8,989.7
Reported NPAT (INRm) 327.6 4,495.0 7,521.0 7,025.3 5,264.2
Reported EPS FD(INR) 2.10 20.76 28.91 26.98 20.22
DB EPS FD(INR) 2.10 20.76 28.91 26.98 20.22
OLD DB EPS FD(INR) 1.59 16.76 25.37 19.07 0.00
% Change 32.2% 23.9% 14.0% 41.5% –
DB EPS growth (%) – 890.5 39.3 -6.7 -25.1
PER (x) 48.4 9.5 7.6 8.2 10.9
EV/EBITDA (x) 12.6 8.4 4.6 3.9 4.4
DPS (net) (INR) 0.00 0.00 0.00 0.00 0.00
Yield (net) (%) 0.0 0.0 0.0 0.0 0.0
Source: Deutsche Bank estimates, company data
1
DB EPS is fully diluted and excludes non-recurring items
2
Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the
year end close
"
12
Cash and other liquid assets 37 29 443 329 989 7,096 11,802
Tangible fixed assets 23,339 22,049 22,032 22,153 25,243 25,172 25,967
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Associates/investments 365 366 611 366 366 366 366
Other assets 15,351 15,750 12,088 14,946 13,392 13,369 13,123
Total assets 39,093 38,194 35,173 37,794 39,990 46,003 51,258
Interest bearing debt 20,316 19,731 15,253 10,243 6,243 6,243 6,243
Other liabilities 5,169 5,710 4,230 7,574 7,753 8,145 8,136
Total liabilities 25,485 25,441 19,483 17,816 13,995 14,388 14,378
Shareholders' equity 13,607 12,753 15,690 19,978 25,995 31,615 36,880
Minorities 0 0 0 0 0 0 0
Total shareholders' equity 13,607 12,753 15,690 19,978 25,995 31,615 36,880
Net working capital 10,676 10,535 8,344 8,068 6,435 6,019 5,782
Net debt/(cash) 20,279 19,702 14,810 9,914 5,253 -853 -5,559
Capital 33,886 32,455 30,500 29,892 31,248 30,762 31,320
Sales growth (%) NM 14.3 31.4 34.0 43.4 9.9 -0.2
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 10.5 11.7 16.5 32.3 37.1 35.2 27.9
27.1% 31.7% 23.1%
EBIT Margin (%) 2.4 5.0 11.4 28.5 34.0 31.9 24.2
52-week Range INR 151.30 - 250.00 Payout ratio (%) NM NM 0.0 0.0 0.0 0.0 0.0
Market Cap INR 45,500 m ROE (%) -14.9 -4.8 2.3 25.2 32.7 24.4 15.4
USD 1,126 m Return on capital (%) -1.0 0.9 4.4 18.2 26.5 24.1 18.4
Operating return on capital (%) 0.9 1.2 3.9 13.7 22.9 23.3 17.6
Company Identifiers
Capex/sales (%) 105.1 0.0 5.1 4.4 13.6 3.1 0.0
Bloomberg ICEM IN
Capex/depreciation (x) 13.1 0.0 1.0 1.2 4.4 0.9 0.0
Cusip ¯ Net debt/equity (%) 149.0 154.5 94.4 49.6 20.2 -2.7 -15.1
SEDOL 6150062 Net interest cover (x) 0.2 0.4 1.2 4.1 12.1 16.5 12.5
Investment thesis
Outlook
We rate India Cements a Buy due to the following: (1) We expect the company to report
earnings CAGR of 25% over FY07-09. (2) Our estimates for FY08 are (+32%) and FY09
(+35%) are higher than the consensus and we expect the consensus earnings upgrade to
drive the stock outperformance. (3) Benefits flowing in from superior bargaining power driven
by our forecast of tight utilisation levels over FY07-10.
(5) Our revised target price of Rs300 per share gives a potential +37 upside.
Note that our new estimates are based on revision of our pan-India cement price forecast for
CY07 to Rs227/50kg bag (+16.6% YoY) and CY08 forecast to Rs249/50kg bag (9.6% YoY).
Note that south India is leading the price rise with cement prices increasing by 10% q-o-q
versus 5% for the country as a whole. Consequently, India Cements Ltd, which is the largest
player in south India, is likely to reap benefits due to its operating leverage.
Valuation
We have thus used an average PE multiple of 12x core earnings (earlier assumed 10x FY08E)
and 7.5x EV/EBITDA FY09E (earlier assumed 7x FY08E) to arrive at the target price of
INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The
forward valuation multiples are similar to those used by us prior to risk to long-term earnings
emerging from threats from government intervention in pricing cement in India. The concerns
stand reduced due to the following: (1) Indian cement companies were successful in
demonstrating that they can pass on government levies to end-users (2) Indian finance
minister has stated that there is no price-freeze and the prices of cement will be dictated
purely by demand and supply forces.
Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for
cement prices. However, as seen from the trading bands (Figures 52 and 53) the stock is
trading virtually at the bottom – an anomaly which we expect the market to correct.
Figure 52: 12-month forward rolling P/E bands Figure 53: 12-month forward rolling EV/EBIDTA band
400 400
300 300
200 200
100 100
0 0
-100 -100
Dec-04
Dec-05
Dec-06
Dec-04
Dec-05
Dec-06
Mar-04
Jun-04
Sep-04
Mar-05
Jun-05
Sep-05
Mar-06
Jun-06
Sep-06
Mar-07
Jun-07
Mar-04
Jun-04
Sep-04
Mar-05
Jun-05
Sep-05
Mar-06
Jun-06
Sep-06
Mar-07
Jun-07
Source: Bloomberg, Company Data, Deutsche Bank Source: : Bloomberg, Company Data, Deutsche Bank
Risks
India Cements is a high-beta stock and any risk on the liquidity front would impact the stock
returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual
demand is lower than estimates and supply greater than estimates, utilization rates could be
lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lower-
than-expected price realization reduces our estimates by ~5% each in FY07 and FY08.
International coal prices have shot up by 20% y-o-y over the last six months. The company is
confident that the impact of coal cost would not be much due to its long-term contracts. We
have assumed 10% CAGR in coal cost for the next three years. Any increase greater than 5%
over and above our base case estimates would have an impact on the company’s earnings.
Based on our sensitivity analysis, we estimate that a 5% increase in fuel cost over our
estimates would depress the earnings by ~2% each in FY07 and FY08.
Similarly, a 1% increase in cement prices increases our EBITDA estimates by 4% for FY08
and 5% for FY09. A 5% rise/drop in coal prices reduces/increases earnings by ~2% and 4%
respectively.
Based on our assumptions we forecast a net sales growth of 26% CAGR for FY07-09E,
driving net profit growth of 25% CAGR for FY07-09E.
11 July 2007
Key changes
Price target 1,240.00 to 1,750.00 Ç 41.1%
Sales (FYE) 18,248 to 19,733 Ç 8.1%
Op prof margin (FYE) 41.3 to 27.1 È -34.3%
Net profit (FYE) 5,270.0 to 4,573.7 È -13.2%
Volume growth when it matters the most
Price/price relative
We are upgrading our FY09 estimates for Shree Cement due to the rise in cement
prices across India, significant capacity addition and its excellent operating 250 2000
efficiency. Our FY08 estimates factor in the impact of higher provisions for 200 1500
depreciation. Cash EPS for FY08E is Rs234; Rs300 for FY09E. 150
1000
100
Cash earnings a better proxy for valuation 50 500
The cash EPS of the company is Rs234 for FY08E - 78% higher than recurring 0 0
EPS- This is on account of a unique policy of depreciating fixed assets at the
higher of the rates prescribed by the Companies Act and the Income Tax Act, on
6
05
06
06
06
07
07
/0
/0
7/
1/
4/
7/
1/
4/
10
10
WDV basis. Moreover, the ROE at 88% in FY08eE and 84% in FY09E is one of Rel. to BSE 30 (L.H. Scale)
the best in the industry. Shree Cements (R.H. Scale)
""
34
102
+91 22-6658-4824 aniruddha.bhosale@db.com Cash flow from operations 1,049 413 1,767 2,798 5,271 9,163 11,053 0
Movement in Net Working Capital 0 0 0 0 0 0 0 0
Capex -946 -389 -1,341 -2,564 -1,022 -4,500 -4,200 0
Free cash flow 103 23 426 234 4,248 4,663 6,853 0
Other investing activities 4 1 8 0 0 0 0 0
Equity raised/(bought back) -150 0 0 0 0 0 0 0
Dividends paid -98 -118 -159 -37 -905 -1,829 -2,979 0
Net inc/(dec) in borrowings 433 -112 16 -209 1,209 0 0 0
Other financing cash flows 0 0 0 0 0 0 0 0
Total cash flows from financing 185 -230 -143 -245 303 -1,829 -2,979 0
Net cash flow 292 -206 291 -11 4,552 2,833 3,874 0
Movement in net debt/(cash) 141 94 -275 -198 -3,343 -2,833 -3,874 0
102
Cash and other liquid assets 345 76 368 191 4,196 7,029 10,904 14,561
Tangible fixed assets 6,587 6,242 6,353 7,277 3,970 4,870 6,070 8,070
Goodwill 0 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0 0
Associates/investments 9 8 0 0 0 0 0 0
Other assets 1,692 1,802 1,396 1,991 3,948 5,673 7,680 10,305
Total assets 8,632 8,128 8,118 9,459 12,113 17,571 24,653 32,935
Interest bearing debt 3,914 3,494 3,209 3,727 5,709 7,709 9,709 11,709
Other liabilities 1,330 1,233 1,379 2,222 2,576 3,290 3,903 4,754
Total liabilities 5,245 4,728 4,588 5,949 8,285 10,999 13,612 16,464
Shareholders' equity 3,388 3,400 3,529 3,510 3,828 6,572 11,040 16,472
Minorities 0 0 0 0 0 0 0 0
Total shareholders' equity 3,388 3,400 3,529 3,510 3,828 6,572 11,040 16,472
Net working capital 1,025 1,378 885 718 2,599 3,810 5,253 7,027
Net debt/(cash) 3,569 3,418 2,841 3,537 1,514 680 -1,194 -2,852
Capital 6,957 6,818 6,370 7,047 5,342 7,252 9,846 13,620
Sales growth (%) 45.2 2.1 21.8 15.4 96.9 44.3 36.6 32.9
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 21.1 27.0 28.6 31.6 44.7 45.4 47.7 38.1
23.1% 45.3% 47.4%
EBIT Margin (%) 8.5 12.1 8.2 8.0 13.1 27.1 36.5 32.5
52-week Range INR 806.55 - 1,524.90 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 46,465 m ROE (%) 1.1 5.7 8.3 5.2 48.3 88.0 84.6 65.8
USD 1,150 m Return on capital (%) 4.2 6.2 6.5 4.1 29.8 77.8 92.7 80.6
Operating return on capital (%) 4.2 6.0 5.1 5.6 19.1 55.2 75.9 66.4
Company Identifiers
Capex/sales (%) 19.5 7.9 22.3 36.9 7.5 22.8 15.6 0.0
Bloomberg SRCM IN
Capex/depreciation (x) 1.6 0.5 1.1 1.6 0.2 1.3 1.4 0.0
Cusip ¯ Net debt/equity (%) 105.4 100.5 80.5 100.8 39.5 10.3 -10.8 -17.3
SEDOL 6100357 Net interest cover (x) 1.2 1.8 2.4 4.4 17.2 11.6 14.5 19.9
Investment thesis
Outlook
We reiterate Buy on Shree Cement with a revised target price of Rs1,790/share (+31%
upside). Based on our assumptions, we forecast a net sales growth of 38% CAGR for FY07-
10E, driving net profit growth of 72% CAGR over the same period. Our earning estimates are
10% higher than consensus for FY08E and 61% higher than the consensus for FY09E.
We expect the Indian cement industry to operate at peak utilisation levels as new capacity
commissioning is likely to be delayed and demand likely to continue to grow at 9-10%
annually. The cement companies are expected to report higher average realisations due to
tight demand-supply scenario expected to persist till 1HFY10/CY09. Accordingly we have
revised our pan-India cement price forecast for FY07 to Rs235/50kg bag (7.7% higher than
our previous assumption) and FY08 forecast to Rs245/50kg bag (18.8% higher than our
earlier assumption).
Valuation
The Indian finance minister has stated that there is no price-freeze and the prices of cement
will be dictated purely by demand and supply forces. Following this, we believe the overhang
of pressure on price realizations by cement companies stands abated.
Based on our sectoral assessment, we believe we are in the mid-cycle of an upward trend for
cement prices. However, as seen from the following trading bands the stock is trading
virtually at the bottom – an anomaly which we expect the market to correct.
Figure 57: 12-month forward rolling P/E bands Figure 58: 12-month forward rolling EV/EBITDA band
2,500 3,000
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0 0
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
-500
Source: Bloomberg, Company Data, Deutsche Bank Source: : Bloomberg, Company Data, Deutsche Bank
We have thus used an average PE multiple of 12x FY08E (earlier assumed 8x FY08E) and 7.5x
EV/EBITDA FY08E (earlier assumed 5x FY08E) to arrive at the target price of INR1,790/share.
It is important to note that these multiples are the same as we used prior to reducing our
multiples due to the risk to long-term earnings emerging from threats from government
intervention in pricing cement in India. Our target multiples are at the low-end of P/E and
EV/EBIDTA bands and at a discount to the region. Moreover, these multiples are at the
lowest range of the respective bands over the last 15 years.
We note that EV/t at our target price is USD209 on FY08E, which is reasonable considering
the position of the cycle.
EV/Ton Ebitda/Ton
200 40
35
150
30
25
100
20
15
50
10
0 5
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Source: Company data, Bloomberg, Deutsche Bank
Risks
Shree Cement is a high-beta stock and any risk on the liquidity front would impact the stock
returns. In addition, our positive bias on the sector is based on the expectation of a deficit till
1HFY09/CY08. A slowdown in the demand growth and/or higher capacity commissioning
may lead to lower-than-expected realisations.
Figure 60 shows the sensitivity of earnings and EBIDTA to cement prices and fuel costs. If
cement prices are higher by 1% then our earnings estimates for FY08 will be higher by 7.6%
and vice versa. Also, the EBIDTA will be higher by 4% for FY08E and vice versa. A 5% rise in
coal prices would reduce FY08 EPS estimates by 1.8% and EBITDA estimates by 1%.
Our revised estimates based on higher price estimates show earning estimates declining by
a 14% in FY08 and rising by 26% in FY09 (over the earlier estimates). Based on our
assumptions we forecast a net sales growth CAGR of 38% for FY07-10E, driving net profit
growth of 71% CAGR over the same period. This is considering the aggressive depreciation
policy the company has adopted.
The cash flow EPS of the company is 3.4x and 1.8x the reported EPS for FY07E and FY08E
respectively. We expect this trend to continue till FY12 on account of significant capacity
additions to be made by the company over the next 3-4 years.
350
300
250
200
150
100
50
-
FY05 FY06 FY07 FY08e FY09e FY010e
Source: Deutsche Bank,
11 July 2007
Key changes
14,911
presence
Rating Hold to Buy Ç
Price target 795.00 to 1,140.00 Ç 43.4%
Sales (FYE) 55,602 to 57,907 Ç 4.1%
Op prof margin (FYE) 29.8 to 29.4 È -1.2%
Net profit (FYE) 10,599.5 to 12,171.4 Ç 14.8%
Upgrade to Buy with a TP of Rs.1,140
UltraTech Cemco is likely to benefit from its markets in South and West both of Price/price relative
which have seen superior realization growth. Cost-inflation risk is coming down as
domestic lignite-based captive power plant gets commissioned this year. Our 200 1500
new earnings estimate for FY09 is up 65% over our previous estimate and 103% 150
1000
above the consensus. Despite recent run-up, the stock is trading at lower end of 100
valuation range. We upgrade our recommendation to Buy. 50
500
6
05
06
06
06
07
07
/0
/0
scenario in the Indian cement sector lasting till CY09. Accordingly, in line with our
7/
1/
4/
7/
1/
4/
10
10
Rel. to BSE 30 (L.H. Scale)
sector price outlook, we have revised the cement price forecast by 7.7% for
FY08E and 18.8% for FY09E. UltraTech Cement Lim (R.H. Scale)
#
324
Cash and other liquid assets 448 602 684 1,001 5,599 19,534 23,326
Tangible fixed assets 30,765 28,534 27,110 32,429 32,190 34,972 38,464
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Associates/investments 0 0 1,482 4,592 6,092 6,092 6,092
Other assets 5,366 6,605 7,077 8,693 15,132 16,428 22,710
Total assets 36,580 35,741 36,352 46,716 59,013 77,026 90,592
Interest bearing debt 15,662 15,380 14,520 15,786 17,786 21,786 21,786
Other liabilities 10,379 10,584 11,370 13,195 15,025 16,455 17,461
Total liabilities 26,041 25,964 25,890 28,981 32,811 38,241 39,247
Shareholders' equity 10,539 9,737 10,414 17,682 26,202 38,785 51,344
Minorities 0 41 48 53 0 0 0
Total shareholders' equity 10,539 9,778 10,461 17,735 26,202 38,785 51,344
Net working capital 1,222 2,085 1,889 1,305 5,464 4,879 9,656
Net debt/(cash) 15,214 14,778 13,836 14,785 12,187 2,252 -1,539
Capital 25,753 24,556 24,297 32,520 38,389 41,037 49,805
!
Sales growth (%) NM 17.8 25.3 46.8 16.5 21.7 11.9
Absolute Price Return 1m 3m 12m EBITDA Margin (%) 14.1 12.4 15.8 29.4 34.2 39.5 35.8
12.9% 20.0% 20.4%
EBIT Margin (%) 3.3 3.2 9.0 24.8 29.4 35.0 31.3
52-week Range INR 620.95 - 1,163.85 Payout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Market Cap INR 111,513 m ROE (%) 1.7 2.6 22.7 56.1 55.5 55.3 39.8
USD 2,760 m Return on capital (%) 3.9 4.1 11.9 29.9 36.4 48.7 42.9
Operating return on capital (%) 2.0 2.4 8.9 33.6 39.3 50.9 43.7
Company Identifiers
Capex/sales (%) 15.6 0.9 2.6 15.3 4.3 8.4 8.9
Bloomberg UTCEM IN
Capex/depreciation (x) 1.4 0.1 0.4 3.3 0.9 1.9 2.0
Cusip ¯ Net debt/equity (%) 144.4 151.1 132.3 83.4 46.5 5.8 -3.0
SEDOL B01GZF6 Net interest cover (x) 0.6 0.8 3.4 14.2 15.9 12.6 11.3
Investment thesis
Outlook
We rate Ultra tech Cement as a buy due to the following. (1) We expect the company to
report earnings CAGR of 51% over the period FY07-09e (2) Our estimates for FY08e are (+38
and for FY09e are (+103% ) higher than consensus and we expect the consensus earnings
upgrade to drive the stock performance (3)Benefits flowing from superior bargaining power
driven by our forecast of tight utilisation levels over FY07-10e.(4) Our revised target price of
Rs 1140per share gives a potential ( +26% upside).
Note our new estimates are based on revision our all India cement price forecast we have
revised our all India cement price forecast for FY08 to Rs235/bag (7.7% higher than our
previous assumption) and FY09 forecast to Rs249/bag (18.8% higher than our earlier
assumption). Ultra tech Cemco is also likely to benefit from the 92 MW power plant coming
up for commissioning
Valuation
We have thus used an average PE multiple of 12x core earnings FY08E (earlier assumed 10x
FY08E) and 7.5xEV/EBITDA FY08E (earlier assumed 7xFY08E ) to arrive at the target price of
INR300/share. The core earnings for FY08E are net of one-time gains from tax breaks. The
forward valuation multiples are similar to those used by us prior to the risk to long-term
earnings emerging from threats from government intervention in pricing cement in India. The
concerns stand reduced due to the following: (1) Indian cement companies were successful
in demonstrating that they can pass on government levies to end-users. (2) Indian finance
minister has stated that there is no price-freeze and the prices of cement will be dictated
purely by demand and supply forces. Based on our sectoral assessment, we believe we are
in the mid-cycle of an upward trend for cement prices. However, as seen from the trading
bands below the stock is trading virtually at the bottom – an anomaly which we expect the
market to correct.
Figure 64: 12-month forward rolling P/E band Figure 65: 12-month forward rolling EV/EBIDTA band
1,400
1,600
1,200
1,000 1,200
800
600 800
400
400
200
0 0
Mar-04
Mar-05
Mar-06
Mar-07
Mar-04
Mar-05
Mar-06
Mar-07
Source: Bloomberg, Company Data, Deutsche Bank Source: : Bloomberg, Company Data, Deutsche Bank
Risks
UltraTech Cement is a high-beta stock and any risk on the liquidity front would impact the
stock returns. In addition, our positive bias on the sector is based on expectations of demand
growth of 10% CAGR and cement production at 9.8% CAGR over FY07-10E If the actual
demand is lower than estimates and supply greater than estimates, utilization rates could be
lower resulting in a risk to our target price. Our sensitivity analysis indicates that a 1% lower-
than-expected price realization reduces our estimates by ~5.0% for FY08 and 3.3% for FY09,
and vice versa.
International coal prices have risen up sharply We have assumed a 13% CAGR in coal cost
for the next three years. Any increase greater than 5% would have an impact on the
company’s earnings. Based on our sensitivity analysis, we estimate that a 10% increase in
fuel cost over our estimates would depress the earnings by ~9.3% FY08E and ~5.0% FY09E.
Figure 66 shows the sensitivity of earnings and EBITDA to cement prices and fuel costs. If
cement prices are higher by 5%, then our earnings estimates will be higher by 25% for FY08
and vice versa. Also, the EBITDA will be higher by 15% for FY08E and vice versa. A 10% rise
in coal prices would reduce EPS estimates for FY08 by 9.3% and EBITDA estimates for FY08
by 5.6%.
Our revised estimates based on higher price estimates show earning estimates rising by a
marginal 4% for FY08e and 13% in FY09e over earlier estimates. Based on our assumptions
we forecast a net sales growth of 19% CAGR for FY07-09E, driving net profit growth of 51%
CAGR for FY07-09E.
Appendix A
Capacity ordered
In the following table, we give the details of 73m tonnes of the capacity that has been
ordered by various companies in the sector.
Appendix 1
Important Disclosures
Additional information available upon request
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issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any
compensation for providing a specific recommendation or view in this report. Manish Saxena
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