Beruflich Dokumente
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Cement
Bouncing back
Jinesh Gandhi (Jinesh@MotilalOswal.com) Tel: +91 22 3982 5416
Cement
ACC ............................................... 24-30 Ambuja Cements ......................... 31-37 UltraTech Cement ....................... 38-44 Grasim Cement ............................ 45-50 Jaiprakash Associates ................ 51-58
*Prices as on 28 March 2011
Birla Corp ..................................... 60-65 India Cements .............................. 66-72 Shree Cement .............................. 73-79
March 2011
Cement
The cement sector has witnessed strong recovery in prices as rationality has prevailed. We believe that the worst is behind us, with trough operating performance witnessed in 2HCY10. Long-term demand drivers are intact, which would ensure return of normal growth. We are upgrading our FY12 estimates by 2-18% to partly factor in for current prices. However, sustenance of discipline and current prices in FY12 could drive further upgrades of 9-33%. Valuations are attractive and offer a good entry point for the next upcycle. We prefer Ambuja Cement, JP Associates and Grasim among large-caps, and Birla Corp and India Cement among mid-caps.
Worst is behind, trough made in 2HCY10 The cement industry witnessed a trough in its operating performance during 2HCY10. Muted demand (~4.5% growth in 9MFY11) and excess capacity (~75% utilization) impacted realizations (~Rs35/bag decline from peak of Rs255/bag) and profitability (decline of Rs1,100/ton from the peak to Rs450/ton in 2QFY11). Revival in demand to be key catalyst for the next upcycle Revival in demand is critical and would be the key catalyst for the next upcycle, especially considering limited visibility in the short-run. Demand has disappointed in 9MFY11. However, long-term drivers in the form of higher infrastructure spend, strong growth in rural housing and normal growth in urban housing remain intact. While short-term visibility is limited, levers in the form of higher number of assembly elections over the next 3-5 years, FY12 being the terminal year of the Eleventh Five-year Plan, pent-up demand and low base of FY11 could help to bring growth momentum back on track. Peak capacity addition, bottom utilization behind; expect gradual improvement Majority of the capacity additions are behind as only ~66mt of new capacities are expected to be added over FY11-14 as against ~105mt over FY08-11. With expected pick-up in demand and decline in the pace of capacity addition, we believe capacity utilization has bottomed out in 2HCY10 and should gradually improve.
Higher number of state elections over next 3-4 years to boost cement demand
Vol Grow th (%) 16 #3 12 #5 8 #5 #1 4 # 7 # 10 # 7 # 10 #7 #5 #7 # of state elections
0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
March 2011
Cement
Sharp recovery in cement prices to drive profitability 4QFY11 onwards Cement prices have recovered by Rs30-40/bag. Peak construction season and production discipline would lead to further price increases till 2QFY12 and would offset any cost inflation. We expect EBITDA/ton to improve to ~Rs894/ton in FY12 and Rs993/ton in FY13 (v/s FY11 average of Rs760/ton) from the trough of Rs525/ton in 2HCY10. Upgrading FY12 EPS by 2-18% to partly factor in for current prices We are upgrading our FY12 estimates by 2-18% to partly factor in current prices. This upgrade is on top of the 3-9% upgrade post-Budget (to factor in the then prevailing cement prices and increase in coal prices by Coal India). We are now assuming realization to be higher by Rs12/bag in FY12 (similar to 4QFY11 average prices, but Rs10/bag lower than March 2011 exit prices). What if discipline prevails for longer period? Cement price recovery over the last two quarters can be largely attributed to discipline on production and pricing in all the key markets, after a phase of irrationality. While it is futile to estimate longevity of these arrangements, the longer they sustain, the higher would be the upgrades. If current prices sustain in FY12, our EPS estimates would be upgraded by 9-33%. Strong cash flows, cheap secondary market valuations drives stake increases by promoters The Cement Industry has been generating strong operating cash flows driven by recovery in cement prices. This coupled with limited capex plans have resulted in strong free cash flow generation for the industry. Further, attractive secondary market valuations (at replacement cost of US$120/ton for large caps and ~US$45-90/ton for mid-caps) is driving promoters to increase their stakes (Holcims creeping acquisition of ACC/ Ambuja, A.V.Birlas intention to increase stake in Grasim, Binani Industries de-listing Binani Cement, Orient Papers issuing warrants at 20% premium to CMP etc).
77
78
FY12E
979
FY11E
March 2011
FY12E
FY08
FY09
FY10
FY14E
Cement
Chg (%)
1.7 8.5 9.9 8.3 5.9 8.1 17.8
Chg (%)
0.8 7.2 9.1 6.9 5.6 16.0 22.1
Government intervention, breakdown in discipline and demand slowdown are key risks We are positive on the cement industry, as we believe that operating performance has recovered from the trough of 2HCY10. However, lack of pick-up in demand, government intervention in pricing and hyperinflation in energy prices are the key risks to our view. While, supply issues and related pricing concern are addressed, re-rating will be a function of revival in demand. Good entry point Buy The worst is behind and we expect gradual improvement in operating performance. Though the sector would continue to be plagued by over-capacity at least till December 11, cement prices would remain buoyant at least till 2QFY12, driven by seasonality in demand and pricing discipline. However, long-term demand drivers continue to be present. We believe current valuations offer a good entry point for the next upcycle. Valuations for the cement stocks currently factor in bottom-of-the-cycle profitability. We prefer Ambuja Cement (favorable market mix, return of superior profitability, creeping acquisition by Holcim and reasonable valuations), JP Associates (emerging cement giant with pan India presence) and Grasim (positive outlook for both Cement and VSF, and very attractive valuations) among large-caps, and Birla Corp (an efficient player with strong balance sheet available at cheap valuations) and India Cement (very high operating and financials leverage and option value in form of IPL and Indonesian coal mine) among mid-caps.
Target Price Upside (%) FY11 P/E (x) FY12 FY13 FY11 EV/EBITDA (x) FY12 FY13 EV/ton (US$) - Cap. FY11 FY12 FY13
ACC * Buy 1,042 1,104 6 19.5 17.6 13.5 11.2 9.4 7.0 126 121 114 Ambuja * Buy 138 169 22 17.0 13.5 10.9 10.3 7.9 6.1 167 150 141 Grasim # Buy 2,469 3,154 28 9.8 8.1 6.8 5.1 4.5 3.2 102 87 54 Ultratech Neutral 1,067 1,371 29 23.4 15.2 11.1 11.7 7.8 5.9 137 129 106 Birla Corp Buy 330 452 37 6.4 4.8 4.2 3.3 2.7 2.1 51 52 37 India Cements Buy 94 117 24 42.2 11.8 9.2 11.8 7.1 5.7 79 79 76 Shree Cement Neutral 1,862 2,166 16 11.0 7.8 7.0 7.7 5.4 3.8 102 87 77 Jaiprakash Buy 88 108.4 23 22.2 16.7 13.8 11.0 9.3 8.0 122 113 94 Sector Aggregate ^ 18.0 13.2 10.4 10.3 7.4 5.6 127 120 105 * Y/E December; ^ Aggregates exclude Grasim and Jaiprakash; # Merger/De-merger of Grasim's cement assets assumed from 2QFY11 Source: Company/MOSL
March 2011 5
Cement
187
Significant drop in realizations, w ith recovery in 3QFY11 w itnessed only in South 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
This coupled with full impact of ~68mt capacity addition since April 2009 resulted in drop in capacity utilization to ~75% in 9MFY11 as against ~86% in FY10 and ~92% in FY09. Cement prices corrected significantly by ~Rs6/ bag in 9MFY11 (v/s average of FY10) and by ~Rs35/bag from peak to trough. This coupled with cost push, in the form of higher energy cost, higher freight cost and lower operating leverage impacted EBITDA/ton by ~Rs620/ton in 9MFY11 (v/s Rs1,303/ton in FY10) and by Rs1,100/ton to ~Rs450/ton from peak to trough. Cement stocks have out-performed in-line with the benchmark over the last 12 months, as the industry witnessed headwinds resulting in bottomof-the-cycle operating performance.
Sensex
1,255
903
948
970
112
2,938 2,946
2,566
2,547
2,506
2,308
2,385
2,215
2,419
2,402
2,480
2,533
2,775
100 88
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Source: Company/MOSL
March 2011
Jan-11
Jul-10
Cement
170
85
-6 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Higher number of state elections over next 3-4 years to boost cement demand
Vol Grow th (%) 16 #3 12 #5 #1 4 #5 # 7 # 10 8 #7 #5 #7 # 10 #7 # of state elections
10
Source: Company/MOSL
7
FY13E
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY09
-2
Cement
Peak capacity addition is behind us, expect slowdown in pace of capacity addition
Majority of the capacity additions are behind only ~66mt of new capacities are expected to be added over FY11-14 as against ~105mt over FY08-11. With expected pick-up in demand and decline in the pace of capacity addition, we believe capacity utilization has bottomed out in 2HCY10. Pace of capacity addition to slow down from FY12: Based on announcements of capacity additions so far, we estimate only ~66mt of new capacity over FY11-14 as against ~105mt of new capacities over FY08-11. Further, annual capacity addition expected from FY12 is <25mt. New capacity addition plans for FY15 and beyond: Next round of capacity addition is expected to begin now to prepare for meeting growth for FY15 and beyond. There have been announcements for new capacities by UltraTech (~9.2mt by FY14) and Ambuja Cement (~3mt by FY14). Delays in execution, ramp-up not ruled out: We note that short-term pressure on operating performance influenced few companies to delay their projects or ramp-up of their recently commissioned plants. Such delays, though not factored in, can positively surprise on demandsupply equilibrium. Also, lack of M&A deals has deterred opportunistic new entrants.
March 2011
13.7
14.2
16
16
18 15 10 6
18
4.5 5 FY03
23 FY08
26 FY09
57 FY10
32 FY11E
24 FY12E
14 FY13E
24 FY14E
18 FY03
20 FY04
19 FY05
8 FY06
1 2 FY07
2 4 FY08
19 FY09
37 FY10
66 FY11E
70 FY12E
67 FY13E
53 FY14E
8
Source: Company/MOSL
Cement
2HCY10 utilization at trough levels: Muted demand and full impact of ~68mt capacity addition since April 2009 resulted in 2HCY10 capacity utilization of ~72%, which we believe is trough capacity utilization. We note that capacity utilization in the previous down cycle (FY02) also bottomed-out at ~72%. Utilization to improve gradually from here: With expected pick-up in demand and decline in pace of capacity addition, we estimate gradual improvement from here-on. We estimate capacity utilization to improve from ~77% in FY11 to ~78% in FY12 and 80% by FY13 (assuming no further delays in new capacities). North & South regions managing utilization a key challenge: With significant capacity addition happening in the North and the South, capacity utilization in these regions is likely to remain lower than national average. Any predatory pricing in these regions will have cascading impact on the other regions as well.
89 85
89
North
East
West
South
Central
Source: Company/MOSL
March 2011 9
Cement
Cement prices recover sharply to near peak levels; expect further increases
Cement prices have witnessed sharp recovery of Rs30-40/bag, after correcting from peak levels. While cement prices are near peak levels, peak construction season and production discipline would lead to further price increases till 2QFY12. Recovery in cement prices much sharper and faster than correction: Cement prices have witnessed very sharp recovery of Rs3040/bag in the last two months across markets, after witnessing correction of ~Rs35/bag (from peak to trough in current cycle). Recovery has been aided by pick-up in demand since January2011 and adherence to production discipline.
255 240 230 225 ` 205 210 Oct-09 Feb-10 Oct-10 Dec-09 Aug-09 Aug-10 Dec-10 Feb-11 Jun-09 Apr-09 Apr-10 Jun-10 180 North East West South Central
Pricing stable despite trough utilization: As a result of production discipline, cement prices have been stable in the medium term despite bottom-of-the-cycle utilization levels. While utilization levels have dropped from ~86% in FY10 to ~77% in FY11, average cement prices are expected to be lower by just Rs3/bag in FY11 compare to FY10 cement prices. impliys up even better pricing power when utilization picks up: The stability of pricing during a trough makes a foundation for higher pricing power when utilization picks up over next few quarters.
290
230
84
170
72
110
60 FY11E FY12E FY13E FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
50
Source: Company/MOSL
10
March 2011
Cement
110
75 0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 40 Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
32.7
EBITDA (%)
23.8
948
970
910
894
903
960
4QFY11E
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
3QFY11
979
FY11E
Source: Company/MOSL
FY12E
FY08
FY09
FY10
Cement
North region to benefit the most in the short term: With pick-up in demand in the North and rationality prevailing, cement prices have increased sharply by Rs25-30/bag in CY11YTD, having a cascading impact on Central and East India. With relatively higher level of consolidation in North, Central and East India, cement prices are expected to remain stronger. Also, visibility of demand pick-up is better in the North as against the South. cascading impact in long run eliminates any regional biases: Although cement is a regional commodity, in the long run demandsupply equilibrium in one region would have cascading impact on other regions. We do not have preference for any particular market in the long run.
259
266
257
239 249
248
251
258
267 271
268
275
226 246
237 244
242
236 233
236 222
239
206 228
North
East
West
South
Cement price movement in the long run tend to be similar across regions (Rs/bag)
North East West South Central
300
250
200
150
100 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E
Source: Company/MOSL
March 2011 12
212 208
Central
214 231
224
248
Cement
90
4 -4 -12
Discipline has led to ~Rs40/bag increase from trough: Discipline in production and pricing since September 2010 has led to ~Rs40/ bag recovery in national average cement prices from trough levels of 3QCY10, with increase of ~Rs80/bag in the South and ~Rs25-30/bag in the North. Disciplined approach was triggered by significant erosion in profitability of the industry and its to service debt. What if it prevails for longer period?: Disciplined approach has prevailed over the last six months and has enabled recovery in profitability despite muted demand and cost inflation. What if this disciplined approach lasts longer? Such cohesive discipline would enable industry to take periodic price increases and passon cost push, despite operating below optimal utilization, and in turn positively surprise on profitability and drive earnings upgrades.
Estimates can see significant upgrades if cement prices sustain at current levels
Cement Prices (Rs/bag) 1,125 EBITDA (Rs/Ton) 1,294 1,094 970 602 446 960 760 894
979
237 FY09
241 FY10
243 1QFY11
223 2QFY11
237 3QFY11
250 4QFY11E
238 FY11E
Source: Company/MOSL
March 2011
Cement
Cement prices can remain high despite low capacity utilization: While cement prices and capacity utilizations are correlated, in the short to medium term, production discipline would lead to divergence in this correlation. If discipline prevails for longer period, we may see extended period of lower utilization and higher prices. Focus on profitability rather than market share: Smaller and marginal cement players did not attempt to gain market share by dropping prices. After witnessing significant erosion in profitability (even cash losses for smaller player) due to focus on market share, we believe these smaller players are much more rational now. This would aid sustenance of discipline. How long does this discipline need to sustain? Sustaining these production arrangements over the medium term would be difficult as demand-supply dynamics would be the key determinants of pricing. However, discipline needs to sustain, especially in the South, at least till monsoon (seasonally weakest period for demand).
FY12 EPS sensitivity to cement prices (Rs/share) Price Chg.* ACC Ambuja UltraTech -200 -100 0 100 240 340 440 18.2 27.0 35.8 44.7 57.1 65.9 74.8 4.6 5.7 6.7 7.8 9.1 10.2 11.3 24.4 35.0 45.6 56.3 71.1 81.7 92.4
Birla Corp India Cement 40.7 47.0 53.3 59.7 68.6 74.9 81.2 -8.2 -5.3 -2.3 0.6 4.7 7.6 10.6
FY12 EV/EBITDA sensitivity to cement prices (x) ACC Ambuja UltraTech -200 -100 0 100 240 340 440 22.1 16.7 13.3 11.0 8.8 7.7 6.8 16.2 13.4 11.5 10.0 8.5 7.6 6.8 14.8 12.1 10.2 8.8 7.4 6.6 5.9
Birla Corp India Cement 4.5 3.8 3.2 2.8 2.4 2.1 1.9 34.2 20.8 14.8 11.4 8.6 7.2 6.2
FY12 Fair value sensitivity to cement prices (Rs/Share) ACC Ambuja UltraTech
Birla Corp India Cement 275 315 355 395 452 492 532
Shree
-200 501 87 668 -100 638 103 832 0 774 118 995 100 911 133 1,159 240 1,102 153 1,387 340 1,239 168 1,551 440 1,376 185 1,714 Current estimates; *Cement price change over FY11 (Rs/ton)
-66 1,204 -33 1,422 0 1,641 34 1,860 80 2,166 113 2,384 147 2,603 Source: Company/MOSL
14
March 2011
Cement
Sharp price increases to drive earnings upgrades: The sharp recovery in cement prices over the last few months has been surprising and is not yet fully modeled in our and consensus estimates. Our FY12 estimates partly model in current cement prices and increase in coal prices by Coal India. As a result, our estimates witness upgrade of 2-18%. If we assume March 2011 exit prices to sustain for FY12, our FY12 estimates would see an upgrade of 9-33%. Cement prices near peak, but well below long-term viable prices: Cement prices have increased sharply and might look unsustainable. However, current prices are still well below longterm viable prices by ~Rs25/bag based on 15% RoIC requirement (~5 year average) and ~Rs3/ bag lower than 10% ROIC-based pricing (~15 year average).
ACC 59.6 Ambuja 8 Grasim 240.6 Ultratech 64.7 Birla Corp 69.3 India Cements 6.1 Shree Cement ^ NA
* MOSL estimates based on Rs12/bag increase in FY12 (i.e Rs10/bag lower than Mar-11 exit prices) & Rs10/bag increase in FY13 # MOSL estimates based on Mar-11 exit prices, which is Rs12/bag higher than our current FY12 pricing assumption; ^ at EBITDA level, as our EPS is adjusted for accelerated depreciation
Cement prices are at near long-term viable prices based on 15% CRoIC
Rs/Ton 15 Yr Avg 5 Yr Avg 3 Yr Avg
Project Cost @ $110/ton RoIC (%) CRoIC (%) NOPAT NOPBT (@ 30% Tax) Interest (@ 10% interest rate & 1:1 D:E) Depreciation (@ 5%) EBITDA Normative cost @ FY12E Implied Net Realizations (incl freight) Indirect taxes, channel margins etc Implied Cement Prices (Rs/bag) Current prices (Rs/bag) Implied price increases (Rs/bag)
5,005 10 15 501 715 250 250 1,216 2,720 3,936 66 263 260 3
5,005 15 20 751 1,073 250 250 1,573 2,720 4,293 70 285 260 25
5,005 20 25 1,001 1,430 250 250 1,931 2,720 4,651 74 307 260 47
15
March 2011
Cement
Government intervention, breakdown in discipline, demand slowdown and cost inflation are key risks
We are positive on the cement industry. Operating performance has been recovering from the trough of 2HCY10. However, lack of pick-up in demand, government intervention in pricing and hyperinflation in energy prices are the key risks to our view.
Government intervention in pricing: Any intervention of the government to curb cement prices would be the key risk. The government has in the past intervened in free pricing of cement to curb inflation, severely impacting operating performance by the cement compaines and their stock prices. Breakdown in discipline: Any disruption in prevailing discipline of production and pricing would have a short-term impact on the profitability of the industry. However, given the recent experience of cash losses, we do not expect discipline to break down. Demand slowdown: We are estimating strong recovery in demand from ~5% growth in FY11 to 12% CAGR in FY12-14. Any failure of demand pick-up would delay improvement in utilization and operating performance. Energy cost inflation: Any hyperinflation in energy prices would impact profitability of the industry, if it is not passed through.
March 2011
Source: Company/MOSL
16
Cement
Trough behind us: We believe that we have already witnessed bottom-of-the-cycle utilization, and expected gradual improvement driven by of sustainable demand drivers. but volatility to prevail: Although the sector would continue to be plagued by over-capacity at least till December 2011, cement prices are expected to remain buoyant at least till 2QFY12, driven by seasonality in demand. We expect high volatility in cement prices and cement companies performance over the next 6-9 months. Good entry point: Presence of sustainable demand drivers and gradual recovery from the trough of 2HCY10 would make the foundation for the next upcycle. Valuations are attractive and offer a good entry point for the next upcycle, notwithstanding volatility in cement prices and operating performance. Prefer Ambuja Cement, JP Associates and Grasim among large-caps, and Birla Corp and India Cement among mid-caps.
March 2011
Comparative valuations
Target Reco ACC * Buy Ambuja * Buy Grasim # Buy Ultratech Neutral Birla Corp Buy India Cements Buy Shree Cement Neutral JaiPrakash Buy Sector Aggregate ^ CMP 1,042 138 2,469 1,067 330 94 1,862 88 Price 1,104 169 3,154 1,371 452 117 2,166 108.4 Upside (%) 6 22 28 29 37 24 16 23 FY11 19.5 17.0 9.8 23.4 6.4 42.2 11.0 22.2 18.0 PE (x) FY12 17.6 13.5 8.1 15.2 4.8 11.8 7.8 16.7 13.2 FY13 13.5 10.9 6.8 11.1 4.2 9.2 7.0 13.8 10.4 EV/EBITDA (x) FY11 11.2 10.3 5.1 11.7 3.3 11.8 7.7 11.0 10.3 FY12 9.4 7.9 4.5 7.8 2.7 7.1 5.4 9.3 7.4 FY13 7.0 6.1 3.2 5.9 2.1 5.7 3.8 8.0 5.6 EV/TON (US$) - CAP FY11 126 167 102 137 51 79 102 122 127 FY12 121 150 87 129 52 79 87 113 120 FY13 114 141 54 106 37 76 77 94 105
* Y/E December; ^ Aggregates excludes Grasim & JaiPrakash; # Merger/De-merger of Grasim's cement assets assumed from 2QFY11
ACC Ambuja Cement Grasim UltraTech Birla Corp India Cement Shree Cement
Cement
Annexure - I
Demand-supply equilibrium to turn favorable by 2HFY12 Million tonnes FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E 343.1 4.4 3.0 258.2 11.9 255.7 12.0 2.5 0.0 76.2 325.7 80.3 366.8 6.9 3.0 288.9 11.9 286.4 12.0 2.5 0.0 79.7 342.0 85.4 390.6 6.5 3.0 317.6 9.9 315.1 10.0 2.5 0.0 82.1 373.6 85.9
Cement Capacity (Year end) 110.2 119.2 134.4 139.6 146.2 153.8 157.6 165.7 189.0 215.2 272.5 304.2 328.7 Growth 5.2% 8.2% 12.8 3.8 4.7 5.3 2.4 5.2 14.0 13.9 26.6 11.6 8.1 Clinker Exports 1.19 2.00 1.8 3.5 5.6 6.0 3.2 3.1 2.4 2.9 2.8 3.0 3.0 Cement Despatches 94 93.4 102.4 111.0 117.1 125.1 141.6 154.9 167.7 181.4 200.2 210.1 230.8 Growth (%) 14.9 -0.6 9.6 8.5 5.5 6.8 13.2 9.4 8.2 8.2 10.4 4.9 9.9 Domestic Consumption 92.1 90.3 99.1 107.6 113.8 121.1 135.6 149.4 164.0 178.2 197.7 207.6 228.3 Growth (%) 15.4 -1.9 9.7 8.6 5.8 6.4 12.0 10.2 9.8 8.7 10.9 5.0 10.0 Cement Exports 2.0 3.2 3.3 3.5 3.4 4.1 6.0 5.9 3.65 3.2 2.5 2.5 2.5 Growth (%) -5.3 61.5 5.4 3.9 -2.6 21.2 47.5 -2.3 -37.8 -12.3 -21.9 0.0 0.0 Capacity Util (%) 86.5 80.2 77.6 82.2 84.3 85.5 92.0 95.5 90.1 85.7 74.6 70.1 71.2 Effective Cap. (Qly add-up)* 101.0 107.0 122.4 129.5 136.8 144.2 150.1 156.7 171.3 200.7 237.3 275.6 301.1 Effective Cap. Util. (%) 94.3 89.3 85.2 88.6 90.1 91.3 96.6 101.0 99.4 91.9 85.6 77.4 77.8 Source: CMA, MOST;^ based on Year ending capacity; *Effective cap is adj for non-operative cap & is quarterly add-up of cap additions Exports can provide positive surprise
Clinker (MT) 12 10.1 9.0 9
Exports have the potential to supplement domestic demand and absorb excess capacity profitably
Cement (MT)
As a % of installed capacity
9.2
5.5
5.5
5.5
0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E
March 2011
18
Cement
Annexure-II
Regional demand-supply equilibrium MT North India Capacity (effective) Despatches Capacity Util. (effective, %) East India Capacity (effective) Despatches Capacity Util. (effective, %) West India Capacity (effective) Despatches Capacity Util. (effective, %) South India Capacity (effective) Despatches Capacity Util. (effective, %) Central India Capacity (effective) Despatches Capacity Util. (effective, %) FY00 19.7 19.8 100.4 8.2 6.2 75.4 18.8 15.3 81.7 31.7 28.9 91.3 30.2 24.0 79.5 FY01 21.3 19.5 91.9 20.1 15.2 75.6 20.1 15.8 78.8 33.8 27.4 81.0 19.2 15.6 81.5 FY02 23.9 21.9 91.7 20.9 16.7 79.6 21.9 17.2 78.8 43.6 29.9 68.5 20.7 16.7 80.6 FY03 25.2 24.1 95.8 21.7 16.7 76.9 24.4 19.3 79.0 44.4 33.4 75.3 21.0 17.8 84.9 FY04 25.8 25.2 97.7 22.4 16.7 74.5 26.2 21.0 80.2 46.2 36.1 78.1 21.7 18.5 85.1 FY05 27.4 26.7 97.6 22.8 18.7 82.1 28.9 22.8 78.7 46.8 37.0 78.9 24.2 20.4 84.3 FY06 30.7 29.7 96.7 24.2 20.0 82.8 28.9 24.9 86.2 51.0 44.9 88.1 25.0 22.3 89.1 FY07 32.4 32.1 99.0 25.2 22.1 87.6 28.9 27.4 94.6 53.5 49.8 93.0 25.5 23.6 92.6 FY08 36.6 36.5 99.6 27.3 23.8 87.3 29.3 28.7 97.7 56.6 54.1 95.7 25.8 24.5 95.2 FY09 46.4 41.1 88.6 28.7 25.5 88.9 31.7 30.8 97.2 65.9 60.6 92.1 27.8 25.5 92.0 FY10 50.5 43.3 85.8 32.5 29.3 90.2 36.4 34.5 94.9 84.0 63.7 75.8 33.0 29.4 89.1 FY11E 64.6 45.5 70.4 39.1 31.2 79.7 41.9 36.6 87.4 100.0 65.6 65.6 36.5 31.3 85.7 FY12E 69.5 50.0 72.0 43.3 34.3 79.2 49.1 40.3 82.0 109.2 72.1 66.0 FY13E 72.8 56.0 77.0 45.6 38.4 84.3 53.1 45.1 84.9 116.8 80.8 69.2 FY14E 78.8 62.7 79.6 47.4 43.0 90.8 56.9 50.5 88.8 121.5 90.5 74.5
40.0 42.5 42.5 34.4 38.5 43.1 86.0 90.6 101.5 Source: Company/MOSL
March 2011
19
Cement
Annexure-III
List of capacity addition expected over FY11-14 Company/Plant Location 1Q Central India Birla Corp MP Prism Cement MP Mysore Cement MP Mysore Cement (G) UP Central Capacity Additions East India ACC Orissa Ambuja CTG JP-SAIL (Bhilai) CTG JK Lakshmi CTG JP-SAIL Jharkhand Century Textiles WB UltraTech CTG East Capacity Additions North India Ambuja (G) HP Birla Corp Rajasthan Ambuja HP India Cement Rajasthan JP Ind - HP - Chamba HP Lafarge HP JK Cement Rajasthan Mangalam Cement Rajasthan JK Cement Rajasthan Lafarge Rajasthan Wonder Cement Rajasthan Ambuja Cement Rajasthan North Capacity Additions
March 2011
FY12E 3Q 4Q 1Q 2Q
FY13E 3Q 4Q 1Q 2Q
FY14E 3Q 4Q
Total
0.9
0.0
3.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.9 3.2 1.0 1.9 7.0 1.2 2.2 2.2 2.7 1.0 1.5 4.8 15.6 1.5 0.9 2.2 1.5 1.5 3.0 2.2 1.5 3.0 3.0 3.0 3.0 26.2
20
2.2 2.7 1.0 1.5 3.4 1.5 0.85 2.2 1.5 1.5 3 2.2 1.5 3.0 3.0 3.0 2.4 2.2 0.0 3.0 0.0 0.0 3.0 0.0 0.0 0.0 3.7 0.0 0.0 0.0 9.0 3.0 3.0 2.2 0.0 0.0 2.7 0.0 1.0 1.5 0.0 0.0 0.0 0.0 0.0 0.0 4.8 4.8 0.0
Cement
Total
3.0 2.5 0.5 1.5 0.0 2.0 2.0 2.0 1.5 3.0 2.8 2.5 4.4 27.7 1.5 2.8 1.2 3.0 2.4 2.0 2.5 2.5 17.9 94.3
March 2011
21
Cement
Annexure-IV
Trend in key performance indicators (December quarter)
Net Sales (Rs M) EBITDA margin (%) Net Profit (Rs M) 3QFY11 YoY QoQ 3QFY11 YoY QoQ 3QFY11 YoY QoQ (%) (%) (BP) (BP) (%) (%) ACC 19,576 1.9 19.6 10.7 -1,420 30 1,481 -52.9 59.1 Ambuja Cement 17,885 0.9 14.4 17.6 -690 -50 2,517 4.3 65.5 UltraTech 37,152 0.9 15.6 19.1 -780 640 3,190 62.7 175.5 Birla Corp 4,794 -14.2 -1.0 19.0 -1,010 320 696 -38.0 0.9 India Cement 7,810 -9.6 -7.2 16.2 270 1,280 203 -25.3 -148.6 Shree Cement 7,796 -10.0 8.6 20.2 -1,860 30 71 -95.8 -70.3 Sector Aggregate* 95,013 -1.7 12.3 16.9 -910 380 8,157 -23.0 98.0 * Grasim's sales and EBITDA Margin for cement business only; Sector PAT excl Grasim
March 2011
22
Cement
Rating Summary
Company Rating CMP (Rs) 1,042 138 2,469 1,067 88 Target Price (Rs) 1,104 169 3,154 1,371 108.4 Upside (%) 6 22 28 29 23
ACC *
LARGE-CAPS
* Y/E December; ^ Aggregates exclude Grasim and Jaiprakash; # Merger/Demerger of Grasim's cement assets assumed from 2QFY11
March 2011
23
1 Volume growth
2 Market mix
Sales (Rs m) 80.3 77.2 90.5 106.6 EBITDA (Rs m) 25.3 15.5 17.9 22.4 NP (Rs m) 16,399 10,065 11,159 14,455 EPS (Rs) 84.7 50.2 57.2 76.7 EPS Growth (%) 46.4 -40.8 13.9 34.1 BV/Share (Rs) 320.1 344.3 374.4 419.1 P/E (x) 12.3 20.8 18.2 13.6 P/BV (x) 3.3 3.0 2.8 2.5 EV/EBITDA (x) 7.1 11.2 9.4 7.0 EV/Sales (x) 2.2 2.2 1.8 1.5 RoE (%) 30.0 16.1 15.9 18.4 RoCE (%) 34.5 16.3 16.8 20.0
STOCK DATA
Volume growth has returned after three years. We expect volumes to grow at a CAGR of 11% over CY10-12 as against flat volumes over CY08-10. The recently commissioned capacities of 7.2m tons would be sufficient to drive growth over the next three years. With operations at new capacities stabilizing, we expect volume growth to pick up in 1QCY11 to ~10% on a low base of last year (volumes had declined by 2.6%).
ACC is a p an-India player, without concentration in any particular region. Hence, we believe it is the best proxy on the Indian cement industry. Incremental volumes for ACC would be driven by new capacities located in Karnataka (South) and Maharashtra (West). These are markets with adverse demand-supply equilibrium in the short run. We expect ACC's 1QCY11 realization to improve by Rs15/bag QoQ.
Shares Outstanding (m) Market Cap. (Rs b) Market Cap. (US$ b) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
ACC is highly dependent on domestic coal. It would be the worst impacted due to the recent increase in domestic coal prices. We estimate ~Rs4/bag increase in energy cost for ACC. With return of volume growth, we expect operating leverage to dilute the impact of energy cost inflation. Our estimates currently do not factor in any operating leverage. We expect EBITDA/ton to increase by Rs410 QoQ in 1QCY11 to Rs784, and by Rs30 in CY11 to Rs761.
After three years of muted volume growth, ACC would witness robust volume growth of ~10% CAGR over the next two years, driven by new capacities. Allotment of coal blocks in Madhya Pradesh (in JV with the state) and West Bengal (in consortium) offers option value in the long term. Creeping acquisition by Holcim would provide support to the stock price. The stock is valued at 17.6x CY11E EPS, 9.4x EV/EBITDA and US$121/ton (~30mt capacity). Maintain Buy with a target price of Rs1,104 (~10x CY11E EV/EBITDA).
24
March 2011
Volume growth returns after three muted years: With operations at new capacities stabilizing, we expect volume growth to pick up in 1QCY11 to ~10% on low base of last year (2.6% de-growth). We estimate 11% volume CAGR over CY10-12 (v/s flat in CY08-10). Incremental market mix in South and West: While it is a pan-India player, ACC's incremental volumes would be driven by new capacities located in Karnataka (South) and Maharashtra (West), where demand-supply equilibrium is adverse in the short run. Highest exposure to domestic coal to reflect in short-term performance: With ~85% of its coal requirement being met by domestic coal (~40% linkage), ACC would be the worst impacted by the recent increase in domestic coal prices, resulting in ~Rs4/bag increase in cost. RMC continues to be a drag on consolidated EPS: ACC's RMC subsidiary continues to post PBIT losses (Rs288m in CY10 v/s Rs477m in CY09 and Rs918m in CY08). ACC has aggressively invested in building the RMC business, but a slowdown in volumes impacted profitability. It has taken several initiatives to turn around the RMC business and believes in its potential to add value.
March 2011
CY07
CY10
CY11E
CY12E
Source: Company/MOSL High dependence on domestic coal due to land locked plants
Imported coal 12% Pet-coke 3% 27.9 23.8 Dom. linkage 40% 986 Dom. open market 45% 825 20.1 1,175 730 763 856 19.7 21.0
CY07
CY08
CY09
CY10
CY11E
CY12E
Source: Company/MOSL
25
Strong balance sheet with net cash of Rs153/share: With completion of major capex and strong cash flow from operations (~Rs18.2b in CY11), we estimate ACC's net cash balance at Rs153/share. Securing coal blocks to ensure supply of cost-effective energy: ACC has equity stake in two coal blocks, viz. ~200m tons reserve in Madhya Pradesh (~50% stake) and ~685m tons reserve in West Bengal (~14% stake). These mines are expected to become operational in 34 years, and will provide cost-effective long-term energy supply assurance. Creeping acquisition by Holcim to support stock: Holcim's creeping acquisition (~3.2% of 5% permissible in a financial year done in FY11YTD) would provide support to the stock. Holcim currently holds 48.8% stake in ACC. Merger of ACC and Ambuja inevitable, but unlikely in near future: Merger of ACC and Ambuja is inevitable for Holcim to fully reap synergies of operations from (a) coordination at market level, (b) freight optimization, and (c) savings on SG&A. However, we believe there are challenges in the form of (a) cultural differences and (b) brand migration, which Holcim would need to address before the merger of two entities.
March 2011
Price
*370 370 891/930 705/891 600 1074.5 1075 999.93
36,000
24,000
12,000
Jan-05 M&A Apr-05 Open offer 1QFY07 Open market 1QFY08 Open market Jun-08 Open market Dec-10 Open market Dec-10 Open market Feb-11 Open market
EPS
PE (x)
EV/EBITDA (x)
22.1 16.7 13.3 11.0 8.8 7.7 6.8
EV/Ton (US$)
120 118 116 115 112 111 109
Source: Company/MOSL
26
Improvement in the earnings power of ACC's assets coupled with completion of divestment of non-core businesses makes it an attractive pure-play on cement, offering a truly pan-India presence. After two years of muted volume growth, we expect ACC to post robust volume growth of ~12% CAGR over the next two years, driven by new capacities. Allotment of coal blocks in Madhya Pradesh (in a JV with the state) and West Bengal (in a consortium) offers option value. The stock is valued at 17.6x CY11E EPS, and at an EV of 9.4x CY11E EBITDA and US$121/ ton (~30m-ton capacity). Maintain Buy with a target price of Rs1,104 (~10x CY11E EV/ EBITDA).
12 11.9 8 8.5
170
125.5
7.7 4 2.4 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11
116
0 May -11 May -10 Mar-11 Sep-11 Nov -11 May -09 Mar-10 Sep-10 May -08 Sep-09 Nov -09 Sep-08 Nov -08 Nov -10 Mar-09 Mar-08 J an-08 J an-09 J an-10 J an-11 Mar-12
27
J ul-11
Source: Company/MOSL
March 2011
J an-12
J ul-08
J ul-09
J ul-10
Mar-11
J an-07
J ul-09
5.4
5.3
5.5 4.9
5.7
5.4
5.0
5.4
5.6
5.3
5.6 4.8
352
372
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
4QCY10
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
Trend in EBITDA
EBITDA (Rs m) 35.3 31.5 26.2 23.2 24.9 22.9 4,375 6,474 4,700 4,136 4,461 7,344 6,679 4,781 6,222 5,530 1,699 2,089 10.4 10.7 3QCY10 4QCY10 33.9 29.6 24.9 27.4 EBITDA Margins (%)
4QCY10
3,490 439 265 804 534 64 1,011 3,117 372
4QCY09
3,585 360 171 737 498 41 886 2,693 892
YoY (%)
-2.7 22.1 54.8 9.2 7.1 55.6 14.2 15.8 -58.3
3QCY10
3,390 632 243 748 467 53 894 3,038 352
QoQ (%)
2.9 -30.5 9.0 7.5 14.3 19.1 13.2 2.6 5.8
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
Source: Company/MOSL
March 2011 28
4QCY10
ACC: Financials
Income statement Y/E December Net Sales Change (%) Total Expenditure EBITDA Change (%) Margin (%) Depreciation Int. and Fin. Charges Other Income - Rec. PBT Before EO Item EO Income/(Expense) PBT After EO Item Tax Tax Rate (%) Reported PAT Adjusted PAT Change (%) Margin (%) CY09 80,272 10.2 54,995 25,277 45.8 31.5 -3,421 -843 2,404 23,418 -474 22,944 6,877 30.0 16,067 16,399 39.1 20.4 CY10 77,173 -3.9 61,634 15,540 -38.5 20.1 -3,927 -568 2,825 13,870 1,565 15,435 4,234 27.4 11,200 10,065 -38.6 13.0 CY11E 90,534 17.3 72,672 17,862 14.9 19.7 -4,900 -494 3,250 15,718 0 15,718 4,558 29.0 11,159 11,159 10.9 12.3 CY12E 106,644 17.8 84,199 22,445 25.7 21.0 -5,256 -330 3,500 20,359 0 20,359 5,904 29.0 14,455 14,455 29.5 13.6 (Rs million) CY13E 123,079 15.4 95,548 27,531 22.7 22.4 -5,671 -330 4,400 25,930 0 25,930 7,520 29.0 18,411 18,411 27.4 15.0 Balance sheet Y/E December Share Capital Reserves Net Worth Loans Deferred Tax Liability Capital Employed Gross Block Less: Accum. Depn. Net Fixed Assets Capital WIP Investments Curr. Assets, Loans&Adv. Inventory Account Receivables Cash and Bank Balance Others Curr. Liab. and Prov. Account Payables Other Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates
March 2011
CY09 1,880 58,282 60,162 5,669 3,493 69,324 68,263 26,680 41,583 21,562 14,756 22,562 7,790 2,037 7,464 5,271 31,139 16,334 3,305 11,500 -8,578 69,324
CY10 1,880 62,815 64,695 5,238 3,615 73,548 81,431 30,607 50,824 15,628 17,027 27,533 9,150 1,783 10,800 5,801 37,464 17,730 3,209 16,525 -9,931 73,548
CY11E 1,880 68,477 70,357 3,000 3,851 77,208 100,059 35,507 64,552 3,000 23,161 27,421 9,922 2,480 8,681 6,337 40,926 18,603 3,721 18,603 -13,506 77,208
CY12E 1,880 76,885 78,765 3,000 4,156 85,921 106,059 40,763 65,296 3,000 32,073 32,300 11,687 2,922 10,226 7,465 46,748 21,913 4,383 20,452 -14,448 85,921
(Rs million) CY13E 1,880 88,699 90,578 3,000 4,545 98,123 112,059 46,434 65,625 3,000 46,173 37,278 13,488 3,372 11,802 8,616 53,952 25,290 5,058 23,604 -16,675 98,123
29
ACC: Financials
Ratios Y/E December Basic (Rs) EPS Consolidated EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E EV/Sales EV/EBITDA P/BV Dividend Yield EV/ton (US$-Cap) Return Ratios (%) RoE RoCE Working Capital Ratios Debtor (Days) Asset Turnover (x) CY09 87.2 84.7 105.4 320.1 23.0 30.9 CY10 53.6 50.2 74.4 344.3 30.5 66.6 CY11E 59.4 57.2 85.4 374.4 25.0 49.3 CY12E 76.9 76.7 104.9 419.1 27.5 41.8 CY13E 98.0 98.0 128.1 482.0 30.0 35.8 Cash flow statement Y/E December OP/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Income/(Expense) CF from Op. incl EO Exp. (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates CY09 25,277 2,404 -6,742 6,138 27,077 -474 26,604 -15,840 -7,966 -23,806 -123 849 -843 -5,059 -5,177 -2,379 9,842 7,464 CY10 15,540 2,825 -4,112 4,690 18,943 1,565 20,507 -7,234 -2,270 -9,505 40 -431 -568 -6,707 -7,666 3,336 7,464 10,800 CY11E 17,862 3,250 -4,322 1,456 18,246 0 18,246 -6,000 -6,135 -12,135 0 -2,238 -494 -5,357 -8,089 -1,978 10,800 8,681 CY12E 22,445 3,500 -5,599 2,487 22,834 0 22,834 -6,000 -8,912 -14,912 0 0 -330 -5,892 -6,222 1,700 8,681 10,226 (Rs million) CY13E 27,531 4,400 -7,131 3,803 28,603 0 28,603 -6,000 -14,100 -20,100 0 0 -330 -6,428 -6,758 1,745 10,226 11,802
30.0 34.5
16.1 16.3
15.9 16.8
18.4 20.0
20.3 22.3
9 1.2
8 1.0
10 0.9
10 0.8
10 0.8
0.1
0.0
0.0
0.0
30
1 Volume growth
2 Market mix
Sales (Rs m) EBITDA (Rs m) NP (Rs m) EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
70.8 18.7 11.9 7.8 2.1 42.3 17.7 3.3 10.5 2.8 19.6 28.4
73.9 18.2 12.4 8.1 4.3 47.7 17.0 2.9 10.3 2.5 18.1 24.1
87.8 22.9 15.6 10.2 25.6 54.0 13.5 2.6 7.9 2.1 20.1 27.4
103.2 27.8 19.3 12.6 23.7 63.1 10.9 2.2 6.1 1.7 21.6 29.5
We expect volume growth to improve to 10.5% CAGR over CY10-12 as against 6% CAGR over CY08-10. The recently commissioned capacities of 7m tons would be sufficient to drive growth over the next two years. Since it would be replacing purchased clinker with captive clinker, its incremental volumes from these capacity additions would be lower.
Ambuja is focused on West, North and East India, and has small exports, as well. Incremental volumes would be from the North and East regions, where price increases have been the highest. We expect Ambuja's 1QCY11 realization to improve by Rs20/bag QoQ.
Shares Outstanding (m) Market Cap. (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
Ambuja has a well diversified fuel mix, with only 55-57% dependence on domestic coal. We estimate Rs2-2.5/bag increase in cost due to increase in domestic coal prices by Coal India. Full benefit of shift to captive clinker is fully reflected in CY09 financials, resulting in ~Rs12/bag savings in RM cost. We estimate EBITDA/ton to improve by Rs450 QoQ in 1QCY11 to Rs1,080 and by Rs140 in CY11 to Rs1,048.
The stock has corrected meaningfully, as its operating performance was under pressure in the last two years. However, with superior profitability being restored, we expect a re-rating. Creeping acquisition by Holcim would provide support to the stock price. The stock is valued at 13.5x CY11E EPS, and at an EV of 7.9x CY11E EBITDA and US$150/ton (~27m-ton capacity). Upgrade to Buy, with a target price of Rs169 (~10x CY11E EV/EBITDA).
31
Volume growth to pick up: We expect volume growth to improve to 10.5% CAGR over CY1012, as against 6% CAGR over CY08-10. Volume growth would be driven by the recently commissioned capacities of 7m tons. Since Ambuja would be replacing purchased clinker with captive clinker, incremental volumes from these capacity additions would be lower. Incremental volumes from North and East: Incremental volumes for Ambuja would be derived from the North and East regions, where price increases have been the highest. We expect Ambuja's 1QCY11 realization to improve by Rs20/bag QoQ. Well diversified fuel mix: Ambuja has a well diversified fuel mix, with only 55-57% dependence on domestic coal (~33% linkage). ~30% of its coal requirement is met by imported coal and the balance by domestic pet-coke. We estimate Rs2-2.5/bag increase in cost due to increase in domestic coal prices.
12.0 9.0
90.4
6.2
80.0 75.2 25
80.7 27
5.6
6.4 24 22
27
2.8 17 18 CY08 19 20
19 CY07
19 CY08
CY07
CY09
CY10
CY11E
CY12E
993 1,125
991 979
912
CY07
CY08
CY09
CY10
760
CY11E
894
CY12E
Source: Company/MOSL
March 2011 32
1,137 993
1,048
1,220 1,109
Return of superior profitability: Ambuja's superior profitability would be restored driven by replacement of purchased clinker with captive clinker. We expect EBITDA to improve from Rs993/ton in CY09 to Rs1,048/ton in CY11 (as against MOSL Cement Universe EBITDA/ton of Rs1,125 and Rs894, respectively). Strong balance sheet with net cash of Rs19/ share: With completion of major capex and strong cash flow from operations (~Rs20b in CY11), we estimate Ambuja's net cash balance at Rs19/share. Creeping acquisition by Holcim to support stock: Holcim's creeping acquisition (full 5% limit available for FY11) would provide support to the stock. Merger of ACC and Ambuja inevitable, but unlikely in near future: Merger of ACC and Ambuja is inevitable for Holcim to fully reap synergies of operations from (a) coordination at market level, (b) freight optimization, and (c) savings on SG&A. However, we believe there are challenges in the form of (a) cultural differences and (b) brand migration, which Holcim would need to address before the merger of two entities.
March 2011
19,000
8,000
Source: Company/MOSL
EPS
PE (x)
EV/EBITDA (x)
16.2 13.4 11.5 10.0 8.5 7.6 6.8
EV/Ton (US$)
150 149 147 146 145 143 142
Source: Company/MOSL
33
The stock has corrected meaningfully, as its operating performance was under pressure in the last two years. However, with full benefit of new capacities (helping to reduce dependence on purchased clinker) and captive power plant realized, Ambuja's superior profitability is restored, which should drive re-rating of the stock. Creeping acquisition by Holcim would provide support to the stock price. The stock is valued at 13.5x CY11E EPS, and at an EV of 7.9x CY11E EBITDA and US$150/ ton (~27m-ton capacity). Upgrade to Buy, with a target price of Rs169 (~10x CY11E EV/ EBITDA).
11
156.9 140
100 Bear cas e TP: Rs 118 50 0 Oc t-11 May-11 Nov-08 Dec-10 Sep-09 Mar-12
34
Feb-10
Jan-08
Jun-08
Apr-09
Jul-10
Source: Company/MOSL
March 2011
1,017
3,929 3,714 3,776 3,834 3,595 3,549
801 740
5.3 5.3 4.4
849
885
597
5.0
4.8
4.4 2QCY08
5.1
4.8 4.1
4.8
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
Trend in EBITDA
EBITDA (Rs M) 31.1 29.6 28.4 24.6 EBITDA Margin (%) 31.3 28.3 26.0 26.7 24.5 18.1 6,227 6,032 5,146 4,622 3,941 3,996 5,228 4,797 4,300 4,344 2,832 3,146 1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 17.6 29.5
4QCY09
3,714 482 164 685 769 703 2,804 910
YoY (%)
-4.5 -31.9 -6.4 29.1 5.2 6.3 4.3 -31.4
3QCY10
3,595 140 227 1,017 787 772 2,945 651
QoQ (%)
-1.3 134.2 -32.4 -13.0 2.8 -3.1 -0.7 -4.1
Source: Company/MOSL
March 2011 35
4QCY10
1QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
4QCY10
2009 3,047 61,632 64,679 4,858 1,657 71,194 62,283 27,841 34,443 27,144 7,224 19,793 6,832 1,522 8,809 2,630 17,437 10,697 6,740 2,356 27 71,194
2010 3,060 70,206 73,266 5,309 650 79,225 88,032 31,713 56,319 9,307 6,211 31,353 9,019 1,282 17,484 3,569 23,971 13,005 10,966 7,382 5 79,225
2011E 3,060 79,792 82,852 5,734 1,000 89,586 100,339 36,234 64,106 5,000 19,556 25,983 9,623 1,925 10,826 3,609 25,064 14,237 10,826 919 5 89,586
(Rs million) 2012E 2013E 3,060 3,060 93,776 111,946 96,836 115,006 6,260 1,000 104,096 110,339 41,290 69,049 5,000 28,767 30,546 11,313 2,263 12,727 4,242 29,271 16,544 12,727 1,275 5 104,096 6,921 1,000 122,927 120,339 46,826 73,513 5,000 42,600 35,829 13,270 2,654 14,929 4,976 34,021 19,092 14,929 1,809 5 122,927
36
Op. Profit/(Loss) before Tax 18,669 Interest/Dividends Recd. 2,097 Direct Taxes Paid -5,849 (Inc)/Dec in WC 6,591 CF from Operations 21,507 EO Income CF from Op. incl EO Exp (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 462 21,969 -13,157 -3,901 -17,058 42 -163 -224 -4,275 -4,621 291 8,518 8,809
19.6 28.4
18.1 24.1
20.1 27.4
21.6 29.5
22.7 31.4
Working Capital Ratios Asset Turnover (x) 1.0 Debtor (Days) 8 Working Capital Turnover (Days) 12 Leverage Ratio (x) Current Ratio Debt/Equity
March 2011
0.9 6 36
1.0 8 4
1.0 8 5
1.0 8 5
1.1 0.0
1.3 0.0
1.0 0.0
1.0 0.0
1.1 0.0
37
1 Volume growth
2 Market mix
Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
214.0 48.7 26.3 96.0 37.1 540.9 11.1 2.0 5.9 1.4 19.3 22.5
11.9 14.5 53.4 370.2 391.2 453.6 12.1 23.4 15.2 2.9 6.7 1.9 26.6 28.5 2.7 11.7 2.3 16.3 18.5 2.4 7.8 1.7 16.6 18.7
We expect volume growth to improve to 12.2% CAGR over FY11-13 as against 6.7% CAGR over FY09-11. Volume growth would be driven by ramp-up at the 15m-ton new capacities, which would be sufficient to drive growth over the next two years. However, in its cash cow business of white cement, UltraTech is operating at peak capacity and is likely to grow at just 3.7% CAGR (FY11-13E).
UltraTech is a p an-India play without concentration in any particular region, insulating it from wide variation in regional demand and price volatility. Incremental volumes would be driven by the North and the South. Its product mix is likely to improve, with lower contribution from clinker, as the new grinding unit in Gujarat commissions operations in FY12. We expect UltraTech's 4QFY11 realization to improve by Rs15/bag QoQ.
Shares Outstanding (m) Market Cap. (Rs b) Market Cap. (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
UltraTech has a well-diversified fuel mix, with just ~53% dependence on domestic coal. We estimate ~Rs2.5/bag increase in cost due to increase in domestic coal prices by Coal India. Full benefit of doubling of captive power plant to 80% dependence has been realized and is reflecting in FY11 performance. We expect EBITDA/ton to improve by Rs290 QoQ in 4QFY11 to Rs1,004 and by Rs80 in FY12 to Rs869.
The recent acquisition of Star Cement (UAE) would put pressure on operating performance in the short run. Ongoing capex plans of Rs102b over the next 3-4 years would restrict free cash flow generation. The stock is valued at 15.2x FY12E EPS, and an EV of 7.8x FY12E EBITDA and US$129/ton (~51m-ton capacity). Maintain Neutral with a target price of Rs1,371 (~10x FY12E EV/EBITDA).
38
Capacity in place for volume growth: We estimate volume growth to improve to 12.2% CAGR over FY11-13E, as against 6.7% CAGR over FY09-11E. Volume growth would be driven by ramp-up at 15mt new capacities, which would be sufficient to drive growth over next 2 years. However, in its cash cow business of White cement it is operating at peak capacity and as result it is estimated to grow at 3.7% CAGR (FY11-13E). Product mix to improve as clinker sale reduces: While incremental volumes are expected to be driven from North and South, we don't estimate any meaningful shift in its market mix. However, its product mix is expected to improve with lower contribution from clinker as new grinding unit at Gujarat commissions operations by FY12. We expect its 4QFY11 realizations to improve by Rs15/bag QoQ. Well-diversified fuel mix: UltraTech has well diversified fuel mix, with only ~53% dependence on domestic coal (~33% linkage coal). Apart from domestic coal, it uses imported coal (~33%) and pet-coke (~14%). We estimate ~Rs2.5/bag increase in cost due to increase in domestic coal prices by Coal India.
March 2011
86.4 83.4 81.4 42.1 35.4 FY08 FY09 49.4 FY10 81.3 48.8 50.8 83.2 60.0
-0.6 33.1 35.1 FY09 FY10 6.0 -1.3 43.9 40.2 39.7 FY11E FY12E FY13E 49.9
FY11E
FY12E
FY13E
FY08
Profitability to improve *
EBITDA (Rs/Ton)
Pet-coke 14%
1,157 1,087
Mega capex plan of Rs102b over next 3-4 years to curtail free cash flow generation: UltraTech has capex plans of Rs102b over the next 3-4 years. It is setting up a Rs56b, 9.2mton brownfield capacity, commence operations by 4QFY13. Further, it is investing Rs45.6b in adding CPPs, adding supporting infrastructure and on modernization and upgradation. Star Cement (UAE) to be a drag: In September 2010, it completed its acquisition of Star Cement, a 3m-ton UAE-based cement company. It reported volumes of 0.75m tons, EBITDA of ~Rs75m (~Rs100/ton) and net loss of Rs270m in 3QFY11. Star Cement is likely to be a drag in the short run. Our estimates are yet to factor in Star Cement. Auxiliary businesses to support profitability: Its auxiliary businesses (~15% of FY11E revenue) like white cement, wall care putty and nascent RMC business are scaling up well. As these businesses scale up, they will support profitability - these niche businesses (except RMC) enjoy good margins and are noncyclical. However, its white cement business is operating at ~90% utilization and its has no plans to add further capacity. We expect white cement volumes to grow at just 3.7% CAGR.
March 2011
23
32 2 21 -21
10 16 -22
40
15 7 -25
FY11E
FY12E
FY13E
Source: Company/MOSL
EPS
PE (x)
EV/EBITDA (x)
14.8 12.1 10.2 8.8 7.4 6.6 5.9
EV/Ton (US$)
128 127 126 124 123 121 120
Source: Company/MOSL
40
UltraTech, with its 50m-ton capacity and panIndia presence, is one of the best proxies for the Indian cement industry. However, the recent acquisition of Star Cement (UAE) would put pressure on operating performance in the short run. Further, ongoing capex plans of Rs102b over the next 3-4 years would restrict free cash flow generation. The stock is valued at 15.2x FY12E EPS, and an EV of 7.8x FY12E EBITDA and US$129/ ton (~51m-ton capacity). Maintain Neutral with a target price of Rs1,371 (~10x FY12E EV/ EBITDA).
16 12
Max Min
132 122.5
44.3
J an-07
Source: Company/MOSL
March 2011
3,251
3,273
3,353
3,158
1,130
2,941
761
706
962
1QF Y10
2QF Y10
3QF Y10
4QF Y10
1QF Y11
2QF Y11
438
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
Trend in EBITDA
36.7 30.5 23.2 14,569 21.1 11,531 10,021 9,764 9,997 12.7 4,078 7,078 25.1 19.1 EBITDA (Rs m) EBITDA (%)
3QFY11
3QFY11
3,791 517 901 189 733 685 3,024 712
2QFY10
3,704 307 760 153 688 666 2,574 1,130
YoY (%)
2.4 68.3 18.5 23.6 6.5 2.8 17.5 -37.0
2QFY11
3,498 499 906 205 698 706 3,014 438
QoQ (%)
8.4 3.7 -0.5 -8.1 4.9 -2.9 0.4 62.6
1QF Y10
2QF Y10
3QF Y10
4QF Y10
1QF Y11
2QF Y11
3QF Y11
Source: Company/MOSL
March 2011 42
3QF Y11
712
179,597 214,018 38.1 19.2 141,434 38,163 21.2 9,236 3,837 2,550 27,640 27,640 8,430 30.5 19,210 19,210 53.4 10.7 165,324 48,693 22.8 10,052 3,499 2,750 37,893 37,893 11,557 30.5 26,335 26,335 37.1 12.3
Appl. of Funds 70,439 180,173 192,297 211,795 * Assuming merger w.e.f July 1, 2010 E: MOSL Estimates
March 2011
43
26.6 28.5
16.3 18.5
16.6 18.7
19.3 22.5
17.0 20.8
1.0 11 43
0.7 13 49
0.9 11 41
1.0 11 42
1.0 12 43
Inc/Dec of Cash -208 33,859 -504 4,185 Add: Beginning Balance 1,045 837 34,697 34,193 Closing Balance 837 34,697 34,193 38,378 '* Assuming merger w.e.f July 1, 2010 E: MOSL Estimates
0.3
0.5
0.4
0.3
0.2
March 2011
44
1 Volume growth
2 Market/business mix
Sales (Rs m) EBITDA (Rs m) NP (Rs m) EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
199.3 203.6 238.3 278.5 57.9 47.9 57.5 69.8 34.0 29.0 35.0 43.0 298.2 253.0 303.9 364.9 25.0 -15.2 20.1 20.1 1,366 1,578 1,835 2,150 8.3 9.8 8.1 6.8 1.8 1.6 1.3 1.1 4.1 5.1 4.5 3.2 1.2 1.3 1.1 0.8 22.7 16.0 16.6 17.0 23.9 20.8 23.1 25.5
We expect cement volume growth for subsidiary, UltraTech to improve to 12.2% CAGR over FY11-13 as against 6.7% CAGR over FY09-11. We estimate VSF business volume growth at 10.4% CAGR, driven by new capacity addition in FY13. Grasim is investing to expand capacity of both cement (~9m tons) and VSF (~156,500 tons) to cater to future growth.
UltraTech's incremental volumes are expected to be driven by the North and South. However, its product mix is expected to improve, with lower contribution from clinker, as new grinding unit at Gujarat begins operations by FY12. Cement business contribution to pro-rata consolidated revenue is estimated at ~65% in FY12 (v/s 57% in FY11), with VSF contributing the balance 35%.
Shares Outstanding (m) Market Cap. (Rs b) / (US$ b) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
VSF (@ 4x FY12 EBITDA) Cement (@ 10x FY12 EBITDA) * Total EV Less: Net Debt * Equity value * after 20% holding company discount
March 2011
We expect cement business profitability to improve by Rs290/ton QoQ in 4QFY11 to Rs1,004/ton, and by Rs80/ton in CY11 to Rs869/ton. VSF business profitability is likely to improve by 100bp over FY11-13, driven by strong VSF prices (assume Rs7/kg increase). We expect Grasim's consolidated EPS to grow at 20% CAGR over FY11-13.
Outlook for the VSF business has improved considerably. This coupled with improving short-term outlook for the cement business augurs well for Grasim. The stock quotes at attractive valuations of 8.1x FY12E consolidated EPS, 1.3x FY12E BV and at an EV of 4.5x FY12E EBITDA. Implied valuation of the cement business is US$86/ton. Maintain Buy, with a target price of Rs3,154 (SOTP based, valuing economic interest in business at 10x EV/EBITDA and 20% holdco discount, and VSF at 4x EV/EBITDA).
45
334
Cement still contributes over 55% to consolidated EBITDA: After consolidating all cement assets into UltraTech, Grasim is perceived as a holding company with limited interest in cement. While its economic interest in the cement business has reduced, it still contributes ~65% consolidated pro-rata revenues and over 55% of its EBITDA. Positive outlook for VSF business: Outlook for Grasim's VSF business has improved considerably, driven by strong cotton and PSF prices, reflecting in ~Rs21/kg increase in VSF prices in the last three months and Rs28/ kg in six months to Rs144/kg. Our FY12 estimates assume VSF realizations of Rs132/ kg. We estimate VSF business PBITDA margin to improve by 150bp in FY12 to 37%. reflecting in capex: Grasim has revised upwards its capacity addition in VSF from 80,000 tons (greenfield) to 156,500 tons (greenfield + brownfield). This is supplemented by caustic capacity addition of 182,500 units. It would be investing Rs29b to augment its capacity by 47% to 490,475 tons by FY13.
36.9
35.5
37.0
36.5
20.4 97 106
334 280
70 233
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY08
FY09
FY10
FY11E
124
FY12E
Non-c ement
67%
210
14
78% 8 28
75% 12
150
28
90 Jan-10
Mar-10
Jun-10
Sep-10
Nov -10
Feb-11
FY08
FY09
FY12E
Source: Company/MOSL
March 2011
Outlook for the VSF business has improved considerably. This coupled with improving shortterm outlook for the cement business augurs well for Grasim. Demerger of the cement business has triggered a de-rating of the stock and it currently trades at implied holding company discount of ~50% to UltraTech. The stock quotes at attractive valuations of 8.1x FY12E consolidated EPS, 1.3x FY12E BV and at an EV of 4.5x FY12E EBITDA. Implied valuation of the cement business is US$87/ton. Maintain Buy, with a target price of Rs3,154 (SOTP based, valuing economic interest in cement business at 10x EV/EBITDA and 20% hold-co discount, and VSF at 4x EV/EBITDA).
Multiple
4 10
FY11
56,486 124,526 181,012 43,799 52,947 23,831 213,991 2,334
FY12
68,653 184,098 252,752 40,784 53,087 23,831 288,885 3,154
FY13
74,800 234,897 309,697 37,769 76,412 23,831 372,171 4,059
FY14
80,757 247,291 328,048 34,754 75,408 23,831 392,533 4,281
@ 20% discount
Source: Company/MOSL
March 2011
47
18% 4% -9%
53.8 3QFY09
65.4
67.4 1QFY10
74.0
81.3 3QFY10
85.7
67.3 1QFY11
67.5
84.6 3QFY11
97
99
84
75 72
1QFY10
3QFY10
1QFY11
3QFY11
Source: Company/MOSL
March 2011
3QF Y11
Grasim: Financials
Income Statement (Consolidated) (Rs Million) Y/E March 2009 2010 2011E 2012E 2013E Net Sales 182,966 199,334 203,649 238,302 278,467 Change (%) 7.8 8.9 2.2 17.0 16.9 Total Expenditure 139,643 141,467 155,762 180,845 208,694 EBITDA Change (%) Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO items Change (%) EO Exp PBT after EO items Tax Tax Rate (%) Reported PAT PAT Adj for EO items Change (%) Margin (%) Less: Minority Interest Consolidated PAT Change (%) 43,323 -12.7 23.7 8,658 34,665 3,067 4,468 36,066 -20.4 0 36,066 9,914 27.5 26,152 26,152 -17.0 14.3 4,286 21,867 -18.9 57,867 33.6 29.0 9,947 47,920 3,346 5,356 49,930 38.4 -3,613 53,543 15,957 29.8 37,586 33,973 29.9 17.0 6,631 27,342 25.0 47,887 -17.2 23.5 10,861 37,026 3,741 6,804 40,089 -19.7 0 40,089 11,071 27.6 29,018 29,018 -14.6 14.2 5,818 23,200 -15.2 57,457 20.0 24.1 11,565 45,892 4,304 6,956 48,543 21.1 0 48,543 13,506 27.8 35,037 35,037 20.7 14.7 7,167 27,870 20.1 69,774 21.4 25.1 12,981 56,793 3,966 7,656 60,483 24.6 0 60,483 17,434 28.8 43,049 43,049 22.9 15.5 9,586 33,463 20.1 Balance Sheet (Consolidated) Y/E March 2009 Equity Share Capital 917 Reserves 114,783 Net Worth 115,700 Loans 59,162 Deferred liabilities 15,919 Minority Interest 16,704 Capital Employed 207,484 Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Goodwill Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Other Liabilities Provisions Net Current Assets Appl. of Funds 190,622 68,254 122,368 19,822 35,626 20,010 45,343 22,210 8,249 2,270 12,615 35,685 24,374 4,749 6,562 9,659 207,484 (Rs Million) 2010 2011E 2012E 2013E 917 917 917 917 124,329 143,774 167,352 196,255 125,246 144,691 168,269 197,172 55,992 65,804 60,804 55,804 20,057 20,057 19,577 19,474 37,548 43,367 50,534 60,120 238,844 273,919 299,185 332,571 209,439 71,646 137,793 7,734 66,759 20,071 45,379 21,835 8,803 2,370 12,371 38,891 22,209 8,161 8,522 6,488 238,844 233,673 82,506 151,166 11,000 78,699 23,890 259,853 94,071 165,781 22,000 78,577 23,890 287,853 107,053 180,800 15,000 103,831 23,890 61,959 30,631 13,923 4,177 13,227 52,909 36,201 11,139 5,569 9,050 332,571
46,839 54,214 22,401 26,213 10,182 11,915 3,055 3,575 11,201 12,511 37,675 45,277 26,474 30,979 6,109 9,532 5,091 4,766 9,164 8,936 273,919 299,185
March 2011
49
Grasim: Financials
Ratios Y/E March Basic (Rs) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/ EBITDA Dividend Yield (%) EV/Ton (US$) Return Ratios (%) RoE RoCE Working Capital Ratios Debtor (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2009 238.5 347.7 1,261.9 30.0 15.0 2010 298.2 455.7 1,365.8 30.0 12.0 2011E 253.0 386.9 1,577.9 35.0 16.2 2012E 303.9 459.7 1,835.0 40.0 15.4 2013E 364.9 541.9 2,150.2 42.5 13.6 Cash Flow Statement (Consolidated) Y/E March 2009 2010 OP/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations EO Items CF frm Op. incl EO 10.4 7.1 2.0 6.3 1.2 8.3 5.4 1.8 4.1 1.2 9.8 6.4 1.6 5.1 1.4 102 8.1 5.4 1.3 4.5 1.6 87 6.8 4.6 1.1 3.2 1.7 54 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 44,791 1,700 -5,509 -4,657 36,325 0 36,325 -26,468 -11,882 -38,350 438 7,991 -3,160 -3,553 1,715 -633 2,903 2,270 57,867 5,356 -11,819 3,271 54,674 3,613 58,287 -13,285 -31,193 -44,478 -18,119 -3,169 -3,346 -3,290 -27,924 -14,114 2,270 -11,844 2011E 47,887 6,804 -11,071 -1,992 41,628 0 41,628 -27,500 -15,760 -43,260 0 9,812 -3,741 -3,755 2,316 685 2,370 3,055 (Rs Million) 2012E 2013E 57,457 6,956 -13,986 748 51,174 0 51,174 -37,180 121 -37,059 0 -5,000 -4,304 -4,292 -13,596 520 3,055 3,575 69,774 7,656 -17,537 489 60,381 0 60,381 -21,000 -25,253 -46,253 0 -5,000 -3,966 -4,560 -13,525 602 3,575 4,177
21.1 20.6
22.7 23.9
16.0 20.8
16.6 23.1
17.0 25.5
16 0.9
16 0.8
18 0.7
18 0.8
18 0.8
0.5
0.4
0.5
0.4
0.3
March 2011
50
1 Volume growth
2 Market mix
Net Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS (Rs) EPS Gr. (%)* BV/Share(Rs) P/E (x) P/BV (x) EV/ EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%) *Consolidated
STOCK DATA
100.9 130.1 151.7 166.0 23.1 30.1 36.5 41.7 8.9 7.7 10.3 12.4 4.2 4.0 5.3 6.4 -0.4 -5.5 33.6 20.4 40.0 49.0 53.1 58.1 21.0 22.2 16.7 13.8 2.2 1.8 1.7 1.5 14.2 11.0 9.3 8.0 3.3 2.5 2.2 2.0 11.8 8.6 10.4 11.5 14.4 11.6 10.9 12.2
Jaiprakash Industries is likely to emerge as the third largest cement group in India, with total capacity of ~33m tons (~36m tons capacity under control). In the next round of capacity additions, it is targeting production of 50m tons. We estimate volume growth of 24.2% CAGR over FY11-13, driven by ramp-up in new capacities. Volume growth would be driven by the recently commissioned ~11m-ton capacities (over FY10-12).
We expect Jaiprakash to diversify its cement operations to become a pan-India play, with a strong foothold in North and Central India. Incremental volumes would be well diversified, as its operations in new regions scale up. We expect the company's 4QFY11 realization to improve by Rs20/bag QoQ.
Shares Outstanding (m) Market Cap (Rs b) Market Cap (US$ b) Past 2 yrs. Sales Growth (%) Past 2 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
Jaiprakash is highly dependent on domestic coal for its energy requirement; ~90% of its current requirement is being met by domestic coal (45-50% linkage). We estimate Rs3-4/bag increase in cost due to increase in domestic coal prices by Coal India. However, benefit of fiscal incentives (at UP and HP plant) coupled with benefit of higher operating leverage would offset cost push. We estimate EBITDA/ton to improve by Rs400 QoQ in 4QFY11 to Rs1,123 and by Rs40 in FY11 to Rs1,018.
The stock trades at 16.7x FY12E and 13.8x FY13E earnings. Our SOTP based target price is Rs108, comprising the cement business at Rs84/ share (8x FY12E EV/EBIDTA), E&C division at Rs31/share (6x FY12E EV/EBIT), power business at Rs27/share (DCF), real estate at Rs33/share (NAV) and net debt of Rs67/share. We maintain Buy , with an SOTP-based target price of Rs108.
March 2011
51
Volume growth to pick up: We estimate volume growth of 24.2% CAGR over FY1113, driven by ramp-up in new capacities.? Volume growth would be driven by recently commissioned ~11m-ton capacities (over FY1012). Incremental market mix to be welldiversified: Incremental volumes for Jaiprakash would be well diversified, as its operations in new regions scale-up. Currently, its market mix is concentrated in North and Central India. High dependence on domestic coal: The company is highly dependent (~90%) on domestic coal for its energy requirement. We estimate Rs3-4/bag increase in cost due to increase in domestic coal prices by Coal India. Fiscal incentives to insulate superior profitability: Jaiprakash enjoys fiscal incentives at its Uttar Pradesh (~4m-ton capacity) and Himachal Pradesh (~5m-ton capacity) plants. Fiscal incentives are in the form of excise duty exemption, sales tax exemption/deferral, transport subsidy (HP plant only) and income tax exemption (HP plant only). We estimate Rs150-200/ton of savings on blended basis due to these fiscal incentives.
March 2011
33.9 11.8 6.7 F Y07 1.7 6.8 F Y08 12.5 7.6 F Y09 10.2 FY10E FY11E 16.2
FY12E
FY13E
FY10E
FY11E
FY12E
Source: Company/MOSL
FY13E
52
FY08
FY09
FY13E
Captive coal block to increase competitive advantage: Jaiprakash has been allotted a coal block in Mandla in Madhya Pradesh, with estimated reserves of 180m tons. The mine will start operations in 2011/2012 and be used to meet coal requirement for a 7m-ton cement plant in Rewa, Madhya Pradesh and a 5m-ton plant in Baga, Himachal Pradesh and other captive plants. The management estimates that the captive mine will lead to savings of Rs1,0001,200/ton, as we estimate the cost of coal (from captive mines) at Rs1,600/ton and coal procurement cost is Rs2,800/ton. Cement capacity target of 50mtpa: In the next round of capacity additions, Jaiprakash is targeting production of 50m tons. The business has already witnessed significant ramp-up in capacity from 7m tons in FY08 to 22.8m tons in March 2010. Jaiprakash has achieved the fastest rollout of greenfield capacity addition in the sector and targets 34m tons of capacity by FY12. We understand that a large part of the planned cement capacity addition from 34m tons to 50m tons will be brownfield, entailing competitive capital cost.
FY09
7.6 12.5 22,360 14.6 8,308 4.7 6,850 -1.0 2,940 1,092 901 81
FY10
10.2 33.9 36,227 62.0 13,637 64.1 10,579 54.4 3,558 1,339 1,039 121
FY11E
16.2 59.1 55,803 54.0 15,821 16.0 10,708 1.2 3,445 977 661 134
FY12E
21.5 32.7 78,804 41.2 21,880 38.3 15,714 46.7 3,665 1,018 731 137
3,824 1.5 1,076 -12.8 815 -16.1 137 6.5 Source: Company/MOSL
Jaiprakash Associate sensitivity to cement prices (FY12) Cement PriceEBITDA/Ton EPS PE (x) EV/EBITDA EV/Ton TP at 8x Remarks chg over FY11 (Rs/Ton) (x) (US$) EV/EBITDA (Rs/Ton) (Rs)
-200 -100 0 100 240 340 440 630 723 815 907 1,036 1,128 1,221 2.3 3.0 3.7 4.4 5.3 6.0 6.7 37.5 29.1 23.8 20.1 16.5 14.6 13.2 12.2 11.4 10.6 10.0 9.2 8.7 8.3 116 116 116 116 116 116 116 76 83 91 98 108 116 123
Source: Company/MOSL
March 2011
53
In-house project portfolio provides strong EPC business visibility: The Jaiprakash group is working on 695msf of RE development and 13GW of power project development, which provides strong revenue visibility on the EPC division. Construction division order book stands at Rs580b, including ~Rs300b of real estate, ~Rs250b of Arunachal Pradesh hydro power projects, etc. RE pre-sales strong, driving a pick-up in near-term earnings growth: The group is working on initial RE development at Noida (through Jaypee Infratech and standalone business) and Greater Noida (standalone entity). During 9MFY11, real estate bookings were 13.6msf, comprising of 3.8msf for the standalone entity and 9.8msf in Jaypee Infratech. As at December 2010, cumulative pre-bookings for the Jaiprakash group stand at Rs158b (including Rs15b in 3QFY11), and customer advances received stand at Rs76b (including Rs13b in 3QFY11). Cumulative customer advances received are 48% of the cumulative bookings.
80 60
15 10
48 42
40 20 0
55.9
59.9
CAGR of 50% 16.8 4.5 18.5 5.1 20.0 4.8 16.6 3.5 17.9 3.6 29.4 7.6
11.7
36
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
30
150
100 18.1 4.5 0 Mar-08 Mar-09 Mar-10 Jun-10 Sep-10 Dec-10 8.1 31.4
50
20%
29.4 35.9 40.6 37.7
*Includes sales by Jaypee Infratech, Jaiprakash Associates, etc, # Includes sales by Jaiprakash Associates, JPSK, etc Source: Company/MOSL
March 2011 54
Business Segment
Construction Cement Mining
Method
Hydro Power Mkt Cap Road project/ Book Value Real Estate Integrated Sports Book Value complex Book Value
25% discount to market cap Advances towards equity and equity investment Advances towards equity and equity investment FY10 book value
Source: Company/MOSL
At project NAV 83.1% stake valued at 25% discount to market cap Rs60m/acre based on project NPV for Yamuna Expressway
March 2011
55
2.9
2.2
2.4
2.2
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4 .2
7 .0
7.9
8.8
12.3
13.5
3 .6
2.6 2.6
2 .7
10.0 0.0
0 .7 3.3
3 .5
1.0
4QFY0 8
1QFY0 9
2QFY0 9
0.3
3QFY0 9
0 .7
4QFY0 9
1QFY1 0
2QFY1 0
0.9
3QFY1 0
4QFY1 0
1.2
Source: Company/MOSL
March 2011
1QFY1 1
3.7
4 .3
24.7
2009 2,368 64,177 66,980 131,062 6,896 204,938 86,191 18,013 68,178 50,819 44,651 92,062 19,547 10,220 29,086 33,081 128 50,367 8,808 36,736 4,823 41,695 205,383
2010 4,249 80,758 85,007 179,088 9,233 273,328 128,471 22,284 106,187 38,916 55,763 130,990 29,097 22,850 38,792 39,947 304 58,529 12,971 39,043 6,515 72,461 273,327
(Rs Million) 2012E 2013E 3,877 98,750 103,005 3,877 108,317 112,572 167,443 10,733 290,747 192,361 43,583 148,779 12,461 68,719 140,053 45,292 38,664 4,779 51,015 304 79,264 20,837 47,170 11,257 60,789 290,747
57
Cons. & Manufact. Expen. 29,953 Staff Cost 3,308 Selling & Dist. Exp. 4,164 Other Expenses 3,455 Total Expenses 40,880 EBITDA % of Net Sales Depreciation Interest Other Income PBT T ax Rate (%) Reported PAT Adjusted PAT Change (%) 16,762 29.1 3,090 5,043 3,881 12,510 3,540 28.3 8,970 8,970 47.1
171,307 170,212 9,733 10,233 276,102 146,861 27,865 118,996 39,626 61,381 123,062 35,314 30,292 12,835 44,317 304 66,964 15,999 43,147 7,818 56,098 276,102 283,450 177,461 35,407 142,054 19,029 66,724 128,927 42,944 35,338 2,952 47,390 304 73,284 18,977 44,926 9,381 55,643 283,450
Cash Flow Statement Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations (Inc)/Dec in FA (Pur)/Sale of Investments CF from Investments
2009 12,510 3,090 5,043 3,540 -7,685 9,418 -42,782 -12,403 -55,185 14,694 48,006 5,043 1,403 56,255 10,488 18,154 28,642
2010 23,817 4,561 10,558 6,733 -21,060 11,142 -30,667 -11,112 -41,778 5,474 48,026 10,558 2,156 40,787 10,151 29,086 39,237
2011E 18,644 5,581 13,244 6,839 -9,594 21,035 -19,100 -5,618 -24,718 506 -7,781 13,244 1,756 -22,275 -25,958 38,792 12,834
(Rs Million) 2012E 2013E 16,347 7,542 14,159 6,058 -9,427 22,563 -10,002 -5,343 -15,345 500 -1,096 14,159 2,346 -17,101 -9,883 12,835 2,952 19,533 8,175 15,430 7,141 -3,319 32,678 -8,332 -1,995 -10,327 500 -2,769 15,430 2,825 -20,524 1,827 2,952 4,779
(Inc)/Dec in Networth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance
15.9 10.3
11.8 14.4
8.6 11.6
10.4 10.9
11.5 12.2
65 0.3
83 0.4
85 0.5
85 0.5
85 0.6
2.0
2.1
1.8
1.7
1.5
58
Rating Summary
Company Rating CMP (Rs) 330 94 1,862 Target Price (Rs) 452 117 2,166 Upside (%) 37 24 16
M ID - C APS
March 2011
59
1 Volume growth
2 Market/business mix
Sales EBITDA NP EPS (Rs) EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
21.6 21.5 25.0 29.2 7.1 5.2 7.1 8.7 5.6 4.0 5.3 6.1 72.4 51.3 68.6 79.5 79.6 60.0 79.9 93.0 72.2 -29.1 33.6 15.9 232.6 276.3 336.7 407.4 4.6 6.4 4.8 4.2 1.4 1.2 1.0 0.8 2.5 3.3 2.7 2.1 0.8 0.8 0.8 0.6 31.1 18.6 20.4 19.5 30.5 21.2 23.9 25.0
We expect volume growth to improve to 10.8% CAGR over FY11-13, as against 6.5% CAGR over FY09-11. Volume growth over the next two years would be driven by ramp-up at the 1.7m-ton expanded capacities. The company is adding a further 2.7m-ton capacity through the brownfield route in Rajasthan, which would be fully operational by 2QFY13.
Birla Corp is a regional player focused on North, Central and East India. Incremental volumes are expected to be driven by the North and Central regions. These markets have seen the highest price increases on QoQ basis. We expect 4QFY11 realization to improve by Rs22/bag QoQ. Its non-cement business contribution is expected to remain stable at 7.7% of revenues.
Shares Outstanding (m) Market Cap. (Rs b) Market Cap. (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
4X FY12E EV/EBITDA
Birla Corp has high dependence on domestic coal at ~70%, with linkage coal contributing ~65% of its total fuel requirement. We estimate Rs4-5/bag increase in energy cost due to increase in prices of domestic linkage coal by Coal India. We expect EBITDA/ton to improve by Rs440 QoQ in 4QFY11 to Rs1,159 and by Rs124 in FY12 to Rs1,055.
Birla Corp is an efficient cement manufacturer, with above average operating matrices. It has very strong balance sheet, with net cash of Rs84/share in FY11 (~27% of market cap). The stock is valued at 4.8x FY12E EPS, and at an EV of 2.7x FY12E EBITDA and US$52/ ton (~7.5m-ton capacity). Maintain Buy, with a target price of Rs452 (~4x FY12E EV/ EBITDA).
452 45.7 78
60
Well-placed for volume growth: We expect volume growth to improve to 10.8% CAGR over FY11-13 as against 6.5% CAGR over FY0911. Volume growth would be driven by rampup at the 1.7m-ton expanded capacities as well as further capacity addition of 2.7m tons (to commission operations by 2QFY13). Favorable market mix: It is a regional player focused on North, Central and East India. Incremental volumes are expected to be driven by the North and Central regions. These markets have seen the highest price increases on QoQ basis. We expect Birla Corp's 4QFY11 realization to improve by Rs22/bag QoQ. High dependence on domestic coal: Birla Corp has high dependence on domestic coal at ~70%, with linkage coal contributing ~65% of its total fuel requirement. We estimate Rs4-5/ bag increase in energy cost due to increase in domestic linkage coal prices by Coal India. Return ratios to improve, with deployment of excess cash: It has undertaken a aggressive capex plan of Rs16b. This would take its total capacity to 11.8m tons by FY13-14. We expect net cash to reduce from Rs108/share in FY11 to Rs84/share in FY12.
6.9
10.8 7.5 5.8 FY08 5.8 FY09 6.1 FY10 FY11E FY12E FY13E 8.1
5.3 0.9 FY08 5.3 0.1 FY09 FY10 FY11E FY12E 5.7 6.0
FY13E
1,351
1,158
FY09
FY10
FY11E
FY12E
FY13E
Source: Company/MOSL
March 2011
61
Birla Corp is an efficient cement manufacturer, with above average operating matrices. It has very strong balance sheet, with net cash of Rs84/share in FY12 (~27% of market cap). The stock is valued at 4.8x FY12E EPS, and at an EV of 2.7x FY12E EBITDA and US$52/ ton (~7.5m-ton capacity). It is available at a significant discount to comparable peers, which we believe is not justified. Maintain Buy, with a target price of Rs452 (~4x FY12E EV/EBITDA).
0 -0.1 -2 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11
-2.9 -40 May -10 Mar-06 Sep-08 J an-07 Nov -07 Mar-11
62
EPS
PE (x)
EV/EBITDA (x)
4.4 3.7 3.2 2.8 2.3 2.1 1.8
EV/Ton (US$)
50 49 48 47 45 44 42
340 440
Source: Company/MOSL
March 2011
J ul-09
1,537
1,602
1.5
1,159
1,195
1,033
950
3,119
782
623
1.2 1QFY09
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
Rs M
Cement Contribution (%) Jute Contribution (%) Others Contribution (%) Sales Less: Inter segment Net Sales Cement Contribution (%) Jute Contribution (%) Others Contribution (%) Total
3QFY11
4,889 92.3 381 7.2 29 0.6 5,300 506 4,794 901 101.8 -9 -1.1 -7 -0.8 885
3QFY10
5,649 92.9 396 6.5 33 0.5 6,078 486 5,592 1,592 100.9 -5 -0.3 -10 -0.6 1,578
YoY (%)
-13.4 -3.8 -11.0 -12.8 -14.3 -43.4 104.3 -31.0 -43.9
2QFY11
4,726 90.0 497 9.5 28 0.5 5,251 408 4,843 706 102.3 47 6.8 -8 -1.2 690
2QFY11
1.1
1.2
QoQ (%)
3.5 -23.3 2.8 0.9 -1.0 27.6 -120.2 -13.8 28.2
1,019
1QFY09
2QFY09
780
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
Source: Company/MOSL
March 2011
3QFY11
910
3QFY11 721
63
2,931
2,953
1.3
819
986
1,174
March 2011
64
CF from Oper. incl EO Items 4,270 7.9 6.9 2.0 1.1 4.6 75 1.4 4.6 4.1 1.4 0.8 2.5 65 1.8 6.4 5.5 1.2 0.8 3.3 51 2.0 4.8 4.1 1.0 0.8 2.7 52 2.1 4.2 3.5 0.8 0.6 2.1 37 2.3 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates -1,947 1,109 -838 46 -236 -360 -550 2,882 315 3,197
25.1 27.9
31.1 30.5
18.6 21.2
20.4 23.9
19.5 25.0
Working Capital Ratios Inventory (Days) 39 Debtor (Days) 4 Working Capital Turnover (Days)1.1 Leverage Ratio Current ratio Debt/Equity (x)
March 2011
48 4 0.8
46 5 0.8
46 5 0.8
46 5 0.8
1.7 0.2
2.0 0.4
2.7 0.3
3.0 0.2
2.5 0.1
65
1 Volume growth
2 Market mix
Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
37.7 35.3 42.2 49.2 8.3 4.7 7.7 9.3 3.3 0.7 2.3 2.9 10.9 2.2 7.9 10.2 -38.5 -79.6 257.1 28.4 138.7 139.2 149.3 155.8 8.6 42.2 11.8 9.2 0.7 0.7 0.6 0.6 5.9 11.8 7.1 5.7 1.3 1.6 1.3 1.1 8.4 1.6 5.3 6.5 10.6 3.5 7.1 8.7
We expect volume growth to return after degrowth in FY11. We estimate volume CAGR of 10% over FY11-13 as against 4.9% over FY09-11. Volume growth would be driven by demand pick-up in South India and entry into North India. We expect capacity utilization to improve from 65% in FY11 to 74% in FY12 and 78% in FY13.
India Cement is focused on South India and enjoys market leadership there. It has recently diversified into North India, with a 1.5m-ton plant in Rajasthan. Incremental volumes would be driven by the North and the South. In the short term, we expect South India to be plagued by excess capacity. Given India Cement's concentration in South India, we expect its 4QFY11 realization to improve by Rs8/bag QoQ.
Shares Outstanding (m) Market Cap. (Rs b) Market Cap. (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
8X FY12E EV/EBITDA
117 26.5 89
India Cement has high dependence on imported coal (~60%). ~30% of its requirement is met by domestic linkage coal. We expect its energy cost to increase by Rs2-2.5/bag due to recent increase in domestic coal prices. With improvement in utilization, we expect high operating leverage to partly offset energy cost inflation. We expect EBITDA/ton to improve by Rs210 QoQ in 4QFY11 to Rs829 and by Rs244 in FY12 to Rs710.
We believe the worst is over for the Indian cement industry, especially for the southern region, with slowdown in capacity addition. With very high operating leverage and relatively high gearing, India Cement would be one of the biggest beneficiaries of an improvement in cement prices in South India. Possible breakdown of the cartel would be our biggest concern. The stock is valued at 11.8x FY12E EPS, an EV/EBITDA of 7.1x and US$79/ton (~15.5mton capacity). Maintain Buy, with a target price of Rs117 (~8x FY12E EV/EBITDA).
66
Significant headroom to grow volumes from current capacities: We expect volume growth to return after de-growth in FY11. We estimate volume CAGR of 10% over FY11-13 as against 4.9% over FY09-11. Volume growth would be driven by demand pick-up in South India and entry into North India. We expect capacity utilization to improve from 65% in FY11 to 70% in FY12 and 78% in FY13. Diversification in North region: India Cement is focused on South India and enjoys market leadership there. However, with the recent commissioning of its ~1.5m-ton plant in Rajasthan, it has entered North India. Incremental volumes are expected to be driven by the North and South. In the short-term, its performance would be largely influenced by the South region, which is expected to be plagued by overcapacity and muted demand. Improvement in profitability: With recovery in cement prices and pick-up in volumes, India Cement's profitability would recover from the trough of FY11. We expect profitability to improve from Rs466/ton in FY11 to Rs710/ton in FY12 to Rs767/ton in FY13.
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY08
FY09
FY10
FY11E
FY12E
FY13E
754
767 710
466
FY08
FY09
FY10
FY11E
FY12E
FY13E
Source: Company/MOSL
67
March 2011
Energy security - a key differentiator: India Cement has acquired a coal mine in Indonesia for US$20m, with reserves of 30m tons of 5,500Kcal/kg calorific value. This mine would give access to imported coal at a cost of US$4550/ton CIF (~US$30-35/ton FOB). Being high moisture coal, it would be blended with imported coal for usage in kiln and would also be used directly in captive power plant. At US$140/ton cost of imported coal and US$60/ton landed cost of captive Indonesian coal, we estimate savings of Rs2.1b post-tax. Further, it is setting up 120MW of CPP, which would increase its dependence on CPP from 20% to ~80%. IPL franchise - option value: While we do not assign value to its IPL team, we believe it offers option value given its success in the first three seasons. In February 2009, owners of the Rajasthan Royals team (winners of the first season) sold 11.5% stake for US$16.4m, valuing the franchise at US$140m. Based on a recent announcement by the BCCI of a floor valuation of US$225m for the auction of two new teams in the IPL, India Cements' IPL franchise would be valued at Rs38/share (~30% of market capitalization).
FY13 EPS sensitivity to imported coal prices and cost of captive coal
Imported coal cost (US$/ton CIF) 100 120 140 160 180
No captive coal 40 Cost of captive 50 coal (US$/ton 60 CIF) 70 80 11.9 16.8 16.0 15.2 14.3 13.5 11.0 17.7 16.8 16.0 15.2 14.3 10.2 18.5 17.7 16.8 16.0 15.2 9.4 19.3 18.5 17.7 16.8 16.0 8.5 20.2 19.3 18.5 17.7 16.8
Based on current estimates Most likely scenario when captive coal mine starts delivering
Source: Company/MOSL
EPS
PE (x)
EV/EBITDA (x)
34.0 20.7 14.7 11.4 8.5 7.2 6.2
EV/Ton (US$)
85 84 83 82 80 79 77
Source: Company/MOSL
March 2011
68
We believe the worst is over for the Indian cement industry, especially for the southern region, with slowdown in capacity addition. With very high operating leverage and relatively high gearing, India Cement would be one of the biggest beneficiaries of an improvement in cement prices in South India. It offers option value in the form of Indonesian coal mine (estimated saving of Rs2.1b) and IPL franchise (estimated at Rs38/share). Possible breakdown of the cartel would be our biggest concern. The stock is valued at 11.8x FY12E EPS, an EV of 7.1x FY12E EBITDA and US$79/ton (~15.5m-ton capacity). Maintain Buy, with a target price of Rs117 (~8x FY12E EV/ EBITDA).
150
90 30
J an-08
J un-08
Apr-09
J ul-10
Source: Company/MOSL
March 2011
1,537
1,602
1,159
1,195
1,033
782
2,931
2,953
819
623
1.2 1QFY09
1.1 2QFY09
3QFY09
4QFY09
2QFY11
3QFY11
Trend in EBITDA
EBITDA (Rs M) 35.8 28.9 21.0 1,143 22.5 23.1 1,935 1,756 1,736 1,316 1,624 1,647 15.8 766 19.0 38.3 29.1 28.8 28.6 EBITDA Margins (%)
3QFY11
3,665
3QFY10
3,028
YoY (%)
21.1
2QFY11
2,909
QoQ (%)
26.0
Expenditure RM Cost 370 451 -18.0 Employee Expenses 309 212 45.9 Power, Oil & Fuel 1,140 909 25.4 Selling Expenses 747 636 17.4 Other Expenses 644 501 28.6 Total Exp 3,209 2,709 18.5 EBITDA 619 422 46.6 * Expenditure and EBITDA inclusive of IPL & Shipping businesses
519 -28.6 222 39.1 964 18.3 685 9.0 602 7.0 2,992 7.3 105 487.2 Source: Company/MOSL
1,019
1QFY09
2QFY09
780
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
Source: Company/MOSL
March 2011 70
3QFY11
910
3QFY11 721
1.3
3,119
4QFY08
950
1QFY09
2QFY09
3QFY09
4QFY09
986
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
1,174
2QFY11
Total Investments 1,590 3,140 2,140 Curr. Assets, Loans&Adv. 21,435 28,764 29,161 Inventory 3,705 4,478 3,868 Account Receivables 3,540 4,853 4,351 Cash and Bank Balance 852 538 1,046 Loans and Advances 13,134 18,692 19,692 Real Estate Projects WIP 204 204 204 Curr. Liability & Prov. 11,533 12,741 10,335 Account Payables 7,445 7,296 6,177 Other Current Liabilities 3,234 4,346 3,384 Provisions 854 1,099 774 Net Current Assets 9,902 16,023 18,826 Appl. of Funds 58,750 65,378 72,645 E: MOSL Estimates; * Adjusted for treasury stocks
March 2011
2009
2010 8,398 335 -1,443 -4,867 2,422 0 2,422 -2,961 -1,990 -4,952 2,831 1,878 -1,833 -661 2,215 -314 852 538
2011E 4,680 145 -110 -2,295 2,420 273 2,693 -8,000 1,000 -7,000 0 6,998 -1,465 -719 4,815 508 538 1,046
2012E
(Rs Million) 2013E 9,316 230 -1,073 -333 8,139 0 8,139 -3,000 0 -3,000 0 -500 -2,167 -988 -3,656 1,484 475 1,959
Oper. Profit/(Loss) bef. Tax 10,097 Interest/Dividends Recd. 444 Direct Taxes Paid -830 (Inc)/Dec in WC -2,206 CF from Operations 7,506 EO expense CF from Operating incl EO 0 7,506 -9,538 -324 -9,863 28 981 -1,398 -659 -1,048 -3,404 4,256 852
7,729 155 -589 -371 6,925 0 6,925 -5,000 0 -5,000 0 468 -2,065 -898 -2,495 -570 1,046 475
(inc)/dec in FA (Pur)/Sale of Investments CF from investments Issue of Shares (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance
15.7 16.8
8.4 10.6
1.6 3.5
5.3 7.1
6.5 8.7
0.6 39.5 33
0.6 43.3 42
0.5 40.0 45
0.6 40.0 45
0.6 40.0 45
1.9 0.5
2.3 0.5
2.8 0.7
2.6 0.7
2.6 0.6
72
Shree Cement: Cement business to improve, but merchant power a drag; maintain Neutral
KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E
1 Volume growth
2 Market/business mix
Sales (Rs b) EBITDA (Rs b) NP (Rs b) Adj EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
STOCK DATA
36.3 15.0
34.5 8.8
44.3 12.2
54.3 15.3
7.1 2.1 1.9 5.0 291.9 169.0 239.3 267.0 55.0 -42.1 41.6 11.6 526.2 569.0 605.6 729.1 6.4 11.0 7.8 7.0 3.5 4.4 2.3 66.8 31.9 3.3 7.7 2.2 30.9 8.5 3.1 5.4 1.7 40.7 8.6 2.6 3.8 1.2 40.0 17.3
We expect volume growth to return, after a muted FY11. Volumes would grow at 10.9% CAGR over FY11-13 as against 9.9% CAGR over FY09-11. Volume growth is likely to be in line with the industry, unlike higher than industry average growth of 33% CAGR over FY06-10. We expect capacity utilization to improve from 77% in FY11 to 85% in FY12 and 95% in FY13.
Shree Cement is a regional player focused on North India. However, it has been gradually diversifying into the Central region and now derives ~72% of its volumes from North India and 28% from Central India. Its incremental market mix is not expected to change and would be driven by the northern and central regions, where price increases have been the highest in 4QFY11. Revenue contribution of merchant power is likely to increase substantially to ~14% in FY12 and 14% in FY13 (v/s 5% in FY10 and 8.6% in FY11E).
Shares Outstanding (m) Market Cap. (Rs b) / (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS
Cement (@ 6x EBITDA) Power (DCF) Total EV Less: Net Debt Equity value
March 2011
Shree Cement is entirely dependent on pet coke and imported coal. The recent increase in domestic coal prices would not have any impact on its costs or profitability. With pick-up in volumes of cement and merchant power, it would benefit from higher operating leverage. We estimate EBITDA/ton to improve by Rs380 QoQ in 4QFY11 to Rs939 and by Rs140 in FY12 to Rs922.
Shree Cement's volume growth is likely to slow down to the industry average over FY1113. This coupled with erosion in its superior profitability due to higher energy cost would impact valuations. Further, it would be susceptible to declining merchant power tariffs coupled with higher cost of generation, resulting in pressure on merchant power profitability. The stock is valued at an EV of 5.4x FY12E EBITDA and US$87/ton (adjusting for power business). Maintain Neutral , with an SOTPbased target price of Rs2,166.
73
Shree Cement: Cement business to improve, but merchant power a drag; maintain Neutral
North-focused market mix augurs well: It is a regional player focused on North India. However, it has been gradually diversifying into Central India. It now derives ~72% of its volumes from North India and 28% from Central India. Its incremental market mix is not expected to change and would be driven by the northern and central regions, where price increases have been the highest in 4QFY11. We estimate ~Rs22/bag QoQ increase in realization in 4QFY11. Volume growth to be in line with the industry: Shree Cement's volume growth is likely to fall in line with the industry average, as against significantly above average growth at 33% CAGR over FY06-10. We expect volume growth to return after a muted FY11. We estimate volumes to grow at 10.9% CAGR over FY11-13. Entirely dependent on pet coke/imported coal: Shree Cement is totally dependent on pet coke/imported coal for its energy requirement. It has recently shifted from pet coke to imported coal for power plants, but continues to use pet coke in kilns. It is highly susceptible to volatile imported coal prices, as even domestic pet coke prices are benchmarked against landed cost of imported coal.
March 2011
but volume growth to moderate and fall in-line with the industry
Volume (m ton) Grow th (%) 11.2 33.6
13.2
12.5 10.2
8.5 28.0
10.2
6.6
12.2
FY08
FY09
FY10E
FY11E
FY12E
FY13E
1,042
FY08
FY09
FY10E
FY11E
FY12E
FY13E
Source: Company/MOSL
74
Outlook for merchant power challenging: Outlook for merchant power in India is challenging given accelerated pace of power capacity addition. CEA expects capacity addition of 44.9GW in FY11-12 v/s 41GW over the past five years. We estimate that merchant capacity will increase from ~2.5GW in FY10 to 5GW by the end of FY11. Given the accelerated pace of capacity addition, merchant tariffs should correct. For the industry, we factor in tariffs of Rs4.5/unit in FY11, Rs4/unit in FY12 and Rs3.5/ unit in FY13 (down from Rs5.5/ unit in FY10). Merchant power profitability to remain under pressure: Merchant power contribution to Shree's revenue is likely to increase substantially to ~16% in FY12 and 18% in FY13 (v/s 5% in FY10 and 8% in FY11E), driven by commissioning of 300MW in 2HCY11. We model a decline in merchant power realizations from Rs6.6 in FY10 to Rs5 in FY11, to Rs4.4 in FY12, and to Rs4.3 in FY13. EBITDA/unit would decline substantially from Rs4.2 in FY10 to Rs1.2 in FY12 and Re1 in FY13.
FY10
97 37 265 6.6 1,750 4.8 2.3 1,120 4.2 64.0 6.9
FY11E
148 77 561 5.0 2,796 8.1 3.5 840 1.5 30.1 8.6
FY12E
437 215 1,557 4.4 6,852 15.5 3.2 1,869 1.2 27.3 14.2
FY13E
422 313 2,271 4.3 9,766 18.0 3.3 2,271 1.0 23.3 14.1
EPS
PE (x)
EV/EBITDA (x)
9.8 8.3 7.3 6.4 5.5 5.0 4.5
EV/Ton (US$)
95 94 92 91 89 87 85
TP SOTP (Rs)
1,204 1,422 1,641 1,860 2,166 2,384 2,603
Remarks
Source: Company/MOSL
March 2011
75
Shree Cement's volume growth is likely to slow down to the industry average over FY11-13. This coupled with erosion in its superior profitability due to higher energy cost would impact valuations. Further, it would be susceptible to declining merchant power tariffs coupled with higher cost of generation, resulting in pressure on merchant power profitability, especially for its upcoming 300MW capacity. The stock is valued at an EV of 5.4x FY12E EBITDA and US$87/ton (adjusting for power business). Maintain Neutral, with an SOTPbased target price of Rs2,166.
~14% upside in base case scenario
3,200 Bull case TP: Rs2,603 2,400 1,600 800 0 Oc t-11 May -11 Nov -08 Feb-10 Dec -10 J an-08 J un-08 Sep-09 Apr-09 Mar-12 J ul-10 Base case TP: Rs 2,166
170
90
87 Mar-11 J ul-09
10
Parameter
EV/EBITDA DCF
Factor
6 @15% Discounting factor
FY12
61,812 14,223 76,146 696 75,449 2,166 14.2
FY13
78,457 12,729 91,297 -6,201 97,498 2,799 47.5
FY14
97,562 11,206 108,865 -15,576 124,442 3,572 88.7
Source: Company/MOSL
March 2011
76
3,201
3,050
3,045
3,158
3,479
3,447
3,205
3,355
3,272
3,010
2,851
1QF Y09
2QF Y09
3QF Y09
4QF Y09
1QF Y10
2QF Y10
3QF Y10
4QF Y10
1QF Y11
2QF Y11
3QFY10
3,205 374 146 549 676 261 2,005 1,199 37.4
YoY (%)
-11.0 -10.0 25.7 29.0 13.9 13.9 14.4 -53.6
2QFY11
3,010 464 216 671 719 350 2,420 590 19.6
QoQ (%)
-5.3 -27.5 -15.0 5.6 7.1 -15.3 -5.2 -5.8
Source: Company/MOSL
2QFY10
3QFY10
Source: Company/MOSL
March 2011 77
3QF Y11
1QF Y09
2QF Y09
3QF Y09
4QF Y09
1QF Y10
2QF Y10
3QF Y10
4QF Y10
1QF Y11
2QF Y11
3QF Y11
Appl. of Funds 26,958 39,271 38,429 39,452 E: MOSL Estimates; * Adj for accelerated depreciation & EO items
March 2011
78
12,171 978 -419 -1,770 10,960 -7,000 1,000 -6,000 0 -1,302 -652 -1,954 3,006 6,376 9,381
69.7 35.0
66.8 31.9
30.9 8.5
40.7 8.6
40.0 17.3
Working Capital Ratios Inventory (Days) 21 Debtor (Days) 8 Working Capital Turnover (Days)100
36 8 62
30 8 114
30 8 128
30 8 168
Leverage Ratio (x) Current Ratio 2.1 1.6 Debt/Equity 1.2 1.1 * Adj for accelerated depreciation & EO items
March 2011
2.6 1.0
2.9 0.9
3.3 0.8
79
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This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. March 2011 80