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March 2011

Cement

Bouncing back
Jinesh Gandhi (Jinesh@MotilalOswal.com) Tel: +91 22 3982 5416

Cement

Cement: Bouncing back


Page No.
Summary ............................................................................................................................... 3-5 Worst is behind, trough made in 2HCY10 ........................................................................ 6 Revival in demand to be key catalyst for the next upcycle ............................................ 7 Peak capacity addition is behind us, expect slowdown in pace of capacity addition .. 8 Bottom-of-the-cycle utilization witnessed in 2HCY10, should improve gradually ..... 9 Cement prices recover sharply to near peak levels; expect further increases ....... 10 Higher prices to offset any cost push and improve profitability ................................... 11 Prefer North region in short term as demand picks-up ................................................ 12 Discipline has prevailed so farWhat if it prevails for longer period? ................ 13-14 Sharp price recovery to drive significant earnings upgrades ...................................... 15 Government intervention, breakdown in discipline, demand slowdown and cost inflation are key risks ........................................................ 16 Valuations reasonable; good entry point ......................................................................... 17 Annexure-I to IV ............................................................................................................ 18-22 Companies ....................................................................................................................... 23-79
Large Caps Small Caps

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

Wealth Creation Study 2004-2009

Cement

Cement: Bouncing back


Strong recovery in cement prices (Rs/bag)
Cap Util (%) - LHS 100 90 80 70 60 Oct-09 Dec-09 Feb-10 Oct-10 Jun-09 Jun-10 Aug-09 Aug-10 Dec-10 Feb-11 Apr-09 Apr-10 Prices (Rs/bag) 275 260 245 230 215

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

Wealth Creation Study 2004-2009


Expect gradual improvement in utilization (%)
101 99 97 94 89 85 Utilizations to im prove from FY12 onw ards Copra (Rs/Qtl) FY00 FY02 FY04 FY06 FY08 FY10 89 90 91 92 86 80 85

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

Profitability to witness gradual recovery


32.7 EBITDA/Ton 30.0 27.2 1,109 1,125 22.6 894 993 FY13E 21.0 760 23.8 EBITDA (%)

979

FY11E

March 2011

FY12E

FY08

FY09

FY10

FY14E

Wealth Creation Study 2004-2009


Upgrading EPS estimates (Rs)
FY12E Rev Old
ACC Ambuja Cement Grasim UltraTech Birla Corp India Cement Shree Cement 59.4 10.2 303.9 70.1 68.6 7.9 239.3 58.4 9.4 276.7 64.7 64.7 7.4 203.1

Cement

Chg (%)
1.7 8.5 9.9 8.3 5.9 8.1 17.8

FY13E Rev Old


76.9 12.6 364.9 96.0 79.5 10.2 267.0 76.3 11.8 334.6 89.8 75.2 8.8 218.6

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

Cement: Comparative valuations


CMP Reco (Rs)

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

Wealth Creation Study 2004-2009

Cement

Worst is behind, trough made in 2HCY10


The cement industry witnessed a trough in its operating performance during 2HCY10, as muted demand and excess capacity impacted realizations and profitability. Demand growth was muted at 4.5% in 9MFY11 as against estimated growth of 10-12%, impacted by significant slowdown in infrastructure activity and muted demand from urban housing.

Muted volumes, excess capacity impact utilization...


Cap Util (%) - RHS 18 13 8 3 -2 9MFY11 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Vol Grow th (%) 110 100 90 80 70

cement realizations (Rs/bag)

186 174 176 172

187

187 177 174 170 169

171 164 167

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.

coupled with cost push impact EBITDA


Cost (Rs/ton) 1,027 1,072 1,039 894 1,101 910 1,326 EBITDA (Rs/ton) 446

MOSL cement index performance (%)


MOSL Cement Index 124
602

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

76 Mar-10 May-10 Nov-10 Sep-10 Mar-11


6

Source: Company/MOSL

March 2011

Jan-11

Jul-10

Wealth Creation Study 2004-2009

Cement

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 are in place to help bring growth momentum back on track. State elections: FY12 would witness assembly election in five states viz. Assam, Kerala, Pondicherry, Tamil Nadu and West Bengal. Spurt in pre-election infrastructure development is expected to drive cement demand. Recent history corroborates this argument. Eleventh Five-year Plans terminal year: Being terminal year of the Eleventh Plan, FY12 would see heightened execution to complete planned projects. Terminal years of the Ninth and Tenth Plans witnessed cement volume growth of 9.6% and 9.4%, respectively. Pent-up demand: Pent-up demand due to muted FY11 demand could support higher growth in FY12. Historcially, demand growth has bounced back after a muted year, with not a single consecutive period of below average demand growth.
March 2011

Volumes expected to recover after muted FY11


340 Volume (mt) 255 Volume grow th (%) 12 18

170

85

0 FY11E FY12E FY13E FY14E FY15E


FY11E

-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

Pent up demand, low base effect also to aid growth


16 20 Yr avg grow th: 8%

10

Historically, after a m uted year vol. grow th has bounced back

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

Wealth Creation Study 2004-2009

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

Pace of capacity addition to slow after 1QFY12


350 304 300 273 5.8 250 215 200 18.2 11.2 13.6 14.4 6.8 11.3 7.9 6.2 4.0 8.4 5.9 329 3.0 2.8 6.2 2.5 343

150 FY09 1Q 2Q 3Q 4Q FY10 1Q 2Q 3Q 4Q FY11 1Q 2Q 3Q 4Q FY12 1Q 2Q 3Q 4Q FY13

Trend in annual capacity addition


Capacity addition (MT) % of demand 28.2

Trend in excess capacities


Excess capacity (mt) % of demand 31 30 26

13.7

14.2

14.9 10.3 8.0 5.4

16

16

18 15 10 6

18

4.5 5 FY03

5.4 5.9 7 FY04 8 FY05

5.2 2.6 4 8 FY06 FY07

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

Wealth Creation Study 2004-2009

Cement

Bottom-of-the-cycle utilization witnessed in 2HCY10, should improve gradually


With expected pick-up in demand and decline in the pace of capacity addition, we believe capacity utilization has bottomed out in 2HCY10.

Trough utilization behind, expect gradual improvement (%)


101 99 97 94 90 91 92 100% 86 80 77 78 85 90% 80% 70% 1QFY12E 1QFY02 1QFY03 1QFY04 1QFY05 1QFY06 1QFY07 1QFY08 1QFY09 1QFY10 FY12E FY14E 1QFY11 FY00 FY02 FY04 FY06 FY08 FY10 110% Estim ate capacity utilization has bottom ed out in 2QFY11 at 71%

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

Utilizations to im prove from FY12 onw ards

North & South key regions to manage utilization (%)


FY08 100 87 80 70 80 66 91 FY09 FY10 98 87 89 75 FY11E FY12E 96 FY13E FY14E 101 95 86

North

East

West

South

Central

Source: Company/MOSL
March 2011 9

Wealth Creation Study 2004-2009

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.

Strong recovery; cement prices at peak levels (Rs/bag)


270 Prices recover by Rs3540/bag since 3QFY11 255 Apr-10 280 Sep-10 Dec-10 Jan-11 Feb-11 Mar-11

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

Stable prices despite trough utilization

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.

108 Cap. Util (%) - LHS 96 Cement Prices (Rs/Bag)

Cem ent prices stable in FY11 despite drop in utilization

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

Wealth Creation Study 2004-2009

Cement

Higher prices to offset any cost push and improve profitability


Cost inflation driven by higher energy prices is expected to be off set by higher cement prices. We believe that EBITDA/ton would witness meaningful improvement from the 2HCY10 average of ~Rs525/ ton. Cost inflation to persist: Cost inflation is expected to persist, driven by higher energy prices (impacting power & fuel, freight and packing costs). Coal cost is likely to remain high and increase further as domestic linkage coal supply shrinks and is progressively linked to international prices. We are factoring in 5% energy cost inflation for FY12. but would be passed on: Cost push being industry-wide phenomenon, we believe that the industry would pass it to consumers, albeit with a lag effect. This coupled with benefit of higher operating leverage will off set cost push. We assume average ~Rs12/bag increase in FY12 realizations over FY11 (similar to 4QFY11 levels and increase Rs10/bag lower than March 2011 levels) and Rs10/bag in FY13. driving improvement in profitability: We estimate improvement in EBITDA/ton from trough levels of ~Rs525/ in 2HCY11. We estimate EBITDA/ton at ~Rs894 in FY12 and Rs993 in FY13 (v/s FY11 average of Rs760).
March 2011

Trend in average cost (Rs/ton)


RM 3,200 2,400 1,600 800 Energy Staff Other Exp

Trend in imported coal prices (US$/ton)


180 Im ported coal prices have hardened by ~35% since Oct-10 145

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

Margins hit trough in 2HCY10


EBITDA (Rs/Ton) 34.7 29.2 30.1 25.0 25.1 1,326 1,255 1,039 1,101 25.4 25.8 25.7 16.9 2QFY11 446 602 13.0 32.6 EBITDA (%)

but expect gradual improvement


EBITDA/Ton 30.0 27.2 24.8 1,109 1,125 22.6 21.0 760 894 993 FY13E
11

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

Wealth Creation Study 2004-2009

Cement

Prefer North region in short term as demand picks-up


For the short term, we prefer cement players focused on North, Central and East India due to pick-up in demand and sharp improvement in prices. However, for the long term, we do not have regional bias.

Prices across regions have recovered sharply (Rs/bag)


Apr-10 Sep-10 Dec-10 Jan-11 Feb-11 Mar-11

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

Wealth Creation Study 2004-2009

Cement

Discipline has prevailed so farWhat if it prevails for longer period?


Cement price recovery over the last two quarters can be largely attributed to discipline in production and pricing in all the key markets, after going through phase of irrationality. While it is futile to estimate longevity of these arrangements, the longer they sustain the higher would be the upgrades.

Volumes have been muted


Vol (mt) - LHS 24 18 12 6 0 Oct-09 Feb-10 Oct-10 Dec-09 Aug-09 Aug-10 Dec-10 Feb-11 Jun-09 Apr-09 Apr-10 Jun-10 YoY Grow th (%) 20

depressing utilizations, but not prices


Cap Util (%) - LHS 100
12

Prices (Rs/bag) 275 260 245 230 215

90
4 -4 -12

80 70 60 Oct-09 Oct-10 Jan-10 Apr-09 Apr-10 Jan-11 Jul-09 Jul-10

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

250 FY12E (current est)

260 FY12E @ Mar'11 level

270 FY12E @ Mar'11 level + Rs10/bag


13

Source: Company/MOSL
March 2011

Wealth Creation Study 2004-2009

Cement

Discipline has prevailed so farWhat if it prevails for longer period?

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

Shree 109.4 138.9 168.4 197.9 239.3 268.8 298.3

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

Shree 9.8 8.3 7.3 6.4 5.5 5.0 4.5

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

Wealth Creation Study 2004-2009

Cement

Sharp price recovery to drive significant earnings upgrades


Sharp recovery in cement prices over the last few months has been surprising, considering demandsupply imbalance. Consensus estimates are yet to factor in these price increases.

MOSL estimates v/s consensus estimates


Consen -sus FY12E MOSL* Diff (%) MOSL Poss. (%) Consen # Upgrade -sus MOSL * FY13E Diff (%) MOSL Poss. (%) # Upgrade

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

59.4 10.2 303.9 70.1 68.6 7.9 239.3

-0.4 27.6 26.3 8.4 -1.1 29.6 3.2

77.0 11.3 331.4 84.7 81.2 10.6 298.3

29.7 11.0 9.0 20.9 18.5 33.3 24.7

66.6 8.8 267.7 76.4 73.9 9.3 NA

76.9 12.6 364.9 96.0 79.5 10.2 267.0

15.5 44.4 36.3 25.6 7.5 9.4 6.9

96.6 13.9 395.7 112.7 93.7 12.9 324.7

25.6 9.9 8.4 17.3 17.9 26.5 21.6

* 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

Wealth Creation Study 2004-2009

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.

Governments intervention in the past had impaired pricing power


When Feb-11 Government initiative Changing excise from 10% of MRP to 10% advalorem + Rs160/ton, for cement priced over Rs190/bag Jan-09 Reimposing CVD/SAD on imports Increases cost of imported cement, by imposing CVD (8.5%) and SAD (4%) for imported cement Dec-08 May-08 Apr-08 Reduces CENVAT rate by 4% to 8.5% Lifts ban on exports from Gujarat, and to Nepal Ban on cement exports To boost demand Eases supply pressure in western market Increase supply in domestic market and helps to control domestic prices Apr-08 Shift to ad-valorem rate of excise at 12% for cement priced above Rs250/bag MRP May-07 Shift to ad-valorem rate of excise for cement prices above Rs190/bag MRP Apr-07 Exempting imported cement from CVD/SAD, if selling price in retail is below Rs190/bag Mar-07 Feb-07 Cap on cement prices for 1 year till Feb'08 Differential excise duty structure on cement, with excise of Rs600/ton for cement having MRP above Rs190/bag, else Rs350/ton Jan-07 Abolishment of 12.5% Import duty on cement Lowering cost of imported cement by Rs17-20/bag Neutral Increase in excise burden than specific rate of Rs600/ ton Lower excise burden if MRP is below Rs250/bag, than specific rate of Rs600/ton Lowering cost of imported cement, by abolishing CVD (Rs408/ton) and SAD (4%) for imported cement Restricts further increase in cement prices Encourage lower prices by offering sops to lower cement prices Negative Negative Neutral Positive Negative Positive Positive Negative Positive Reasoning To reduce double taxation, as excise on MRP implied excise on excise and sales tax. Impact Positive

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

Wealth Creation Study 2004-2009

Cement

Valuations reasonable; good entry point


The worst is behind and we expect gradual improvement in operating performance, though volatility would remain high. This coupled with longterm demand drivers and current valuations makes a compelling Buy case.

Snapshot of operating performance


Volumes (MT) FY10 ACC * 21.5 Ambuja * 18.8 Grasim # 31.0 Ultratech 20.2 Birla Corp 5.7 India Cements 11.0 Shree Cement 10.2 JaiPrakash 10.2 Sector Aggregate ^ 107.4 FY11 21.3 20.0 25.0 35.8 6.0 10.0 10.2 16.2 103.3 FY12 23.8 22.0 27.3 45.3 6.7 11.4 11.2 21.5 120.4 FY13 26.7 24.6 30.4 50.5 7.5 12.8 12.5 25.0 134.7 EBITDA/Ton (Rs) FY11 730 912 726 726 864 466 861 976.6 759 FY12 FY13 FY11 53.6 8.1 253.6 46.0 51.1 2.2 169.0 4.0 761 850 1,006 1,095 833 974 833 974 1,032 1,133 666 746 1,049 1,183 980.8 1039.7 865 978 EPS (Rs) FY12 59.4 9.9 300.2 68.0 67.0 7.7 227.5 6.1 FY13 75.5 12.3 363.4 95.2 77.8 11.1 254.1 7.9 FY11 16.1 18.1 16.1 16.4 18.5 1.6 30.9 8.6 15.7 ROE (%) FY12 15.9 19.4 16.4 16.1 20.0 5.1 39.1 11.8 17.0 FY13 18.1 21.1 16.9 19.2 19.3 7.1 39.1 13.9 19.1

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

Upgrading EPS estimates


Rev 59.4 10.2 303.9 70.1 68.6 7.9 239.3 FY12E Old 58.4 9.4 276.7 64.7 64.7 7.4 203.1 Chg (%) 1.7 8.5 9.9 8.3 5.9 8.1 17.8 Rev 76.9 12.6 364.9 96.0 79.5 10.2 267.0 FY13E Old 76.3 11.8 334.6 89.8 75.2 8.8 218.6 Chg (%) 0.8 7.2 9.1 6.9 5.6 16.0 22.1 17

ACC Ambuja Cement Grasim UltraTech Birla Corp India Cement Shree Cement

Wealth Creation Study 2004-2009

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

8.9 6.0 6.1 5.3

6.9 6 3.1 3 5.2 5.1

5.5

5.5

5.5

0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

March 2011

18

Wealth Creation Study 2004-2009

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

Wealth Creation Study 2004-2009

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

FY11E 2Q 0.85 3.2 3Q 4Q 1Q 2Q

FY12E 3Q 4Q 1Q 2Q

FY13E 3Q 4Q 1Q 2Q

FY14E 3Q 4Q

Total

0.0 1.2 2.2

0.9

0.0

3.2

0.0

0.0

0.0

1.0 1.9 2.9

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

Wealth Creation Study 2004-2009


Company/Plant Location 1Q South India ACC Karnataka Bharathi Cement AP Chettinad Cement (G) TN Penna Cement AP Prism Cement AP Zuari Cement AP Madras Cement TN Chettinad Cement TN Dalmia Cement Karnataka JP Ind - AP AP Vicat Sagar Karnataka Chettinad Cement Karnataka UltraTech Karnataka South Capacity Additions 0.0 West India Ambuja - Ahmedabad (G) Gujarat JP Ind -Guj. Anjan (SP-II) Gujarat JP Ind - Gujarat Anjan (G) Gujarat ACC Maharashtra JP- GMDC Gujarat Ultratech Gujarat Century Textile Maharashtra Kesoram Ind Maharashtra West Capacity Additions 0.0 Total Capacity Additions 5.8 2Q 1.5 FY11E 3Q 1.5 2.5 0.5 1.5 2 2.0 2.0 1.5 3 2.8 2.5 1.5 4.0 1.5 2.8 1.2 3.0 2.4 2.0 2.5 0.0 6.8 4.3 8.3 4.2 10.9 0.0 6.2 0.0 4.0 4.4 8.4 0.0 5.9 0.0 3.0 0.0 2.8 2.5 6.2 2.5 2.5 2.5 0.0 0.0 0.0 2.5 0.0 18.2 0.0 3.0 0.5 3.5 4.0 0.0 1.5 3.0 2.8 0.0 0.0 0.0 2.5 4.4 4.4 0.0 4Q 1Q 2Q FY12E 3Q 4Q 1Q 2Q FY13E 3Q 4Q 1Q 2Q FY14E 3Q 4Q

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

Wealth Creation Study 2004-2009

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

Trend in key performance indicators (December quarter)


Total Cost (Rs/ton) 3QFY11 YoY QoQ (%) (%) ACC 3,117 15.8 2.6 Ambuja Cement 2,924 4.3 -0.7 UltraTech 3,079 -7.7 0.6 Birla Corp 2,505 -2.6 -12.8 India Cement 3,046 16.9 8.7 Shree Cement 2,295 14.4 -5.2 Sector Aggregate 2,946 17.6 0.3 Energy (Rs/ton) 3QFY11 YoY QoQ (%) (%) 804 9.2 7.5 885 29.1 -13.0 901 27.4 -0.5 897 41.6 26.4 1,140 25.4 18.3 708 29.0 5.6 877 23.4 1.0 Freight (Rs/ton) 3QFY11 YoY QoQ (%) (%) 534 7.1 14.3 809 5.2 2.8 733 26.0 4.9 510 8.8 8.1 747 17.4 9.0 770 13.9 7.1 698 15.0 6.2

Trend in key performance indicators (December quarter)


Volume (M Ton) 3QFY11 YoY QoQ (%) (%) ACC 5.6 4.7 16.1 Ambuja Cement 5.0 5.6 15.9 UltraTech 9.8 0.1 6.6 Birla Corp 1.5 -0.8 7.3 India Cement 2.0 -26.1 -24.9 Shree Cement 2.6 2.1 14.8 Kesoram Ind 1.3 -18.3 -11.9 Sector Aggregate 26.6 -0.6 7.4 Realization (Rs/Ton) EBITDA (Rs/Ton) 3QFY11 YoY QoQ 3QFY11 YoY QoQ (Rs/T) (Rs/T) (Rs/T) (RS/T) 3,490 -95 100 372 -520 21 3,549 -165 -47 624 -286 -27 3,791 514 293 712 -466 274 3,226 -505 -271 721 -438 98 3,665 637 756 619 197 514 2,851 -354 -159 556 -643 -34 3,191 457 315 659 64 720 3,548 138 163 602 -394 155

Trend in key performance indicators (December quarter)


Total RM Cost (Rs/ton) 3QFY11 YoY ACC Ambuja Cement UltraTech Birla Corp India Cement Shree Cement Sector Aggregate 503 328 517 271 370 337 436 (%) 25.5 -31.9 -1.6 -56.1 -18.0 -10.0 -8.4 Staff Cost Other Exp (Rs/ton) 3QFY11 YoY QoQ 1,011 748 740 544 480 297 724 (%) (%) 14.2 13.2 6.3 -3.1 27.8 -1.7 -9.2 -13.3 20.9 16.1 13.9 -15.3 17.9 3.1 (Rs/ton) QoQ 3QFY11 YoY QoQ (%) -26.6 134.2 3.7 -64.0 -28.6 -27.5 -10.3 265 154 189 283 309 183 223 (%) 54.8 -6.4 52.6 11.4 45.9 25.7 32.0 (%) 9.0 -32.4 -8.1 -9.3 39.1 -15.0 -6.9

March 2011

22

Wealth Creation Study 2004-2009

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 *

Buy Buy Buy Neutral Buy

LARGE-CAPS

Ambuja * Grasim # Ultratech Jaiprakash

* Y/E December; ^ Aggregates exclude Grasim and Jaiprakash; # Merger/Demerger of Grasim's cement assets assumed from 2QFY11

March 2011

23

Wealth Creation SCement

ACC: Return of volume growth; maintain Buy


KEY FINANCIALS (RS B) Y/E DECEMBER 2009 2010 2011E 2012E

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.

3 Cost and profitability


188.0 185.6 4.1 66.6 3.1
10X CY11E EV/EBITDA

4 Earnings and valuation

Shares Outstanding (m) Market Cap. (Rs b) Market Cap. (US$ b) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS

Target price (Rs) Upside (%) EV/Ton at TP (US$)

1,104 6.4 163

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

Wealth Creation SCement

ACC: Return of volume growth; maintain Buy

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

Capacity in place for future growth


Capac ity (MT) 89.2 90.6 85.5 82.2 76.4 69.4 26 22 23 31 CY08 CY09 CY10 CY11E CY12E 31 31 Capacity Utilization (%)

Return of volume growth after 3 years


Dis patches (MT) Grow th (%) 10.0 12.0

6.1 5.2 2.4 21 20 CY07 21 CY08 22 CY09 -1.1 23 26

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

Profitability set to improve


EBITDA (Rs/Ton) 31.5 EBITDA (%)

CY07

CY08

CY09

CY10

CY11E

CY12E

Source: Company/MOSL
25

Wealth Creation SCement

ACC: Levers present for re-rating

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

Strong balance sheet (Rs m)


48,000 Cas h Flow from Operations Free Cash Flow Net Cas h

Holcimss creeping acquisition to support stock


Period Type Stake (%)
13.2 20.8 2.0 5.0 4.6 1.2 1.4 0.6

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

0 CY07 CY08 CY09 CY10 CY11E CY12E

Source: Company/MOSL ACCs sensitivity to cement prices (CY11)


Cement Price EBITDA/Ton chg over CY10 (Rs/Ton) (Rs/Ton)
-200 -100 0 100 240 340 440 322 422 522 622 762 862 962

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

TP at 10x Remarks EV/EBITDA (Rs)


501 638 774 911 1,102 1,239 1,376

18.2 27.0 35.8 44.7 57.1 65.9 74.8

54.4 36.6 27.5 22.1 17.3 15.0 13.2

Current assumption Based on Mar-11 exit prices

Source: Company/MOSL

26

Wealth Creation SCement

ACC: Valuation and view

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).

ACCs EV/EBITDA chart


16 EV/EBDITA(x ) Av g(x ) Peak(x ) Min(x )

ACCs EV/Ton chart


EV/ton (US$) 250 222.6 Max Avg Min

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

90 51.1 10 May -10 Mar-06 Sep-08 Nov -07

116

~6% upside in base case scenario


1,600 Bull case TP: Rs1,376 1,200 Base case T P: Rs1,102

800 Bear case T P: Rs774 400

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

Wealth Creation SCement

ACC: Key performance indicators


Trend in volumes and realizations
Volume (m tons ) Realization (Rs /ton) 3,767 3,834 3,390 3,490
870 782 804 801 1,130 892

Trend in EBITDA (Rs/ton)


1,355 1,333 1,115 1,049

3,840 3,931 3,325 3,375 3,571 3,499 3,587 3,585

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 (%)

Key performance indicator Rs/Ton


Net realization Expenditure Raw Materials Staff Cost Power Freight Purchase of cement Other Expenditure Total cost EBITDA

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

Wealth Creation SCement

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

Wealth Creation SCement

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

12.3 9.9 2.2 7.1 3.3 2.2 153

20.8 14.0 2.2 11.2 3.0 2.9 126

18.2 12.2 1.8 9.4 2.8 2.4 121

13.6 9.9 1.5 7.0 2.5 2.6 114

10.6 8.1 1.1 5.1 2.2 2.9 102

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

Leverage Ratio Debt/Equity (x) 0.1 * EPS numbers are annualised


March 2011

0.1

0.0

0.0

0.0

30

Wealth Creation SCement

Ambuja Cement: Market mix favorable in short run; upgrade to Buy


KEY FINANCIALS (RS B) Y/E DECEMBER 2009 2010 2011E 2012E

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.

3 Cost and profitability


1,529.9 4.5 9.5 -1.7 36.7 1.9

4 Valuation & view

Shares Outstanding (m) Market Cap. (US$ b) Past 3 yrs. Sales Growth (%) Past 3 yrs. NP Growth (%) Dividend Payout (%) Dividend Yield (%)
VALUATION BASIS

10X CY11E EV/EBITDA

Target price (Rs) Upside (%) EV/Ton at TP (US$)


March 2011

169 27.1 189

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

Wealth Creation SCement

Ambuja Cement: Market mix favorable in short run; upgrade to Buy

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.

Capacity in place for future growth


Capac ity (MT) 94.7 89.1 Cap Util (%)

Volume growth to pick up


Des patches (MT) Grow th (%)

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

25 CY09 CY10 CY11E CY12E

CY07

CY09

CY10

CY11E

CY12E

Well diversified fuel mix

Superior profitability to be restored (Rs/ton)


Ambuja MOSL Cement Univ ers e

Pet-coke 13% Dom. linkage 39%

993 1,125

991 979

Dom. open market 18%

912

CY07

CY08

CY09

CY10

760

CY11E

894

CY12E

Source: Company/MOSL
March 2011 32

1,137 993

1,048

Imported coal 30%

1,220 1,109

Wealth Creation SCement

Ambuja Cement: Levers present for re-rating

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

Strong balance sheet (Rs m)


41,000 Cash Flow from Operations Free Cas h Flow Net Cash 30,000

Holcimss creeping acquisition to support stock


Date
Jan-06 Apr-06 Nov-06 Dec-06 Jan-07 Apr-07 Sep-07 Sep-07 Oct-07 Dec-07

# of Stake Price Mode shares (%) (Rs/sh)


200.0 0.4 50.0 150.7 22.5 68.5 60.0 10.9 50.0 82.5 13.1 0.0 3.3 9.8 1.5 4.5 3.9 0.7 3.3 5.4 137 115 148 148 149 154 105 90 139 Bought from the promoters group Open Offer Bought from the promoters group Merger of ACEL with ACEM (through ACIL) Open market Open market Promoters group Open market Open market Open Offer

19,000

8,000

-3,000 CY07 CY08 CY09 CY10 CY11E CY12E

Source: Company/MOSL

Ambuja Cement sensitivity to cement prices (CY11)


Cement Price EBITDA/Ton chg over CY10 (Rs/Ton) (Rs/Ton)
-200 -100 0 100 230 330 440 515 615 715 815 945 1,045 1,155

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

TP at 10x Remarks EV/EBITDA (Rs)


87 103 118 133 153 168 185

4.6 5.7 6.7 7.8 9.1 10.2 11.3

28.7 23.4 19.7 17.1 14.5 13.0 11.7

Current assumption Based on Mar-11 exit prices

Source: Company/MOSL

33

Wealth Creation SCement

Ambuja Cement: Valuation and view

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).

Ambujas EV/EBITDA chart


16 EV/EBDITA(x) Av g(x ) 12.2 7.7 7 7.1 3.5 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 Peak(x) Min(x)

Ambujas EV/Ton chart


330 250 170 90 59.1 10 May -10 Mar-06 Sep-08 J an-07 Nov -07 Mar-11 J ul-09 EV/ton (US$) Av g 286.0 Max Min

11

156.9 140

~27% upside in base case scenario


200 Bull case T P: Rs185 150 Base cas e TP: Rs 169

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

Wealth Creation SCement

Ambuja Cement: Key performance indicators


Trend in volumes and realizations
Sales (m ton) 3,828 3,448 3,573 3,538 3,448 3,619 Net Realization (Rs/ton)

Trend in EBITDA (Rs/ton)

1,017
3,929 3,714 3,776 3,834 3,595 3,549

801 740
5.3 5.3 4.4

853 782 777 785 685 674

849

885

597
5.0

4.8

4.4 2QCY08

4.7 3.9 3QCY08 4QCY08

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

Income statement (Rs/ton)


4QCY10
Net Realization Raw Material Staff Cost Power & Fuel Freight Other expenditure Total Cost EBITDA 3,549 328 154 885 809 748 2,924 624

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

Wealth Creation SCement

Ambuja Cement: Financials


Income statement Y/E December Net Sales Change (%) Total Expenditure % of Sales EBITDA Change (%) Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Exp. EO Expense/(Income) PBT after EO Exp. Current Tax Deferred Tax Tax Rate (%) Reported PAT PAT Adj for EO Items Change (%) 2009 70,769 13.8 52,100 73.6 18,669 5.9 26.4 2,970 15,699 224 2,097 17,571 -462 18,033 5,308 541 32.4 12,184 11,872 2.2 2010 73,902 4.4 55,666 75.3 18,236 -2.3 24.7 3,872 14,364 487 2,476 16,353 -265 16,619 3,983 0 24.0 12,636 12,434 4.7 2011E 87,813 18.8 64,959 74.0 22,854 25.3 26.0 4,521 18,333 330 3,250 21,253 0 21,253 5,207 425 26.5 15,621 15,621 25.6 (Rs million) 2012E 2013E 103,233 121,090 17.6 17.3 75,480 73.1 27,753 21.4 26.9 5,056 22,697 400 4,000 26,297 0 26,297 6,443 526 26.5 19,328 19,328 23.7 87,106 71.9 33,984 22.5 28.1 5,536 28,448 400 5,000 33,048 0 33,048 8,427 661 27.5 23,960 23,960 24.0 Balance sheet Y/E December Equity Share Capital Total Reserves Net Worth Deferred Liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Misc Expenditure Appl. of Funds E: MOSL Estimates
March 2011

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

Wealth Creation SCement

Ambuja Cement: Financials


Ratios Y/E December Basic (Rs) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (Cap) - US$ Dividend Yield (%) Return Ratios (%) RoE RoCE 2009 7.8 9.7 42.3 2.4 35.1 2010 8.1 10.7 47.7 2.6 36.7 2011E 10.2 13.2 54.0 3.5 31.4 2012E 12.6 15.9 63.1 3.5 27.7 2013E 15.7 19.3 75.0 3.5 24.2 Cash flow statement Y/E December 2009 2010 18,236 2,476 -3,983 3,649 20,378 265 20,644 -7,912 1,013 -6,898 582 -534 -487 -4,632 -5,070 8,675 8,809 17,484 2011E 22,854 3,250 -5,632 -195 20,277 0 20,277 -8,000 -13,345 -21,345 -1,135 775 -330 -4,899 -5,590 -6,658 17,484 10,826 (Rs million) 2012E 2013E 27,753 4,000 -6,969 1,546 26,330 0 26,330 -10,000 -9,210 -19,210 0 526 -400 -5,344 -5,218 1,901 10,826 12,727 33,984 5,000 -9,088 1,668 31,564 0 31,564 -10,000 -13,833 -23,833 0 661 -400 -5,790 -5,529 2,202 12,727 14,929

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

17.7 14.2 3.3 2.8 10.5 175 1.7

17.0 12.9 2.9 2.5 10.3 168 1.9

13.5 10.5 2.6 2.1 7.9 150 2.5

10.9 8.7 2.2 1.7 6.1 141 2.5

8.8 7.2 1.8 1.3 4.5 115 2.5

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

Wealth Creation SCement

UltraTech Cement: Investing for future; maintain Neutral


KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E

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

70.5 19.7 10.9 87.8

130.0 179.6 25.8 38.2 12.5 45.7 19.2 70.1

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.

3 Cost and profitability


274.2 279.4 6.1 NA NA 15.4 0.6

4 Valuation and view

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

10X FY12E EV/EBITDA

Target price (Rs) Upside (%) EV/Ton at TP (US$)


March 2011

1,371 34.6 160

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

Wealth Creation SCement

UltraTech Cement: Investing for future; maintain Neutral

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

~60mt capacity by FY13 *


Capac ity (mt) 93.5 Cap Util (%)

Volume growth set to recover *


Dis patches (mt) 14.4 10.7 Grow th (%) 13.7

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

Well diversified fuel mix

Profitability to improve *
EBITDA (Rs/Ton)

Pet-coke 14%

1,157 1,087

Dom. linkage 33%

1,029 976 869 801

Imported coal 33%

Dom. open market 20%


FY08 FY09 FY10 FY11E FY12E FY13E

Source: Company/MOSL * Including Samruddhi Cement for comparison


39

Wealth Creation SCement

UltraTech Cement: Challenges ahead

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

Net debt to reduce gradually (Rs b)


CFO Capex Net Debt FCF

Investing Rs102b to augment capacity and supporting infrastructure


Capacity Capex (Rs B)
Brownfield expansion at Raipur 4.8MT Brownfield expansion at K'taka 4.4MT Thermal CPP 25MW WHRS CPP 45MW Logistic Infrastructure Bricks & RMC Residual capex for earlier projects Modernization & Upgradation Total 56.0 4.7 11.4 1.4 6.3 21.9 101.7

23

32 2 21 -21

10 16 -22

40

15 7 -25

FY11E

FY12E

FY13E

Source: Company/MOSL

UltraTechs sensitivity to cement prices (FY12)


Cement Price EBITDA/Ton chg over FY11 (Rs/Ton) (Rs/Ton)
-200 -100 0 100 240 340 440 459 554 650 745 879 974 1,070

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

TP at 10x Remarks EV/EBITDA (Rs)


668 832 995 1,159 1,387 1,551 1,714

24.4 35.0 45.6 56.3 71.1 81.7 92.4

41.8 29.1 22.3 18.1 14.3 12.5 11.0

Current assumption Based on Mar-11 exit prices

Source: Company/MOSL

40

Wealth Creation SCement

UltraTech Cement: Valuation and view

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).

UltraTechs EV/EBITDA chart


EV/EBDITA(x) Av g(x ) 13.1 7.9 8 4 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 7.2 2.5 Peak(x ) Min(x)

UltraTechs EV/Ton chart


250 190 130 70 10 May -10 Mar-06 Nov -07 Sep-08 J ul-09 Mar-11 Mar-12
41

16 12

EV/ton (US$) Av g 202.0

Max Min

132 122.5

44.3

~34% upside in base case scenario


2,000 Bull case TP: Rs1,714 1,500 Base case TP: Rs1,371 1,000 Bear cas e TP: Rs 995 500 0 May -10 May -11 Mar-11 J ul-11 Sep-11 Nov -11 Mar-10 May -09 Nov -10 Sep-10 May -08 Mar-09 Sep-09 Nov -09 Mar-08 Sep-08 Nov -08 J an-08 J an-09 J an-10 J an-11 J an-12 J ul-08 J ul-09 J ul-10

J an-07

Source: Company/MOSL
March 2011

Wealth Creation SCement

UltraTech Cement: Key performance indicators


Trend in volumes and realizations
Realizations (Rs/ton) 10.2 8.7 3,635 3,613 9.8 11.0 Dispatc hes (m ton) 10.3 9.2 9.8
1,349

Trend in EBITDA (Rs/ton)


EBITDA (Rs /ton)

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

Trend in key operating parameters (incl. RMC business)


Rs/Ton
Realization RM Cost Power & Fuel Staff Cost Freight & Forwarding Other Expenditure Total Expenditure EBITDA

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

Wealth Creation SCement

UltraTech Cement: Financials


Income Statement (Post-merger)* Y/E March FY09 Net Sales Change (%) Total Expenditure EBITDA Margin (%) Depreciation Int. and Finance Charges Other Income - Rec. PBT PBT after EO expense Tax Tax Rate (%) Reported PAT Adj PAT Change (%) Margin (%) 70,497 10.4 50,786 19,711 28.0 3,881 1,175 1,227 15,882 15,882 4,949 31.2 10,932 10,932 11.9 15.5 FY10 130,005 84.4 104,191 25,814 19.9 7,590 2,792 2,524 17,955 17,955 5,436 30.3 12,519 12,519 14.5 9.6 FY11E FY12E (Rs million) FY13E 241,302 12.7 190,039 51,263 21.2 11,109 3,220 2,250 39,184 39,184 11,951 30.5 27,233 27,233 3.4 11.3 Balance sheet (Post-merger)* Y/E March FY09 Equity Share Capital 1,245 Reserves 44,842 Net Worth 46,087 Deferred liabilities 8307 Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets 16,045 70,439 80,781 31,365 49,417 2,594 16,696 14,724 8,217 2,158 837 3,511 12,991 11,381 1,610 1,733 FY10 FY11E FY12E 2,742 2,742 2,742 104,515 121,640 145,569 107,257 124,382 148,311 17487 17487 18056 55,428 180,173 190,192 65,999 124,192 9,500 10,574 66,365 17,610 4,774 34,697 9,285 30,458 26,355 4,104 35,907 50,428 192,297 211,372 75,235 136,136 10,000 10,574 70,517 20,202 5,476 34,193 10,646 34,930 30,226 4,704 35,587 45,428 211,795 216,372 85,287 131,084 30,000 10,574 82,069 24,348 6,596 38,378 12,747 41,932 36,310 5,622 40,137 (Rs million) FY13E 2,742 170,075 172,817 18644 40,428 231,888 256,372 96,397 159,975 10,000 10,574 100,188 28,397 7,691 49,262 14,839 48,848 42,308 6,540 51,340 231,888

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

Wealth Creation SCement

UltraTech Cement: Financials


Ratios (Post-merger)* Y/E March Basic (Rs) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (Cap-US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Debtor (Days) Inventory (Days) Leverage Ratio Debt/Equity FY09 87.8 119.0 370.2 6.0 8.0 FY10 45.7 73.3 391.2 6.0 15.4 FY11E 70.1 103.7 453.6 6.5 10.9 FY12E 96.0 132.7 540.9 7.5 9.1 FY13E 99.3 139.8 630.3 8.5 10.0 Cash Flow Statement (Post-merger)* Y/E March FY09 FY10 Op. Profit/(Loss) before Tax 19,711 25,814 Interest/Dividends Recd. 1,227 2,524 Direct Taxes Paid -3,871 -5,436 (Inc)/Dec in WC -752 -314 CF from Operations 16,315 22,587 CF from Oper. incl EO exp.16,315 22,587 (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 -2,762 -6,348 -9,109 4 -5,371 -1,175 -871 -7,413 -89,272 6,122 -83,151 59,757 39,383 -2,792 -1,925 94,423 FY11E 38,163 2,550 -8,430 -184 32,099 32,099 -21,680 0 -21,680 0 -5,000 -3,837 -2,085 -10,923 (Rs million) FY12E FY13E 48,693 51,263 2,750 2,250 -10,989 -11,363 -365 -319 40,090 41,830 40,090 41,830 -25,000 0 -25,000 0 -5,000 -3,499 -2,406 -10,905 -20,000 0 -20,000 0 -5,000 -3,220 -2,727 -10,947 10,884 38,378 49,262

12.1 9.0 2.9 1.9 6.7 127 0.6

23.4 14.5 2.7 2.3 11.7 138 0.6

15.2 10.3 2.4 1.7 7.8 131 0.6

11.1 8.0 2.0 1.4 5.9 107 0.7

10.7 7.6 1.7 1.1 5.3 101 0.8

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

Wealth Creation SCement

Grasim: Firing on both cylinders; maintain Buy


KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E

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%.

3 Cost and profitability


91.7 224.8/ 5.0 13.6 1.7
SOTP (RS)

4 Valuation and view

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

749 2008 2,756 -398 3,154

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

Wealth Creation SCement

Grasim: Firing on both cylinders; maintain Buy

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.

VSF Volume growth to remain strong


Capac ity ('000 tons ) Cap. Util (%) Volumes ('000 tons )

Higher VSF realizations to drive margins


Realiz ations (Rs /Kg) PBITDA Margins (%)

100 36.6 490 90 84 92 132 131 FY13E


58% 57% 16 36 22 FY10 FY11E 23 54% 19 29 21 FY13E
46

36.9

35.5

37.0

36.5

76 334 302 334 306 334 334 373 103

20.4 97 106

334 280

70 233

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY08

FY09

FY10

FY11E

124

FY12E

Higher competing fiber prices augurs well for VSF (indexed)


330 Cotton 270 PSF VSF

Cement still contributes over 55% to EBITDA (Rs b)


Cement Cement's c ontribution (%)
Pre de-merger of cement

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

Wealth Creation SCement

Grasim: Valuation and view

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).

FY12 Consolidated EPS sensitivity to VSF & Cement pricing


FY12 Cement price change assumption CE CE CE + CE + Rs5/bag (+10/ Rs5/ Rs10/ bag over bag bag FY11)
125 130 132 135 140 144 278.9 299.0 293.3 313.4 300.2 320.3 307.7 327.8 322.1 342.2 333.7 353.7 Based on current Current estimates (CE) 258.9 273.3 280.2 287.7 302.1 313.6 319.0 333.4 340.4 347.9 362.3 373.8 pricing

Grasim: Sensitivity analysis of fair value (FY12)


Cement business valuation (EV/EBITDA)
0 20 30 50 60 6 2,648 2,347 2,197 1,896 1,745 8 3,150 2,749 2,548 2,147 1,946 10 3,652 3,154 2,899 2,397 2,147 12 4,154 3,552 3,251 2,648 2,347

Holding company discount (%)

VSF Prices (Rs/Kg)

Grasim: SOTP based fair value (Rs m)


Parameter
Standalone VSF business UltraTech Cement @ 60.3% (post 20% holdco discount) Total EV Less: Gross Debt (incl pro-rata in subs) Add: Cash & liquid invest Add: Group holdings Total Equity Value Fair value (Rs/share) EV/EBITDA (x) EV/EBITDA (x)

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

Wealth Creation SCement

Grasim: Key performance indicators


Trend in VSF volumes
Volumes ('000 Tons ) 51% 31% 19% 6% -0.2% -11% -18% 56.8 1QFY09 62.5 -22%
1QF Y09 2QF Y09 3QF Y09 4QF Y09 1QF Y10 2QF Y10 3QF Y10 4QF Y10 1QF Y11 2QF Y11 105 102 102 97 98 87 110 112

Trend in VSF realizations (Rs/Kg)


Grow th (%)
118 116 123

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

Trend in EBITDA (Rs/ton)


EBITDA (Rs m) 41.7 31.0 27.7 21.4 17.3 11.3 1,953 1,477 635 1QFY09 3QFY09 1,981 1,097 3,544 4,037 3,632 3,886 3,042 2,728 EBITDA Margin (%) 41.9 34.8 35.5 31.9 34.4

Trend in VSF capacity utilization (%)


98 92 83 75 70 62 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
48

97

99

84

75 72

1QFY10

3QFY10

1QFY11

3QFY11

Source: Company/MOSL
March 2011

3QF Y11

Wealth Creation SCement

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

Wealth Creation SCement

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

Wealth Creation SCement

Jaiprakash Associates: Emerging giant; maintain Buy


KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E

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.

3 Cost and profitability


1,938.4 169.9 3.8 13.9 5.1 23.2 0.5

4 Valuation and view


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

Wealth Creation SCement

Jaiprakash Associates: Emerging giant; maintain Buy

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

Capacity in place for growth


Capac ity (mt) 95 66 75 56 46 22.2 7.0 FY07 9.0 FY08 13.5 FY10E FY11E FY12E FY09 63 32.8 25.6 32.8 Capacity Utilization (%) 76

Volume growth to improve


Sales (mt) Growth (% YoY) 59.1

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

32.7 21.5 25.0 16.3

FY12E

High dependence on domestic coal


Imported 5%

FY13E

Superior profitability to be restored


EBITDA (Rs /Ton) 1,339 1,173 1,092

Dom - open market 45%

Dom Linkage 50%

1,076 1,018 977

FY10E

FY11E

FY12E

Source: Company/MOSL

FY13E
52

FY08

FY09

FY13E

Wealth Creation SCement

Jaiprakash Associates: Levers present for re-rating

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.

Cement business summary (Rs m) FY08


Sales Volume (m tons) Growth (% YoY) Net revenues Growth (% YoY) EBIDTA Growth (% YoY) EBIT Growth (% YoY) Per ton summary Net Realisation EBIDTA EBIT Trend in capit al employed 6.8 19,504 7,936 6,920

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

FY13E CAGR (%)*


25.0 16.3 95,606 21.3 26,910 23.0 20,365 29.6 45.3 47.5 26.7 21.9

2,884 1,173 1,023 58

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

Current assumption Based on Mar-11 exit prices

Source: Company/MOSL

March 2011

53

Wealth Creation SCement

Jaiprakash Associates: RE/EPC business provides strong growth opportunity

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.

EPC business performance (Rs m)


Revenues EBIT EBIT margin (%) CAGR of 10% 30 66.8 65.2 24

RE performance (Rs m) on upmove...


20 Rev enues (LHS) EBIT (LHS) EBIT margin (%) - RHS 54

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

18 10.2 11.4 11.1 12 6

11.7

36

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

0 FY08 FY09 FY10 FY11E FY12E FY13E

30

...driven by strong pre-sales (Rs b)


Noida* 200 Jaypee Gro up RE s ale s in NCR region h as cross ed Rs126b in Ju ne-10, up from Rs18b in Mar-08 126.0 95.9 Gr. Noida # Sales (msf)

EBIT contribution for each segment (%)


Cement Dividend 110% 80% 50% Construction Others Real Estate

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

-10% FY08 FY09 FY10 FY11E FY12E FY13E

*Includes sales by Jaypee Infratech, Jaiprakash Associates, etc, # Includes sales by Jaiprakash Associates, JPSK, etc Source: Company/MOSL
March 2011 54

Wealth Creation SCement

Jaiprakash Associates: RE/EPC business provides strong growth opportunity


SOTP Standalone Business
E&C Business Cement Business Coal Mining Debt Equity Value (A) Subsidiary Cos JP Power Ventures Jaypee Ganga Infra Jaypee Sports Intl Other investment Total (B) Real Estate / BOT Jaypee Greens Jaypee Infratech Land bank at NOIDA Total (C) Total ( A + B + C )

Business Segment
Construction Cement Mining

Method

Valuation Value Value Rationale Multiple (x) (Rs m) (Rs/sh)


7.0 66,443 8.0 178,214 9,000 165,758 87,899 57,502 5,219 6,499 2,161 71,380 10,937 52,976 7,200 71,113 230,392 31 84 4 78 41 27 2 3 1 34 5 25 3 33 108 Source: Company/MOSL At par with Industry Average At 20% discount to large cap cement players Book value FY10

Implied valuations for Cement Busines Particulars FY12E


Enterprises Value Less: Value of other business EPC Power Real Estate Investment Residual Value for Cement Cement Capacity (MT) Implied EV/Ton (US$) 351,897 66,443 57,502 71,113 22,878 133,961 27 108

FY12 EV/EBIT FY12E EV/EBIDTA Book Value Book Value

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

Real Estate Road Deve/ Real Estate Real Estate

NPV of project development 25% Discount to CMP NPV/acre

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

Wealth Creation SCement

Jaiprakash Associates: Key performance indicators


Trend in volumes (m tons)
3.9 3.4 2.7 1.9 2.0 1.7
2,400 1,200 0 1QF Y09 2QF Y09 3QF Y09 4QF Y09 1QF Y10 2QF Y10 3QF Y10 4QF Y10 1QF Y11 2QF Y11 3QF Y11

Trend in Realisation and EBITDA (Rs/ton)


3.6
4,800 3,600 Realisation (Rs/ton) EBIDTA (Rs/ton)

2.9

2.2

2.4

2.2

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

Trend in EPC revenues (Rs m) and margin (%)


Revenues (Rs m) 24,000 18,000 12,000 6,000 0 4QF Y08 1QF Y09 2QF Y09 3QF Y09 4QF Y09 1QF Y10 2QF Y10 3QF Y10 4QF Y10 1QF Y11 EBIT margins (%) 40.0 30.0 20.0

RE revenue booking (Rs b)


Revenue s Cum. Re ve nue s 17.2 20.4 2QFY1 1 3.2 3QFY1 1
56

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

Wealth Creation SCement

Jaiprakash Associates: Financials


Income Statement Y/E March Net Sales Change (%) 2009 57,642 45.3 2010 100,889 75.0 58,091 6,653 6,839 6,194 77,776 23,114 22.9 4,561 10,558 15,829 23,824 6,733 28.3 17,091 8,933 -0.4 2011E 130,079 28.9 80,091 5,667 8,890 5,368 100,015 30,064 23.1 5,581 13,244 7,404 18,644 6,839 36.7 11,805 7,703 -13.8 (Rs Million) 2012E 2013E 151,744 166,026 16.7 9.4 93,645 6,234 9,779 5,572 115,230 36,514 24.1 7,542 14,159 1,534 16,347 6,058 37.1 10,289 10,289 33.6 100,890 6,857 10,757 5,802 124,306 41,720 25.1 8,175 15,430 1,418 19,533 7,141 36.6 12,392 12,392 20.4 Balance Sheet Y/E March Share Capital Reserves Net Worth Loans Deffered Tax Liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Other Current Assets Current Liab. & Prov. Creditors Other Liabilities Provisions Net Current Assets Application of Funds
March 2011

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

2011E 3,877 90,807 95,062

(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

Wealth Creation SCement

Jaiprakash Associates: Financials


Ratios Y/E March Basic (Rs) Adjusted EPS Growth (%) Consolidated EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E (standalone) P/E (consolidated) Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x)
March 2011

2009 4.2 47.1 3.6 -30.0 5.7 56.5 0.6 15.6

2010 4.2 -0.4 1.6 -55.9 6.4 40.0 0.9 12.6

2011E 4.0 -5.5 5.3 240.1 6.9 49.0 0.8 14.9

2012E 5.3 33.6 0.5 -89.8 9.2 53.1 1.1 22.8

2013E 6.4 20.4 4.8 780.4 10.6 58.1 1.3 22.8

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

20.9 24.8 15.6 17.3 5.0 1.6 0.7

21.0 56.4 13.9 14.2 3.3 2.2 1.0

22.2 16.6 12.9 11.0 2.5 1.8 0.9

16.7 162.1 9.6 9.3 2.2 1.7 1.2

13.8 18.4 8.3 8.0 2.0 1.5 1.4

(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

Wealth Creation SCement

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

Birla Corp India Cements Shree Cement

Buy Buy Neutral

March 2011

59

Wealth Creation SCement

Birla Corp: Good market mix at great value; maintain Buy


KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E

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.

3 Cost and profitability


77.0 23.9 0.5 23.1 19.5 14.8 2.1

4 Valuation and view


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).

Target price (Rs) Upside (%) EV/Ton at TP (US$)


March 2011

452 45.7 78
60

Wealth Creation SCement

Birla Corp: Good market mix at great value; maintain Buy

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.

Capacity in place for growth


Capacity 91.4 91.5 93.1 80.3 81.5 Cap Util (%) 68.4

Volume growth to improve


Dispatches Grow th (%) 12.0 9.6

6.9

6.5 7.4 6.6

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

High dependence on domestic coal

Superior profitability to be restored


EBITDA (Rs /Ton)

Pet-coke 10% Imported c oal 20%

1,351

Dom. linkage 65%

1,147 1,055 906 931

1,158

Dom. open market 5%


FY08

FY09

FY10

FY11E

FY12E

FY13E

Source: Company/MOSL

March 2011

61

Wealth Creation SCement

Birla Corp: Valuation and view

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).

Birla Corps EV/EBITDA chart


EV/EBDITA(x ) 6 Peak(x) 5.8 4 2 2.8 2.4 Av g(x ) Min(x)

Birla Corps EV/Ton chart


EV/ton (US$) 120 111.3 80 54.4 40 0 47 Max Avg Min

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

Birla Corps sensitivity to cement prices (FY12)


Cement Price EBITDA/Ton chg over FY11 (Rs/Ton) (Rs/Ton)
-200 615 715 815 915 1,055 1,155 1,255 -100 0 100 240

EPS

PE (x)

~46% upside in base case scenario


600 Bu ll cas e TP: Rs 532 450 300 Bear cas e TP: Rs 355 150 0 Oc t-11 Feb-10 May -11 Nov -08 Sep-09 Dec -10 Mar-12 J an-08 J un-08 Apr-09 J ul-10 Base case T P: Rs452

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

TP at 4x Remarks EV/EBITDA (Rs)


275 315 355 395 452 492 532 Based on Mar-11 exit prices Current assumption

40.7 47.0 53.3 59.7 68.6 74.9 81.2

7.3 6.3 5.6 5.0 4.3 4.0 3.7

340 440

Source: Company/MOSL

March 2011

J ul-09

Wealth Creation SCement

Birla Corp: Key performance indicators


Trend in volumes and realizations
Realization (Rs/ton) 1.6 3,717 3,621 1.4 3,096 3,083 3,259 Volume (m ton) 1.7 1.5 1.5 1.4 3,448 3,468 3,510

Trend in EBITDA (Rs/ton)

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

Trend in revenue mix Trend in EBITDA


EBITDA (Rs M) 35.8 28.9 21.0 1,143 22.5 23.1 1,935 1,756 1,736 1,624 1,647 15.8 766 19.0 1,316 38.3 29.1 28.8 28.6 EBITDA Margins (%)

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

Trend in PBIT mix (Rs m)

3QFY11 721
63

2,931

2,953

1.3

819

986

1,174

Wealth Creation SCement

Birla Corp: Financials


Income Statement Y/E March Net Sales Change (%) Total Expenditure EBITDA Change (%) Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT Change (%) Tax Tax Rate (%) PAT PAT Adj for EO Items Change (%) Margin (%) 2009 17,907 3.8 13,649 4,258 -26.2 23.8 434 3,824 221 761 4,365 -20.8 1,130 25.9 3,235 3,235 -17.8 18.1 2010 21,570 20.5 14,519 7,051 65.6 32.7 556 6,495 270 1,383 7,608 74.3 2,036 26.8 5,572 5,572 72.2 25.8 2011E 21,494 -0.4 16,294 5,200 -26.2 24.2 669 4,531 575 1,313 5,269 -30.7 1,317 25.0 3,952 3,952 -29.1 18.4 (Rs Million) 2012E 2013E 24,965 16.1 17,888 7,077 36.1 28.3 871 6,206 511 1,440 7,135 35.4 1,855 26.0 5,280 5,280 33.6 21.1 29,209 17.0 20,538 8,671 22.5 29.7 1,044 7,627 369 1,013 8,271 15.9 2,150 26.0 6,120 6,120 15.9 21.0 Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 3,965 3,296 669 2,872 16,414 4,299 3,650 649 4,118 25,799 4,407 3,439 968 7,449 27,545 5,142 3,994 1,148 10,255 31,980 5,949 4,673 1,275 8,813 34,494 Balance Sheet Y/E March Equity Share Capital Reserves Net Worth Loans Deferred Liabilities Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others 2009 770 12,107 12,877 2,764 772 16,414 13542 6942 6,600 1419 5523 6,837 1929 200 3197 1511 2010 770 17,142 17,912 7,092 795 25,799 14300 7313 6,987 3278 11417 8,418 2837 221 3393 1966 2011E 770 20,508 21,278 5,682 584 27,545 19578 7982 11,595 1000 7500 11,856 2687 322 6482 2364 (Rs Million) 2012E 2013E 770 25,157 25,927 5,682 370 31,980 25078 8853 16,225 2500 3000 15,397 3121 374 9156 2746 770 30,602 31,372 3,000 122 34,494 30578 9897 20,681 2000 3000 14,762 3651 438 7460 3213

March 2011

64

Wealth Creation SCement

Birla Corp: Financials


Ratios Y/E March Basic (Rs) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton - Cap (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE 2009 42.0 47.6 167.2 4.5 12.5 2010 72.4 79.6 232.6 6.0 9.7 2011E 51.3 60.0 276.3 6.5 14.8 2012E 68.6 79.9 336.7 7.0 11.9 2013E 79.5 93.0 407.4 7.5 11.0 Cash Flow Statement Y/E March Op.Profit/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations 2009 4,482 223 -1,045 611 4,270 2010 7,301 567 -1,913 -894 5,060 5,060 -2,795 -5,555 -8,350 4,368 -252 -631 3,485 196 3,197 3,393 2011E 5,200 1,313 -1,528 -241 4,743 4,743 -3,000 3,917 917 -1,410 -575 -586 -2,570 3,090 3,393 6,482 2012E 7,077 1,440 -2,069 -132 6,316 6,316 -7,000 4,500 -2,500 0 -511 -631 -1,142 2,674 6,482 9,156 (Rs Million) 2013E 8,671 1,013 -2,398 -255 7,030 7,030 -5,000 0 -5,000 -2,682 -369 -676 -3,727 -1,697 9,156 7,460

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

Wealth Creation SCement

India Cement: Light at the end of the tunnel; maintain Buy


KEY FINANCIALS (RS B) Y/E MARCH 2010 2011E 2012E 2013E

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.

3 Cost and profitability


307.2 28.3 0.6 18.7 -12.1 81.4 2.2

4 Valuation and view

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

Target price (Rs) Upside (%) EV/Ton at TP (US$)


March 2011

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

Wealth Creation SCement

India Cements: Light at the end of the tunnel; maintain Buy

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.

Significant headroom to grow from current capacity


Capacity (MT) 104.7 15.6 14.1 13.0 78.0 8.8 70.4 70.0 64.6 78.1 15.6 15.6 Cap Util (%)

Volume growth should recover after muted FY11


Volumes (MT) 20.2 11.6 9.4 -1.1 9.2 11.0 9.1 10.0 -8.4 10.9 12.1 8.4 Grow th (%) - RHS

FY08

FY09

FY10

FY11E

FY12E

FY13E

FY08

FY09

FY10

FY11E

FY12E

FY13E

High dependence on imported coal


Pet-c oke 2%

Profitability to improve from troughs of FY11


1,170 1,092 EBITDA (Rs /Ton)

Dom. linkage 30% Imported coal 60%

754

767 710

Dom. open market 8%

466

FY08

FY09

FY10

FY11E

FY12E

FY13E

Source: Company/MOSL
67

March 2011

Wealth Creation SCement

India Cement: Levers present for re-rating

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

Implied residual value of cement business (FY12E)


Rs M Market Cap Net Debt EV Less: EV of CSK Residual EV for cement Implied PE (x) Implied EV/EBITDA (x) Implied EV/Ton (US$) Rajasthan Royal Pune team Kochi team deal@US$140m @US$370m @US$333m 28,336 28,318 56,655 6,281 50,373 9.7 6.5 72 28,336 28,318 56,655 17,020 39,635 5.0 5.1 57 28,336 28,318 56,655 15,332 41,323 5.7 5.3 59

Based on current estimates Most likely scenario when captive coal mine starts delivering

Source: Company/ MOSL

Source: Company/MOSL

India Cements sensitivity to cement prices (FY12)


Cement Price EBITDA/Ton chg over FY11 (Rs/Ton) (Rs/Ton)
-200 -100 0 100 240 340 440 160 260 360 460 600 700 800

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

TP at 8x Remarks EV/EBITDA (Rs)


-66 -33 0 34 80 113 147 Current assumption Based on Mar-11 exit prices

-8.2 -5.3 -2.3 0.6 4.7 7.6 10.6

-11.2 -17.5 -39.5 152.9 19.6 12.1 8.7

Source: Company/MOSL

March 2011

68

Wealth Creation SCement

India Cement: Valuation and view

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).

India Cements EV/EBITDA chart


19 15 14.5 11 8.4 7 5.1 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 7.3 EV/EBDITA(x ) Avg(x) Peak(x) Min(x)

India Cements EV/Ton chart


270 210 EV/ton (US$) Avg 220.3 126.5 82 70.9 May -10 Mar-06 J an-07 Nov -07 Sep-08 Mar-11 J ul-09 Max Min

150

90 30

~24% upside in base case scenario


240 180 Base case TP: Rs117 120 60 0 May -11 Oc t-11 Feb-10 Nov -08 Sep-09 Dec -10 Mar-12
69

Bull case T P: Rs147

Bear cas e TP: Rs80

J an-08

J un-08

Apr-09

J ul-10

Source: Company/MOSL

March 2011

Wealth Creation SCement

India Cement: Key performing indicators


Trend in volumes and realizations
Realization (Rs/ton) 1.6 3,717 3,621 1.4 3,096 3,083 3,259 Volume (m ton) 1.7 1.5 1.5 1.4 3,448 3,468 3,510 1.5

Trend in EBITDA (Rs/ton)

1,537

1,602

1,159

1,195

1,033

782

2,931

2,953

819

623

1.2 1QFY09

1.1 2QFY09

1.2 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11

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 (%)

Income statement (Rs/ton): Key operating indicators*


Rs/Ton
Net realization

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

Wealth Creation SCement

India Cements: Financials


Income Statement Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depreciation EBIT Int. and Finance Charges Other Income - Rec. PBT bef. EO Exp. EO Expense/(Income) PBT after EO Exp. Current Tax Deferred Tax Tax Rate (%) PAT Adj for EO items Change (%) Margin (%) 2009 34,268 12.6 24,306 70.9 9,962 29.1 2,033 7,928 1,121 470 7,276 793 6,483 1,862 299 33.3 4,851 -27.2 14.2 2010 37,711 10.0 29,445 78.1 8,265 21.9 2,331 5,934 1,426 370 4,877 -436 5,313 1,633 137 33.3 3,253 -32.9 8.6 2011E 35,292 -6.4 30,612 86.7 4,680 13.3 2,536 2,144 1,465 145 824 -273 1,097 110 104 19.5 663 -79.6 1.9 (Rs Million) 2012E 2013E 42,153 49,241 19.4 16.8 34,424 81.7 7,729 18.3 2,875 4,854 2,065 155 2,944 0 2,944 589 74 22.5 2,282 243.9 5.4 39,925 81.1 9,316 18.9 3,252 6,064 2,167 230 4,126 0 4,126 1,073 124 29.0 2,930 28.4 5.9 Balance Sheet Y/E March Equity Share Capital Fully Diluted excl Treas. stk Total Reserves Net Worth Minority Interest Deferred Liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP 2009 2,824 2,735 33,490 36,314 0 2,556 19,880 58,750 53,136 15,053 38,083 9,040 2010 3,072 2,983 38,286 41,358 0 2,693 21,327 65,378 57,102 17,916 39,186 7,029 2011E 3,072 2,983 38,451 41,522 0 2,797 28,326 72,645 68,131 20,452 47,679 4,000 (Rs million) 2012E 2013E 3,072 3,072 2,872 2,872 39,804 41,680 42,876 44,752 30 2,870 28,794 74,570 72,131 23,327 48,804 5,000 2,140 30,188 4,620 5,197 475 19,692 204 11,562 6,327 4,042 1,193 18,626 74,570 95 2,994 28,294 76,135 79,131 26,579 52,552 1,000 2,140 33,322 5,396 6,071 1,959 19,692 204 12,879 6,632 4,722 1,525 20,443 76,135
71

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

Wealth Creation SCement

India Cements: Financials


Ratios Y/E March Basic (Rs) * Fully Diluted EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) * P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/Ton (US$) Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Inventory (Days) Debtor (Days) Leverage Ratio (x) Current Ratio Debt/Equity * Adjusted for treasury stocks
March 2011

2009 17.7 25.2 132.3 2.0 15.3

2010 10.9 18.7 138.7 2.0 20.3

2011E 2.2 10.7 139.2 2.0 81.4

2012E 7.9 17.9 149.3 2.5 39.4

2013E 10.2 21.3 155.8 2.8 33.7

Cash Flow Statement Y/E March

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

5.3 3.7 0.7 1.3 4.5 77 2.1

8.6 5.0 0.7 1.3 5.9 77 2.1

42.2 8.7 0.7 1.6 11.8 79 2.1

11.8 5.3 0.6 1.3 7.1 79 2.7

9.2 4.4 0.6 1.1 5.7 76 2.9

(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

Wealth Creation SCement

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).

3 Cost and profitability


34.8 66.1/1.5 38.5 28.4 27.7 0.7
SOTP (RS)

4 Valuation and view

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

1,774 411 2,186 20 2,166

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

Wealth Creation SCement

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

Utilization rate should pick-up


Capacity (mt) 94.3 Cap Util (%) 95.0 93.9 13.2 85.4 13.2 9.0 7.0 12.0 77.3 84.7

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

21.3 9.6 -0.5


FY08 FY09 FY10E FY11E FY12E FY13E

12.2

FY08

FY09

FY10E

FY11E

FY12E

FY13E

High dependence on pet coke/ imported coal

Erosion in superior profitability


EBITDA (Rs/ton) 1,306 1,356

Imported coal 40%

1,061 922 778


Pet c oke 60%

1,042

FY08

FY09

FY10E

FY11E

FY12E

FY13E

Source: Company/MOSL
74

Wealth Creation SCement

Shree Cement: Challenges ahead

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.

Merchant power business to remain under pressure


FY09
Merchant Power Capacity (MW) Merchant Power Sales (MW) Unit sold (m units) Realizations (Rs/unit) Merchant Sales (Rs M) % of Total Sales Cost (Rs/unit) EBITDA (Rs m) EBITDA (Rs/unit) EBITDA Margins (%) % of Total EBITDA 4 16 118 6.8 806 3.0 2.6 500 4.2 62.0 4.9

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

Source: Company/MOSL Shree Cements sensitivity to cement prices (FY12)


Cement Price EBITDA/Ton chg over FY11 (Rs/Ton) (Rs/Ton)
-200 -100 0 100 240 340 440 482 582 682 782 922 1,022 1,122

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

109.4 138.9 168.4 197.9 239.3 268.8 298.3

17.3 13.7 11.3 9.6 7.9 7.1 6.4

Current assumption Based on Mar-11 exit prices

Source: Company/MOSL

March 2011

75

Wealth Creation SCement

Shree Cement: Valuation and view

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

Shree Cements EV/EBITDA chart


12 9 6 3 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 1.0 5.0 EV/EBDITA(x) Avg(x) 9.4 5.4 Peak(x) Min(x)

Shree Cements EV/Ton chart


EV/ton (US$) 250 196.2 Max Av g Min

170

90

103.9 18.9 May -10 Mar-06 Sep-08 J an-07 Nov -07

87 Mar-11 J ul-09

10

Shree Cement: Sum of the parts valuations


Rs M
Cement business Merchant Power Total EV Less: Net Debt Equity Value Fair Value (Rs/share) Upside (%)

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

Bear cas e TP: Rs1,641

Source: Company/MOSL

March 2011

76

Wealth Creation SCement

Shree Cement: Key performance indicators


Trend in cement volumes and realizations
Realization (Rs/ton) 2.5 2.4 1.9 2.0 2.1 2.5 Dispatc hes (m ton) - RHS 2.6 2.7 2.6 2.5 2.3

Trend in cement EBITDA (Rs/ton)


1,561 1,254 1,097 867 590 556 1,009 1,543 1,199 1,134 1,003

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

Trend in merchant power business


Units Sold (m units ) 5.3 5.0 4.1 3.0 213 1.9 1.1 53 1QFY10 64 70 78 77 4QFY10 1QFY11 2QFY11 74 3QFY11 1.6 EBITDA (Rs/unit)

Cement business income statement (Rs/ton)


3QFY11
Net Realization Raw Material Cost Staff Cost Power & fuel Freight & selling Exp Other Exp Total Exp EBITDA EBITDA Margin (%) 2,851 337 183 708 770 297 2,295 556 19.5

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

Wealth Creation SCement

Shree Cement: Financials


Income Statement Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depriciation EBIT Int. and Finance Charges Other Income - Rec. PBT before EO Expense Extra Ordinary Exp./(Inc.) PBT after EO Expense T ax Tax Rate (%) Reported PAT Adj PAT for EO items Change (%) Margin (%) Adj PAT * 2009 27,106 31.2 17,643 65.1 9,464 34.9 2,054 7,410 744 829 7,495 309 7,185 1,449 20.2 5,736 5,983 107.8 22.1 6,558 2010 36,321 34.0 21,296 58.6 15,025 41.4 5,704 9,321 1,291 1,284 9,313 634 8,679 1,918 22.1 6,761 7,097 18.6 19.5 10,168 2011E 34,545 -4.9 25,764 74.6 8,781 25.4 6,480 2,300 1,102 1,040 2,239 0 2,239 179 8.0 2,060 2,060 -71.0 6.0 5,886 (Rs Million) 2012E 2013E 44,326 28.3 32,155 72.5 12,171 27.5 9,752 2,419 1,302 978 2,094 0 2,094 168 8.0 1,927 1,927 -6.5 4.3 8,335 54,333 22.6 38,986 71.8 15,347 28.2 8,644 6,704 1,302 788 6,189 0 6,189 1,232 19.9 4,957 4,957 157.3 9.1 9,301 Balance Sheet Y/E March Equity Share Capital Total Reserves Net Worth Deferred Liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets 2009 348 11,752 12,100 -104 14,962 26,958 22,559 16,291 6,269 4,789 8,448 14,294 1,545 583 4,723 7,443 6,842 2,956 3,885 7,452 2010 348 17,984 18,332 -124 21,062 39,271 36,189 21,995 14,194 3,000 15,922 15,822 3,581 824 4,164 7,252 9,667 4,668 4,999 6,155 2011E 348 19,473 19,821 -393 19,000 38,429 41,189 28,475 12,713 5,000 9,922 17,543 2,839 757 6,376 7,571 6,751 4,732 2,018 10,793 (Rs million) 2012E 2013E 348 20,747 21,096 -644 19,000 39,452 51,689 38,227 13,461 1,500 8,922 23,711 3,643 972 9,381 9,715 8,143 6,072 2,071 15,568 348 25,053 25,401 -1114 21,000 45,287 55,689 46,871 8,817 2,500 8,922 35,844 4,466 1,191 18,279 11,909 10,797 7,443 3,354 25,047 45,287

Appl. of Funds 26,958 39,271 38,429 39,452 E: MOSL Estimates; * Adj for accelerated depreciation & EO items

March 2011

78

Wealth Creation SCement

Shree Cement: Financials


Ratios Y/E March Basic (Rs) Adj. EPS * Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA EV/ton (US$-Cap) Dividend Yield (%) Return Ratios (%) RoE RoCE 2009 188.3 247.2 347.3 10.0 7.1 2010 291.9 455.6 526.2 13.0 7.8 2011E 169.0 355.0 569.0 14.0 27.7 2012E 239.3 519.2 605.6 16.0 33.9 2013E 267.0 515.1 729.1 16.0 13.2 Cash Flow Statement Y/E March Oper. Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations (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 2009 9,445 587 -1,644 219 8,607 -5,330 -3,802 -9,132 1,655 -755 -326 573 48 4,674 4,723 2010 14,498 1,131 -1,897 -61 13,671 -11,710 -6,306 -18,016 5,729 -1,332 -611 3,786 -559 4,723 4,164 2011E 8,781 1,040 -448 -2,426 6,947 -7,000 6,000 -1,000 -2,062 -1,102 -571 -3,735 2,212 4,164 6,376 2012E (Rs Million) 2013E 15,347 788 -1,702 -581 13,852 -5,000 0 -5,000 2,000 -1,302 -652 46 8,897 9,381 18,279

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

9.9 7.5 5.4 2.8 7.0 165 0.5

6.4 4.1 3.5 2.3 4.4 111 0.7

11.0 5.2 3.3 2.2 7.7 102 0.8

7.8 3.6 3.1 1.7 5.4 87 0.9

7.0 3.6 2.6 1.2 3.8 77 0.9

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

Wealth Creation SCement

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This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of it s affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its af filiates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. 2. 3. 4. Analyst ownership of the stock Group/Directors ownership of the stock Broking relationship with company covered Investment Banking relationship with company covered ACC No No No No Ambuja Cement No No No No UltraTech Cement No No No No Grasim Cement No No No No Jaiprakash Associates No No No No Birla Corp No Yes No No India Cement No No No No Shree Cement No No No No

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

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