Company Report

UltraTech Cement
Cement
April 05, 2007 ICICIdirect Code: ULTCEM Price (03/04/07) Rs 715 Potential upside 24% Target Price Rs 890 Time Frame 12-15 mths

OUTPERFORMER

Company

Profile

Registered Office Ahura Center, 2nd Floor, Mahakali Caves Road, Andheri (E), Mumbai - 400 093 Tel: 91-22-66917800 Fax: 91-22-66928109 Website: www.ultratechcement.com Chairman : Kumar Mangalam Birla Business Group: Birla AV

UltraTech Cement, a subsidiary of Grasim Industries, is one of the leading cement manufacturers in the western and southern regions. The company has undertaken a Rs 2,700 cr capex plan over the next three years (FY07-09) to increase its production capacity. It is also replacing its high-cost napthabased power plant in Gujarat with an efficient lignite-based plant. The stock is currently available at a attractive enterprise value per tonne of $140 per tonne. We initiate coverage on the company with an OUTPERFORMER rating. INVESTMENT RATIONALE

Shareholding Pattern as on 31/12/2006

Major Holders % 52.45 10.06 8.21 29.28 Promoters Foreign Holdings Institutional Investors General Public & Others

Stock Data Market Cap (Rs crore) Shares Outstanding (in crore) 52-week High (Rs) 52-week Low (Rs) Avg. Volume Absolute Return 3 mth (%) Absolute Return 12 mth (%) Sensex Return 3 mth (%) Sensex Return 12 mth (%) 8901 12.45 1250 495 36617 -30.87 12.84 -5.86 14.79

Capex to drive growth The company has undertaken a Rs 2,700 crore expansion plan over the next three years (FY07-09). It will scale-up its production capacity by 4 million tpa from the current 17 million tpa by Mar FY08. We expect net sales to grow at a CAGR of 25% to Rs 6,587.15 crore in FY09E from Rs 3,339.33 crore in FY06. Captive power plant to cut costs UltraTechs earnings were impacted due to its high power costs. It is now addressing past issue by setting up captive power plants at its units in Gujarat and Chhattisgarh. In Gujarat, it will replace its naptha-based power plant by a more efficient lignite-based plant. We expect savings of Rs 170 crore per annum FY09 onwards which would boost the companys EBIDTA margins to 33.8%, in line with other major cement players. Low cement clinker ratio, more scope for blending
Currently, the companys cement clinker conversion ratio is low at 1.14, below the industry average of 1.45. We expect company will reach to 6065% of blended cement as against 40% currently of blended cement. This should help it to reduce costs and improve profitability.

Strong presence in fast-growing markets

UltraTech has a strong presence in the southern and western regions. These markets are expected to grow at a faster pace than other regions. With the demand-supply mismatch expected to continue till FY09, the companys additional capacity of 4 million tpa will get easily absorbed.

Performance Chart

VALUATIONS
At the current price of Rs 715, the stock trades at an EV/EBIDTA of 6.40x FY08E and 5.03 x FY09E respectively. We have taken the average of various valuations like EV/EBITDA, P/E and P/BV to arrive at a target price of Rs 890. At the target price, the stock would be valued at $140 EV/tonne for FY09E at an increased capacity of 21 million tonnes Exhibit 1: Key Financials
Year to March31 PAT (Rs cr) Shares in issue (in cr) EPS (Rs) % Growth P/E (x) Price/Book (x) EV/EBIDTA (x) RoNW (%) RoCE (%) FY06 229.76 12.45 18.46 38.70 8.57 17.12 21.83% 14.75% FY07E 831.48 12.45 66.79 261.86 10.70 4.91 6.13 58.32% 47.59% FY08E 729.3 12.45 58.58 -12.29 12.20 3.55 6.40 33.77% 31.38% (Rs Crore) FY09E 987.79 12.45 79.34 35.44 9.00 2.57 5.03 33.12% 30.35%

Rupesh Sankhe rupesh.sankhe@icicidirect.com

ICICI Brokerage Services Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Road, Prabhadevi, Mumbai - 400 025

For private circulation only

Source: ICICIdirect Research

COMPANY BACKGROUND
UltraTech Cement was incorporated in August 2000 as L&T Cement. The cement division of L&T was demerged in 2004 after Grasim made an open offer to acquire 30% of the equity shares. The company has five integrated plants, five grinding units and three terminals two in India and one in Sri Lanka. These include an integrated plant and two grinding units of the erstwhile Narmada Cement Company Ltd, a subsidiary, which has been amalgamated with the company in May 2006. UltraTech has an annual capacity of 17 million tonnes. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzolana Cement. It is also the countrys largest exporter of cement clinker. The company exports over 2.55 million tpa annum, which is about 58% of the countrys total exports in FY06. The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. UltraTechs subsidiaries are Dakshin Cements Ltd and UltraTech Ceylinco (Private) Ltd.

INVESTMENT RATIONALE
I) Capex to drive earnings growth
The company has undertaken Rs 2,700 crore expansion plan over the next three years (FY06-09). It plans to increase its production capacity by 4 million tpa from the existing 17 million tpa and will also install captive power plants at its units in Gujarat and Chhattisgarh. The additional capacity is scheduled for commissioning by March 2008. We believe these initiatives would result in volume growth of 11% in FY09 and substantial savings of Rs 170 cr per annum in power cost.

Exhibit 2 : UltraTechs current production capacities

Plant Composite integrated plants Andhra Pradesh Cement Works Awarpur Cement Works - Maharashtra Gujarat Cement Works Hirmi Cement Works - Chhattisgarh Narmada Cement - Gujarat Grinding units Arakkonam Cement Works - Tamil Nadu West Bengal Cement Works Jharsuguda Cement works - Orissa Narmada Cement - Maharashtra Narmada Cement - Gujarat Total
Source: Company, ICICIDirect Research

Kiln capacity (tpd) 8,000 9,500 15,000 8,050 4,350

Capacity (million tpa) 2.3 3.3 5.3 1.6 0.4 1.2 1 0.8 0.4 0.7 17

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Exhibit 3 : Capex schedule

Projects/Location Co-generation plant Andhra Pradesh Capacity expansion: 4 million tonnes-Andhra Pradesh Thermal power plant-Andhra Pradesh-46 MW Lignite based power plant-Gujarat-92 MW Coal based power plant-Chhattisgarh-50 MW Ready Mix Concrete Modernization & De-bottlenecking Others Total
Source: Company, ICICIDirect Research

Date of commissioning Dec 07 Mar 08 Mar 08 Mar 08 FY09 FY09 FY09

Cost (Rs crore) 35 1,274 574 270 60 303 182 2,698

Exhibit 4 : Major players are expanding capacity (in million tpa)

Company ACC Gujarat Ambuja UltraTech Cement Grasim Jaiprakash Associates
Source: ICICIDirect Research

Existing capacity 19.4 16 17 13.1 7

Additional capacity (FY07-10) 4.9 4.4 4 9.3 15

Total capacity 24.3 20.4 21 22.4 22

UltraTechs capacity expansion is in line with other major players. Post-expansion, we expect it to maintain its market share. We expect net sales to grow at a CAGR of 25% to Rs 6,587.15 crore in FY09E from Rs 3,339.33 crore in FY06.

II)

Captive power plants to reduce costs by Rs 170 cr FY09 onwards

UltraTech Cement is investing in captive thermal power plants and improving its capability to manage alternative fuels. A capex of Rs 844 crore has been earmarked for installing captive power plants at its units in Gujarat and Chhatisgarh. It plans to replace its naptha-based power plant in Gujarat with a more efficient 92 MW lignite- based plant which would lower its cost to Rs 2 per unit from Rs 5.28 per unit. Already entered into a pact with the Gujarat Mineral Development Corporation (GMDC) to source lignite. We expect annual savings of about Rs 170 crore on power costs from FY09 onwards.

Exhibit 5 : Power cost saving

Plant 50 MW Coal 92 MW Lignite 46 MW Coal Co-Generation Plant
Source: Company, ICICIDirect Research

Location Chattisgarh Gujarat Andhra Pradesh

Existing cost per unit (Rs) 4.00 5.28 100% requirement for increase capacity (4 mtpa)

Estimated cost per unit (Rs) 2.10 2.00

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Exhibit 6: Power cost for major cement players (FY06)

450 400 350 300 250 200 150 100 50 0 413.60 341.00 304.00

274.00 220.00 190.68 162.00

Rs

JK Cement

JK Lakshmi Birla Corp

UltraTech

ACC

Power cost per tonne

Gujarat Ambuja

Shree Cement

Source:

ICICIdirect Research

Cement is an energy-intensive industry with energy typically constituting around 40% of the production cost. While the industry is vulnerable to volatility in energy prices, the situation is further compounded, given the growing shortfall in supplies of indigenous coal and high prices of imported fuels.The company plans to overcome this constraint by setting up a power plant as it has a high power cost compared to ACC and Gujarat Ambuja. We expect operating margins to improve from 30.4%in FY08E to 33.8% in FY09E on account of higher blending ratio and captive power plant despite increase in input cost and excise duty.

III)

Low cement clinker ratio, more scope for blending

Currently, the companys cement clinker conversion ratio is at 1.14, much below the industry average of 1.45. We expect the company to reach a 60-65% of blended cement and overall ratio of about 1.35. Which would help it to reduce costs and improve profitability.

Exhibit 7 : Cement clinker ratio comparison

Company ACC Gujarat Ambuja Shree Cement Ultratech Cement
Source: ICICIDirect Research

FY04 1.36 1.16 1.25 1.01

FY05 1.41 1.3 1.4 1.04

FY06 1.5 1.52 1.55 1.14

Scope for higher blending

IV) Strong presence in fast-growing markets

UltraTech has a strong presence in the southern and western regions. These markets are expected to grow at a faster pace than other regions. With the demand-supply mismatch expected to continue till FY09, the companys additional capacity of 4 million tpa in south region will get easily absorbed.

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Exhibit 8: Break-up of sales across various markets

11%

40% 24%

5% 20% East
Source: Company, ICICIdirect Research

West

Central

Exports

South

Currently, 24% of the companys revenues is from the southern region. This region is expected to show higher cement demand growth on the back of infrastructure development, proliferation IT/ITES companies and housing. The companys presence in the lucrative western market will help to get higher realizations.

INDUSTRY OUTLOOK
Cement demand in the country is growing at approximately 1.5x GDP growth. The cement industry is likely to grow at a CAGR of 10% in the medium-term on account of buoyant housing demand and increased thrust on infrastructure development and industrial projects. Further, initiatives taken by the government under the National Highway Development Programme for building highways and roads, the Pradhan Mantri Gram Sadak Yojana for constructing pucca roads in rural areas, and Bharat Nirman for promoting irrigation, water supply, roads, housing, electrification and telephone connectivity are likely to be the major growth drivers for cement demand.

Exhibit 9 : Region-wise capacity utilization (MTPA)

FY02 North - Capacity North - Production North - Capacity utilization (%) East-Capacity East - Production East - Capacity utilization (%) West - Capacity West - Production West - Capacity utilization (%) South - Capacity South - Production South - Capacity utilization (%) Central - Capacity Central - Production Central - Capacity utilization (%) Total - Capacity Total - Production Industry utilization (%)
Source: ICICIDirect Research

FY03 25.2 24.1 95.8 21.7 16.7 76.9 24.4 19.3 79 44.4 33.4 75.3 21 17.8 84.9 137.1 111.3 81.2

FY04 25.8 25.2 97.7 22.4 16.7 74.5 26.2 21.1 80.2 46.2 36.1 78.1 21.7 18.5 85.1 144.1 117.4 81.5

FY05 27.4 26.7 97.6 22.8 18.7 82.1 28.9 22.8 78.7 46.8 37 79.1 23.7 20.4 86.1 150.1 125.6 83.6

FY06 29.6 28.8 97.3 24.5 20.1 81.8 28.9 24 83.8 48.6 38.8 80 25.1 22 87.8 158.1 141 84.7

FY07E 31.9 32.3 98.5 24.7 22.8 92 29.5 27.7 94 51.4 46.3 90 26.3 24.2 92 164 157.7 98.5

FY08E 45.4 44 97 24.7 23.7 96 32.7 32.1 98 51.4 47.3 92 27.5 25.3 92 181.7 172.4 97

FY09E 53.5 49.2 92 30.1 28.6 95 32.7 29.4 90 63.8 55.5 87 27.5 25.3 92 207.6 188.1 97

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 80.6 131 102.4 78.1

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I)

Eastern region: Capacity utilization to go up

Cement demand in the eastern region is driven by industrial and infrastructure development taking place in the resource-rich states like Orissa, Chhattisgarh, and Jharkhand. Strong housing demand in West Bengal is also boosting demand for cement. During April-January 2007, the region has seen a growth of 6.35%. We expect total capacity to reach 30.13 million tones by FY09 and consumption at 28.6 million tonnes by FY09 at 95% capacity utilization. Blending in the region has reached 1.58 levels, which indicate that capacity utilization are expected to go up.

Exhibit 10: Share of players in Eastern region (24.5 mtpa-FY06)

Others 10% OCL India 8% Century Textiles 9% Grasim Industries 9% Gujarat Ambuja 9% Ultratech Cement 14%
Source: CMIE, ICICIdirect Research

Lafarge India 23%

ACC 18%

II)

Southern region: Higher share of capacity addition to boost volumes

The southern region accounted for 30% capacity of Indias total installed capacity of 160 million tones in FY06. The demand driver for cement in this region continues to be housing, IT/ITES, and infrastructure. Housing demand in the region comes from private activities as well as large-scale rural housing projects initiated by the government. Infrastructure demand is derived from a large number of irrigation projects under implementation in Andhra Pradesh; the metro project in Hyderabad; and international airports in Chennai, Hyderabad and Bangalore. Apart from this, there is also a lot of activity in commercial construction malls, multiplexes, etc. Demand in this region has grown at 11.52% during April 2006-Jan 2007 .We expect total capacity to reach 63.77 million tonnes by FY2009 and consumption 55.5 million tonnes by FY2009 at 87% capacity utilization.

Exhibit 11: Share of players in Southern region (48.6 mtpa-FY06)

India Cements 17% Others 36% Madras Cements 12%

Ultratech Cement 7% Kesoram Ind 7% Grasim Industries 9%

ACC 12%

Source: CMIE, ICICIdirect Research

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III)

Western region: Lower exports to exert downward pressure on price

Demand drivers in the region continue to be housing, real estate, infrastructure, etc. Capacity utilisation in the region have gone up to more than 90%, indicating strong demand, which is expected to further grow at a healthy pace due to a lot of development activity in the region. During April 2006 January 2007, demand has grown at 8.45%. We expect total capacity to reach 32.7 million tones and consumption 29.43 million tones by FY09 at 90% capacity utilization

Exhibit 12: Share of players in Western region (28.9 mtpa-FY06)

Others 9% Gujarat Ambuja 30%

ACC 4% Century Textiles 5% Saurashtra Cement 5% Sanghi Industries 7% Grasim Industries 10%

Ultratech Cement 20%

Source: CMIE, ICICIdirect Research

a)

Exports to slow down

The western region is the export hub and has the advantage of being able to export excess production to places like the Middle East. Exports from the western region are expected to be impacted starting mid-2007 as capacities in Middle East commence production. The Middle East is expected to witness capacity additions of 22 million tonnes starting mid-2007, which will come in phases. As these capacities materialize, the excess quantity will also flow back to India, further affecting demand-supply dynamics in the region.

b)

Prices to remain under pressure

The western region is expecting a capacity expansion of 13.5 million tonnes over the next 5 years, and players expanding their capacities are Birla Corp, Century, Indo Rama, Sanghi Cements, etc. The region is expected to see a lowering of operating rates on account of two things first, supply is expected to grow at healthy pace, and second, exports are expected to decline drastically, which will result in the export quantities flowing back into the markets of the western region, further exerting pressure on prices in the region.

RISKS & CONCERNS

Export to fall
UltraTechs exports accounted for 58% of total exports from India in FY06 at 2.55 million tonnes. Around 22 million tonnes of capacity is being added in Middle East and going forward, we expect a slowdown in exports and average realizations.

Overcapacity in domestic market

India, around 55 million tonnes capacity is expected to come up by FY09, which is expected to put downward pressure on cement prices, impacting realizations.

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FINANCIALS
Sales to grow at healthy pace
The company is set witness strong growth in turnover on account of additional capacity and higher blended cement. The firm trend in cement prices in the South and West will also prop up sales. We expect net sales to grow at a CAGR of 25% to Rs 6,587.15 crore in FY09E from Rs 3,339.33 crore in FY06.

Exhibit 13 : Revenue model assumption

Unit Installed Capacity Clinker Cement Production Clinker Cement Capacity Utilization Clinker Cement Average Sales Realization Domestic - Cement ExportCement Clinker
Source: ICICIdirect Research

FY06 14.44 17

FY07 14.44 17 13.57 14.72 94% 86% 3014 2410 1680

FY08 14.44 17 13.42 16.78 93% 98% 3014 2458 1731

FY09 14.44 21 13.28 19 91.90% 90.50% 3165 2581 1800

Million Tonnes

Million Tonnes 12.73 13.33 % 88% 78% Rs /Tonne 2123 2133 1632

We have assumed average net cement realizations (excluding Rs 30 per tonne on excise) at Rs 151 in FY08 and Rs 158 in FY09. The outlook is based on the demandsupply dynamics as western region is expecting a capacity expansion of 13.5 million tonnes over the next five years and additional supply of around 4 million tonne due to declining exports.

EBIDTA margins to improve

We expect EBIDTA to grow at a CAGR of 55% to Rs 2229 crore in FY09E from Rs 591 crore in FY06. We expect operating margins to decline from 32.9% in FY07E to 30.4% in FY08E on account of the governments move to cap price. However, operating margin will improve to 33.8% in FY09E post commissioning of the new captive power plants.

Exhibit 14: Operating Margin

40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

32.9%

30.4%

33.8%

17.7%

FY'06E
Source: ICICIdirect Research

FY'07E

FY'08E

FY'09E

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Robust growth in net profit

We expect net profit to grow at a CAGR of 62% to Rs 987.79 crore in FY09E from Rs 229.76 crore in FY06 on the basis of improved realizations, capacity addition and cost saving. EPS is expected to zoom to Rs 79.32 in FY09E from Rs 18.46 in FY06.

Exhibit 15: Enterprise value/EBITDA

20.00 15.00 10.00 5.00 0.00 FY06
Source: ICICIdirect Research

17.12

Valuation at the historical low

6.13 6.40

5.03

FY07E

FY08E

FY09E

VALUATION
Indian cement companies including UltraTech are on a higher growth trajectory with sales at over 20% per year compared to 8% for international peers. We expect the Indian cement companies to maintain their volume growth due to capacity additions. Domestic cement stocks appear attractive based on P/E and EV/EBITDA compared to international peers. We expect Indian companies to trade at a premium in the medium-term on account of their higher operating margins of 32% against 15% for international peers. At the current price of Rs 715, the stock trades at an EV/EBIDTA of 6.40x FY08 and 5.03x FY09 estimated EBITDA respectively. We have valued the company considering various multiples like EV/EBITDA, P/E and P/BV and taken an average to arrive at the target price of Rs 890. At a target price Rs 890 Ultratech would be valued at $140 EV/ Tonne for FY09E at an increased capacity of 21.0 million tonnes based on FY09 estimate.

Exhibit 16 : EV/tonnes valuations (Q3FY07)

EV ($ per tonne) ACC Gujarat Ambuja Ultratech India Cement Shree Cement JK Cement Madras Cement
Source: ICICIdirect Research

EBITDA 34% 39% 31% 28% 45% 28% 33%

160 198 137 144 159 65 138

Attractive enterprise value per tonne

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Exhibit 17: Valuation matrix

50% 40%

Shree Cement

Madras Cement Ultra Tech J K Cement ACC India Cement

Gujarat Ambuja Cement

EBITDA Margin

30% 20% 10% 0%

50

100 EV($ per tonne)

150

200

250

Source: ICICIdirect Research

Exhibit 18 : EV/EBITDA multiple valuation methodology

FY09E EV/EBITDA EBITDA (Rs cr) EV Investment+ Cash Total EV Less Debt Total EV Equity capital Equity value per share
Source: ICICIdirect Research

6 2229 13374 71 13445 2360 11085 124.5 890

Assumption is based on expected cyclical downton of cement industry after FY09

Exhibit 19 : Global peer valuation

Global Comparision Adelaide Brighton Anhui Conch Cement Cemex Cimsa CRH Holcim Holcim ltd Indocement Lafarge Semen Gresik Siam Cement Avg Global
Source: Consensus estimate

Currency Price AUD HKD USD TRY EUR PHP CHF IDR EUR IDR THB 3 18 35 9 27 5.8 104.1 4950 106 29200 244 FY07E 14 25 10 11 12 24 14 22 22 13 10 16.1

P/E FY08E 13 20 10 9 11 19 12 16 16 11 9 13.3

EV/EBITDA FY07E 8 12 7 6 8 9 7 11 11 6 9 8.5 FY08E 7 10 7 6 6 8 6 8 8 5 8 7.2

EPS Growth FY07E 7 132 9 -16 18 23 8 12 12 32 8 22.3 FY08E 8 25 1 18 15 29 11 40 40 17 5 19

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Exhibit 20 : Peer group valuation

EPS FY08E ACC Gujarat Ambuja Ultratech India Cement Shree Cement
Source: ICICIdirect Research

EV/EBITDA FY09E 72 10.55 79.34 21.5 165 FY08E 7.5 7 6.40 6.4 6.6 FY09E 8 7.3 5.03 5.85 5.3 FY08E 9.03 9.45 12.20 7.75 6.24

P/E FY09E 9.79 9.86 9.00 7.20 5.49

CMP 705 104 715 155 906

78 11 58.58 20 145

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FINANCIAL SUMMARY
Profit and Loss Account
(Rs Crore) Year to March 31 FY06 FY07E FY08E FY09E Total Income 3339.83 4976.44 5918.29 6587.15 ................................................................................................................................................. % change 49% 19% 11% ................................................................................................................................................. EBITA 591.19 1636.39 1796.47 2229.13 ................................................................................................................................................. % change 177% 10% 24% ................................................................................................................................................. Depreciation 216.03 278.44 468.65 531.23 ................................................................................................................................................. EBIT 375.16 1357.94 1327.82 1697.9 ................................................................................................................................................. % change 27% 22% 26% ................................................................................................................................................. Interest 89.64 116.93 222.98 201.47 ................................................................................................................................................. EBT 285.52 1241.01 1104.84 1496.43 ................................................................................................................................................. % change 335% -11% 35% ................................................................................................................................................. Tax 60.51 409.53 375.53 508.64 ................................................................................................................................................. As % of EBT 33 33.99 33.99 .................................................................................................................................................
Earning to decline due to less pricing power of industry

PAT 229.76 831.48 729.3 987.79 ................................................................................................................................................. % change 262% -12% 35% ................................................................................................................................................. No. of Shares (crore) 12.45 12.45 12.45 12.45 ................................................................................................................................................. EPS (Rs.) 18.46 66.79 58.58 79.34 ................................................................................................................................................. DPS (Rs.) 2.5 4 2.5 2.5 ................................................................................................................................................. CEPS (Rs.) 35.43 89.15 96.22 122.01

Balance Sheet
(Rs Crore) Year to March 31 FY06 FY07E FY08E FY09E Share Capital 124.49 124.49 124.49 124.49 ................................................................................................................................................. Reserves & Surplus 913.78 1688.49 2382 3334.01 ................................................................................................................................................. Secured Loans 1221.93 1233.88 2599.68 2391.18 ................................................................................................................................................. Unsecured Loans 229.9 169.9 139.9 94.9 ................................................................................................................................................. Current Liabilities & Prov. 1133.01 1022.63 1012.99 1047.49 ................................................................................................................................................. Total 3623.11 4239.39 6259.07 6992.07 ................................................................................................................................................. Uses of Funds ................................................................................................................................................. Net Block 2537.17 2308.73 3430.08 3428.85 ................................................................................................................................................. Capital Work In Progress 141.03 1021.03 2029.03 2694.03 ................................................................................................................................................. Cash 61.6 130.32 37.7 63.92 ................................................................................................................................................. Trade Receivables 172.55 221.81 231.3 237.97 ................................................................................................................................................. Loans& Advances 158.8 173.8 139.8 132.8 ................................................................................................................................................. Inventory-other 551.96 383.7 391.15 434.5 ................................................................................................................................................. Total 3623.11 4239.39 6259.07 6992.07

Fund raising for capacity expansion

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Cash Flow Statement

(Rs Crore) Year to March 31 FY06 FY07E FY08E FY09E Profit after tax 229.8 831.48 729.3 987.79 ................................................................................................................................................. Depreciation 216 278.44 468.65 531.23 ................................................................................................................................................. Change in working cap. 105.8 -41.39 -32.58 -1.48 ................................................................................................................................................. Operating cash flow 551.6 1068.53 1165.37 1520.51 .................................................................................................................................................
Capex program

Increase/(Decrease) in Gross Block 216.16 50 1590 530 ................................................................................................................................................. Increase/Decrease in Cap. WIP 92.85 880 1008 665 ................................................................................................................................................. Increase/(Decrease) in Total Inv. 46.26 -35 -40 10 ................................................................................................................................................. Cash Flow from Inv. -355.27 -895 -2558 -1205 ................................................................................................................................................. Payment of dividend 35.48 56.77 35.79 35.79 ................................................................................................................................................. Increase in total term Liabilities 155.5 -48.05 1335.8 -253.5 ................................................................................................................................................. Cash Flow from Fin. -191 -104.81 1300.01 -289.29 ................................................................................................................................................. Opening cash balance 56.3 61.6 130.32 37.7 ................................................................................................................................................. Closing cash balance 61.6 130.32 37.7 63.92

Ratios
Year to March 31 FY06 FY07E FY08E FY09E EPS (Rs) 18.46 66.79 58.58 79.34 ................................................................................................................................................. Book Value Per Share 83.40 145.62 201.32 277.79 .................................................................................................................................................
Attractive valuation

Enterprise Value (Rs crore) 10118.88 10034.80 11506.24 11216.52 ................................................................................................................................................. Enterprise Value/Sales 3.06 2.09 1.96 1.71 ................................................................................................................................................. Enterprise Value/EBITDA 17.12 6.13 6.40 5.03 ................................................................................................................................................. Market Cap/Sales 2.69 1.81 1.52 1.36 ................................................................................................................................................. Price/Book Value 8.57 4.91 3.55 2.57 ................................................................................................................................................. Operating Margin (%) 17.70% 32.88% 30.35% 33.84% ................................................................................................................................................. Net Profit Margin (%) 6.88% 16.71% 12.32% 15.00% ................................................................................................................................................. Return On Net-Worth 21.83% 58.32% 33.77% 33.12% ................................................................................................................................................. Return On Capital Employed 14.75% 47.59% 31.38% 30.35% ................................................................................................................................................. Debt/Equity 1.40 0.77 1.09 0.72 ................................................................................................................................................. Current Ratio 0.68 0.76 0.69 0.73 ................................................................................................................................................. Quick Ratio 0.35 0.51 0.40 0.41 ................................................................................................................................................. Assets Turnover Ratio 1.3 2.1 2.1 1.9 ................................................................................................................................................. Debtors Turnover Ratio 22.2 25.2 26.1 28.1 ................................................................................................................................................. Inventory Turnover Ratio 5.5 6.8 9.8 8.8

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USERS GUIDE
Assets The resources owned by a company that is expected to provide benefits to its business. Total assets are shown in Rupees crores and represent the last day of the specified reporting period. Asset Turnover This figure represents how many dollars in revenue a company has generated per dollar of assets. It is calculated by dividing total revenues for the period by total assets for the same period. In comparison, the industry average and S&P 500 are shown for the most recent fiscal year. Asset turnover can give an indication of how efficient a company is. A high asset turnover, which expresses how many times a company sells-or turns over-its assets in a year is a sign of high efficiency. Balance Sheet Balance sheet represents how much a company owns (equivalent to its assets), how much it owes (equivalent to its liabilities) and the difference between the two i.e. equity, which is part owned by shareholders. Book Value Book value is also known as equity or net worth which is the same as total assets minus total liabilities. Book value per share is net worth divided by shares outstanding and shows how much of equity is represented by each share of stock Capital Expenditure Capital expenditure is the money invested by the company in the future growth of its business and includes land, plant, equipments, intellectual property rights etc. Cash Flow Cash Flow shows the movement of cash in and out of a business from day-to-day operations and other indirect effects, such as capital expenditure, tax and dividend payments etc. Cash flow adjusts the income figures to a cash basis after including operating differences such as depreciation, but before adjusting for investments (such as purchases of plants or equipment) or financing. Current Assets Current assets include cash and anything that is expected to be converted into cash within twelve months of the balance sheet date. Current assets when used in comparison with current liabilities is a good measure of companys short term liquidity. Current Liabilities Current liabilities are liabilities which the company expects to pay within twelve months of the balance sheet date on account of trade creditors, dividend etc. Current liabilities when used in comparison with current assets is a good measure of companys short term liquidity. Current Ratio Current ratio is equal to current assets divided by current liabilities and is a measure of companys liquidity of a business, i.e. its ability to meet its short-term obligations. Also referred to as the Liquidity Ratio. Debt to equity ratio Debt/equity ratio equals companys total debt (including short term and long term obligations) divided by shareholders equity (also known as networth). This ratio indicates the amount of liabilities the business has for every rupee of shareholders equity. This ratio is a good indicator of a businesss capacity to repay its creditors and is considered very important by most term lenders. Depreciation Depreciation is a non cash charge taken against companys profit for the deterioration of its asset value over its useful life Dividend Portion of profits that a company distributes to its shareholders. Dividend payout ratio indicates percentage of the earnings paid to shareholders in cash. Dividend Yield % The dividends per share of the company over the trailing oneyear period as a percentage of the current stock price Earnings per share (EPS) EPS is the amount of profit a company earns from its continuing operations in a given year divided by the average number of shares outstanding. EBIDTA EBIDTA (Earnings before interest depreciation and amortization) is calculated by looking at earnings before the deduction of interest, tax, depreciation amortization expenses. EBIDTA is useful in analysis companies that have large amounts of fixed assets which are subject to heavy depreciation charges (such as manufacturing companies) or in the case where a company has a large amount of acquired intangible assets on its books and is thus subject to large amortization charges (such as a company that has purchased a brand or a company that has recently made a large acquisition). Enterprise Value (EV) EV is a measure of what the market believes a companys ongoing operations are worth. Enterprise value is equal to (companys market capitalization + debt - cash and cash equivalents). EV is of significant importance to both individual investors and potential acquirers considering a takeover of the company. EV/EBITDA EV/EBITDA is the enterprise value of a company divided by earnings before interest tax depreciation and amortisation. EV/ EBITDA has an edge over P/E ratio as it is unaffected by

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companys financing structure as it compares the value of the business, free of debt to earnings before interest. If a business has debt, a buyer of that business clearly needs to take that debt into account in valuing the business, which the EV reflects. Forward P/E A stocks current price divided by the EPS estimate for the next fiscal year. This ratio indicates how cheap or expensive a stock is as compared to forward earnings estimates. The lower the forward P/E, the cheaper the stock. Intangible assets Intangible assets as distinguished from tangible assets includes items like goodwill, trademark, or patent and do not have any physical existence Free Reserves Free reserves are profits retained by a company in its books and is available for distribution to shareholders. These reserves do not include capital redemption reserve, or asset revaluation reserve. Leverage Leverage is companys long-term debt in relation to equity in its capital structure. The larger the long-term debt, the higher the leverage. Leveraged Company A company which has higher proportion of debt in its capital structure. Market Capitalization Market capitalization represents the total market value of the company at the current price, of the total number of equity shares issued by a company. Net Profit The final profit of a company, after all deductions including interest, depreciation and taxes. It is also knows as the bottom line. Net profit margin Net profit margin is a measure of a companys profitability and efficiency and is calculated by dividing net profits by sales. P/E Ratio (or Price-Earnings Ratio) Market price per share divided by the firms earnings per share. It is the most commonly used valuation tool and shows how much investors are willing to pay for a rupee earned by the company. PEG Ratio PEG ratio is arrived by dividing forward P/E of a stock by its projected EPS growth. PEG ratio represents how much the investors are paying for companys growth. Price/Book Ratio Price/Book Ratio compares a stocks market value to the value of total assets less total liabilities (book). It is also called market-tobook and still is a popular tool and measures tangible assets of the company.
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Quick Ratio The quick ratio is defined as current assets minus inventories and then divided by current liabilities. It measures the liquidity of a company and indicates whether the company can meet its obligations from the current assets. It is also known as the acid test ratio. Return on Equity (ROE) or Return on Networth (RONW) Return on equity is an important financial ratio & indicates how well the company firm has used reinvested earnings to generate additional earnings. Return on Assets (ROA) Return on Assets is equal to the net income divided by assets and indicates how much profit a company generates on its total assets. Unlike ROE, ROA does not get impacted by the firm taking in more debt. Return on capital employed (ROCE) ROCE is a fundamental financial performance measure and is arrived by dividing profit before interest against the money that is invested in the business. (profit before interest and tax/capital employed x 100) which indicates how much profit the company is generating at the operating level. Revenue Growth Revenue growth represents the rate of revenue growth over the trailing one-year period and gives a good picture of the rate at which companies have been able to expand their businesses. Retained Earnings Retained earnings are part of a companys earnings which is not distributed as dividends but held back and accumulated for its growth. Share A share is one unit of ownership of a company. Shareholders funds A measure of the shareholders total interest in the company represented by the total share capital plus reserves. Tangible Assets Tangible assets are assets that have a physical existence, like cash, gold, real estate, machinery, etc. Total Revenue Revenue is a measure of how much money a company has brought in within a given period. It is used in the context of revenue figures for previous years and quarters and is a common way to measure the size of a company. Yield Yield is arrived at by dividing the annual dividend per share by the current stock price and displayed as a percentage.

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RATING RATIONALE
ICICIdirect endeavours to provide objective opinions and ecommendations. ICICIdirect assigns ratings to its stocks according to their notional target price vs current market price and then categorises them as Outperformer, Performer, Hold, and Underperformer. The performance horizon is 2 years unless specified and the notional target price is defined as the analysts valuation for a stock. Outperformer: 20% or more; Performer: Between 10% and 20%; Hold: +10% return; Underperformer: -10% or more.

Harendra Kumar

Head - Research

harendra.kumar@icicidirect.com

ICICIdirect Research Desk ICICI Brokerage Services Limited, 2nd Floor, Stanrose House, Appasaheb Marathe Road, Prabhadevi, Mumbai - 400 025 research@icicidirect.com

Disclaimer
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Brokerage Services Limited (IBSL). The author of the report does not hold any investment in any of the companies mentioned in this report. IBSL may be holding a small number of shares/position in the above-referred companies as on date of release of this report. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This information may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. IBSL and affiliates will not accept any liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. IBSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IBSL and its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

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