Cement Elra

Closer to dawn
Ravindra Deshpande ravindra.deshpande@elaracapital.com +91 22 4062 6805 Ravi Sodah ravi.sodah@elaracapital.com +91 22 4062 6817
India Cement
9 November 2010 Elara Securities (India) Private Limited
India | Cement
9 November 2010
Initiating Coverage
Cement
Closer to dawn
Slower capacity addition to maintain demand-supply balance Indian cement industry witnessed massive capacity additions during the past three to four years on the back of a strong pricing regime. The nameplate cement capacity in the country went up by nearly 38% from FY08 till FY10. However, the same was reciprocated by a demand growth of only 20% which pulled down utilizations and therefore, the cement pricing as well as profitability of the industry. Lower profitability and cash inflows slowed down the capacity additions. Besides, the hurdles in acquiring land for greenfield projects as well as obtaining approvals and clearances for mining have taken a toll on capacity additions. Therefore, we believe, capacity utilizations in the sector would start improving post FY12 with the decelerating pace of capacity additions. Pricing: The worst is behind us We believe the actual cement pricing will depend upon the demand supply equations in the region, actual cost of production and players individual as well as collective actions. However, we expect the worst to be over for the cement pricing considering the improving demand supply equations and the resultant utilization levels in the industry. Although, we expect utilization levels to drop again in the Q2&Q3 FY12, we also assume that the higher cost push might arrest the fall in prices. Our RoCE based methodology to forecast prices, denotes that prices will rise the maximum in the Western region. Upside in large caps limited, mid-caps flaunt superior potential We expect the upcycle in the cement cycle to be at least one year away. Our historical valuation analysis as well as comparative analysis suggests that current valuations enjoyed by large cap players are close to the discounted upcycle valuations. Hence, we believe the upside in these large cap stocks will be limited. However, mid-cap players are trading way below their distress case valuations hence warrant a favorable risk reward ratio even considering the regional risk. Sluggish capacity additions
350 300 (Million tonne ) 250 200 150 100 50 0 FY11E FY12E FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 18 15 12 9 6 3 0 (Million tonne )
Global Markets Research
Effective capacity (LHS) Increase in effective capacity (RHS) Source: CMA, Elara Securities Estimates
All India Demand & Supply(mn tonnes)

All India Year end capacity Effective Capacity Dispatches Capacity utilization (%) FY09 FY10 FY11E FY12E FY13E 212 205 181 89 247 232 200 86 276 270 216 80 301 296 238 81 318 310 263 85
Source: CMA, Elara Securities Estimates
Cement prices improve in major cities

330 (INR per bag) 280 230 180 130 Apr-08 Apr-09 Apr-10 Jul-08 Jul-09 Oct-08 Oct-09 Jul-10 Oct-10 Jan-09 Jan-10 FY10
Mumbai Chennai
Delhi Hyderabad
Kolkata
Source: CMIE, Elara Securities Research
Valuation
With a sharp increase in cement prices in past two months, we believe that earnings of cement companies will bottom out in Q2FY11. We also expect the cement demand to gradually improve on the back of a strong construction and infrastructure demand. However, we believe the valuations of frontline stocks have already factored in the potential up-cycle in the sector. Yet `value buy opportunities are still available among mid-cap cement stocks.
Mid caps: Valuation gap swells
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY11 FY12 20 0 (20) (40) (60) (80) (100)
Valuation disc for mid caps EBITDA/tonne disc Source: Elara Securities Estimates
Key Financials
MCAP CMP Target Upside INR bn USD mn (INR) (INR) (%) UltraTech Reduce 310 6,976 1,122 1,139 1.5 Ambuja Sell 226 5,099 148 119 (19.8) ACC Accumulate 200 4,495 1,062 1,123 5.7 India Cements Accumulate 36 803 116 131 12.5 Shree Cem Accumulate 75 1,698 2,165 2,501 15.5 JK Cement Buy 12 264 168 220 31.4 Orient paper Buy 12 265 61 87 41.7 JK Lakshmi Buy 8 174 63 78 24 Source: Company, Elara Securities Estimates 1 USD= INR44.4 Company Rating EV/EBITDA(x) FY11E FY12E 10.4 8.5 9.8 9.2 10.2 8.0 7.9 4.2 6.6 4.8 6.7 5.2 3.4 2.9 3.8 3.6 P/E(X) FY11E FY12E 17.5 15.3 17.2 16.9 16.7 15.0 18.4 10.7 19.2 12.6 16.1 8.9 6.0 5.8 6.4 4.8 EV/tonne(USD) FY11E FY12E 144 138 184 180 131 122 62 56 98 82 54 51 50 40 47 55 RoE(%) FY11E FY12E 20.9 18.4 18.8 16.8 18.5 17.9 5.2 7.8 19.4 24.1 6.5 10.8 23.2 19.7 11.1 13.8
Elara Securities (India) Private Limited
(%)
Cement
Table of Content
Executive Summary The worst is behind us Demand to quicken from H2FY11.. Pricing: Downside remains limited. Comparative analysis Valuation & Recommendation 3 5 7 10 12 20
Company Section
Ultratech Cement Restructuring priced in.. Ambuja Cements Melody from clinker.. ACC In the region of comfort India Cement Warming South winds Shree Cement Regional champ at reasonable value JK Cement Grey eminence.. 69 63 53 43 33 23
Orient Paper Lord of low cost, master in a downturn. JK Lakshmi Cement Cementing its true place.. 81 75
Cement
Executive summary
Capacity additions to slowdown on lower prices After adding record capacities addition of a ~ 87mn tonnes between FY07 and FY10, the country has witnessed a marginal slowdown in the pace of addition. Primarily, the capacity additions were the result of higher operating cash flows on the back of high cement pricing regime. However, due to cost push and low cement prices, operating cash flows of cement companies have come under pressure resulting in a slowdown in new project announcement. Besides, long procedures related to the acquisition of land and obtaining environment clearances have delayed the commissioning of many cement plants. Thus, after capacity additions of whooping ~35mn tonnes by FY10, the cement industry is expected to add ~29mn tonnes in FY11, ~24mn tonnes in FY12 and 17mn tonnes in FY13. Between FY10FY13, the industry is expected to add 71mn tonnes while in the same period, the demand is expected to increase by only 63mn tonnes. Demand to accelerate in second half Growth in cement demand has been sluggish (4.9%) during the first half of FY11 due to heavy monsoons and a higher base effect. We believe the demand will accelerate from H2FY11 onwards on the back of a higher demand from infrastructure and construction sectors. As we approach the last two years of XIth Five Year Plan, we believe there will be a higher thrust on the infrastructure since the Government plans to spend ~52% of the target expenditure in the last two years. Buoyant order book of construction companies also indicate that construction activities will pick up in the near future. On the back of the firm demand from the user industry, we expect the demand to grow at 8% in FY11, followed by 10.4% in FY12 as well as in FY13. Therefore with the moderating pace of capacity additions and a steady demand growth, we expect capacity utilizations in the industry to gradually improve going ahead. We consider that the pan India capacity utilizations will improve to 81% in FY12 only to better to 85% in FY13. However, we expect a dip in capacity utilizations in monsoons of FY12 (Q2 & Q3 of FY12). Pricing : The worst seems to be over We believe that in terms of pricing, the worst is behind us. A gradual improvement in utilization levels on the back of an enhancement in cement demand (supported by an increase in cost of production) will prevent a sharp fall in prices in future. We believe, Q2FY11 is likely to be the worst quarter for cement producers as low cement prices in Q2FY11 had resulted in a negative EBITDA/tonne for some Southern
We have built in our estimates, a price increase of ~INR25/bag in H2FY11 from Q2FY11 levels. For FY12, we have built in a decline of ~INR17/bag over H2FY11 levels (On annual basis, our cement prices for FY12 are 23% higher than FY11). Scenario to look up from FY13; Upcycle a year away As discussed earlier, we expect utilizations to gradually improve from FY12 before reaching a level of 85% in FY13. The demand on the other hand, is expected to grow at a steady pace after suffering hiccups in the first half of FY11. The XIth 5 Year Plan envisages an investment of INR 10,750 bn with a focus on infrastructure activities which will ensure a steady demand growth for cement. Therefore, we believe that the stable pace in demand and lack of strong capacity additions will create a healthy cement market in the country. Little upside in large caps, value lies in midcaps For valuation of cement companies, we have used EV/tonne based methodology as the earnings based valuations have historically failed to provide a fair picture of the stock performance. The entire large cap pack is already trading at a premium to its replacement cost as well as close to its peak cycle EV/tonne valuations. As we believe, the upcycle is still one year away, for valuing large cap players, we have discounted the average bull cycle EV/tonne multiples at a WACC of 13%. However, for mid cap players, we have used a distress case EV/tonne valuation of USD62/tonne, considering the regional risk. Historically, mid cap players have traded at a discount to the large cap peers as the profitability of mid caps too was lower than their large cap counterparts. But due to the cost cutting initiative undertaken by mid cap cement
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players and an RoCE of well below WACC for majority of players. Therefore, we expect things to perk up going ahead as cement companies are likely to opt for price increases rather than higher volumes. Earnings of cement companies are more sensitive to pricing changes (~4% variation with 1% change in pricing) than volume changes (~2% change with a 1% change in volume sales). Due to the mature behavior of cement players, prices have already gone up by INR20 -100 per bag in the past two months. Further, discount in the cement price in trade and non-trade has also been reduced from INR40 per bag to INR20/bag. We believe, the concerted action of the players might not be a long term phenomenon, but with improving capacity utilizations and a strong cost push, cement prices might have a little downside from the current levels.
Cement
players, the EBITDA/tonne discount of these companies has gone down from 63% in the last down cycle to 10% in FY10. However, the valuation gap has increased from 30% to 56% during the same period. We believe that the sharp valuation gap between frontline and midcap cement companies is unjustified. Hence, we believe the mid cap players offer more upside than their large cap peers while the risk reward ratio is more favorable to mid caps as these are trading at a significant discount to their large cap peers as well as the replacement cost of cement assets. We initiate our coverage on large cap cement stocks with Accumulate rating on ACC (TP: INR1,123;Upside:6% ) Sell rating on Ambuja (TP: INR119;Upside:-20% ) and Reduce on UltraTech (TP: INR1,1139; Upside: 2% ). Considering the potential upside, the IPL franchise might hold for India Cements, we initiate our coverage with a Accumulate recommendation (TP: INR136; Upside: 13%). We have considered the minimum bid price for Indian Premier League (IPL) 4 franchise as a valuation for Chennai Super Kings team. Any upside in the same will warrant an upside for the India cements stock. We continue to maintain our Buy rating on Orient Paper (TP: INR87; Upside: 42%), JK Lakshmi (TP: INR78; Upside: 24% ), JK Cement (TP: INR220; Upside: 31%), considering the below distress case valuations the stocks are currently trading at and the favorable risk reward ratio these stocks offer. We have assigned Accumulate rating on Shree Cements (TP: INR2,501; Upside: 16%), taking into account its superior fundamentals and low valuations.
Cement
The worst is behind us

Capacity additions decline as unfavorable pricing, land acquisition issues crop up Demand subdued in H1FY11; to firm up from H2FY11 on higher infra spend Large caps not attractive, but mid caps in favorable risk reward zone
Capacity addition in listless mode

Riding on the firm cement prices during the FY06 to FY08, cement companies had generated huge operating cash flows. The period witnessed a demand growth of ~10% CAGR, matched by only ~6% CAGR in capacity additions. The increased capacity utilizations during the period augured well for a high cement pricing regime. Cement prices in fact surpassed the inflation during the period. Exhibit 1: Cement prices shoot up during FY06-10
260 (INR per bag) 220 180 140 100 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Besides the land acquisition, procedures related to forest as well as environment clearances are likely to delay the implementation of the already announced greenfield projects. Even brownfield projects have faced delays of at least three to six months as seen by the precedents. After record nameplate capacity additions of ~35mn tonnes in FY10, the industry is expected to add ~29mn tonnes in FY11 followed by ~24 mn tonnes in FY12 and 17 mn tonnes in FY13. Going forward, the industry will add another ~46 mn tonnes of capacity over next 32 months (ie: from August 2010 till March 2013), putting the total capacity at 318 mn tonnes by the end of FY13. So considering the slowing pace of capacity additions, increasing timelines for completion of greenfield as well as brownfield projects and the current depressed profitability enjoyed by the sector, we believe the capacity additions will not reach the peak levels of FY09 to FY11. We believe any new plant announcement will take at least two years (for brownfield) and at least three to four years (for greenfield) to come on stream. Therefore, we believe the demand supply equations will improve only gradually. Exhibit 3: Capacity addition - Missed deadlines
Company Capacity Type (mn tonnes) 2.4 State Initial Actual timeline Sep-10
Source: CMA, Elara Securities Research
On the back of huge increase in the operating cash flows and favorable demand supply scenario, the industry lined up huge capacity addition programs. As was evident, the country witnessed highest capacity additions during FY09 and FY10. The country added a total capacity of ~63 mn tonnes in these two years. Exhibit 2: Operating cash flows step up in FY07-10
50 40 (INR bn) 30 20 10 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Strong operating cash flows generated by the industry
Orient Paper
Brownfield Maharashtr Mar-10 a /Andhra Pradesh
Madras Cement GrasimShambhupura: Clinker Grinding
4,000 TPD Brownfield Jayanthipur Sep-09 kiln. am 4.4 Brownfield Rajasthan
Jan-10
Source: Capitaline, Elara Securities Research
Q4FY08 Q1FY10 Q4FY08 Q2FY09 Q4FY08 Q1FY10
The higher capacity additions coupled with financial slowdown, led to subdued cement pricing. With such a subdued cement pricing and high cost regime, operating cash flows of cement companies have been under pressure since FY10. Despite a steady growth in the demand, the oversupply scenario has become inevitable
Source: Elara Securities Research
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in the domestic cement market in the medium term. Hence, companies have been cautious in going ahead with the cement capex which curtailed the pace of capacity additions in the country. Some of the cement companies (like Shree Cement, JK Lakshmi and Orient Paper) have utilized their accumulated cash flows to diversify into other businesses like merchant power. This was reflected in the capacity addition announcements as the industry passed the euphoria stage.
Cement
Exhibit 4: Capacity addition momentum down
350 (Million tonne s) 300 250 200 150 100 50 0 FY11E FY12E FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 Pace of capacity addition slows down 18 15 12 9 6 3 0 (Million s tonnes)
prices crashed in Hyderabad and Chennai, down from the peak by ~40% and 35% respectively in Aug10 before recovering sharply in month of September and October. Due to the oversupply scenario in the region and reduced profitability of cement players, the pace of new capacity additions has slowed down. Hence, out of new capacities that are expected to hit the market by FY13, the share of South has reduced to mere 25%. Hence, we believe capacity utilization in South will increase to 77% in FY13. Exhibit 6: Capacity adds more secular by FY13
South 25% North 22%
Effective capacity (LHS) Increase in effective capacity (RHS)

South to witness massive capacity additions The new supply coming on stream has been skewed towards the Sothern region due to huge limestone reserves, strong demand growth between FY06 to FY09, particularly in Andhra Pradesh (South grew at a CAGR of 12.8%, Andhra Pradesh grew at CAGR of 20.4%), and larger size of the market (south is the largest market in India and even bigger than Russia, Brazil. Japan, and South Korea). Exhibit 5: South faces brunt of excess supply
North 26%
East 15% Central 20%

Source: Elara Securities Estimates
West 18%
Exhibit 7: Region wise capacity additions (mn tonnes)

Year end capacity FY10 +Capacity additions North Eastern Southern 54 13.8 68 1.8 70 4.5 74 20.0 35 2.2 37 2.1 39 4.8 44 9.0 93 9.3 102 8.3 110 2.5 113 20.0 Western Central 37 1.0 38 5.9 43 2.5 46 9.0 29 3.0 32 6.4 38 2.9 41 12.0 All India 247 29.1 276 24.4 301 17.2 318 71.0
South 51% West 7% Central 6%
FY11 +Capacity additions FY12 +Capacity additions FY13 Total
East 10%
During Apr08-Aug10, a whopping 51% of new capacities that came on stream were in South India. Due to such massive capacity additions, utilizations in South has declined from 94% in FY08 to 74% in FY10. Cement
Cement
Demand to quicken from H2FY11
First two quarters register below average growth After reporting an impressive growth of 10.1% in FY10, the cement demand has decelerated to only 4.8% YoY in Apr Sep10 period due to seasonal weakness and a higher base. The delayed monsoons last year accounted for the higher base in Q2FY10 as compared to the Q2FY11 consumption. Apart from this, flood like situation in few states and near completion of some of the major projects (such as Common Wealth) also impacted the cement demand. Scenario brighten up on infra, real estate push We believe the cement demand will accelerate from H2FY11 onwards, driven by infra spend and a recovery in the real estate sector. We believe the last two years of the current Five Year Plan (FY11 and FY12) will provide enough impetus to infrastructure investments. Similarly, higher residential as well as commercial construction activities backed by Government schemes like Indira Away Yojana (IAY) and Interest Subsidy scheme will consume higher cement in the next two years to come. As we approach the last two years of XIth Five Year Plan (FY11 & FY12), we expect nearly INR10,750bn to be spent on infrastructure activities. The total planned expenditure of the entire XIth Plan is INR20,562bn and nearly 52% of the same will be spent in the last two years. Hence assuming that only 70% of the target expenditures materialize in the last two years (FY11 & FY12) of the Plan, we expect cement demand of ~154mn tonnes to be generated due to infrastructure activities. Exhibit 8: Infra spending to sustain high consumption
12,000 10,000 (INR bn) 8,000 6,000 4,000 2,000 FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY08 FY09 FY10 6 7 7 8 9 9 10 10 10 10 12 10 8 6 4 2 0 (%) (mn tonne)
Exhibit 9: Infra-related spending to be strong

200 150 100 50 0 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E FY16E FY17E 40 30 20 10 0 (%)
Projected cement demand (LHS) % of total Infra spending projected each year (RHS)
Source: Planning Commission, Elara Securities Research
Exhibit 10: Share of infra in total demand to go up

Year FY11E FY12E FY13E Projected cement demand from infra (mn tonnes) 69 85 92 Total projected cement demand (mn tonnes) 216 238 263 % of total 32 36 35
A sizable chunk of these infrastructure investments has been on roads in these five year plans. The Government has planned to invest INR3,141.5bn (USD69.8bn) on roads and bridges in the XIth Five Year Plan. Of the total investments, ~47% is planned to be spent in the last two years (FY11 and FY12) of the plan. A major thrust has been on building national highways which consume higher cement than other roads. A sum of 22,921km of national highways are being planned to be built in three years from FY10 to FY12. We believe, the average execution per day of national highways will increase as we approach the end of the XIth Plan. According to our infrastructure analyst, the execution per day is likely to be ~15.2km/day in FY11 which will increase to 16.8km/day in FY12 and 19.2km/day in FY13.
XIth Plan: Investments in road sector

Exhibit 11: Roads to gather momentum (INR bn)
INR bn FY08 FY09 FY10 FY11E FY12E Total
Centre 183.2 194.5 206.7 226.2 263.0
State 175.3 181.5 188.9 206.1 248.2
Private 159.7 171.9 196.4 251.4 288.5
Total 518.2 547.9 592.0 683.7 799.7 3,141.5
Investment in infrastructurein (LHS) Investment as % of GDP(RHS)

Source: Planning Commission, Elara Securities Estimates
In the XIIth Five Year Plan, the Government has planned to spend ~INR40,750bn on infrastructure activities. Hence even post FY12, we expect the infra related cement consumption to remain strong.
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Exhibit 12: Execution visibility high till FY15
Average Execution per day FY10 FY11E FY12E FY13E FY14E FY15E FY16E FY17E
Source: Planning Commission, Elara Securities Estimates
Exhibit 15: Credit flow to infra, construction soars

KM/day 8.7 16.8 19.2 19.5 16.1 4.5 1.6 (INR bn) 15.2 460 440 420 400 380 360 340 28-Aug-09 22-May-09 21-May-10 20-Nov-09 26-Feb-10 4,500 4,000 3,500 3,000 2,500 (INR bn)
Leading indicators show that construction activities will pick up sharply in years to come. The total outstanding order book of the major construction players was up 40% YoY at the end of Q1FY11. The order book to bill ratio has also been consistently on an uptrend. At the end of Q1FY11, the average order book to bill ratio of major construction players stood at 3.2x (as compared to last years average of 2.4x). Furthermore, credit flow to construction and infrastructure sectors has shown a positive trend. As of 22nd May, 2010, the total loans outstanding to construction and infrastructure sectors were up (YoY) 16% and 44% respectively. Exhibit 13: Construction order book on an uptick
400 300 (INR bn) 200 100 3,000 2,500 (INR bn) 2,000 1,500 1,000 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 New order during the quarter (LHS) Total order book (RHS)
Construction(LHS)
Infrastructure(RHS)
The real estate sector is also showing signs of recovery which has been visible from the revenue trends of real estate majors which has increased 65% YoY in Q1FY11. The credit flow to the housing sector also indicates improvement in the housing volume. An indication of this can be seen from the Q2FY11 outstanding loan book of HDFC Limited which was up 19% YoY. Exhibit 16: Real estate revenues recover
40 30 (INR bn) 20 10 0 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Sep-10 Jul-10
Exhibit 17: HDFCs loan book remains buoyant

1050 1000 (INR bn) 950 900 850 Sep-09 Jul-09 Mar-09 Jan-10 May-09 Mar-10
Exhibit 14: Build-up in order-book seen for majors

3.4 Order book to sales ratio(x) 3.2 3.0 2.8 2.6 2.4 2.2 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 2.4 2.5 2.8 3.1 3.2
Source: HDFC, Elara Securities Research
May-10
Nov-09
Cement
Past trends indicate that with rising income levels, people are shifting from semi-pucca and kutccha houses to pucca houses which create demand for cement. Besides, incentives provided by the Central as well as state Governments are likely to provide an impetus for the rural and semi-urban housing. The Planning Commission estimates a growth of ~4% CAGR (2001 to 2012) in pucca houses denoting higher cement consumption. Central Government initiatives like Indira Away Yojana (IAY) and several state Government initiatives like construction subsidy (Gujarat, Himachal Pradesh, Punjab, Jharkhand etc) have provided incentives for pucca houses which is evident from the trends witnessed in the past. With the Governments extension of the 1% interest subvention on a housing loan of INR1mn (where the cost of the house does not exceed INR2mn) and increased spending in the Rajeev Awaas Yojana (RAY) by 700% from the last the financial year to INR12.7bn for FY11, we believe that housing demand will continue to remain strong in rural areas. Exhibit 18: Shift to Pucca houses gathers speed
Year 1961 1971 1981 1991 2001 Households Total Housing (mn) Stock (mn) 14.9 19.1 29.3 40.7 55.8 13.3 18.5 28 39.3 50.95 Pucca Semi-pucca (mn) (mn) 6.44 11.8 18.09 29.79 41.17 4.9 4.35 6.8 6.21 8.08 Kutcha (mn) 1.96 2.35 3.11 3.3 1.7
have depended upon the GDP multiplier factor to estimate the cement demand in the country. For the last five years, the cement consumption in India has grown at an average multiplier of 1.3 x GDP growth. Over the past ten years, the same has shown a growth of 1.1x GDP, which was due to a negative growth in cement consumption in FY01. Exhibit 20: Cement to GDP multiple to stay constant
Avg. GDP to cement consumption multiple of last 15 years is 1.3X Cement consumption to GDP Multiple GDP YoY Growth(%) 20 15 10 5 0 (5) 1.11.51.02.01.22.4 1.72.30.71.11.11.01.11.21.4 r=0.94 4 3 2 1 0 (1)
(0.4) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Cement consumption growth to GDP multiple (RHS) GDP Growth (LHS) Cement Consumption Growth (LHS)
Source: CMA, CMIE,Elara Securities Research
Considering the slowdown in the cement demand due to factors mentioned earlier in this report, we have used the GDP multiplier of 1.0x for FY11. However, taking into account the fact that we are approaching last two years of XIth Plan and the buoyant activities expected in the commercial as well as residential construction spaces, we have relied on a multiplier factor 1.3x GDP for estimating the demand growth in FY12 and FY13. Accordingly, we expect the cement demand to grow by 8% in FY11 and 10.4% in FY12 -FY13 period. Hence, we estimate the cement consumption to reach a level of 263mn tonnes by the end of FY13, registering a CAGR of 9.6% over the next three years. Exhibit 21: Demand estimates at different multiples
FY11E Real GDP YoY growth (%) Bull Case Multiple Cement to GDP Multiple (x) Cement Demand growth (%) Capacity utilization (%) Base case Multiple Cement to GDP Multiple (x) 1.2 9.2 81 1.0 8.0 80 0.9 6.8 79 1.5 12.0 83 1.3 10.4 81 1.1 8.8 78 1.5 12.0 88 1.3 10.4 85 1.1 8.8 81 8.0 FY12E 8.0 FY13E 8.0
The private sector has also maintained its capex buoyant. At the end of Q1FY11, value of projects under implementation in the private sector stood at 59 trillion, up by 17% (YoY). Exhibit 19: Pvt capex growing rapidly
60 55 55 (INR trillion) 50 45 40 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
59
50
51
52
53
44
Cement Demand growth (%) Capacity utilization (%) Bear Case Multiple Cement to GDP Multiple (x) Cement Demand growth (%) Capacity utilization (%)
Domestic demand to grow at a CAGR of 9.6% Historically, the cement consumption has shown a strong direct co-relation with the countrys GDP growth. The correlation between the two was as high as 94% between FY05 to FY09. Due to lack of reliable data, we
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Cement
Capacity utilization rebound in FY12 In first eight months of CY10 (Jan- Aug10), the industry added 38mn tonnes of capacity, (16.4% increase over CY09). However, during the same period (Jan- Aug10) cement demand grew by only 6.3%. Considering the demand slowdown in FY11 and higher capacity additions in the last two to three years, we expect capacity utilizations to come down to 80% (7-year low) from 86% in FY10. However, we expect the demand to revive in FY12 and FY13 and with the slowing down pace of capacity additions, we expect utilizations to improve to 81% in FY12 and 85% in FY13. Exhibit 22: Capacity utilization: Gradually improving
All India Year end capacity Effective Capacity Dispatches Capacity utilization (%) FY09 212 205 181 89 FY10 247 232 200 86 FY11E 276 270 216 80 FY12E 301 296 238 81 FY13E 318 310 263 85
Exhibit 25: Monsoon utilization to remain low

95 90 85 (%) 80 75 70 65 Q1FY10 Q3FY10 Q1FY11 69 Q3FY11 Q1FY12 Q3FY12 Q1FY13 Q3FY13 CY07 CY08 CY09 82 84 81 79 74 76 90 90 93 89 83 78 81 89 87
Pricing: Downside remains limited

We believe the actual cement pricing will depend upon the demand supply equations in the region, actual cost of production and players individual as well as consolidated actions. However, we anticipate the downside for cement prices to be restricted mainly due to the rising cost of production, increasing levels of consolidation in the industry, better financial position of the industry players and the bettering demand supply equations post H2FY12. Prices of key raw material (imported coal as well as petcoke) have been on a consistent uptrend. Diesel prices have recently gone up thereby raising the transport cost for players. Hence we believe the cost push factor will arrest the cement pricing fall as we go ahead. Historical data too indicates that higher costs have supported higher cement prices. Exhibit 26: ACC: Higher costs pump up realizations
Quarter wise analysis Due to the sharp increase in supply and moderate growth in demand, capacity utilization of the industry has declined from 90% in Q4FY10 to 69% in Q2FY11, lowest since Q2FY99. We expect capacity utilization to improve in FY12 except the monsoon period when we anticipate the same to drop to 74% in Q2FY12 and 76% in Q3FY12. However, we see the same to remain close to 80% levels or above in the FY13. Exhibit 23: Peak capacity addition behind us
30 25 (Mn tonnes) 20 15 10 5 0 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11E Q4FY11E Q1FY12E Q2FY12E Q3FY12E Q4FY12E Q1FY13E Q2FY13E Q3FY13E Q4FY13E Capacity additions bunch up in H1CY10 12 10 8 6 4 2 0 (%)
4,000 (INR per tonne) 3,500 3,000 2,500 2,000 1,500 CY05 CY06 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05
Capacity addition (LHS)

% increase in capacity (RHS)
Exhibit 24: Steady growth in cement dispatches

80 (Mn tonnes) 70 60 50 40 Q3FY11E Q1FY12E Q3FY12E Q1FY13E Q3FY13E Q1FY10 Q3FY10 Q1FY11 18 15 12 9 6 3 0
Relisation
Cost
Source: Capitaline, Company, Elara Securities Research
(%)
All India Cement Despatches (LHS)

YoY (RHS)
10
Cement
Exhibit 27: Ambuja: Costs inflate realizations
4,000 3,500 (INR per tonne) 3,000 2,500 2,000 1,500 1,000 FY96 FY97 FY98 FY99 FY00 FY01 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09
an average net debt equity ratio of ~2.6x in FY03 when the industry witnessed a steep ~7.4% price decline. The last few years of the `Bull Run had transformed the balance sheets of these companies which now have 0.4x debt equity ratios. Besides, the companies are almost in the final leg of their capacity additions which might not put a stress on the operating cash flows for the company in the period of stress. Exhibit 30: Industrys balance sheet improves
3.0 2.5 (x) 2.0 1.5 1.0 0.5 0.0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 20 15 10 5 0
Realizations
Cost
Exhibit 28: Reliance on imported coal to increase cost

Cost Item Limestone Royalty Increase in other raw material cost Fuel Electricity Freight Excise duty Total
Source: Elara Securities Estimate
INR per tonne 20 45 138 41 54 83 380
Net debt equity ratio (LHS) % increase in Effective Capacity (RHS)

Source: CMA,Capitaline, Elara Securities Research
The consolidation levels in the industry have increased as compared to the last downcycle with top five players now controlling close to ~54% of capacities as compared to 31.3% in 2000 (the last downcycle). The consolidated action of players was visible recently in South where despite lowest capacity utilizations in the region, cement prices increased in the range of INR75 100/bag. Historically as well, benefits of consolidation were witnessed in the Northern region, where players resorted to lower production to control the prices during the initial part of FY09. Hence, we believe, the increased consolidation in the industry will negate any significant price falls in the cement industry. Exhibit 29: Industry consolidation increases
100 80 (%) 60 40 20 0 FY2000 Share of top 5 players
We have tried to compute the cement pricing based on the minimum RoCE the players would desire in the coming years. Accordingly, we have considered Southern companies to desire at least 8% (equal to risk free rate of return) RoCE in the years to come considering the looming oversupply concerns in the region. Similarly, we have assumed a desired RoCE of 12% for Western players as excess capacities in the Southern market are likely to spoil equations in the Western region. In the northern region, we have assumed desired RoCE of 10% considering the possible slowdown in demand post the Common Wealth Games. Apart from this, among the major regions, Northern region is expected to witness the second highest capacity addition (ie: 22%). For the Eastern as well as Central regions, we have assumed the highest desired RoCE of 14% as the demand supply equations in these regions are likely to be more favorable as compared to other regions in the country. Accordingly, the prices are expected to rise the most in the Western region, where the prices were depressed due to spillover effect of low prices in Southern region. However, we expect the pricing in the Eastern region to remain flat as the same had not declined sharply. We expect the prices in the Southern region to have risk of downside than upside considering the unfavorable demand supply equations and the quantum of hikes taken recently. For rest of the country, we expect prices to increase ~4% in the coming years. Despite higher cement prices, the profitability of cement players may come under pressure in Q2 and Q3FY12 when the capacity utilization is expected to reach 74%
11
46.0 68.7
54.0 31.3 At present Others
Besides, the companies have better balance sheets now as compared to the earlier downturn. The industry had
Cement
Source: Capitaline, Company, Elara Securities Research
(%)
Cement
and 76% respectively. Post these quarters, the capacity utilization is expected to bounce back in Q4FY12 to 89%. Exhibit 31: Cement prices bounce back
330 (INR per bag) 280 230 180 130 Feb-09 Aug-08 Aug-09 Feb-10 Aug-10 Apr-08 Apr-09 Jun-08 Apr-10 Jun-09 Dec-08 Dec-09 Jun-10 Oct-08 Oct-09 Oct-10
Comparative analysis
The nature of the cement industry does not provide any barriers to entry; companies gain an edge over peers due to the inherent characteristics like plant location, sourcing of key raw material and capital structure etc. We have tried to analyze few of the key parameters which have a significant bearing on the profitability of these companies. We have tried to rank the large cap companies on different parameters with 1 being lowest and 3 being the highest rating. Regional presence: The cement industry is characterized by regional demand supply as it is uneconomical to transport cement over long distances, being a low priced commodity. Our analysis shows that if cement companies transport outside the radius of ~1,000- 1,200 kms by rail and/or road, these players would not be making profits at the EBITDA level. Therefore, the regional demand supply equations play an important role in the pricing dynamics and profitability of the cement players. Exhibit 33: EBITDA neutral lead distances
Mumbai Chennai
Delhi Hyderabad
Kolkata
Exhibit 32: Implied cement price increase from RoCE (%)

INR Realization per tonne (present) Greenfield capex cost per ton Target EBIT/tonne Target RoCE(%) At Capacity utilization (%) Cost (inc dep) per tonne EBIT / tonne RoCE(%) Implied Realization per tonne Implied price change (INR) % change At Capacity utilization (%) Cost (inc dep) per tonne EBIT per tonne RoCE(%) Implied Realization per tonne Implied price increase (INR) % change South Central 4,292 5,000 400 8.0 100 2,949 1,343 26.9 3,349 (943) (22.0) 72 3,244 1,048 15.1 3,937 (355) (8.3) 3,712 5,000 700 14.0 100 3,096 617 12.3 3,796 83 2.2 98 3,158 555 10.9 3,869 157 4.2 East 3,644 5,000 700 14.0 100 2,672 972 19.4 3,372 (272) (7.5) 89 2,806 838 15.0 3,595 (49) (1.3) West 3,570 5,000 600 12.0 100 2,979 591 11.8 3,579 9 0.2 84 3,128 442 7.4 3,797 228 6.4 North 3,661 5,000 500 10.0 100 3,108 553 11.1 3,608 (53) (1.5) 85 3,263 398 6.8 3,822 161 4.4
Average Q1FY11 EBITDA/tonne prior to Freight expenses Transport cost per tonne per km by road Maximum distances viable by road Transport cost per tonne per km by road Maximum distances viable by rail
1,506 1.5 1,004 1.35 1,115
We expect the capacity utilization in the South to decline from 74% in FY10 to 69% in FY11 due to an increase in capacity and subdued demand. However, this situation is likely to improve to 72% in FY12 and 77% in FY13 due to the slower pace of capacity additions. Despite improving capacity utilizations, the same will be the lowest in the Southern region hence, we prefer companies having minimum presence in this region. In the case of East, we expect the capacity utilization to increase from 86% in FY10 to 88% in FY11, 90% in FY12 and 93% in FY13. The capacity additions in this region have been low while the demand has remained strong. In the Central region, the utilizations are expected to decline due to capacity additions. Capacity utilization is likely to decline from 104% in FY10 to 100% in FY11 and further to 92% in FY12. However in FY13, capacity utilization is expected to improve to 96%.The scenario in the Northern and Western regions might remain close to the all India average.
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Cement
As mentioned earlier, we expect cement prices to remain firm in H2FY11. The price increase is expected to be sharper in the western region, as the prices in western region were depressed by low prices in south. Though among all regions cement prices are highest in the southern region, we expect cement prices in south to fall by 8%. Due to supply overhang, we expect cement players in the South to earn ~36% lower EBIT per tonne than players in other regions. Players having higher presence in the Southern region will continue to earn lower return ratios and margins as compared to players having presences in other regions. In our coverage universe, Ambuja has the best regional mix as it does not have presence in the Southern region. Apart from this, about 14% of the capacity of the company is in the Eastern region and 7% in the Central region. We expect these regions to have better pricing environments as compared to other regions in India. The average capacity utilization of Eastern and Central region is likely to be ~1,400bps and ~900bps higher than pan India. We expect players having presences in Central and Eastern region to earn ~21% higher EBIT per tonne as compared to players having pan-India presences. Due to Ambujas superior regional mix in frontline cement players, we have assigned it the highest rating of 3. The other two frontline players UltraTech and ACC too do not have very high regional risk due to pan-India presences. However, due to ACCs relatively higher capacity in low priced Southern market (ACC has 36% of its capacity in South as compared to 23% for UltraTech), we have assigned it the lowest rating 1 while UltraTech gets a rating of 2. India Cements has the worst regional mix in mid-cap cement companies as ~92% of its capacity is in South India. Players such as Shree Cement and JK Lakshmi Cement have restricted presence in the Northern region. We do not expect Northern region to be hit as badly as the South. Exhibit 34: Region wise yearly capacity utilization (%)
110 100 90 80 70 60 FY19 North Eastern FY10 FY11E Western Southern FY12E FY13E Central All India
Exhibit 35: Utilization to stay firm in Central India

100 95 90 (%) 85 80 75 70 Central Eastern Western All India
Source: Elara Securities Estimate
96 90 83 82
82
73
North Southern
(Average for FY11-FY13)
North UltraTech Cement post merger UltraTech Cement pre merger Ambuja ACC India Cements Shree Cement JK Cement JK Lakshmi Orient Paper 26 0 42 24 0 100 62 88 0
East South 14 18 14 18 0 0 0 0 0 23 35 0 36 92 0 38 0 60
West Central 26 48 37 4 8 0 0 12 40 11 0 7 18 0 0 0 0 0
Source: Company, Elara Securities Research
Exhibit 37: India Cements leads Southern capacity

100 75 50 25 0 UltraTech Cement pre merger ACC UltraTech Cement post merger India Cement Orient Paper JK Cement 0 Shree Cement 0 JK Lakshmi 0 Ambuja 90 60 38 35 32 26
Power and fuel cost: Power and fuel constitutes 25-35% of the total expenditure for cement manufacturers who mainly use coal and petcoke as fuel for manufacturing cement. The coal is usually sourced from three sources viz linkage coal, open market purchases in domestic market and imports. Prices of petcoke and imported coal are presently hovering around INR7,250/tonne and INR5,175/tonne respectively. Prices of domestic coal vary, depending on its calorific values. Players having presence in the Southern region (particularly Tamil Nadu) are likely to have the cost disadvantage due to higher dependence on imported
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Cement
Exhibit 36: Region wise capacity break-up (%)
Cement
Exhibit 38: Power and fuel cost per tonne of cement manufactured using different fuels
Fuel cost Fuel INR Per Calorific INR per tonne Values kcalry (a) Domestic Imported Pet Coke 3,000 5,175 7,250 (b) 4,000 6,000 8,000 c=b/a 0.75 0.86 0.91 Input out put ratio (d) 18.5% 12.3% 8.8% kcalry per tonne of cement (e) 740 740 740 Fuel cost f=a*d 555 639 634 Per unit Electricity VC cost INR (g) 2.3 2.7 2.8 Electricity Power & Electricity consumption Electricity cost Fuel cost per per tonne tonne of cement (h) (i) J=f+i 85 85 85 198 227 239 753 866 873
coal. As these are located distantly from mines, players with plants in Tamil Nadu (such as India Cements, Madras Cement, Dalmia Cement) are heavily dependent on imported coal. The price of imported coal has increased 42% YoY due to the improvement in global sentiment while petcoke has also gone up ~100% YoY in line with a hike in crude oil prices. Going ahead, we do not expect the price of pet coke to soften as RIL (the largest manufacturer of pet coke in India) has reduced the sale of petcoke in the open market as it has started using petcoke for captive power and petrochemical products manufacturing. As far as the linkage coal is concerned, Coal India has increased coal prices by ~10% to 11% in Q3FY10. At present prices, we expect power and fuel cost for players dependent on the domestic coal, imported coal and petcoke to be approximately INR753, INR 856 and INR 873 respectively for every tonne of cement produced. The player dependent on domestic coal is likely to have cost advantage of INR 113 per tonne as compared to player using imported coal and INR 121 as compared to player using petcoke. Thus, players dependent on domestic coal such as Orient Paper and ACC are likely to have lowest power and fuel cost per tonne of cement. Historically, petcoke prices (adjusted for differences in the kcalr) have been cheaper by 20-30% as compared to imported coal. However, due to supply disturbances as mentioned above, current prices of petcoke are at a marginal premium to landed price of imported coal. If this premium increases, we expect cement players dependent on petcoke such as Shree Cement, JK Cement and JK Lakshmi Cement to gradually shift towards imported coal.
Exhibit 39: Fuel mix of cement players

Company UltraTech JK Lakshmi ACC India Cements Shree Cement JK Cement JK Lakshmi Orient Paper Domestic Coal (%) 62 0 85 45 0 10 0 100 Imported Petcoke Other P&F cost Coal (%) (%) (%) FY10/CY09 29 0 15 55 0 0 0 0 9 90 0 0 100 90 90 0 0 10 0 0 0 0 10 0 711 633 715 913 544 *903 633 635
Source: Company, Elara Securities Research *Higher as compared to peers due to production of white cement
As ACC meets only 15% of its fuel requirements through imports we have assigned it a rating of 3 on this parameter. We have assigned UltraTech 2 rating and Ambuja 1 due to their relatively higher dependence on imported coal (UltraTech 29% and Ambuja 30%). Players dependent on grid for power, such as India Cements, are likely to have cost disadvantage of INR161 per tonne as compared to player dependent on CPP for power such as Shree Cement. Apart from this, players dependent on grid also run the risk of loss of production due to power cuts which have curtailed cement production particularly in the states of AP and TN in last few years during the summer. Exhibit 40: Savings from CPP
INR Grid cost Average variable cost Electricity consumption per tonne of cement Saving per tonne
4.5 2.6 85 161
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Cement
Exhibit 41: Players look for self sufficiency in power
Company UltraTech Ambuja ACC India Cements Shree Cement JK Cement Orient Paper JK Lakshmi % of power meet through CPP CY09/FY10 90 65 68 9 97 83 24 70 CY10/FY11E 96 95 83 9 97 97 94 95 CY11/FY12E 95 95 91 37 97 97 97 95
Earning sensitivity: Lower earnings sensitivity to cement price decline will prevent the earnings of the company from sharp erosion in a downturn. A one percent price change is likely to impact the EPS of Ambuja, UltraTech and ACC by 3.4%, 3.5% and 3.8% respectively. Thus we have assigned a rating of 3 for Ambuja, 2 for UltraTech and 1 for ACC. In the midcaps OPI (2.7%) and Shree Cement (2.9%) have the lowest earnings sensitivity to price decline while India Cements (8%) has the highest earnings sensitivity. Exhibit 43: OPI least sensitive to price decline (%)
7.5 6.5 5.5 4.5 3.5 2.5 Orient Paper JK Lakshmi Ultra tech Shree Cement ACC JK Cement Ambuja Cement India Cement 2.7 2.9 3.4 3.5 3.8 5.1 5.5
Source: Company, Elara Securities Estimates
In frontline players, UltraTech meets about 90% of its electricity needs through CPP as compared to 68% for ACC and 65% for Ambuja. Thus we have assigned rating of 3 to UltraTech, 2 for ACC and 1 for Ambuja. Transport mix/freight costs: Freight costs constitute ~25 30% of the total cost of sales for cement companies who normally dispatch through rail and/or road. Rail transport is cheaper as compared to road transport as it warrants a saving of 0.25paise/tonne/km. Assuming an average lead distances of 600kms, the rail transport generates savings of INR150/tonne vis a vis road. Thus in the downturn, when lead distances to market are expected to increase and in the scenario of high crude prices, a player having a higher dependence on rail as a mode of transport such as ACC is likely to have an edge over others. Exhibit 42: Road dominates transport mix (%)
Road Ultra Tech Cement Ambuja Cement ACC India Cements Shree Cement JK Cement Orient Paper JK Lakshmi
Fixed cost: Players having lower fixed cost will be betteroff than peers in the downturn as this edge ensures a lower breakeven point. In our coverage universe of large caps, UltraTech has the lowest fixed cost (20%) and ACC has the highest (25%). Thus we have assigned a rating of 3 for UltraTech, 2 for Ambuja and 1 for ACC. In the midcaps, Shree Cement (12%) and OPI (15%) have the lowest fixed cost while JK Cement (24%) has the highest. Exhibit 44: ACC has the highest fixed cost
30 25 (%) 20 15 10 5 Orient Paper JK Lakshmi Ultra Tech Shree Cement India Cement JK Cement Ambuja ACC 12 15 19 20 20 22 24 25
Rail 35 30 50 54 23 15 20 48
Sea 3 15 0 0 0 0 0 0
62 55 50 46 77 85 80 52
ACC dispatches about 50% of its volume by rail as compared to 35% by UltraTech and 30% by Ambuja. Thus we have assigned rating of 3 to ACC. As Ambuja dispatches about 15% of the cement by sea, we have assigned rating of 2 to Ambuja and 1 to UltraTech.
Cement
15
8.5
Cement
Exhibit 45: Operational parameters

Fixed Earning cost sensitivity capacity breakup YoY (%) Company as a Capacity to price % of CY09/ CY10/ CY11/ Domestic Imported Petcoke Other CY09/ CY10/ CY11/ decline North East South West Central sales FY10 FY11E FY12E Coal (%) Coal (%) FY10 FY11E FY12E (%) (%) % of power meet through CPP Fuel Mix UltraTech Ambuja ACC India Cements Shree Cement JK Cement Orient Paper JK Lakshmi 90 65 68 9 97 83 24 70 96 95 83 9 97 97 94 95 95 95 91 37 97 97 96.9 95 62 70 85 45 0 10 100 0 29 30 15 55 0 0 0 0 9 0 0 0 100 90 0 90 0 0 0 0 0 0 0 10 26 42 24 0 100 62 0 88 14 14 18 0 0 0 0 0 23 0 36 92 0 38 60 0 26 37 4 8 0 0 40 12 11 7 18 0 0 0 0 0 14 7 1 20 21 13 11 14 5 6 (4) 13 1 18 21 (9) 12 13 16 6 9 15 5 12 3.5 3.4 3.8 8 2.9 5.5 2.7 5.1 20 20 25 22 12 24 15 19 52 25 31 16 14 8 5 5 Region wise Volume Growth
Volume growth: We also expect players who have recently completed capacity expansions such as OPI, Ambuja and JK Cement to be better off as volume growth will prevent a sharp erosion in absolute earnings of a company. Players who have not yet completed capacity expansions such as JK Lakshmi Cement are likely to witness a serious decline in earnings due to the subdued volume growth on account of capacity constraints. In the large cap space, Ambuja is expected to report a volume CAGR of 9.4% as in Q1CY10, the company has added two grinding units of 1.5mn tonnes each at Nalgarh (HP) and Dadri (UP). UltraTech is expected to report a CAGR of 8.2% while ACC is expected to report volume CAGR of 5.7% during the same period. Thus, we have assigned 3,2,1 rating to Ambuja, UltraTech and ACC respectively. In mid-cap space, JK Cement is expected to report a strong volume CAGR of 17% as its 3mn tonnes Karnataka plant has come on stream. JK Lakshmi Cement is expected to report lowest volume CAGR of ~1% due to capacity constraints. Exhibit 46: Financial parameters
Net debt equity ratio(x) Company UltraTech Ambuja ACC India Cement Shree Cement JK Cement Orient Paper JK Lakshmi CY09/ FY10 0.3 (0.2) (0.2) 0.7 0.1 0.9 0.6 0.2 CY10/ FY11 0.3 (0.2) (0.1) 0.5 0.1 0.7 0.1 0.3 CY11/ FY12 0.1 (0.3) (0.3) 0.4 (0.3) 0.6 (0.1) 0.4 CY09/ FY10 26.1 20.1 29 10.5 49.2 22.6 22.6 27.2 RoE(%) CY10/ FY11 20.9 18.8 18.5 5.2 19.4 6.5 23.2 11.6
EBITDA per tonne As UltraTech is in the process of restructuring, we have looked at FY12 EBITDA per tonne of cement players. In frontline cement companies, we expect Ambuja to earn the highest EBITDA per tonne (INR978) as compared to its peers due to its superior regional mix and operational efficiency. ACC is expected to have an EBITDA per tonne of INR892 due to its cost advantage while UltraTech is expected to earn an EBITDA per tonne of INR 769. Thus, we have assigned rating of 3, 2 and 1 for Ambuja, ACC and UltraTech respectively. Return ratios: Among the frontline players, ACC is expected to earn RoE of 18%-29% between in CY10-CY11 as compared to 17%- 26% earned by others. The superior RoE is enjoyed by ACC on the back of its cost advantage resulting from its higher dependence on domestic coal as a fuel and rail for dispatching cement. Ambuja is expected to have lower ROE than that UltraTech despite higher EBITDA/tonne because of the higher cash on the balance sheet which is earning a lower yield than the core cement business. Thus, we have assigned a 3, 2 and
EBITDA per tonne CY11/ FY12 18.4 16.8 17.9 7.8 24.1 10.8 19.7 13.8 CY09/ FY10 979 993 1,117 758 1,364 964 892 925 CY10/ FY11 832 1,061 888 494 907 535 879 710 CY11/ FY12 769 978 892 833 863 568 785 857 Q1FY11 792 1,108 1,115 376 1,027 668 887 551 MCAP (bn) 310 226 200 36 75 12 12 8
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Cement
1 rating to ACC, UltraTech and Ambuja respectively. In the midcap space, Shree Cement is expected to earn RoE of 19% in FY11 while Orient Paper is expected to earn 23%. These players are expected to have a superior ROE due to their low cost structure, diversfied revenue stream and volume growth due to completion of expansion. JK Lakshmi is expected to have lowest ROE i.e 11.6% (13.6% adjusted for CWIP) due to a sharp decline in earnings on account of subduded volume growth and funds getting blocked in CWIP. Size: The larger size provides the benefit of economics of scale, pricing power and a bigger balance sheet to comfortably fund major projects. By the end of FY11, UltraTech will have capacity of ~52.4 mn tonnes (globally 9th largest) and will be 1.7x of ACC and 2.1x of Ambuja. Thus, we have assigned the highest rating to UltraTech on this parameter. We have assigned rating of 3, 2 and 1 to UltraTech, Ambuja and ACC respectively. In our midcap coverage universe, Shree Cement and India Cements are mid-size player who will have a capacity of close to 15.6mn tonnes and 13.5 mn tonnes by end of FY11. Balance sheet: We believe that as the industry enters the downturn phase, players having a healthy balance sheet will be better off than others. Lower debt equity ratio will not only reduce the interest and principal repayment burden on cash flows but will also enable the company to take advantage of any distress opportunities that might be available. In frontline cement companies, Ambuja and ACC are expected to have net cash on balance sheets between CY09 to CY11. Thus, we have assigned Ambuja and ACC rating of 2. UltraTech, though is not likely to have a stretched balance sheet, with a comfortable net debt equity ratio of 0.3x in FY10, it is placed a notch below the rest. Considering the same, we have assigned UltraTech rating of 1. In the mid-cap space, only India Cements and JK Cement are likely to have debt equity ratio of more than 0.5x. Rest of the mid-cap spectrum is likely to have a healthy balance sheet. Exhibit 47: Vital statistics of frontline cement players
Region ACC Ambuja UltraTech 1 3 2 Fuel mix 3 1 2 CPP 2 1 3 Transport mix 3 2 1 Balance sheet 2 2 1 Earning sensitivity to price decline 1 3 2 Fixed cost 1 2 3 Volume growth 1 3 2 EBITDA per tonne 2 3 1 RoE 3 1 2 Size 2 1 3 Total 21 22 22
Conclusion: Thus, in the environment of high energy prices, we believe that players dependent on rail for transport such as ACC and players dependent on domestic coal such as Orient Paper will be better off than players dependent on imported coal (such as India Cements ) and petcoke (such as JK Cement and Shree cement). We also believe that in the case of a downturn, players having a lower debt equity ratio such as ACC, Ambuja and Shree Cement will be better off than those with a higher ratio such as India Cements and JK cement. Lower debt equity ratio will help reduce the pressure on a companys opertaing cash flows to serve the interest and principal. Earning based valuation irrelevant for industry Traditionally, earnings based valuation ratios have failed to time the cement cycles correctly. As is evident from the chart, the peak EV/EBITDA multiple made a good case to buy the stock and vice versa. Hence, we believe, the EV/tonne is a better representation of the valuations of companies in the volatile cement sector. Exhibit 48: ACC: EV/EBITDA (x) and RoCE (%)
EV/EBITDA is the highest when the return ratio is the lowest - which is a theoretical sign to sell shares 30 25 20 15 10 5 0 FY95 FY97 FY99 FY01 FY03 FY05 CY06 CY08 RoCE(%)
18 15 EV/EBITDA(x) 12 9 6 3 0
EV/EBITDA(LHS)
RoCE(%)(RHS)
Note: 3 indicates the best. As we have given equal weight to all parameters we have just added the score At end of CY11 Acc and Ambuja both are expected to have same net debt equity ratio we have assigned 2 rating to both on balance sheet strength parameter Source: Company, Elara Securities Research
Cement
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Cement
Exhibit 49: ACC: EV/EBITDA (x) and MCAP (INR Bn)
If someone had brought ACC stock when EV/EBITDA was lowest he would have lost money at a CAGR of 22% 18 15 12 (x) 9 6 3 0 CY06 CY08 FY95 FY97 FY99 FY01 FY03 FY05 If someone had brought ACC stock when EV/EBITDA was highest despite lower return ratio he would have made money at a CAGR of 22% over 5 years 3 (INR bn) 2 (INR bn) 2 1 1 0
Exhibit 53: ACC: Market cap and EV/tonne

EV per tonne bottom outs when stock bottom outs 250 200 150 100 50 0 FY95 FY97 FY99 FY01 FY03 FY05 CY06 CY08 CY10 EV per tonne is highest when stock has peaked out 250 200 150 100 50 0 (USD)
Market Cap (LHS)

Source: Capitaline, Elara Securities Estimates
EV/Tonne in USD (RHS)
EV/EBITDA(LHS)
Source: Capitaline ,Elara Securities Research
Market Cap
Mid cap vs large cap: Valuation gap widens

50 40 30 20 10 0 (10) CY06 CY08 (%)
Exhibit 50: ACC: Cash P/E (x)and RoE(%)

50 40 (x) 30 20 10 0 FY95 FY97 FY99 FY01 FY03 FY05
Usually, mid cap cement companies have traded at a discount to their large cap peers. A major reason for the same is the pan-India presence of large cap peers which reduces the risk of regional concentration and lower free float. In terms of profitability, the mid-cap cement companies were less profitable in terms of EBITDA/tonne till FY07. But post FY07, when the pan-India witnessed a pricing increase in excess of ~25% coupled with cost cutting measures undertaken by cement companies, the profitability of mid-cap players has been aligned in line with that of large cap players. However, the gap of valuations in terms of EV/tonne has widened significantly, increasing from ~30% pre-FY07 to more than ~60% post FY07. The large cap players have consistently traded at a premium to their replacement costs in the past four years (excluding the period of subprime crises). In fact, they traded at nearly twice the replacement cost in FY07 and FY08 whereas mid-cap players have barely traded above their replacement cost. The maximum valuation that mid cap players managed was a ~10% to 15% discount to the replacement cost in FY06-FY07 period. Since then, these mid-cap players have traded well below their replacement cost. However, the valuation gap for mid-cap players has been consistently coming down which now lies in the range of ~50 -60% discount to large cap peers. We believe with improving cement pricing and bettering EBITDA/tonne for cement players, the valuation discount for mid-cap players will gradually narrow down. Therefore, we have valued mid-cap cement players at ~38% discount to the replacement cost. Our valuation of USD62/tonne assigned to mid-cap players indicates the distress case EV the cement plants deserve in case of a continued downturn.
P/CEPS(LHS)
RoE(RHS)
Exhibit 51: ACC: Cash P/E (x) and Mcap (INR bn)
50 2.5 2.0 (INR bn) 1.5 1.0 0.5 0.0 FY95 FY97 FY99 FY01 FY03 FY05 CY06 CY08
40 P/CEPS(x) 30 20 10 0
P/CEPS(LHS)
Mcap (RHS)
Exhibit 52: ACC: EV/tonne, RoE and RoCE

250 (USD per tonne) 200 150 100 50 0 CY06 CY08 FY95 FY97 FY99 FY01 FY03 FY05 60 40 20 0 (20) (%)
EV/Tonne in USD (LHS) RoCE (RHS)

Source: Capitaline, ,Elara Securities Research
RoNW (RHS)
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Cement
Exhibit 54: Margin gaps narrows, valuation broadens
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Exhibit 55: All India capacity utilization, EV per tonne

In last down cycle when industry operated at capacity utilizations of 80-81 the EV/tonne of large cap was USD67-80.With similar capacity utilizations expected for the industry valuations are 1.5x higher Run up in the stock prices much sharper than improvement in fundamentals of the industry
20 0 (20) (%) (60) (80) (100) Valuation disc for mid caps
(USD Per tonne)
(40)
240 210 180 150 120 90 60 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E r=0.86
100 95 (%) 90 85 80 75
EBITDA/tonne disc
Large cap valuations across business cycles The cement industry is likely to operate at capacity utilizations of 80% in FY11 and 81% in FY12; similar to the FY03-FY04 period. During FY03-FY04, large cap was trading at EV per tonne of USD67-80. Present valuations of cement players are 1.9x last down cycle. However there has also been corresponding improvement in EBITDA/tonne for cement players due to improvement in cost efficiency. Frontline cement players are expected to earn 1.9x higher EBITDA/tonne as compared to last down cycle. Thus we believe that present valuations for the frontline companies are fair.
Average Large Caps EV per tonne (LHS) Capacity Utilization of the Industry (RHS)
Source: CMIE, CMA, Elara Securities Estimates
Exhibit 56: Better profitability justifies rich valuations

250 (USD per tonne) 200 150 100 50 0 FY11E FY12E FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 1,200 1,000 800 600 400 200 0 (INR EBITDA/tonne)
Average Large Caps EV per tonne (LHS) Average Large Caps EBITDA/tonne (RHS)
Source: Capitaline, Elara Securities Estimates
Cement
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Cement
Valuation & Recommendation

Earnings based valuation multiples not useful for cement stocks Large cap valued on discounted bull case EV per tonne multiple Mid cap valued on distress EV per tonne multiple, to factor in higher regional risks
Valuations
With earnings based valuation multiples failing to provide a correct historical trend, we have used EV/tonne as our valuation multiple for all companies under our coverage. With the industry in the midst of a downturn and cement prices as well as profitability in a highly volatile zone, we have tried to value companies based on discounted upcycle valuations that these deserved. Considering the uncertain cement market scenario and given the outperformance of large cap cement players as well as the premium they command over mid-cap segment, we have tried to find whether large cap stocks still make value proposition at the current level. In order to find a fair EV per tonne for frontline cement companies we have looked at the historical average upcycle valuation and theoretical bull cycle valuation. As mentioned earlier, our industry analysis indicates that the pace of capacity addition will slow down and the demand will grow at steady pace. We expect the demand to catch up with supply post FY12 and the pricing power to return to industry. However, in the intermediate period, we expect the profitability of the cement players to remain subdued. As we expect the bull cycle in the cement industry to be still 1 year away, we have discounted average up cycle valuation by 1 year using WACC of 13%. Upcycle average benchmark valuation for large caps We have used two approaches for the same viz. 1. Historical upcycle valuation and 2 Theoretical bull cycle valuation. 1. Historical upcycle valuations
Exhibit 57: Historical upcycle valuations

USD per tonne Ambuja ACC Average PV multiple PV EV per tonne
178 132 155 0.88 137
2.
Theoretical bull cycle value
This approach is based on the notion as to what should be the fair valuation for acquiring the existing company to reap benefits of an upcycle rather than going for a greenfield expansion. In our view, the industry player would pay replacement cost of ~USD100 per tonne + PV of profitability of three years (as it takes minimum three year to set up a greenfield plant) in order to reap the benefits of an upcycle in the cement industry. Exhibit 58: Bull case DCF
Year (INR /tonne) Capex cost INR mn Debt INR mn Capacity in tonne Capacity Utilization (%) Production in tonnes EBITDA per tonne Depreciation@ 5% Interest PBT per tonne Tax per tonne PAT per tonne Increase WC per tonne Free cash flow per tonne Free cash flow to firm INR mn PV multiple PV of Cash Sum INR mn Terminal value= replacement cost EV per tonne in USD PV multiple PV EV per tonne WACC (%)
1 5,000 2,500
1,000,000 1,000,000 1,000,000 100 1,200 250 238 713 214 499 10 976 976 0.88 864 2,305 5,000 162 0.9 144 13.0 100 1,200 250 238 713 214 499 10 976 976 0.78 765 100 1,200 250 238 713 214 499 10 976 976 0.69 677 1,000,000 1,000,000 1,000,000
In this approach, we have considered average upcycle EV per tonne for Ambuja and ACC. As per our working, these players have traded at an average EV/tonne of USD155. However, as we anticipate the upycle for cement sector to be 1 year away from now, we have discounted the same for 1 year using WACC of 13%. The computation leads to an average benchmark valuation of USD137/tonne under this approach.
20
Cement
As shown in the table, assuming the upcycle operating parameters (100% capacity utilization and EBITDA of INR1,200/ tonne), the fair valuation works out to be USD162 per tonne. However as discussed earlier, we anticipate the up cycle for cement sector to be 1 year away. Hence, we have discounted the average up cycle valuation of USD162/tonne for 1 yr using WACC of 13%. According to this method, we get a valuation of USD144/tonne under this approach. In order to decide the target multiple for large cap stock, we have used the average of the above two methods. Exhibit 59: Bull case DCF
USD per tonne Method 1 Method 2 Average
distress value of the company in an extended down cycle. 1. DCF
Exhibit 61: Bear Case DCF

Year Capex cost (INR mn) Debt (INR) 1 3,500 1,750 2 . 20
137 144 140
Target multiple for frontline cement players Our comparative analysis have shown (kindly refer to exhibit no 47 on page no 17) steep valuation differences in frontline cement companies is unjustified. Thus, we have valued UltraTech and Ambuja at par to our discounted up cycle valuations (USD 140 per tonne). We have valued ACC at 5% discount to Ambuja and UltraTech taking into account its smaller size and lower profitability. Exhibit 60: Target multiple
Total UltraTech Ambuja ACC
Capacity (tonne) Capacity Utilization (%) Production (tonne) EBITDA (per tonne) EBITDA (INR mn) Depreciation@ 5% Interest PBT (per tonne) Tax (per tonne)
1,000,000 1,000,000 75 750,000 350 263 175 166 9 3 6 10 347 260 0.88 230 1,829 40 13 75 750,000 350 263 175 166 9 3 6 10 347 260 0.78 204
1,000,000 75 750,000 350 263 175 166 9 3 6 10 347 260 0.09 23
Target EV per tonne 140 140 133
PAT (per tonne) Increase WC (per tonne) Free cash flow (per tonne) Free cash flow to firm (INR mn) PV multiple PV of Cash Sum in mn EV per tonne in USD WACC (%)
22 22 21
Target EV per tonne for mid-cap cement companies As is evident from the historical perspective, mid-cap companies have always traded at a discount to their large cap peers as well as to the replacement cost. The discount has prevailed despite having a minor difference between the profitability and return ratios for these players. The regional concentration and the lower free float are some of the reasons for the discount. However, over the past few years, though the discount has been consistently narrowing down, there exists a huge gap (~56%) between the large cap and small cap companies. We have valued mid-cap companies at a distress EV per tonne where we have factored in most of negative surprises. We have also used a uniform multiple for all mid-cap players irrespective of their profitability and size. Three methods have been applied for calculating the
2.
Lowest M&A deals in last two decades
The lowest M&A deal in the cement industry had taken place at an EV per tonne of USD41-42. However, these deals had taken place in 1998. The inflation adjusted value for the deal works out to be USD75-77 per tonne.
Cement
21
We have tried to calculate the distress value for cement players by using DCF. We have assumed that cement players will earn an EBITDA/tonne of INR350 for the next 20 years and will operate at a capacity utilization of 75%. In this method, we have assumed that the industry is in a structural down cycle for a continuous period of twenty years and the profitability of cement players will not improve. We have assumed the terminal value for the plant to be zero. The DCF based target multiple works out to be USD40 per tonne.
Cement
Exhibit 62: M&A deal valuations on an uptrend
Year 1998 1998 1999 2003 2005 2006 2007 2008 2008 Acquirer Target Capacity (Million tonne) 2.0 1.1 12.0 17.0 18.0 13.4 1.0 3.0 2.5 EV/ tonne (US$) 42 41 144 82 110 195 152 220 105 121 168 Inflation adjusted 77 75 248 119 143 242 179 247 118 161 197
Exhibit 63: PV of a plant assuming nil free cash flows

Replacement cost USD PV multiple Fair value of replacement cost
Source:
100 0.7 69
Guj Ambuja Modi Grasim Grasim Holcim Holcim Cimphor CRH Vicat Shri Digvijay L&T ACC Guj Ambuja Sri Digvijay My Home Sagar Guj Ambuja ACC
The average of above three methods works out to be USD62 per tonne. We have used this multiple for valuing the mid-cap cement players in our coverage universe. Our target valuation for mid-cap is at a 38% discount to the replacement cost and 56% discount to our target multiple for UltraTech. Exhibit 64: Average of three distress case valuations
Distress value by method (a) Distress value by method (b) Distress value by method d (c) Average
Average for 20 years Average for 5 years

40 76 69 62
3.
Discounted value of a plant in downturn
In this method, we have assumed that the profitability of mid-cap players will remain depressed for three years (3x of what assumed for large cap). Thus, we have assumed that for the next three years, midcap players will not be able to earn any operating cash flow. Even after three years, return ratios of the plant will be very close to the cost of capital. In such a case, the fair EV per tonne will be the present value of USD100.
22
India | Cement
9 November 2010
Initiating Coverage
Ultratech Cement
Restructuring priced in
Merger with Samruddhi Cement creates a global giant UltraTech Cement Limited (UltraTech) has emerged as the worlds ninth largest cement manufacturer following the merger of Samruddhi Cement Limited (SCL) with itself. It will be the largest cement company in India, having a capacity of 52.4mn tonnes - almost double the capacity of the second and third players, viz: ACC and Ambuja. Apart from this, post the merger, UltraTech has a presence in all five major regions, thereby eliminating the regional risk. Furthermore, the merger is also expected to increase FY12 EPS of the company by 10.3%.(Kindly refer to Exhibit 4 on page no 27) Healthy balance sheet to ensure smooth capex deployment At the end of FY10, UltraTechs net debt to equity ratio was 0.3 and gross cash and investment was INR17.5 bn. Lower debt equity ratio and bigger size of the balance sheet will enable the company to smoothly fund its next round of expansion. The company has already announced the second round of expansion to increase (consolidated) the capacity by 9.2mn tonnes to 61.6 mn tonnes. Valuation discount to ACC, Ambuja to diminish UltraTech has historically traded at a discount of~18% to ACC and ~33% to Ambuja due to various reasons including lower free float, higher regional risk and dependence on expensive sources of power. Post the restructuring, UltraTechs free float as well as regional mix has improved. Further, UltraTech has added 211MW of CPP capacities in the last two years. Due to an increase in CPP capacity, its dependence on the external source of power is expected to come down to ~5% in FY11 and FY12 from 75% prior to FY10. We expect the CPP to result in a saving of INR 137/tonne(INR 5.2 bn) from FY11 and INR165/ tonne (INR 7.8bn) in FY12 .Thus with the improving profitability and better free float, we expect the valuation gap between UltraTech and Ambuja to be bridged in the medium term.
Rating : Reduce
Target Price : INR1,139 Upside: 2% CMP : INR1,122 ( As on 2 November 2010) Key data*
Bloomberg /Reuters Code: Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/USDmn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 USD= INR44.4
Source: Bloomberg ; * As on 2 November 2010
ULTC.BO /UTCEM IN 276/276 310/6,976 240,353 10
Price & Volume

1,200 1,100 1,000 900 800 700 Oct-09 Mar-10 Vol. in '000s (RHS) Source: Bloomberg 2,000 1,500 1,000 500 0 Jul-10 Nov-10 Ultratech Cement (LHS)
Share holding (%)

Promoter Institutional Investors Other Investors General Public Source: BSE
Q3FY10 Q4FY10 Q1FY11 Q2FY11 54.8 21.3 8.6 15.3 54.8 22.6 7.8 14.8 54.8 22.2 8.0 15.0 64.1 18.7 8.6 8.5
Price performance (%)

Sensex Ultratech ACC Ambuja Cements Source: Bloomberg
3M 12.3 30.1 28.0 26.4
6M 17.0 17.5 17.5 23.1
12M 32.1 51.5 51.9 74.7
Valuation
UltraTech will enjoy benefits of higher scale of operations coupled with cost savings due to increased consumption of captive power. However, the stock is already trading at close to 38% premium to its replacement cost and close to our discounted upcycle EV/tonne. We have valued UltraTechs grey cement business at EV/tonne of USD140 and the white cement business at a conservative valuation of USD186/tonne. Accordingly, we initiate our coverage on UltraTech with a Reduce and a target price of INR 1,139. Key Financials
Y/E Mar (INR mn) FY08 FY09 FY10 FY11E FY12E Rev 55,092 63,831 70,497 140,614 185,837 YoY (%) 12.2 15.9 10.4 NA NA EBITDA 17,201 17,064 19,711 30,659 36,334 EBITDA (%) 31.2 26.7 28.0 21.8 19.6 Adj PAT 10,076 9,770 10,696 15,298 20,216
Stock performance
180 Rebased to 100 160 140 120 100 80 Nov-09 Feb-10 May-10 Ultratech Aug-10 Nov-10 Sensex
Source: Bloomberg
YoY (%) Fully DEPS 28.8 (3.0) 9.5 NA NA 80.4 77.4 84.6 64.1 73.3
RoE (%) 45.2 31.0 26.1 20.9 18.4
P/E (x) EV/tonne (USD) EV/EBITDA (x) 14.0 14.5 13.3 17.5 15.3 189.6 153.8 135.1 143.9 138.5 9.0 8.9 7.1 10.4 8.5
Source: Company, Elara Securities Estimates Note: Financials for FY09 & FY10 are prior to restructuring of cement business of AV Birla group and hence not strictly comparable
Ultratech Cement
Valuation trigger
Recovery in cement prices
Investment summary Pan India presence to reduce regional risks Healthy balance sheet
1,400 1,200 1,000 800 600 400 200 0

Target price reached 1 2
Power cost to reduce
Valuation trigger 1. Recovery in cement prices
Key risks
Apr-08 Apr-10 Apr-09 Feb-09 Aug-08 Feb-10 Aug-09 Aug-10 Feb-11 Apr-11 Aug-11 Dec-08 Dec-09 Dec-10 Oct-08 Oct-09 Oct-10 Jun-08 Jun-09 Jun-10 Jun-11 Oct-11
Sharp decline in cement prices Slow down in cement demand
Source: Bloomberg, Elara Securities Estimates
Valuation overview - EV/tonne based valuations

FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV White Cement Capacity EV /tonne multiple White Cement business EV EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 0.6 186 5,022 312,462 (1,920) 314,382 276 1,139 1,122 1.5 mn tonnes USD/tonne INR Mn 48.8 140 307,440
Our assumptions Cement Volume to grow at a CAGR of ~8.2% Realizations to increase at a CAGR of 0.9%.
Valuation driver - EV/tonne , RoE and RoCE

160 140 (EV/tonne) 120 100 80 60 40 20 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 0 20 40 (%) RoNW(%) (RHS) ROCE (%) (RHS) 60
EV/Tonne(US$) (LHS))
24
Ultratech Cement
Financials (Y/E Mar)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Net Deferred Tax Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios(%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
Source: Company, Elara Securities Estimates Note: Financials for FY09 & FY10 are prior to restructuring of cement business of AV Birla group and hence not strictly comparable
FY09 63,831 17,064 1,036 18,100 3,230 14,870 1,255 13,615 3,844 9,770 9,770 FY09 1,262 34,759 21,416 57,437 74,010 27,653 46,357 6,773 10,348 1,189 (7,229) 57,437 FY09 15,682 (1,106) 14,576 (8,500) 6,075 1,917 (7,954) 38 FY09 15.9 (0.8) (3.0) 26.7 15.3 0.5 31.0 29.2 77.4 (3.7) 4.9 14.5 8.9 2.4 153.8 0.4
FY10 70,497 19,711 1,227 20,938 3,881 17,057 1,175 15,882 5,185 10,696 10,696 FY10 1,265 44,822 16,045 62,132 80,781 31,365 49,417 2,594 16,696 1,733 (8,307) 62,132 FY10 16,856 (752) 16,104 (2,592) 13,512 (7,410) (6,300) (198) FY10 10.4 15.5 9.5 28.0 15.2 0.3 26.1 28.5 84.6 9.2 6.2 13.3 7.1 2.0 135.1 0.6
FY11E 140,614 30,659 2,409 33,068 7,668 25,400 2,903 22,498 7,199 15,298 15,298 FY11E 2,760 97,830 41,473 142,063 176,559 69,185 107,374 20,000 16,696 15,481 (17,487) 142,063 FY11E 25,799 (1,295) 24,504 (18,867) 5,637 (4,921) (6,300) (5,584) FY11E NA NA NA 21.8 NA 0.3 20.9 24.9 64.1 (24.2) 6.5 17.5 10.4 2.3 143.9 0.6
FY12E 185,837 36,334 4,333 40,667 8,451 32,216 2,485 29,730 9,514 20,216 20,216 FY12E 2,760 116,029 37,973 156,762 199,059 77,636 121,423 12,930 16,696 23,201 (17,487) 156,762 FY12E 29,740 895 30,635 (15,430) 15,205 (8,004) 1,414 8,615 FY12E NA NA 32.1 19.6 10.9 0.1 18.4 21.6 73.3 14.3 6.5 15.3 8.5 1.7 138.5 0.6
Revenue & margins growth trend

200,000 150,000 (INR mn) 100,000 50,000 0 FY09 FY10 FY11E FY12E
Net Revenues (LHS)
26.7
28.0 21.8 19.6
30 25 20 15 10 5 0
EBITDA Margin (RHS)
Adjusted profits growth trend

25,000 20,000 (INR mn) 15,000 10,000 5,000 0 FY09 FY10 FY11E FY12E
Adjusted PAT
Return ratios (%)

40 31.0 30 29.2 20 26.1 20.9 10 FY09 FY10
ROE (%)
28.5 24.9 21.6
18.4 FY12E
FY11E
ROCE (%)
Comfortable debt equity ratio
Trading at a premium to replacement cost
Cement
25
(%)
Ultratech Cement Ultratech Cement
Investment rationale
Restructuring of AV Birla group cement business to eliminate regional risks Dependence on imported coal to increase cost pressures Lower dependence on expensive power to improve cost efficiency Overseas acquisitions to provide exposure to cement markets outside India
A global giant emerges post revamp

Grasim and UltraTech have consolidated their cement business. The restructuring was carried out in two steps: Grasim demerged its cement business into a separate company viz: SCL and then, SCL was merged with UltraTech. The swap ratio for the merger was of four shares of UltraTech for every seven shares of SCL. After the restructuring, Grasim now owns ~60.3 % in UltraTech. The company has now emerged as the worlds ninth largest manufacturer having capacity of 52.4 mn tonnes almost double the capacity of distinct second and third players - ACC and Ambuja - in the Indian cement industry. The larger size provides the benefit of economics of scale and a bigger balance sheet to comfortably fund major projects. Exhibit 1: Group structure: Pre and post restructuring
Grasim Shareholders Ultratech Public Shareholders 45% Grasim VSF / Others 65% Samrudhhi Cement 55% UltraTech Cement
Exhibit 2: UltraTech sneaks into global top 10

Lafarge - France Holcim - Switzerland CNBM - China Heidelberg - Germany Cemex - Mexico Anhui Conch - China ItalCementi - Italy Taheiyo - Japan UltraTech + Samruddhi CRH - Ireland Buzzi Unichem - Italy Eiro Cement Cimpor - Portugal Jdong- China Hauxin- China 0
263 257 133 115 101 95 74 57 52 50 44 39 37 35 35 100 200 (mn tonne) 300
Exhibit 3: UltraTech leads by miles

1)UltraTech + Samruddhi 2)ACC 3)Ambuja Cement 4) JP 5) India Cement 6) Shree Cement 7)Madras Cement 0 14 12 10 20 40 (mn tonne) 60 26 25 22 52
(35%)
Grasim Shareholders
UltraTech Public Shareholders
Source: Company, CMA ,Elara Securities Research
Grasim VSF / Others 60.3% UltraTech + Samrudhhi Cement

Apart from this, post merger, UltraTech will have a presence in all five major regions, thereby eliminating regional risk. Further, the merger is also expected to increase FY12 EPS of the company by 10.3% as proportion of the volume from low price Southern region will reduce.
26
Ultratech Cement
Exhibit 4: Key financials for FY12
Post Pre restructuring restructuring Sales volume (mn tonnes) Realization per tonne Costs per tonne EBITDA per tonne Net Sales(INR Mn) EBITDA (INR Mn) Net Profit(INR Mn) No of share (mn) EPS
Var (%) 109.1 7.8 6.8 12.2 125.3 134.5 140.7 118.2 10.3
compared to 36% of ACC. Thus the regional risk of the UltraTech has also been substantially reduced. Prior to FY10, UltraTech used to meet about 75% of its electricity requirement through expensive source of power -: grid, DG sets and naphtha based power plants. However, with the company increasing its coal based CPP capacity by 211MW in last two years, UltraTechs dependence on expensive source of power has been reduced to 10% in FY10 and is expected to reduce to 5% in FY11 &FY12.The CPP have resulted into savings of INR INR 127/tonne (INR 146 / tonne) in FY10. We expect company to save INR 221 bn (INR 167 per tonne ) in FY11 and INR 231bn ( INR 164/ tonne) in FY12. Thus, with an improvement in free float, cost structure and regional mix, we expect UltraTech to trade at par to Ambuja and close to 5% premium to ACC. Exhibit 7: EV/tonne gap reduces
300 (USd per tonne) 250 200 150 100 50 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E UltraTech
23 3,649 2,964 685 82,474 15,491 8,398 126 66
47 3,933 3,164 769 185,837 36,334 20,216 276 73
Exhibit 5: UltraTech pre-merger: Region wise capacity

East 18% South 35%
West 48%
Exhibit 6: Post-merger: Region wise capacity break-up

Central 11% East 14%
ACC
Ambuja
North 26%
West 26%
South 23%
Valuations discount to ACC, Ambuja to shrink Historically, UltraTech has traded at a discount of 18% to ACC and 33% to Ambuja, primarily on account of: High regional risk Dependence on expensive source of power Lower free float
Acquisition of ETA Star Cement would provide exposure to cement market outside India though it is likely to adversely impact the profitability in the medium term. UltraTech has acquired the management control of ETA Star Cement at an EV INR1.7bn (at EV/tonne of USD120). ETA Star Cements manufacturing facilities include a 2.3mtpa clinkerisation plant, and 2.1mtpa of cement grinding capacity in the UAE, 0.4mtpa and 0.5mtpa of cement grinding capacity in Bahrain and Bangladesh respectively. The acquisition of ETA Star Cement has provided the company an opportunity to explore cement market outside India. However, due to low profitability in Middle East vis a vis India, the acquisition is likely to act as a drag. Nevertheless, due to small size of acquisition, we expect its impact on overall profitability to be marginal. We expect the acquisition will dilute FY12 EBITDA margins by 20 bps and RoCE by 30 bps. Dependence on imported coal to heighten cost stress Power and fuel costs constitute ~24% of cost of goods sold for UltraTech which meets 29% (on a consolidated basis) of its fuel requirements through imports. The prices
27
Post restructuring, free float is no longer an issue for UltraTech who will be a pan India player, and will enjoy a better regional mix as compared to ACC. UltraTech will have 23% of its capacity in low price southern region as
Cement
Ultratech Cement
of imported coal have increased by 42% YoY (7.6% QoQ) due to an improvement in the global sentiment. Thus the hike in power and fuel costs will partly lessen the benefit of saving from CPP. Exhibit 8: Fuel mix: Dependent on imported coal
Company ACC UltraTech Shree Cement India Cement JK Lakshmi JK Cement Orient Paper Ambuja Domestic Coal (%) 85 62 0 45 0 10 100 70 Imported Petcoke (%) Other (%) Coal (%) 15 29 0 55 0 0 0 30 0 9 100 0 90 90 0 0 0 0 0 0 10 0 0 0
Exhibit 9: Key balance sheet ratios

FY10 Net Debt Equity (x) Gross Cash & Investments(INR mn)
FY11E 0.3 31,279
FY12E 0.1 39,894
0.3 17,533
Exhibit 10: Summary of free cash flow

INR mn Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Free Cash Flow as a % of Mcap Free Cash Flow as a % of EV
FY10 16,856 (752) 16,104 (2,592) 13,512 10 10
FY11E 25,799 (1,295) 24,504 (18,867) 5,637 2 2
FY12E 29,740 895 30,635 (15,430) 15,205 5 5
Healthy balance sheet, capex to take off smoothly UltraTech had a comfortable net debt equity ratio, of 0.3x at the end of FY10. The company also had gross cash and equivalents of INR17.5bn. Lower debt equity ratio bigger and stronger balance sheet will enable the company to smoothly fund its next round of expansion. The company has announced brownfield expansions aggregating to 9.2mn tonnes at Chhattisgarh and Karnataka units with related grinding units and bulk terminals at the investments of INR56bn. Post the implementation of expansion UltraTech Cement (consolidated) capacity will increase to 61.6mn tonnes from 52.4mn tonnes at present. The aggressive expansion by the company will enable the AV Birla group to maintain its market share at close to 18% in domestic market.
Key risk
Increase in fuel prices More than expected increase in coal prices may adversely affect profitably of the company. Sharp decline in cement prices Cement prices may decline due to slow down in cement demand or bunching up of capacities addition.
28
Ultratech Cement

At EV/tonne of USD139, restructuring gets priced in Initiating coverage with Reduce, target price of INR1,139 on limited upside visibility Valuing at EV/tonne of USD140 on FY12 capacity, at par with Ambuja
Valuations
Traditionally UltraTech has traded at a discount to the other large cap peers viz. Ambuja and ACC. However, with the consolidation of Grasims cement business and steps to address operational inefficiencies, we believe, the valuation discount between these players will narrow down. We have valued the grey cement business of UltraTech at an upcycle EV/tonne valuation of USD140/tonne. We have used a conservative valuation multiple of USD186/tonne for its white cement business. The white cement business is characterized by significantly higher realizations (~4.6x as that of grey cement) as well as EBITDA. Accordingly we arrive at a valuation of INR 1,139 which leaves an upside of ~2% in the stock.
Exhibit 11: EV/tonne based valuations

FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV White Cement Capacity EV /tonne multiple White Cement business EV EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 0.6 186 5,022 312,462 (1,920) 314,382 276 1,139 1,122 1.5 mn tonnes USD/tonne INR Mn 48.8 140 307,440
Cement
29
Ultratech Cement
Company description
UltraTech Cement Limited, the erstwhile L&T Cement, is Indias leading cement player. It is also one of the largest exporters of cement clinker from India. Post the merger of Samruddhi Cement, UltraTech has emerge as the world ninth largest manufacturer having capacity of 52.4mn tonnes - more than double the capacity of distinct second and third players - ACC and Ambuja - in the cement industry. UltraTech will have presence in all five regions in India.
Board of Directors & Management

Kumar Birla, Non-Executive Chairman Kumar Mangalam Birla is Non-Executive Chairman of the Board of UltraTech. He obtained his MBA degree from London Business School. K C Birla - Chief Financial Officer K C Birla is the Chief Financial Officer and Senior Executive President of UltraTech. O Puranmalka - Whole-time Director O Puranmalka has been appointed the Group Executive President, Chief Marketing Officer and Whole-time Director of UltraTech, effective April 01, 2010.
30
Ultratech Cement
Coverage History
1,400 1,200 1,000 800 600 400 1
0
Aug-08 Aug-09 Aug-10 Jan-09 Sep-08 Sep-09 Jan-10 Sep-10 Oct-08 Oct-09 Jun-08 Jun-09 Jun-10 Apr-08 Apr-09 Nov-08 Nov-09 Apr-10 Oct-10 Jul-08 Jul-09 Jul-10 May-08 May-09 May-10 Nov-10 Feb-09 Mar-09 Feb-10 Mar-10 Dec-08 Dec-09
Not Covered
Covered
Date 1
Rating
Target Price INR1,139
Closing Price INR1,122
02-Nov-2010 Reduce
Guide to Research Rating

BUY ACCUMULATE REDUCE SELL Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5%
Cement
31
200
Ultratech Cement
Notes
32
India | Cement
9 November 2010
Initiating Coverage
Ambuja Cements
Melody from clinker
Capacity expansion to drive volume growth Ambuja Cements Limited (Ambuja) would complete its expansion in CY10 to take the total cement grinding capacity to 27mn tonnes. In Q1CY10, the grinding capacity of the company rose to 25mn tonnes (from 22mn tonnes), and is expected to be 27 mn tonnes by end of CY11. However, the clinker capacity of the company will remain at 16.7mn tonnes enabling the company to produce up to 25mn tonnes of cement. We expect this to lead to a 9.4% volume CAGR over CY0911. On the back of volume growth, we expect earnings to grow at a CAGR of 4.6% despite the subdued pricing regime and higher cost of production. Lower clinker purchases to cushion margins Ambujas CY09 earnings were depressed due to the purchase of clinker from the open market. With its 4.6mn tonnes clinker capacity that came on stream in Q1CY10, we expect the company to save ~INR165/tonne in CY10 and ~INR236/tonne in CY11. Hence EBITDA margins of Ambuja are expected to hold around 25-28% in CY10 as well as in CY11 despite an increase in cost per tonne (ex raw material) at a CAGR of 5.2% between CY09 and CY11. Dependence on imported coal to neutralize savings from clinker Power and fuel costs constitute ~26% of Ambujas cost of goods sold. Ambuja meets 30% of its fuel requirements through imports. The prices of imported coal have increased by 42% YoY. Thus any increase in power and fuel cost will partly neutralize the benefit of saving from lower clinker purchase. Favorable regional mix: Absence in South to be a boon We like Ambujas regional mix as it does not have any presence in the Southern region - which is expected to have the worst demand supply equation. Ambuja has better a regional mix than the other large cap players hence will be better off as compared to the rest.
Rating : Sell
Target Price : INR119 Downside : 20% CMP : INR148 ( As on 2 November 2010) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 US$= INR44.4
ACEM IN/ABUJ.BO 1,524/1,524 226/5,099 2,107,833 2
Price & Volume

150 130 110 90 70 Oct-09 Mar-10 Vol. in mn (RHS) Source: Bloomberg 5 0 Jul-10 Nov-10 Ambuja Cement (LHS) 15 10
Share holding (%)

Q4CY09 Q1CY10 Q2CY10 Q3CY10 46.4 39.8 4.7 9.1 46.4 40.7 4.3 8.6 46.4 41.5 3.6 8.6 46.4 42.4 3.3 7.9

Sensex Ambuja Cements Ultratech ACC Source: Bloomberg
3M 12.3 26.4 30.1 28.0
6M 17.0 23.1 17.5 17.5
12M 32.1 74.7 51.5 51.9
Valuation
At the CMP of INR148, Ambuja is trading at 17.2x and 16.9x its CY10 and CY11 earnings, respectively. On an EV/tonne basis, it is trading at USD184/tonne and USD180/tonne of its CY10 and CY11 capacities, respectively. The stock is currently trading at a premium to its replacement cost as well as large cap peers having a pan India presence. Although, Ambuja has the benefits of efficient operations and possibilities of volume growth, we believe, the stock price has already factored in both. Current valuations are already close to the average peak EV/tonne that Ambuja has traded at. Therefore, considering the steel valuations and steep premium to its large cap peers as well as replacement cost, we initiate coverage of Ambuja Cements with a Sell rating and a target price of INR119. Key Financials
Y/E Dec (INR mn) CY08 CY09 CY10E CY11E Rev YoY (%) EBITDA 62,347 9.3 17,087 70,769 13.5 18,669 76,429 8.0 21,226 87,701 14.7 21,998 EBITDA (%) 27.4 26.4 27.8 25.1 Adj PAT 11,335 12,184 13,103 13,334 YoY (%) Fully DEPS (9.8) 7.4 7.5 8.0 7.5 8.6 1.8 8.8
Stock performance
180 Rebaed to 100 160 140 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Sensex Nov-10 Ambuja Source: Bloomberg
RoE (%) 21.9 20.1 18.8 16.8
P/E (x) EV/tonne (USD) EV/EBITDA (x) 19.9 260.4 12.7 18.5 213.6 11.3 17.2 184.5 9.8 16.9 179.8 9.2
Source: Company, Elara Securities Estimate
Ambuja Cements
Valuation trigger
Decline in cement prices
Investment summary Cement expansion to drive volume growth Lower clinker purchases to support margins
160 140 120 100 80 60 40 20 0

Target price reached 1 2
Favorable regional mix Healthy balance sheet
Valuation trigger 1. Decline in cement prices

Aug-11 Oct-11
Apr-08
Apr-10
Apr-09
Feb-09
Aug-08
Feb-10
Aug-09
Aug-10
Dec-08
Dec-09
Dec-10
Feb-11
Apr-11
Oct-08
Jun-08
Oct-09
Jun-09
Jun-10
Oct-10
Jun-11
Key risks Sharp decline in cement prices Slow down in cement demand

CY11E Grey Cement Capacity EV /tonne multiple Target EV Less: Net Debt Target Market Capitalizations Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside)
Our assumptions Cement Volume to grow at a CAGR of ~9.4% Cost per tonne to increase at a CAGR of 2.6% Realizations to increase at a CAGR of 1.7%.
mn tonnes USD/tonne INR mn INR mn INR mn mn INR/ share INR/ share (%)
25.0 140 157,500 (23,649) 181,149 1,524 119 148 (19.8)

300 250 (EV/tonne) 200 150 100 50 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 CY07 CY08 CY09 CY10E CY11E 0 20 40 (%) EV/Tonne (USD) (RHS)
60
ROE(%) (LHS)
ROCE (%) (LHS)
34
Ambuja Cements
Financials (Y/E Dec)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Miscellaneous Expenses not written off Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth@ EBITDA Margin Net Margin@ Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%) CY08 62,347 17,087 1,754 18,841 2,598 16,243 321 15,923 4,588 11,335 2,688 14,023 CY08 3,049 53,680 2,887 3,808 63,423 57,069 25,142 31,928 19,472 3,324 8,657 43 63,423 CY08 12,274 (2,612) 9,662 (16,415) (6,753) (4,821) 13,666 2,093 CY08 9.3 (16.4) (9.8) 27.4 18.2 (0.2) 21.9 27.7 7.4 (9.8) 2.2 19.9 12.7 3.5 260.4 1.5 CY09 70,769 18,669 2,558 21,227 2,970 18,257 224 18,033 5,849 12,184 12,184 CY09 3,050 61,659 1,657 4,858 71,225 62,241 27,841 34,400 27,144 7,270 2,383 27 71,225 CY09 14,525 6,562 21,087 (12,844) 8,243 (4,859) (3,093) 291 CY09 13.5 9.3 7.5 26.4 17.2 (0.2) 20.1 27.1 8.0 7.4 2.4 18.5 11.3 3.0 213.6 1.6 CY10E 76,429 21,226 2,158 23,383 4,382 19,001 345 18,656 5,553 13,103 286 13,388 CY10E 3,051 71,306 657 4,858 79,872 97,386 32,223 65,162 1,000 7,270 6,413 27 79,872 CY10E 16,531 (1,089) 15,442 (9,000) 6,442 (5,086) 1,585 2,941 CY10E 8.0 13.7 7.5 27.8 17.1 (0.2) 18.8 25.2 8.6 7.5 2.1 17.2 9.8 2.7 184.5 1.4 CY11E 87,701 21,998 2,210 24,208 5,071 19,137 88 19,049 5,715 13,334 13,334 CY11E 3,051 80,914 657 4,858 89,480 107,886 37,294 70,592 500 7,270 11,091 27 89,480 CY11E 17,057 609 17,665 (10,000) 7,665 (3,814) 1,436 5,287 CY11E
15

100,000 90,000 (INR mn) (%) 26 25.1 25 CY10E CY11E EBITDA Margin (RHS) 80,000 70,000 60,000 50,000 CY08 CY09 Net Revenues (LHS) 26.4 27 27.8 27.4 28

15,000 14,000 (INR mn) 13,000 12,000 11,000 10,000 CY08 CY09 CY10E CY11E PAT Growth (RHS) Adjusted PAT (LHS) (9.8) 7.5 7.5 1.8 10 5 (%) 0 (5) (10) (15)
Return ratios
30 27.7 27.1 25.2 25 22.6 21.9 20.1 18.8 CY10E 16.8 CY11E
20
14.7 3.6 1.8 25.1 15.2 (0.3) 16.8 22.6 8.8 1.8 2.1 16.9 9.2 2.3 179.8 1.4
CY08
CY09 ROE (%)
ROCE (%)
Strong balance sheet position with net cash per share of INR16 (CY11E)
Trading at steep premium to its peers, replacement cost
@ On adjusted bottomline Source: Company, Elara Securities Estimates
Cement
35
Ambuja Cements Ambuja Cements
To grow faster than industry in CY11 on capacity addition Lower clinker purchases to cushion profitability Strategically placed in high-growth Northern, Central and Eastern regions
Capacity addition to enhance volume

For past three years, Ambujas cement volume grew at a CAGR 6% (as compared to 8.7% for the industry) due to capacity constraints and mismatch in clinker and cement capacity. Exhibit 1: ACL had moderate volume growth in past
12 10 8 (%) 6 4 2 CY07 CY08 Industry
Source: Company, CMA, Elara Securities Research
Exhibit 2: Ambuja to show improvement in margins

400 0 (bps) (400) (800) (1,200) (1,600) (1,050) (1,410) JKCEM ACC SCL JKL ICL UltraTech Ambuja 8.7 Western OPI 8.6 Sothern (870) (670) (620) (620) 140 130
Favorable regional mix

CY09 ACL
However, Ambujas efforts to expand capacities would enable it to grow its cement volume better than the industry average. In Q1CY10, the company has added two grinding units of 1.5mn tonne each at Nalgarh (HP) and Dadri (UP), increasing the grinding capacity to 25mn tonnes. It also plans to add another grinding unit of 1mn tonne each at Maharashtra and Chhattisgarh by the end of CY10, taking the cement capacity to 27mn tonnes. Thus, we expect Ambuja to post volume growth of 12.5% as compared to 10.4% of the industry in CY11. On the back of volume growth, we expect earnings of the company to grow at a CAGR of 4.6%. Lower clinker purchases to cushion margins Due to mismatch between cement and clinker capacity, Ambuja had to purchase 1.7 mn tonnes of clinker from the open market. In Q1CY10 Ambuja commissioned clinker capacity of 4.6mn tonnes (at Himachal Pradesh and Chhattisgarh), taking clicker capacity to 16.7mn tonnes (current grinding capacity stands at 25mn tonnes). We expect the company to save INR165 per tonne in CY10 and INR236 per tonne in CY11. Saving from the clinker purchase will cushion the margins of the company from fall in cement realizations. Thus in our coverage universe, only Ambuja and OPI are expected to report an improvement in EBITDA margins in CY10/FY11.
Ambuja does not have a presence in the Southern region which is expected to have worst demand supply equations. About ~63% of the companys capacity is located in the fast growing Northern, Eastern and Central regions. As compared to the all India growth of 12.1%, Northern, Central and Eastern region grew by 17.7%, 15.8% and 13.6% respectively. Furthermore we expect these Central and Eastern regions to have better pricing environments as compared to other regions in India. The average capacity utilization of Eastern and Central region is likely to be 1,400 bps and 900 bps higher than pan India. The capacity utilization of the North and Western region is expected to be very close to pan India average. Exhibit 3: Key markets report better growth in FY10
20 16 (%) 12 8 4 0 Eastern All India ( ex ACC & ACL India) All India ( Inc ACC & ACL India) Central North 17.7 15.8 13.6
12.1
10.1
36
Ambuja Cements
Exhibit 4: Central zone dominates utilization in FY10
110 100 (%) 90 80 70 Sothern Western Eastern All India
Source: CMA,, Elara Securities Research

INR mn Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Free Cash Flow as a % of Mcap Free Cash Flow as a % of EV CY09 14,525 6,562 21,087 (12,844) 8,243 4 4 CY10E 16,531 (1,089) 15,442 6,442 3 3 CY11E 17,057 609 17,665 7,665 3 4
104
90 84 75 84 84
(9,000) (10,000)
North
Central
Thus, Ambuja has a better regional mix than other large cap players. Exhibit 5: Focal presence in high growth North
Centeral, 7 %
However, we do not expect the company to earn cash yield of more than 8% on its investments. Cement business is expected to earn RoCE of ~28%. Thus increase in proportion of cash in the balance sheet is expected to pull down the blended return ratios of the company. We expect the RoCE of Ambuja to decline from 23.4% in CY09 to 25.2% in CY10 and further to 22.6% in CY11. Dependence on grid, generators set to reduce In past 15 months, Ambuja has commissioned 93MW of CPP(15MW at Bhatapara in Chhattisgarh, 15MW at Maratha in Maharashtra, 33MW at Bhatapara in Chhattisgarh and 30MW at Ambujanagar in Gujarat ). The total power capacity of the company now stands at 400MW (265MW thermal and 135MW DG). On account of new thermal capacity coming on stream, dependence on grid and DG sets is expected to reduce. We expect company to save INR342mn (INR17 per tonne) in CY10 and INR720mn (INR 29 per tonne) in CY11. Apart from this we expect company to earn EBITDA of INR 125.4 mn, INR 84.6 mn in CY11 from sale of power. Exhibit 8: Source of power (%)
CY09 Grid DG Thermal-CPP 20 15 65 CY10E 3 2 95 CY11E 3 2 95
North, 42% West, 37%
East, 14%
Healthy balance sheet Ambuja has the strongest balance sheet among its peers. At the end of CY09, it had a net debt equity ratio of -0.22. As the operating cash flows of the company are likely to be much higher than its capex , we expect the company to generate free cash flow of INR14.1 bn over the next two years. Thus the net cash and investment of the company would increase from INR14.4bn at end of CY09 to INR23.6bn (INR16 per share, i.e. 10% of CMP) by the end of CY11. Free cash to firm as a percentage of EV is expected to be 4% in CY11. Exhibit 6: Key balance sheet data
CY09 Net Debt Equity (x) Gross Cash & Investments(INR mn) Net Cash & Investments(INR mn) Net Cash & Investments(per share) Net Cash & Investments as a % of CMP
CY10E (0.25)
CY11E (0.28)
(0.22) 16,077 14,420 9 6
19,018 24,306 18,361 23,649 12 8 16 10
Cement
37
Ambuja Cements
Exhibit 9: CPP slashes electricity costs
3.7 3.6 (kWh) 3.6 3.5 3.5 3.4 3.4 CY09 CY10E CY11E Blended electricity cost (LHS) Electricity cost per tonne (RHS)
Exhibit 12: Imported coal inflates power costs

315 310 (INR per tonne) 305 300 295 290 285 280 1,100 1,000 (INR per tonne) 900 800 700 600 CY09 CY10E CY11E 757 857 963
Exhibit 10: Revenue, profit from merchant power

CY09 Mn KWh INR mn Revenue Cost EBITDA EBITDA margins(%) Per Unit Revenue Cost EBITDA 6 3 2 5 3 2 5 3 1 425 248 177 42 394 269 125 33 372 288 85 29 75 CY10E 79 CY11E 83
Exhibit 13: Imported coal prices remain firm

Internatinoal Coal Prices 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Apr-07 Jun-07 Sep-07 Dec-07 Mar-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Jul-09 Oct-09 Jan-10 Apr-10 Jun-10 Sep-10 Baltick dry index (LHS) Richards Bay Coal Spot (RHS)
Source: Bloomberg, Elara Securities Research
200 150 100 50 0
Key risk
Sharp increase in cement prices A higher than anticipated improvement in cement prices may improve the profitability of the company. One per cent increase in cement prices will augment the earnings of the company by 3.4% Faster ramp-up of new plant Any significant ramp-up in cement volumes, higher than our current estimates, will put our earnings estimates at risk.
Reliance on imported coal to intensify cost pressure Ambuja meets 30% of its fuel requirements through imports. Prices of imported coal have gone up YoY by 42% due to recovery in the global economy. Prices of domestic coal on the other hand have increased by only 10%-11%. Thus despite decline in raw material cost at a CAGR of 22.7%, the total cost per tonne is expected to increase at a CAGR of 2.6%. Exhibit 11: Fuel Mix
Company ACC Ultra Tech Cement Shree Cement India Cement JK Lakshmi JK Cement Orient Paper Ambuja Cement Domestic Coal (%) 85 62 0 45 0 10 100 70 Imported Coal (%) 15 29 0 55 0 0 0 30 Petcoke (%) 0 9 100 0 90 90 0 0 Other (%) 0 0 0 0 10 0 0 0
Source: Company, Elara Securities Research *Higher as compared to peers due to production of white cement
38
Baltick dry Index
Ambuja Cements

Stock trades at 80% premium to its replacement cost, steep premium to peers Initiating coverage with Sell, target price of INR119 for its unwarranted valuation Valuing company at EV/tonne of USD140 per tonne on CY11 capacity
Valuation
At the CMP of INR 148, Ambuja is trading at 17.2x and 16.9x its CY10 and CY11 earnings, respectively. On an EV/tonne basis, it is trading at USD184/tonne and USD180/tonne of its CY10 and CY11 capacities, respectively. The stock is presently trading at a whopping 80% premium to its replacement cost. We believe that such huge premium is unjustified for any cement company in the downturn. In terms of relative valuations, Ambuja is trading at ~38% premium to other frontline cement companies. We believe going ahead, the valuation gap between Ambuja and other large cap companies will reduce, particularly post restructuring UltraTech. Thus, we are initiating coverage on Ambuja with a SELL rating and a target price of INR 119. We have valued the company at EV /tonne of USD 140 on CY11 capacity of 25mn tonnes (though company will have grinding capacity of 27mn tonnes, 2mn tonnes of grinding capacity will be purely for logistic purpose).

CY11E Grey Cement Capacity EV /tonne multiple Target EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn mn INR/ share INR/ share (%) 25.0 140 157,500 (23,649) 181,149 1,524 119 148 (19.8)
Cement
39
Ambuja Cements
Company Description
Ambuja Cements Limited was set up in 1986. The company is controlled by the Holcim group, which owns ~46%. The total capacity of the company, as on CY09, is 25 mn tonne with a 400 MW of captive power capacity. Ambuja has a presence in the north, east and western regions of India. Its plants are situated in Gujarat, Maharashtra, Himachal Pradesh, Punjab, Rajasthan, Uttarakhand, Chhattisgarh and West Bengal. Ambuja has bulk cement terminals at Muldwarka (Gujarat), Panvel, Navi Mumbai,Kochi and Surat. Ambuja is one of the major exporters of cement in India. The company largely exports to the Middle East.

Narotam Sekhsaria, Non-Executive Chairman Narotam Sekhsaria is the Non-Independent NonExecutive Chairman of the Board of Ambuja effective from September 24, 2009. Sekhsaria holds a Bachelor's Degree in Chemical Engineering from the University of Bombay. He was the founder promoter and the Chief Executive and Managing Director of the company since its inception in April 1983 till January 2006. Sekhsaria relinquished the post of Managing Director when the management control was transferred to Holcim. In September 2009, he was appointed as Non-executive Chairman after Suresh Neotia relinquished the post of Chairman. Paul Hugentobler - Vice Chairman Paul Heinz Hugentobler serves as Non-Independent Non-Executive Director of Ambuja and has been appointed this position effective from September 24, 2009. Hugentobler obtained a degree in civil engineering from the Swiss Federal Institute of Technology, ETH, Zurich, and a degree in economic science from the University of St. Gallen. He joined Holcim Group Support Limited as CEO of Siam City Cement, Bangkok, Thailand. He has been a Member of the Executive Committee of Holcim since January 2002 with responsibility for South Asia and ASEAN excluding Philippines. He joined the Board in May 2006. Onne Van Der - Managing Director Onne Van Der Weijde serves as CEO - Designate, Whole Time Director of Ambuja since February 17, 2010, and has been appointed as Managing Director effective May 1, 2010. He joined the Board as Non-executive Director in January 2009. Onne holds a Bachelors' degree in Economics & Accounting from Rotterdam, the Netherlands and a Master's degree in Business Administration from the University of Bradford, UK. In the year 1996 he joined Holcim and after holding various positions, he was appointed Director and General Manager for Holcim (India) Private Limited. in March 2005. He was the CFO of ACC for around 2 years during 2006-2008. He possess more than 15 years of experience in cement industry including 5 years in Indian cement industry.
40
Ambuja Cements
Coverage History
160 140 120 100 80 60 40 1
Not Covered
Covered
Date 1
Rating
Target Price INR119
Closing Price INR148
02-Nov-2010 Sell

Cement
41
20
Jun-08
Jun-09
Jun-10
Jul-08
Jul-09
Apr-08
Apr-09
Feb-09
Aug-08
Aug-09
Feb-10
Apr-10
Jul-10
Aug-10
Mar-09
Dec-08
Dec-09
Mar-10
Jan-09
Sep-08
Sep-09
Jan-10
Sep-10
Oct-08
Oct-09
Nov-08
Nov-09
Oct-10
May-08
May-09
May-10
Nov-10
Ambuja Cements
Notes
42
India | Cement
9 November 2010
Initiating Coverage
ACC
In the region of comfort
Pan-India presence to reduce regional risks ACC Limited (ACC) has a presence in all five regions of India, hence runs a lower regional risk as compared to other major cement players. Out of the total ~27.5 mn tonnes of capacity, 36% is in South India, where, we believe due to the surplus situation, pricing power will be the lowest. However, we consider that the presence of the company in other regions with a better demand supply situation (23% in Eastern region and 19% in Central region) will improve its overall profitability. Thus, the pan-India presence of the company will insulate it from regional risks. Reliance on domestic coal to insulate margins from rising costs Power and fuel costs constitute ~27% of the ACCs cost of goods sold. The company meets 85% (75% through linkages) of its fuel requirement through the domestic coal. Prices of domestic coal are not as volatile as that of imported coal. Thus dependence on domestic coal provides a greater cost visibility to ACC as compared to its peers. Prices of imported coal have increased ~42% YoY. We believe that ACC will have a cost advantage of ~INR 96/ tonne as compared to players depending on imported coal, and INR103/ tonne as compared to players dependent on petcoke. Healthy balance sheet to support distress acquisitions At the end of CY09, ACC had a net cash and investment of INR16.6bn and net debt equity ratio of -0.15. We expect ACC to generate free cash flow of INR11.3bn over next two years. Thus, the net cash and investment of the company is expected to increase to ~INR28.5 bn (INR 152 per share, i.e. 14% of CMP) by end of CY11. Strong balance sheet will also enable the company to capitalize on any distress opportunity that might be available in the down turn.
Rating : Accumulate
Target Price : INR1,123 Upside : 6% CMP : INR1,062 ( As on 2 November 2010) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/USDmn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 USD= INR44.4 ACC IN/ACC.BO 188/188 200/4,495 432,034 10
Price & Volume

1,100 1,000 900 800 700 600 Oct-09 Mar-10 Vol. in mn (RHS) Source: Bloomberg Jul-10 4 3 2 1 0 Nov-10 ACC (LHS)
Share holding (%)

Q4CY09 Q1CY10 Q2CY10 Q3CY10 46.2 32.0 6.3 15.5 46.2 32.4 6.2 15.2 46.2 32.8 5.9 15.1 46.2 33.1 6.1 14.6

Sensex ACC Ultratech Ambuja Source: Bloomberg
3M 12.3 28.0 30.1 26.4
6M 17.0 17.5 17.5 23.1
12M 32.1 51.9 51.5 74.7
Valuation
At the CMP of INR 1,062 per share, the stock is trading at 16.7x and 15x its CY10 and CY11 earnings, respectively. It is trading at EV/tonne of USD131 and USD122 of its CY10 and CY11 capacities, respectively. With narrowing of the gap in debt equity ratio and EBITDA per tonne between ACC and Ambuja, we expect that the valuations gap between the two also to narrow down further. (Kindly refer to Exhibit no. 12 and Exhibit no. 13 on page no 49). Thus we are initiating our coverage on ACC with Accumulate rating and a price target of INR1,123 per share. We have valued the company at USD133 on CY11 capacity. Key Financials
Y/E Mar (INR mn) CY08 CY09 CY10E CY11E Rev 73,086 80,272 77,346 91,932 YoY (%) 4.5 9.8 (3.6) 18.9 EBITDA 17,332 24,531 18,426 21,459 EBITDA (%) 23.7 30.6 23.8 23.3 Adj PAT 11,737 15,881 11,940 13,265
Stock performance
160 Rebased to 100 140 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Sensex Nov-10 ACC Source: Bloomberg
YoY (%) Fully DEPS (7.5) 35.3 (24.8) 11.1 62.5 84.5 63.5 70.6
RoE (%) 25.9 29.0 18.5 17.9
ACC
Valuation trigger
Ramp up of Karnataka cement capacity Ramp up of Maharashtra cement capacity
Investment summary Pan-India presence to reduce regional risks
1,200
1 2 3
1,000 800 600 400 200 0

Target price reached
Dependence on domestic coal to provide cost advantage Healthy balance sheet
Valuation trigger 1. Ramp up of Karnataka cement capacity

Apr-08 Apr-10 Apr-09 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Apr-11 Aug-11 Dec-08 Dec-09 Dec-10 Oct-08 Oct-09 Oct-10 Jun-08 Jun-09 Jun-10 Jun-11 Oct-11
2. Ramp up of Maharashtra capacity
cement
Key risks Valuation overview - EV/tonne based valuations

CY11E Capacity EV /tonne multiple EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn mn INR/ share INR/ share (%) 30.5 133 182,543 (28,487) 211,030 188 1,123 1,062 5.7%
Our assumptions Cement volume to grow at a CAGR of ~5.7% Cost per tonne to increase at a CAGR of 6.4% Realizations to increase at a CAGR of 1.5%.

250 200 150 100 50 0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09 CY10E CY11E 50 40 30 20 10 0 (10) %
USD/tonne
EV/Tonne in USD (LHS)

RoNW (RHS)
RoCE (RHS)
44
ACC
Financials (Y/E Dec)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios(%) Revenue Growth EBITDA Growth PAT Growth@ EBITDA Margin Net Margin@ Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
CY08 73,086 17,332 2,887 20,219 2,942 17,277 400 16,878 5,140 11,737 391 12,128 CY08 1,879 47,399 4,820 3,358 57,455 58,357 23,660 34,697 16,029 6,791 (61) 57,455 CY08 16,081 1,003 17,083 (14,762) 2,321 (2,971) 3,058 2,408 CY08 4.5 (9.7) (7.5) 23.7 16.1 (0.3) 25.9 32.8 62.5 (7.5) 37.5 17.0 10.8 2.6 176.5 3.5
CY09 80,272 24,531 2,411 26,942 3,421 23,521 843 22,678 6,797 15,881 186 16,067 CY09 1,880 58,282 5,669 3,493 69,324 68,263 26,680 41,583 21,562 14,756 (8,578) 69,324 CY09 21,857 2,504 24,362 (15,154) 9,208 (4,546) (6,658) (1,997) CY09 9.8 41.5 35.3 30.6 19.8 (0.2) 29.0 37.1 84.5 35.3 43.2 12.6 7.5 2.3 149.8 4.1
CY10E 77,346 18,426 3,053 21,479 3,953 17,526 579 16,948 5,008 11,940 11,940 CY10E 1,880 67,176 5,109 3,493 77,658 106,325 30,633 75,692 500 14,756 (13,291) 77,658 CY10E 15,419 (194) 15,225 (17,000) (1,775) (4,184) 1,052 (4,907) CY10E (3.6) (24.9) (24.8) 23.8 15.4 (0.1) 18.5 23.8 63.5 (24.8) 26.0 16.7 10.2 2.4 130.7 2.5
CY11E 91,932 21,459 3,256 24,715 5,397 19,317 367 18,950 5,685 13,265 13,265 CY11E 1,880 77,396 2,049 3,493 84,818 109,575 36,030 73,545 250 14,756 (3,733) 84,818 CY11E 17,815 3,667 21,481 (3,000) 18,481 (6,472) 1,215 13,224 CY11E 18.9 16.5 11.1 23.3 14.4 (0.3) 17.9 23.8 70.6 11.1 26.0 15.0 8.0 1.9 121.5 2.5

100,000 90,000 (INR mn) 80,000 23.7 70,000 60,000 CY08 CY09 CY10E CY11E
EBITDA Margin (RHS) Net Revenues (LHS)
35 30.6 30 23.8 23.3 (%) 25 20

20,000 15,000 (INR mn) 10,000 5,000 0 CY08 CY09 CY10E CY11E
PAT Growth (RHS) Adjusted PAT (LHS)
35.3
40 30 11.1 20 0 (24.8) (10) (20) (30) (%) 10
(7.5)
Return ratios (%)

40 32.8 30 29.0 20 25.9 18.5 10 CY08 CY09
ROE (%)
37.1
23.8
23.8
17.9 CY11E
CY10E
ROCE (%)

Strong cash & investment book
Trading at a discount to its peers
Cement
45
ACC ACC
Presence in all major regions to temper larger exposure to South Dependence on domestic coal to shield against volatility in imported fuel prices Healthy balance sheet
Pan-India presence assuages regional risks ACC, through its 16 plants, has a presence in all five regions of India. Out of total cement capacity of 26 mn tonnes, 23% is in the North, 36% in South, 19% in East, 4% in West and 18% in Central India. Though as of now, the share of the Western region is marginal, it is expected to increase post commissioning of the Chanda plant in Maharashtra. Exhibit 1: Lowest exposure to Western region
North 23% East 19% West 4%
On a regional basis, ACC has the highest exposure in the Southern region where we expect average capacity utilizations between FY11-FY13 to be 900 bps below the all India average. We also expect prices in the Southern players to earn 36% lower EBIT per tonne than those having a presence in other regions. However, we believe that the presence of the company in Eastern and Central regions would improve its overall profitability. We expect these regions to have a better pricing environment as compared to other regions in India. The average capacity utilization of Eastern and Central region is likely to be 1,400 bps and 900 bps (respectively) higher than the pan India average. We expect players having a presence in Central and Eastern regions to earn 21% higher EBIT per tonne as compared to players with a pan India presence. Even data indicates that historically, magnitude and timing of the price decline have been different for various regions of India. Thus with its presence in all five regions, ACC runs a lower regional risk. Lower fuel risk due to dependence on domestic coal Power and fuel costs constitute ~27% of ACCs the cost of goods sold. It meets 85% (75% through linkage) of its fuel requirement through domestic coal.
Central 18% South 36%

Exhibit 2: CY11 to improve Western presence

North 21% East 16%
West 15%
South 32%
Central 16%
Exhibit 3: Relevance of pan-India presence: Magnitude, timing of price declines different for various regions
30 20 (% Change) 10 0 (10) (20) FY96 FY97 FY98 Northern FY99 FY00 Central FY01 FY02 FY03 Eastern Western FY04 FY05 Southern FY06 FY07 FY08 All India average FY09
46
ACC
Exhibit 4: Dependent mainly on domestic coal
Company ACC UltraTech Shree Cement India Cement JK Lakshmi JK Cement Orient Paper Ambuja Domestic Coal (%) 85 62 0 45 0 10 100 70 Imported Coal (%) 15 29 0 55 0 0 0 30 Petcoke (%) 0 9 100 0 90 90 0 0 Other (%) 0 0 0 0 10 0 0 0
effective long-term energy supply assurances. ACC has also entered into a joint venture (~14% stake) with five other partners, and has been allotted a coal mine in West Bengal with a geological reserve of ~685mt. Hence, in long run, we expect the cost leadership of ACC to strengthen further as some of the coal blocks that have already been allocated to ACC will start production. However, as the mine is unlikely to begin production prior to CY11, we have not factored in any benefit from these mines. Capacity constraints restrict volume growth
Exhibit 6: ACC grows slower than industry

20 15 10 (%) 5 0 (5) (10) (15) May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
We believe that ACC will have a cost advantage of ~INR 96/ tonne as compeered to players dependent on imported coal. It would be INR 103 / tonne as compared to players dependent on petcoke. Exhibit 5: Sectoral coal allocation on a decline
Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Receipts Coal production against linkage mn tonnes mn tonnes 11 10 10 10 11 10 8 9 10 11 12 13 15 15 14 15 15 238 246 254 270 286 296 291 299 310 323 324 356 377 407 431 456 493 Coal Receipts as % of Coal production 4 4 4 4 4 3 3 3 3 3 4 4 4 4 3 3 3
Industry
ACC
However, with the ramping up of the Karnataka plant and a new green field plant at Chanda expected to come on stream by end of CY10, we expect ACC to report a volume growth of ~15.8% in CY11. Healthy balance sheet At the end of CY09, ACC had a strong balance sheet with a net debt equity ratio of -0.15, with net cash and cash equivalents of INR16.6 bn. With operating cash flows of the company for next two years being much higher than the capex, we expect the net cash and investment of the company to INR ~28.5 bn (INR 152 per share, i.e 14% of CMP) by end of CY11. Exhibit 7: Key balance sheet data
CY09 Net Debt Equity (x) Gross Cash & Investments(INR mn) Net Cash & Investments(INR mn) Net Cash & Investments(per share) Net Cash & Investments as a % of CMP
With the coal production in India not matching cement output, the share of coal received by cement sector has been gradually declining. It has become increasingly difficult for new players to obtain coal linkages Coal block allocations to hike fuel security in long run ACC has entered into a JV with the Madhya Pradesh State Mining Corporation to mine four coal blocks with mineable reserves of ~200mt. The mines are expected to become operational in 4-5 years, and will provide costElara Securities (India) Private Limited
CY10E (0.07) 17,313 12,203 65 6
CY11E (0.27) 30,536 28,487 152 14
(0.15) 22,220 16,551 88 8
47
Cement
Prices of domestic coal are not as volatile as that of imported coal. Coal India and its subsidiary have increased coal prices by 10% to 11% in Q3FY10, first time since Q3FY08. Thus, the dependence on domestic coal provides a greater cost visibility to ACC as compared to its peers.
In CY10 (Jan-Sep10), ACC has reported a decline volume of on 3.3% (as compared to 6.2% increase for the industry) due to capacity constraints.
ACC
INR mn Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Free Cash Flow as a % of Mcap Free Cash Flow as a % of EV CY09 21,857 CY10E 15,419 CY11E 17,807
Exhibit 10: Energy efficiency improves

100 (kwh per tonne) 95 90 85 80 75 FY01 FY03 FY05 CY06 CY08 KWH/tonne(LHS)
820 800 780 760 740 720 Kcal/kg of Clinker(RHS) (Kcal/kg of Clinker)
2,504 24,362 (15,154) 9,208 5 5
(194) 15,225 (17,000) (1,775) NA NA
3,668 21,476 (3,000) 18,476 9 11
Acquiring smaller cement companies ACC has acquired 45% stake in Asian Cement and 100% stake in Encore Cement. Asian Cement has a 0.3mt grinding unit in HP, and is adding a 1mt grinding unit. Encore Cement has a 0.2mt slag grinding unit at Vishakapatnam, thereby strengthening its presence in Coastal AP. As ACC has a strong balance sheet, we believe it will be able to capitalize on any distress opportunity that might be available in downturn.
Lower power, fuel costs improve efficiency The blended electricity cost per unit for ACC has declined from INR 3.4 per kwh in CY08 to INR2.9 kwh due an increase in the use of CPP. Apart from this, ACC has been gradually reducing electricity and energy consumption per tonne of cement. Thus, despite a 4% increase in landed price of coal for ACC, its power and fuel cost had declined by 4.6% (INR34 per tonne)in CY09. Exhibit 9: Reliance on CPP to increase
4.3 3.8 (INR per KWH) 3.3 3 2.8 2.3 1.8 FY01 FY03 FY05 CY06 CY08 % of Power meet through CPP(RHS) Blended CPU(LHS) CPP cost per unit(LHS) Grid cost per unit(LHS)
80 3 3 3 3 3 2 3 3 3 70 60 (%) 50 40 30 20
Key risk
Slowdown in cement demand Slow down of cement demand may worsen oversupply and could lead to a sharp decrease in cement prices. Delay in capacity addition Delay in capacity additions could result in lower than expected volume growth for the company. Decline in linkages Decline in coal linkages may increase the dependence of the company on imported coal.
48
ACC

Stock trades at EV/tonne of USD122, discount to frontline players Valuing at EV/tonne of USD133 on CY11 capacity, 5% discount to Ambuja Initiating coverage with Accumulate rating, target price of INR1,123
At the CMP of INR 1,062 per share, the stock is trading at 16.7x and15x its CY10 and CY11 earnings, respectively. It is also trading at EV/tonne of USD131 and USD122 of its CY10 and CY11 capacities, respectively. Historically ACC has traded at 25% discount to Ambuja due to weaker balance sheet and lower profitability. However, going ahead we expect a gap in both debt equity and the EBITDA per tonne to reduce. Historically, EBITDA per tonne gap between ACC and Ambuja has been ~37%. We believe that going ahead, the gap in EBITDA per tonne would reduce to 9% due to:(a) Cost cutting initiatives undertaken by the company, (b) Dependences on domestic coal We also expect the net debt equity ratio for both companies to be almost at par at the end of CY11. Thus, we believe that valuation gap between two to come down to 5%. We are initiating our coverage on ACC with an Accumulate rating and a price target of INR1,123 per share. We have valued the company at EV/tonne of USD133 (5% discount to Ambuja) on CY11 capacity of 30.5 mn tonne. Exhibit 11: Present valuation gap unjustified
290 (USD per tonne) 240 190 140 90 40 FY00 FY01 FY02 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09 CY10 CY11 Capacity EV /tonne multiple EV Less: Net Debt Target Market Capitalizations Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn mn INR/ share INR/ share (%)
Exhibit 12: Debt equity of ACC, Ambuja to be at par

1.5 1.0 (x) 0.5 0.0 (0.5) FY00 FY01 FY02 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09 CY10 CY11
ACC
Ambuja Cement
Exhibit 13: EBITDA per tonne gap to narrow down

1,400 1,200 INR per tonne 1,000 800 600 400 200 0 FY00 FY01 FY02 FY03 FY04 FY05 CY05 CY06 CY07 CY08 CY09 CY10 CY11
ACC
Ambuja Cement

CY11E 30.5 133 182,543 (28,487) 211,030 188 1,123 1,062 5.7%
ACC
Ambuja Cement
Cement
49
ACC
Company description
Established in 1936 by the merger of ten cement companies, ACC Limited is one of Indias oldest cement manufacturers. The companys current capacity stands at 26mt. Swiss cement major Holcim has taken over the control and management of ACC through Ambuja Cement India Pvt Ltd (ACIL). With its stakes in Ambuja Cement and ACC, Holcim controls about 51mt of cement capacity (approximately ~19% of Indias capacity). ACC has a presence in all major regions. Since the entry of Holcim, ACC has decided to focus on its core cement business, and has divested most of its noncore businesses including its refractory and asbestos business. The company has also transferred its RMC business to a wholly-owned subsidiary, ACC Concrete Ltd, with effect from January 1, 2008.

Narotam Sekhsaria, Non-Executive Chairman NS Sekhsaria serves is the Non-Executive Chairman of ACC He is also the founder-promoter and current Chairman of Ambuja. Paul Hugentobler - Non-Executive Deputy Chairman Paul Hugentobler serves as Non-Executive Deputy Chairman of the Board of ACC. He has a degree in Civil Engineering from the ETH, Zurich, and a degree in Economic Science from the University of St. Gallen. He joined Holcim Group Support Ltd in 1980 as Project Manager and in 1994, he was appointed as Area
Manager for Holcim. From 1999 until 2000, he also served as CEO of Siam City Cement, Bangkok, Thailand. He has been a Member of the Executive Committee since January 1, 2002 with the responsibility for South Asia and ASEAN excluding Philippines. He has been appointed as Vice Chairman of Ambuja Cements Ltd with effect from September 24, 2009. Sunil K Nayak - Chief Financial Officer Sunil K. Nayak serves as Chief Financial Officer. He has B.Com, LLB degrees, and is FCS, FCA, and AICWA. His last employment was with Clariant Chemicals (India) Limited.
50
ACC
Coverage History
1,200 1 1,000 800 600 400 200 0
Not Covered
Covered
Date 1
Rating
Target Price INR1,123
Closing Price INR1,062
02-Nov-2010 Accumulate

Cement
51
Aug-08
Aug-09
Aug-10
Jan-09
Sep-08
Sep-09
Jan-10
Sep-10
Oct-08
Oct-09
Jun-08
Jun-09
Jun-10
Apr-08
Apr-09
Nov-08
Nov-09
Apr-10
Oct-10
Jul-08
Jul-09
Jul-10
May-08
May-09
May-10
Nov-10
Feb-09
Mar-09
Feb-10
Mar-10
Dec-08
Dec-09
ACC
Notes
52
India | Cement
9 November 2010
Initiating Coverage
India Cements
Warming South winds
High exposure to South a concern; hopes pinned on better prices Out of total 14mn tonnes of cement capacity of India Cements Limited (ICL), about 92% of the capacity is in the Southern region. Due to lower consolidation and lower capacity utilizations, we expect south based players to earn 36% lower EBIT per tonne than players in other regions. However, in the recent past, South cement players have shown signs of maturity and better coordination. In past few weeks, cement prices in the region have increased by INR 75-100/bag. Cost rationalization in progress; return ratios to reflect the effort In order to rationalize the cost structure, ICL has acquired a coal mine in Indonesia, and is in the process of setting up CPP of 100 MW. We believe that the mine acquisition will result in savings of ~INR 200/tonne from FY12 onwards. The CPP is expected to generate additional savings of INR 50/tonne from Q3FY12. Historically return ratios of ICL have been below industry average due to lower profitability and inefficient utilization of capital. However, with the cost rationalization steps undertaken by the company and the recent rise in cement prices in South, we believe that return ratios will gradually improve going ahead. IPL not factored in total valuation scoreboard India Cements owns franchise rights of an IPL team (Chennai Super Kings). We believe that the present stock price does not reflect the valuations of IPL team. With few of the IPL teams expected to list in near future we believe that market will gradually start factoring IPL valuations in stock price. We have valued the investment in IPL at USD225mn which was the base price for the bidding of new franchises. Any increase in the valuation of IPL franchise will add to the potential upside in the stock. (Please refer to Exhibit 13 on Page 59 for target valuations at different IPL valuations).
Rating : Accumulate
Target Price : INR131 Upside : 13% CMP : INR116 (* As on 2 November 2010) Key data*
ICEM IN/ICMN.BO 307.2/307.2 36 /803 1,800,771 10
Price & Volume

150 140 130 120 110 100 90 Oct-09 Mar-10 Vol. in mn (RHS) Source: Bloomberg 20 15 10 5 0 Jul-10 Nov-10 India Cement (LHS)
Share holding (%)

Q3FY10 Q4FY10 Q1FY11 Q2FY11 27.4 44.3 18.0 10.4 25.2 48.1 17.9 8.9 25.2 46.4 20.0 8.4 25.2 44.5 22.4 8.0

Sensex India Cements Ultratech ACC
3M 12.3 13.2 30.1 28.0
6M 17.0 (5.6) 17.5 17.5
12M 32.1 18.3 51.5 51.9
Valuation
At the CMP of INR116 per share, the stock is trading at 18.4x and 10.7x its FY11E and FY12E earnings, respectively. It is trading at adjusted EV/tonne of USD62 and USD56 of its FY11 and FY12 capacities respectively. We have assigned our distress case valuation of USD62/tonne for the cement business considering the unfavorable regional presence and relative cost disadvantage. We have valued the investment in IPL at USD225mn which was the base price for the bidding of new franchises. We recommend Accumulate on ICL with target price of INR 131. Key Financials
Y/E Mar (INR mn) FY09 FY10 FY11E FY12E Rev 34,974 38,293 42,565 46,738 YoY (%) 14.8 9.5 11.2 9.8 EBITDA EBITDA (%) 9,898 8,153 6,417 11,367 28.3 21.3 15.1 24.3 Adj PAT 4,835 3,171 1,942 3,344 YoY (%) 40.7 (34.4) (38.9) 72.5 Fully DEPS 16.8 10.5 6.3 10.9
Source: Bloomberg
Stock performance
140 Rebased to 100 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Nov-10 India Cement Source: Bloomberg Sensex
RoE (%) 16.1 10.4 5.2 7.8
India Cements
Valuation trigger
CPPs coming on stream Ramping up of the coal production from mine Any disinvestment or listing of IPL franchise in future
Investment summary New CPPs and coal mine acquisition to reduce power and fuel cost Market leader in South India IPL valuations key to upside
250 200 150
3 4
100 50 0
Valuation trigger 1. Ramping up of the coal production from mine 2. CPPs coming on stream 3. Any disinvestment or listing of IPL franchise in future
Target price reached
Apr-08
Apr-10
Apr-09
Feb-09
Aug-08
Feb-10
Aug-09
Aug-10
Feb-11
Apr-11
Aug-11
Dec-08
Dec-09
Dec-10
Oct-08
Oct-09
Oct-10
Jun-08
Jun-09
Jun-10
Valuation overview - SOTP Based valuations

FY12E Capacity EV /tonne multiple Grey Cement business EV Value of IPL Business Base price for the bids Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 10,125 53,705 13,588 40,117 307.2 131 116 12.5 mn tonnes USD/tonne INR mn 15.6 62 43,580
Jun-11
Oct-11
Key risks Sharp decline in cement price Slower than expected ramp up of coal mine and CPPs
Our assumptions Cement realization to increase at a CAGR of 1.6% Cement volumes CAGR of 9.4% to increase at a
Valuation driver - EV/tonne with change in RoCE & RoNW

180 160 EV/tonne 140 120 100 80 60 40 20 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E (40) (60) 20 0 % 60 40
(20)
EV/Tonne(USD)
ROE(RHS)
ROCE (RHS)
54
India Cements
Consolidated Financials (Y/E Mar)

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Minority interest Profit from Associates Adj. after Minority interest & asso. Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Minority Interest Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Miscellaneous Expenses not written off Deferred Tax Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth@ EBITDA Margin Net Margin@ Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
@ On adjusted bottomline Source: Company, Elara Securities Estimates
FY09 34,974 9,898 544 10,442 2,045 8,397 1,123 7,274 2,439 4,835 8 (73) 4,754 529 4,224 FY09 2,825 32,518 31 19,888 2,744 58,006 53,360 15,121 38,239 9,040 3,556 6,828 158 185 58,006 FY09 9,132 6,816 15,948 (9,446) 6,502 (1,041) 289 5,750 FY09 14.8 3.5 40.7 28.3 21.0 0.7 16.1 33.4 16.8 2.0 6.9 4.6 1.4 65.0 1.7
FY10 38,293 8,153 422 8,575 2,345 6,231 1,428 4,802 1,632 3,171 0 57 3,228 (291) 3,518 FY10 3,073 37,381 15 23,006 2,903 66,378 57,400 18,011 39,388 14,291 5,148 7,345 206 66,378 FY10 6,919 7,865 14,784 (10,238) 4,546 3,885 (1,623) 6,808 FY10 9.5 (17.6) (34.4) 21.3 8.4 0.7 10.4 11.3 10.5 (37.6) 2.0 11.0 6.2 1.4 67.1 1.7
FY11E 42,565 6,417 468 6,885 2,711 4,174 1,455 2,719 781 1,938 (3) 0 1,942 0 1,942 FY11E 3,073 44,628 113 25,676 2,903 76,393 69,188 20,818 48,370 8,532 3,195 16,101 196 76,393 FY11E 11,717 6,079 17,796 (6,029) 11,767 1,115 1,953 14,835 FY11E 11.2 (21.3) (38.9) 15.1 4.6 0.5 5.2 17.6 6.3 (39.8) 0.3 18.4 7.9 1.3 62.4 0.2
FY12E 46,738 11,367 269 11,636 3,547 8,089 3,442 4,647 1,303 3,344 1 0 3,343 0 3,343 FY12E 3,073 47,989 114 21,808 2,903 75,887 72,238 24,366 47,872 7,337 3,195 17,287 196 75,887 FY12E 10,516 10,469 20,985 (1,855) 19,130 (7,475) 11,655 FY12E 9.8 77.1 72.5 24.3 7.2 0.4 7.8 33.8

50,000 40,000 (INR mn) 30,000 20,000 10,000 0 FY09 FY10 FY11E FY12E Net Revenues (LHS) 21.3 15.1 33.6 24.3 40 30 20 10 0 EBITDA Margin (RHS) (%)

6,000 5,000 (INR mn) 4,000 3,000 2,000 1,000 0 FY09 FY10 FY11E FY12E PAT Growth (RHS) Adjusted PAT (LHS) (34.4) (38.9) 40.7 72.5 80 60 40 0 (20) (40) (60) (%) 20
Return ratios
40 30 20 10 0 FY09 FY10 ROE (%) 16.1 10.4 5.2 FY11E 7.8 FY12E 17.6 11.3 33.4 33.8
ROCE (%)
Debt-equity ratio to come down 10.9 72.2 0.5 10.7 4.2 1.1 55.7 0.4
Available at distress valuations despite sharp increase in prices in South India
Cement
55
India Cements India Cements

Higher exposure to South worrisome; profitability to remain below industry average Indonesian coal mine acquisition, new captive power plants to improve cost efficiency Lower return ratios to perk up on better pricing and cost efficiency
High exposure to a fragmented market

ICL is the market leader in the Southern region. It controls about 14% of the South Indian capacity. Out of total 14 mn tonnes of cement capacity, about 92% of the capacity of ICL is in the Southern region. It is gradually trying to diversify in other regions. The company will be adding 1.5 mn tonnes of cement capacity in the state of Rajasthan. Even post commissioning of Rajasthan plant in Q2FY11, it will have a whopping 83% of the capacity in South India, the region which is expected to have the lowest capacity utilizations. During the last three years, about 39mn tonnes of capacity were added in the Southern region at a CAGR of 20%. Demand, on the other hand has grown at a CAGR of 12%. Thus capacity utilizations of the region have declined from 93% in FY06 to 74% in FY10 (i.e 1,200 bps below pan-India average). Exhibit 1: Higher concentration of capacity in South
West 8%
of the South region is expected to be 900 bps lower than the all India average. Due to surplus in the Southern region, we expect the average lead distance for ICL to increase which will further put pressure on margins. Furthermore, due to lower consolidation and lower capacity utilization, we expect south based players to earn 36% lower EBIT per tonne than players in other regions. However in the recent past cement players in the Southern region have shown signs of maturity and better co-ordination. The players have undertaken production cuts to reduce supply and thereby, affect a hike in prices. Thus, the Southern region has been the first to hike cement prices at the end of the lean season. In past few weeks, cement prices have increased by INR 75-100 per bag (the highest among five major regions of India). Exhibit 3: South leads industry capacity addition
15 15 10 6 6 2 2 2 2 2 Central Eastern Southern FY11E FY12E FY13E 93 94 104 100 0 87 86 89 89 89 87 86 2 89 3 3 4 2 3 3 3 3 84 80 18 10 94 3 North Western FY09 FY10 North Western Central Eastern Southern All India FY09 FY10 FY11E FY12E
Source: CMA .Company, Elara Securities Estimates
20 15 (mn tonne) 10 5 0
South 92%
Exhibit 2: Southern exposure to come down in FY11

North West 10% 7%
Exhibit 4: Capacity utilization to stay low in South

105 100 95 (%) 90 85 80 75 70
South 83%
Going ahead, we expect capacity utilizations of Southern region to continue to remain below all India average. Between FY11 to FY13, the average capacity utilizations
56
74 72 75
82 82
82
89 86
86
India Cements
Reliance on foreign coal, grid limits cost competency Power and fuel costs constitute ~31% of ICLs cost of goods sold. ICL meets 70% of its fuel requirement through imports. Due to the dependence on imported coal, we expect ICL to have a cost disadvantage of INR62/tonne of cement produced as compared to players dependent on domestic coal. ICL has recently acquired coal mining rights in Indonesia to meet its fuel requirements. The mine has reserves of 30mt of coal with 5,800Kcal/kg. ICLs investment in this mine is estimated to be ~USD20mn. The benefits of the mine are expected to flow in from FY12. We expect the mine acquisition to result in savings of ~INR 200/tonne from FY12. Apart from this, ICL is entirely dependent on external sources for power. Higher dependence on external sources for power has not only increased the cost but also hampered the production due to power cuts in Andhra Pradesh and Tamil Nadu. The company is also in the process of setting up a CPP of 50 MW each in Andhra Pradesh and Tamil Nadu. The TN plant is expected to come on stream by the end of Q1FY11 and TN plant in Q3FY12. The new CPPs are expected to meet 60% of the power requirement and would result in savings of INR 50/tonne. Lower return ratios compared to industry peers In FY10, ICL had reported net profit margins of 8.4% and asset turnover of 0.7 x as compared to industry average of 16% and 1.1x respectively. Due to lower profitability and inefficient utilizations of capital, the company has below industry average return ratios. ICL reported a RoE of 10.4% and RoCE of 11% in FY10 as compared to industry average RoE of 28% and RoCE of 27%. However, with the initiative undertaken by the company to improve cost efficiency, the return ratios of the company are expected to improve. The RoCE of ICL is expected to improve from 11.3% in FY10 to 17.6% in FY11 and further to 33.8% in FY12. Improvement in RoE is likely to be much gradual due to QIP and redemption FCCB The RoE is expected to drop from 10.4% in FY10 to 5.2% in FY11 and to improve marginally to 7.8% in FY12. Exhibit 5: ICL RoE to remain lower than peers
(%) 100 50 (%) 0 (50) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Exhibit 6: RoCE to improve on higher cement prices

50 40 30 (%) 20 10 0 (10) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E ICL ACC Ambuja
Exhibit 7: Lower asset turnover ratio vs peers

1.8 1.5 1.2 (x) 0.9 0.6 0.3 0.0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
ACC
India Cement
Ambuja Cement
Exhibit 8: Cost rationalization to better margins

40 (EBITDA margin %) 30 20 10 0 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
ACC
India Cement
Ambuja Cement
Exhibit 9: NPM to remain lower than peers

40 30 20 10 0 (10) (20) (30) FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
ACC
India Cement
Ambuja Cement
ICL
ACC
Ambuja
Cement
57
India Cements
Higher debt equity ratio, FCCBs to burden cash flows ICL has raised INR2.95 bn in Q1FY11. Post the QIP, the net debt equity ratio of the company now stands at 0.7, much higher compared to its peers. Apart from this higher debt equity ratio, pending FCCBs at USD 75 mn remain an overhang on the stock. . The FCCBs are due for redemption in May 2011 to be converted at a price of INR305 per share (163% higher than CMP) or redeemable at 147.7% of its face value. As the FCCBS are deep out of money, we expect its redemption to result in cash outflow of INR4.96bn, representing 47% of FY12 operating cash flow or 44% of FY12 EBITDA. Apart from this, the company is also expected to book unrecognized interest expenses of INR1.58bn in FY12. The unrecognized interest expenses will take away 32% of the incremental EBITDA of FY12. Exhibit 10: Higher debt equity ratio vs industry
0.8 0.6 0.4 (x) 0.2 (0.0) (0.2) (0.4) (0.6) ICL FY09 FY10 ACC FY11E Ambuja FY12E
IPL valuation not fully reflected in share price India Cements has acquired the Chennai franchise of the Indian Premier League (IPL) for USD91mn in January 2008. The investment in IPL was done by the company from the point of view of advertising its brands across the country. We have valued the Chennai Super Kings using the recent IPL auction minimum base price that was fixed at USD225mn. In the recent auction, franchises were sold at average price of USD351.5mn (Kochi and Pune). Considering the actual franchise deals happening in the IPL, ICL has already more than tripled its investments. Exhibit 12: Franchise details
Franchise Pune Kochi Mumbai Bangalore Hyderbad Chennai Delhi Mohali Kolkata Jaipur Average Bid Amount (USD mn) 370 333 112 112 107 91 84 76 75 67 143 Owner Sahara Adventure Sports Group Rendezvous Sports World Limited Reliance Industries UB Group Deccan Chronicle India Cements GMR Holding Preity Zinta,Ness Wadia, Mohi Burmanl Shahrukh Khan, Juhi Chawla Emerging Media Group,Raj Mudhra,
Highest earnings sensitivity to price changes In our coverage universe, ICL has the highest earnings sensitivity to price changes. Higher cost structure as a result of dependence on imported coal and grid power are the key reasons for higher sensitivity to price movements. We believe that recent price hikes as well as improvement in cost structure with coal mine acquisition and captive power will favorably impact the earnings of the company. Exhibit 11: Most sensitive to price changes (%)
10 8 6 4 2 0 Shree Cement Orient paper JK Lakshmi India Cem Ultratech Ambuja JK Cem ACC 2.7 2.9 3.4 3.8 5.1 5.5 5.5 8.0
However, the company management indicated that it does not want to either list or offload any stake in the franchise in the short to medium term. Therefore, we have valued its investment in the franchise at the base IPL bid price of USD225mn. Any upside in this valuation will increase the target price and potential upside accordingly. We have summarized a sensitivity of target price to the various franchise values as in Exhibit no 13. With listing of few of IPL teams on cards, we believe market will gradually start factoring IPL valuations in stock price.
Key risks
Slower ramp up of coal mine and CPPs Slower ramp up of coal mine and CPP may result in lower than expected savings Sharp fall in cement prices in South India Sharp fall in prices in South India, the key market for the company, may adversely impact the earnings of the company
58
India Cements

Trades at 44% discount to replacement cost despite its reasonable size, improving fundamentals Valuing cement business at distress EV/tonne of USD62, IPL franchise remains key for upside Initiating coverage with Accumulate rating, target price of INR131
Valuation
At the CMP of INR 116 per share, the stock is trading at 18.4x and 10.7x its FY11 and FY12 earnings, respectively. It is trading at an EV/tonne of USD62 and USD56 its FY11 and FY12 capacities, respectively. On EV-based multiples (EV/tonne and EV/EBITDA), ICL is available at valuations lower than the last down cycle when it had incurred losses due to higher leverage. In terms of relative valuations, ICL is available at ~62% discount to frontline cement companies. We believe that worst has already been factored in the stock price. Thus, we are initiating coverage on the stock with an Accumulate rating and a price target of INR131 per share. We have valued the company on Sum of Parts Valuation (SOTP) basis. We have valued the cement business of the company at EV/tonne of USD 62, equivalent to distress value for cement plant. We have valued Chennai Super Kings at the recent IPL auction minimum base price that was fixed at USD 225 mn (INR 34 per share).
Exhibit 13: SOTP Based valuations

(INR mn) USD:INR Exchange Rate Capacity EV /tonne multiple Grey Cement business EV Value of IPL Business USD mn INR mn Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) 175 225 275 325 375 7,875 10,125 12,375 14,625 16,875 51,455 53,705 55,955 58,205 60,455 13,588 13,588 13,588 13,588 13,588 37,867 40,117 42,367 44,617 46,867 45.0 15.6 62 15.6 62 15.6 62 15.6 62 15.6 62 FY12E
43,580 43,580 43,580 43,580 43,580
307 123 116
307 131 116
307 138 116
307 145 116
307 153 116
6.2
12.5
18.8
25.1
31.4
Cement
59
India Cements
Company Description
Established in 1946, India Cements Limited (ICL) is among the largest players in South India with a cement capacity of ~14mn tonnes. The company has seven plants of which four are in Andhra Pradesh and three in Tamil Nadu. India Cements key markets are Andhra Pradesh, Tamil Nadu, Kerala, parts of Karnataka and Maharashtra. ICL has historically been a South-based player. However, going forward, it is in the process of diversifying its presence by venturing into North India. India Cements sells its cement under the brand name of Sankar Super Power, Coromandel Super Power and Raasi Super Power. India Cements had acquired the Chennai franchise in the Indian Premier League (IPL), the 20:20 format tournament started by the Board of Control of Cricket in India (BCCI) for USD91million in January 2008. The investment in IPL was done by the company from the point of view of advertising its brands all across the country.

N Srinivasan, Vice Chairman, Managing Director N.Srinivasan is the Vice Chairman and Managing Director of India Cements. Over the last decade and a half, he has been the President of the Cement Manufacturers' Association between 1991 and 2006 and Chairman of the Board of Governors of the National Council for Cement and Building Materials (NCBM) for four terms between 1991 and 2006). He was also the Chairman of Development Council for Cement Industry (DCCI) constituted by the Government of India for two terms (1992-96). During the year 2000-2001, N.Srinivasan was President of the All India Organization of Employers. He was also an active Member of the Prime Minister's High Profile Council of Trade and Industry (1996-2001). He is a post graduate in Chemical Engineering from the Illinois Institute of Technology, US. Rupa Gurunath, Non-Executive Director Rupa Gurunath serves as Non-Executive Director. She is BSC. and holds a Post Graduate Diploma in Computer Applications. K Nair, Director Krishna Prasad Nair, a Director, has received his BCom and MBA degrees. He is Chief General Manager and Human Resource head of IDBI Bank Limited. G.Balakrishnan, President, Company Secretary Compliance Officer,
G.Balakrishnan, serves as a President, Compliance Officer, Company Secretary of India Cements Limited.
60
India Cements
Coverage History
250
200
150 1 100
50
Not Covered
Covered
Date 1
Rating
Target Price INR131
Closing Price INR116
02-Nov-2010 Accumulate

Cement
61
Jun-08
Jun-09
Apr-08
Apr-09
Feb-09
Feb-10
Apr-10
Jun-10
Jul-08
Jul-09
Jul-10
Aug-08
Aug-09
Aug-10
Jan-09
Jan-10
Mar-09
Dec-08
Mar-10
Dec-09
Sep-08
Sep-09
Sep-10
Oct-08
Oct-09
Oct-10
Nov-08
Nov-09
May-08
May-09
May-10
Nov-10
India Cements
Notes
62
India | Cement
9 November 2010
Company Update/Target price/Rating changed
Shree Cement
Regional champ at reasonable value
Foray into merchant power to stabilize cyclical cement earnings Shree Cement Limited (SCL) has ventured into the profitable merchant power business. It has a CPP capacity of 265MW which is expected to increase to 565MW by the end of Q3FY12. The company expects to sell the excess power in the open market on merchant rates. On account of the increase in the CPP capacity, we expect the EBITDA from power business to increase from INR1.3bn in FY10 to INR4.4bn in FY12. The share of the power EBITDA in the total EBITDA is expected to increase from 8% in FY10 to ~30% in FY12. Apart from providing earnings growth, we believe the merchant power business will provide stability to the cyclical cement business cash flows. Capacity addition to push up volume to CAGR of~ 5% SCL is in the process of increasing its clinker and grinding capacity by 1mn tonne and 1.5mn tonnes respectively. The expansion is expected to be complete by the end of FY11. The capacity addition is likely to provide volume growth from FY12 for the cement business of the company. Due to the capacity addition, we expect cement volumes to increase at a CAGR of ~5% between FY10 to FY12. Lowest cost producer, highest margin earner in North Despite its dependence on pet coke, SCL enjoys a cost advantage over peers due to its efficient operations and captive power unit. In Q1FY11, it had cost of INR2,323/tonne as compared to INR2,712/tonne for other North Indian cement players. Due to lower production cost, SCL enjoys the highest margins in the Northern region. The cement division of SCL had earned EBITDA margins of 31% as compared to ~17% of other cement players. Strong cash flows to further fortify balance sheet At the end of FY10, the company had a net debt equity ratio of 0.05x and gross cash and investments of INR20 bn. We expect the company to generate free cash flow to firm of INR 36.8bn over next two years.
Rating : Accumulate
Target Price : INR2,501 Upside : 16% CMP : INR2,165 ( As on 2 November 2010) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/USDmn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 USD= INR44.4
SRCM IN/SHCM.BO 35/35 75/1,698 25,509 10
Price & Volume

2,450 2,200 1,950 1,700 1,450 1,200 Oct-09 Mar-10 Vol. in '000s (RHS) Source: Bloomberg 0 Jul-10 Nov-10 Shree Cement (LHS) 200 100 300
Share holding (%)

Q3FY10 Q4FY10 Q1FY11 Q2FY11 65.6 15.1 14.7 4.7 65.6 13.7 16.1 4.6 65.5 13.3 16.5 4.6 64.8 12.8 18.3 4.1

Sensex Shree Cement Ultratech ACC Source: Bloomberg
3M 12.3 20.1 30.1 28.0
6M 17.0 0.8 17.5 17.5
12M 32.1 40.4 51.5 51.9
Valuation
At the CMP of INR 2,165 per share, Shree Cement is trading at 19.2x and 12.6x its FY11 and FY12 earnings, respectively. On an EV/tonne basis, it is trading at USD98/tonne and USD82/tonne of its FY11 and FY12E capacities, respectively. Despite having a low cost structure, diversified revenue stream and a healthy balance sheet, the stock is trading at ~44% discount to frontline cement companies. Thus, we have assigned Accumulate rating on the stock with revised target price of INR 2,501 per share. We have valued cement business of the company at USD100/tonne (equivalent to replacement cost) and power division on DCF basis. Key Financials
Y/E Mar (INR mn) FY08 FY09 FY10 FY11E FY12E Rev 20,659 27,150 36,321 42,630 51,876 YoY (%) 51.0 31.4 33.8 17.4 21.7 EBITDA 8,624 9,508 15,117 11,750 14,249 EBITDA (%) 41.7 35.0 41.6 27.6 27.5 Adj PAT 2,604 5,780 7,483 3,918 5,962
Stock performance
160 Rebased to100 140 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Sree Cement Source: Bloomberg Sensex
YoY (%) Fully DEPS 47.1 122.0 29.5 (47.7) 52.2 74.7 165.9 214.8 112.5 171.1
RoE (%) 46.2 61.4 49.2 19.4 24.1
P/E (x) EV/tonne (USD) EV/EBITDA (x) 29.0 13.0 10.1 19.2 12.6 190 189 130 98 82 9.1 8.1 5.1 6.6 4.8
Shree Cement
Valuation trigger
Completion of expansion project to drive cement volume growth Power expansion to accelerate volume growth
Investment summary Low cost structure to insulate the company from losses in the downturn.
2,700 2,200 1,700

Target price reached 1 2 3
Healthy balance sheet and investment book
Valuation trigger 1. Completion of expansion project to drive cement volume growth 2. Power expansion to accelerate volume growth
1,200 700 200
Apr-08
Apr-10
Apr-09
Feb-09
Aug-08
Feb-10
Aug-09
Aug-10
Feb-11
Apr-11
Aug-11
Dec-08
Dec-09
Dec-10
Oct-08
Oct-09
Oct-10
Jun-08
Jun-09
Jun-10
Jun-11
Oct-11
Key risks Sharp decline in cement prices
Valuation overview - Sum of Parts Valuation

Grey Cement Capacity EV /tonne multiple Grey Cement business EV Value of power business DCF value Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 18,413.7 79,614 (7,522) 87,136 34.8 2,501 2,165 15.5 mn tonnes USD/tonne INR mn FY12E 13.6 100 61,200
Slow down in cement demand
Our assumptions Cement volume to grow at a CAGR of ~5% Cement realizations to increase at a CAGR of 3.3%.

300 250 200 (EV/tonne) 150 100 50 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 70 60 50 (%) 40 30 20 10 0
EV/Tonne(USD)
RoE(RHS)
RoCE (RHS)
64
Shree Cement

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Deferred Tax Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
FY09 27,150 9,508 829 10,337 2,363 7,973 744 7,229 1,449 5,780 5,780 FY09 348 11,752 14,962 27,062 22,559 16,291 6,269 4,789 8,448 7,452 104 27,062 FY09 7,801 219 8,020 (5,330) 2,690 573 (3,215) 48 FY09 31.4 10.2 122.0 35.0 21.3 0.1 61.4 35.2 165.9 122.0 10.0 13.0 8.1 2.8 189 0.5
FY10 36,321 15,117 1,284 16,400 5,902 10,498 950 9,548 2,066 7,483 (722) 6,761 FY10 348 17,984 21,062 39,395 29,509 21,989 7,520 9,674 15,922 6,155 124 39,395 FY10 12,601 (61) 12,540 (11,710) 830 3,786 (5,174) (559) FY10 33.8 59.0 29.5 41.6 20.6 0.1 49.2 32.2 214.8 29.5 12.6 10.1 5.1 2.1 130 0.6
FY11E 42,630 11,750 1,469 13,218 6,509 6,718 1,813 4,906 979 3,918 3,926 FY11E 348 21,631 20,492 42,471 36,139 28,489 7,650 12,790 15,922 5,985 124 42,471 FY11E 10,762 (1,332) 9,430 (9,746) (316) (2,654) 1,469 (1,501) FY11E 17.4 (22.3) (47.7) 27.6 9.2 0.1 19.4 16.4 112.5 (47.7) 7.3 19.2 6.6 1.8 98 0.3
FY12E 51,876 14,249 2,092

60,000 35.0 (INR mn) 40,000 20,000 0 FY09 FY10 Net Revenues (LHS) 27.6 27.5 41.6 50 40 (%) 30 20 10 0 FY11E FY12E EBITDA Margin (RHS)
16,341 7,000 9,341 1,889 7,452 1,490 5,962 5,962 FY12E 348 27,180 18,562 46,090 52,939 35,489 17,450 15,922 12,594 124 46,090 FY12E 12,758 890 13,649 (4,010) 9,639 (4,232) 2,092 7,499 FY12E 21.7 21.3 52.2 27.5 11.5 (0.3) 24.1 21.1 171.1 52.2 11.1 12.6 4.8 1.3 82 0.5

8,000 6,000 (INR mn) 4,000 2,000 0 FY09 FY10 Adjusted PAT (LHS) FY11E (47.7) 122.0 52.2 150 100 (%) 50 0 (50) (100) FY12E PAT Growth (RHS)
29.5
Return ratios (%)

70 60 50 40 30 20 10 0 61.4 49.2
(%)
35.2
19.4 32.2 16.4
24.1 21.1 FY12E
FY09
FY10 ROE
FY11E ROCE

Revenue to grow at a CAGR of 19.5% on the back of higher power and cement volumes
Trading at a discount to its replacement cost despite strong return ratios
Cement
65
Shree Cement Shree Cement

Trades at 18% discount to its replacement cost despite a healthy balance sheet, return ratios Valuing cement business at EV/tonne of USD100, factoring in superior fundamentals Reiterating our Accumulate rating, upgrading target price to INR2,501
At the CMP of INR 2,165 per share, the stock is trading at 19.2x and 12.6x its FY11 and FY12 earnings, respectively. It is trading at an EV/tonne of USD 98 and USD 82 its FY11 and FY12 capacities, respectively. Despite having impressive return ratios & margins, low earning risk, SCL is trading at a discount to its peers and replacement cost. Thus, we have assigned Accumulate rating and target price of INR 2,501. We have arrived at a target price for the company on SOTP basis. We have valued cement business of the company on EV/tonne basis. We have assigned EV/tonne of USD100 for FY12 year end capacity of the company. We have valued merchant power business of the company of DCF basis. Exhibit 1: Sum of Parts Valuation
Grey Cement Capacity EV /tonne multiple Grey Cement business EV Value of power business DCF value Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 18,413.7 79,614 (7,522) 87,136 34.8 2,501 2,165 15.5 mn tonnes USD/tonne INR mn FY12E 13.6 100 61,200
66
Shree Cement
Company Description
Shree Cement Limited is one of the largest cement manufacturer in North India and among the top five cement manufacturing company in the country. At the end of FY10, the company has total cement capacity of 12.6 mn tonnes and its cement manufacturing operations is spread across northern region. The company also had power capacity of 215 MW. The company is also one of the most profitable cement players in the industry at the operating level. Shree Cement sells its products across Rajasthan, Uttar Pradesh, Uttarakhand, Delhi, Haryana and Punjab. The cement is marketed under the three brand names, Shree Ultra Jung Rodhak Cement, Bangur Cement and Tuff Cement.
B. G. Bangur, Executive Chairman B.G. Bangur is Executive Chairman of the Board of SCL. He holds a Bachelors of Commerce (Hons.) from Calcutta University. He is also the director in The Didwana Industrial Corporation Limited, NBI Industrial Finance Company Limited, Shree Capital Services Limited, Khemka Properties Private Limited and Digvijay Finlease Limited. He is actively associated with various Philanthropic and Charitable Institutions and trusts. Prashant Bangur, Executive Joint President Prashant Bangur, Executive Joint President is the Executive Joint President of SCL. He has done his MBA in Finance and Logistic from Indian School of Business. Ashok Bhandari, CFO & Joint President Ashok Bhandari is the Chief Financial Officer and Joint President of SCL. H. Bangur, Managing Director H. M. Bangur is Managing Director of SCL. He is a Chemical Engineer from IIT, Mumbai and he brings to
the board technical insights which are a driving force of the technical excellence achieved by the Company. Bangur is also a Director in the Kamla Company Limited. He was the President of Cement Manufacturers' Association (CMA), the prime body for co-ordination, policy making and co-operation of the cement industry in India. M. K. Singhi, Executive Director M. K. Singhi is an Executive Director of SCL. He is a fellow Chartered Accountant and a Science and Law Graduate. He joined the Company as President in January 1995 and has 31 years experience of working at senior positions. He is the leader of Indian Cement Sector Task Force for Energy Conservation, appointed by Bureau of Energy Efficiency, Ministry of Power, Government of India. He is a member of Cement Sustainability Initiative (CSI) of World Business Council for Sustainable Development. He is also a member of Cement Task Force of Asia Pacific Partnership on Clean Development and Climate. He is the President of Rajasthan Cement Manufacturers Association. He is also on the Board of Shree Cement Marketing Limited.
Cement
67
Shree Cement
Coverage History
2,500 1 3 2 1,500 4
2,000
1,000
500
0
Aug-08 Aug-09 Aug-10 Jan-09 Sep-08 Sep-09 Jan-10 Sep-10 Oct-08 Oct-09 Jun-08 Jun-09 Jun-10 Apr-08 Apr-09 Feb-09 Nov-08 Nov-09 Feb-10 Apr-10 Oct-10 Jul-08 Jul-09 Jul-10 May-08 May-09 May-10 Nov-10 Mar-09 Mar-10 Dec-08 Dec-09
Not Covered
Covered
Date 1 2 3 4
Rating
Target Price INR2,432 INR2,335 INR2,300 INR2,501
Closing Price INR2,240 INR1,997 INR1,809 INR2,165
29-Apr-2010 Accumulate 21-May-2010 Accumulate 16-Aug-2010 Buy 02-Nov-2010 Accumulate
68
India | Cement
9 November 2010
Company Update
JK Cement
Grey eminence
Grey cement capacity up 67%, to prop up earnings JK Cement Limited (JKCEM) has increased its grey cement capacity by 67% from 4.5mn tonnes to 7.5mntonnes, through a greenfield expansion in Karnataka. The capacity expansion is likely to spur the volume growth in FY11 as well as in FY12. On account of the capacity addition, we expect JKCEMs grey cement volume to go up at a CAGR of 16.8%, cushioning earnings of the company from a decline in margins. White cement to provide stable cash flow JKCEM has a capacity of 0.4mn tonnes in the white cement segment, characterized by the presence of just two players and a relatively steady demand (with higher realizations and margins). White cement realizations are ~4.6x higher than grey cement (INR13,301/tonne as compared to INR 2,873 tonne for grey). In Q2FY11 while white cement earned an EBITDA/tonne of INR 2,494, grey cement earned a negative EBITDA/tonne of INR 112. Thus we believe the white cement business will continue to provide the company stable cash flows to comfortably service its interest expenses. Plans to hike capacity in North India by 2.5mn tonnes JKCEM is planning to increase its cement capacity in North region by way of a brownfield expansion. The expansion is likely to be complete by end of Q2FY13 post which, the total grey cement capacity in the North would touch 7mn tonnes while the overall capacity, 10mn tonnes. The capacity expansions will provide the company with a sustained volume growth in the coming years. Karnataka plant to reduce regional risk JKCEM had a restrictive presence only in the Northern region prior to commissioning of the Karnataka plant which has slashed the regional risk. The company will become partly insulated from the slowdown in demand in Northern region post the Common Wealth Games.
Rating : Buy
Target Price : INR220 Upside : 31% CMP : INR168 ( As on 2 November 2010) Key data*
JKCE IN/JKCE.BO 70/70 12/264 107,900 10
Price & Volume

200 180 160 140 120 100 Oct-09 Mar-10 Vol. in mn (RHS) Source: Bloomberg 4 3 2 1 0 Jul-10 Nov-10 JK Cement (LHS)
Share holding (%)

Q3FY10 Q4FY10 Q1FY11 Q2FY11 65.3 20.0 3.8 10.9 65.3 18.9 4.2 11.6 65.3 19.7 3.8 11.2 65.3 20.0 4.2 10.5

Sensex JK Cement Ultratech ACC Source: Bloomberg
3M 12.3 5.9 30.1 28.0
6M 17.0 (10.0) 17.5 17.5
12M 32.1 37.4 51.5 51.9
Valuation
At the CMP of INR 168 per share, the stock is trading at 16.1x and 8.9x its FY11 and FY12 earnings, respectively. It is trading at EV/tonne of USD54 and USD51 of its FY11 and FY12 capacities, respectively. Considering the volume growth from the greenfield plant, stable cash flow from white cement business and a steep discount at which the stock is trading to its replacement cost we are reiterating a Buy rating on the stock with priced target of INR 220/share.
Stock performance
180 Rebased to100 160 140 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Sensex Nov-10 JK Cement Source: Bloomberg
Key Financials
Y/E Mar (INR mn) FY08 FY09 FY10 FY11E FY12E Rev 14,583 14,968 18,268 21,308 25,214 YoY (%) 18.2 2.6 22.0 16.6 18.3 EBITDA 4,157 3,240 4,391 2,881 3,525 EBITDA (%) 28.5 21.6 24.0 13.5 14.0 Adj PAT 2,652 1,423 2,260 726 1,319 YoY (%) Fully DEPS 48.5 37.9 (46.3) 20.4 58.8 32.3 (67.9) 10.4 81.6 18.9 RoE (%) 41.5 17.0 22.6 6.5 10.8 P/E (x) EV/tonne (USD) EV/EBITDA (x) 4.4 81 3.5 8.2 96 6.4 5.2 65 4.3 16.1 54 6.7 8.9 51 5.2
JK Cement
Valuation trigger
Financial closure of new projects Ramping up of Karnataka plant.
Investment summary Robust volume growth to cushion the earnings of the company
250 200 150 100 50 0

White cement business to provide stable cash flow
Valuation trigger 1. Ramping up of Karnataka plant. 2. Financial closure of new projects

Key risks Slower ramp up of Karnataka plant Sharp decline in cement prices

FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV White Cement Capacity EV /tonne multiple White Cement business EV EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside)
Our assumptions Grey cement volumes to grow at CAGR of ~16.8% White cement volumes to grow at CAGR of 15%
mn tonnes USD/tonne INR Mn mn tonnes USD/tonne INR Mn INR mn INR mn INR mn mn INR/ share INR/ share (%)
7.5 62 20,847 0.4 125.0 2,250 23,097 7,695 15,401 70 220 168 31.4
Valuation driver: EV/tonne , RoE and RoCE

120 100 80 25 60 40 20 FY10E FY11E FY12E FY06 FY07 FY08 FY09 15 45
EV/tonne
35 % 5 EV/Tonne in USD(LHS) RoE(RHS) ROCE (RHS)
70
JK Cement

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Miscellaneous Expenses not written off Net Deferred Tax Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Cash Balance transferred from Jaycem Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x)* EV/Sales (x)* EV/Tonne (USD)* Dividend Yield (%) FY09 14,968 3,240 79 3,319 524 2,795 455 2,340 916 1,423 1,423 FY09 699 11,161 5,644 17,505 14,411 2,254 12,158 351 107 5,871 24 (1,006) 17,505 FY09 2,506 (93) 2,412 (916) 1,496 (1,793) 92 (204) FY09 2.6 (22.1) (46.3) 21.6 9.5 0.5 17.0 16.9 20.4 (46.3) 3.5 8.2 6.4 1.4 95.6 2.1 FY10 18,268 4,391 193 4,584 855 3,729 616 3,113 853 2,260 2,260 FY10 699 12,838 10,737 24,275 23,767 3,245 20,522 2,253 60 3,271 27 (1,858) 24,275 FY10 3,400 (820) 2,580 (1,989) 591 (796) 65 204 65 FY10 22.0 35.5 58.8 24.0 12.4 0.9 22.6 17.9 32.3 58.8 6.0 5.2 4.3 1.0 64.7 3.6 FY11E 21,308 2,881 180 3,061 1,099 1,962 857 1,106 379 726 87 813 FY11E 699 13,569 9,887 24,156 26,267 4,344 21,923 1,000 60 3,004 27 (1,858) 24,156 FY11E 2,687 240 2,927 (1,247) 1,680 (1,707) (26) FY11E 16.6 (34.4) (67.9) 13.5 3.4 0.7 6.5 8.1 10.4 (67.9) 1.0 16.1 6.7 0.9 53.6 0.6 FY12E 25,214 3,525 273 3,797 1,160 2,637 697 1,940 621 1,319 1,319 FY12E 699 14,807 8,387 23,893 27,767 5,504 22,263 1,100 60 2,302 27 (1,858) 23,893 FY12E 3,095 63 3,158 (1,600) 1,558 (2,197) (639) FY12E 18.3 22.3 81.6 14.0 5.2 0.6 10.8 11.0 18.9 81.6 1.0 8.9 5.2 0.7 51.1 0.6

30,000 21.6 (INR mn) 20,000 10,000 0 FY09 FY10 FY11E FY12E Net Revenues (LHS) 24.0 13.5 14.0 30 20 10 0 EBITDA Margin (RHS) (%)

2,500 2,000 (INR mn) 1,500 1,000 500 0 FY09 FY10 FY11E FY12E (46.3) (67.9) 81.6 58.8 100 50 0 (50) (100) (%)
Adjusted PAT (LHS)
PAT Growth (RHS)
Return ratios (%)

25 20 15 10 5 0 FY09 FY10 ROE FY11E ROCE FY12E 17.0 16.9 17.9 8.1 10.8 6.5 11.0 22.6
Revenues to grow at a CAGR of 17% on the back of strong volume
Debt equity to remain comfortable despite capacity additions
*JKCEM had set up a green field plant in a subsidiary which was merged with parent in FY10. For comparison purpose EV based ratios are taken on consolidated basis for FY09 Source: Company, Elara Securities Estimate
Cement
71
JK Cement JK Cement

Trades at 49% discount to its replacement cost, market overlooks stable white cement business Valuing grey cement at distress EV/tonne of USD62,white cement at conservative USD185 Restating our Buy rating, target price unchanged at INR220
Valuation
At the CMP of INR 168 per share, the stock is trading at 16.1x and 8.9x its FY11 and FY12 earnings, respectively. It is trading at EV/tonne of USD54 and USD51 of its FY11 and FY12 capacities, respectively. Despite stable cash flow in the white cement business and robust volume growth in grey cement the stock is trading at sharp discount to its replacement cost. Thus we are reiterating our Buy rating on the stock with unchanged target price of INR 220 per share We have valued the company on SOTP basis. We have valued the grey cement business of the company at EV/tonne of USD 62 (equivalent to distress case value) and white cement business at EV/tonne of USD 185. We have assigned higher valuations to white cement business due to the fact that profitability (3.9x of grey cement in Q1FY11) and replacement cost (3x of grey cement) for white cement plant is much higher than grey cement.

FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV White Cement Capacity EV /tonne multiple White Cement business EV EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside)
mn tonnes USD/tonne INR Mn mn tonnes USD/tonne INR Mn INR mn INR mn INR mn mn INR/ share INR/ share (%)
7.5 62 20,847 0.4 125.0 2,250 23,097 7,695 15,401 70 220 168 31.4
72
JK Cement
Company Description
JK Cement Limited, a part of the JK group, was incorporated by acquiring the cement division assets of JK Synthetics in November 2004. It is an affiliate of the J.K. Organization, which was founded by Lala Kamlapat Singhania in the year 1994. Currently, JK Cement has grey cement capacity of 7.5 mn tonnes(in the state of Rajasthan and Karnataka) and white cement capacity of 0.4 mn tones (in the state of Rajasthan). The company is the second largest manufacturer of white cement in India. JK Cement sells cement under brand names Sarvashaktiman (43 grade OPC), JK Super (Blended cement) JK White Cement and JK Wall Putty. During FY10, the company had reported revenue of INR 18,268mn million (20% from white cement and 80% from grey cement) and a net profit of INR 2,260 mn million.
Board of Directors& Management

Gaur Hari Singhania, Chairman Dr. Singhania, our Chairman, holds a Master of Arts degree in Economics and a PhD degree in Economics from Agra University. He has corporate experience spanning 50 years. He has been associated with the Company as its Promoter Director and has led our Company since its inception in 1994. He is also the Chairman of JKSL, Juggilal Kamlapat Cotton Spg. & Wvg. Mills Company Limited and J.K. Traders Limited. He has held the position of Chairman of the Merchant Chambers of Uttar Pradesh and Employers Association of Northern India. He has also been the president of Uttar Pradesh Stock Exchange Association Limited. He has been a director of Pradeshiya Industrial Investment Corporation of Uttar Pradesh, UttarPradesh State Industrial Development Corporation and the Uttar Pradesh State Sugar Corporation. Currently, he is also the Chancellor of Dayanand Shiksha Sansthan and the President of Kanpur Education Society. Yadupati Singhania, Managing Director and Chief Executive Officer Singhania, Managing Director and Chief Executive Officer, holds a Bachelor of Technology (B.Tech.) degree from Indian Institute of Technology, Kanpur. He has experience spanning 25 years in the cement industry. He has been associated with the Company as its Promoter Director and has led our Company since its inception in 1994. He was appointed Managing Director of the Company with effect from April 1, 2004. He was instrumental in setting up the JKSL Cement Division. He is the Director of the Employers Association of Northern India, President of Kanpur Productivity Council, and member of the Board of Governors of the National Council for Cement and Building Material and Jodhpur Chamber of Commerce. He is also a member of the managing committee of Cement Manufacturers Association. He has held the position of District Governor of Rotary International and President of Foreign Trade Development (India) Association.
Cement
73
JK Cement
Coverage History
250
200
150
100
50
Jun-08
Jun-09
Jun-10
Jul-08
Jul-09
Apr-08
Apr-09
Feb-09
Aug-08
Aug-09
Feb-10
Apr-10
Jul-10
Aug-10
Mar-09
Dec-08
Dec-09
Mar-10
Jan-09
Sep-08
Sep-09
Jan-10
Sep-10
Oct-08
Oct-09
Nov-08
Nov-09
Oct-10
May-08
May-09
Not Covered
Covered
Date 1 2 1-Jun-2010
Rating Buy
Target Price INR245 INR220
Closing Price INR185 INR182
29-Apr-2010 Buy

BUY Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5%
ACCUMULATE REDUCE SELL
74
May-10
Nov-10
India | Cement
9 November 2010
Company Update/Target price changed
Orient Paper
Lord of low cost, master in a downturn
Brownfield expansion to steer volume growth Orient Paper & Industries Limited (OPI) has increased its cement capacity from 3.4mn tonnes at the end of FY09 to 5mn tonnes at the end of FY10. On account of capacity additions, OPI has been growing 7.5x faster than the industry. Till August 2010, it has reported a dispatch growth of 40% compared to 4.7% for the industry. On the back of the strong volume growth, we expect EBITDA of the cement division to grow YoY by 20% in FY11 despite low cement prices. Low cost structure to guard earnings in downturn OPI is the lowest cost producer (40% lower than industry average) of cement in India due to its efficient plants and logistical advantages. OPI is able to obtain all raw materials within a radius of 70 kms from its plant. The average lead distance to market for OPI is only 350 km as compared to 600 km for its peers. Furthermore, OPI is 100% dependent (out of which 75% is linkage coal) on domestic coal, prices of which are less volatile as compared to imported coal and petcoke. Domestic coal (post adjusted for differences in calorific value of coal) is cheaper than imported coal and petcoke by ~17% and ~13% respectively. We believe that low cost structure will guard earnings of the company in the downturn. Investment accounts for 11% of market cap OPI holds 1.55 mn shares of Century Textiles and 0.9 mn shares of Hyderabad Industries. The market value of the companys investment is approximately INR1.4bn (i.e 11% of MCAP). Apart from this, OPI has a paper plant at Brajrajnagar in Orissa where operations remain suspended since 1999. OPI currently has around 850 acres of land in this unit along with fully developed townships, educational institutions and recreational centers.
Rating : Buy
Target Price : INR87 Upside : 42% CMP : INR61(* As on 2 November 2010) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/USDmn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 USD= INR44.4
OPI IN/ORPP.BO 193/193 12/265 299,832 1
Price & Volume

70 60 50 40 Oct-09 Mar-10 Vol. in mn (RHS) Source: Bloomberg 8 6 4 2 0 Jul-10 Nov-10 Orient Paper (LHS)
Share holding (%)

Q3FY10 Q4FY10 Q1FY11 Q2FY11 33.9 31.8 15.7 18.6 33.5 33.0 15.6 17.9 33.7 34.2 15.4 16.7 33.6 34.8 17.7 14.0

Sensex Orient Paper Ultratech ACC
3M 12.3 12.9 30.1 28.0
6M 17.0 3.8 17.5 17.5
12M 32.1 42.0 51.5 51.9
Valuation
Despite having strong return ratios and margins, OPI is trading at a steep discount to its frontline cement companies and the replacement cost. At the CMP of INR 61 per share, the stock is trading at 6x and 5.8x its FY11 and FY12 earnings, respectively. It is trading at an implied EV/tonne of USD 50 and USD 40 its FY11 and FY12 capacities, respectively. We are reiterating a BUY rating on the stock with a revised priced target of INR 87/share. We have valued the company on SOTP basis and the companys paper and fan division at EV/EBITDA multiple of 1.5X and 3x respectively. We have valued the cement division at an EV/tonne of USD62/tonne which we believe should be the fair value of the cement company in the down cycle. Key Financials
Y/E Mar (INR mn) Rev YoY (%) EBITDA FY08 12,958 17.6 3,488 FY09 15,032 16.0 3,913 FY10E 16,198 7.8 3,074 FY11E 19,130 18.1 3,886 FY12E 21,935 14.7 3,786 Source: Company, Elara Securities Estimates EBITDA (%) 26.9 26.0 19.0 20.3 17.3 Adj PAT 2,099 2,315 1,593 1,981 2,030
Source: Bloomberg
Stock performance
160 Rebased to 100 140 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Orient Paper Source: Bloomberg Sensex
YoY (%) Fully DEPS 51.3 10.9 10.3 12.0 (31.2) 8.3 24.3 10.3 2.5 10.5
RoE (%) 66.9 41.3 22.6 23.2 19.7
P/E (x) EV/tonne (USD) EV/EBITDA (x) 5.6 75 3.8 5.1 96 4.1 7.4 68 5.4 6.0 50 3.4 5.8 40 2.9
Orient Paper
Valuation trigger
Volume growth in cement division due to completion of brownfield expansion Turnaround in paper division
Investment summary Low cost structure to insulate the company from losses in downturn. Healthy book balance sheet, investment
100 90 80 70 60 50 40 30 20 10 0
Valuation trigger 1. Volume growth in cement division due to completion of brownfield expansion 2. Turnaround in paper division
Apr-08
Apr-10
Apr-09
Feb-09
Aug-08
Feb-10
Aug-09
Aug-10
Feb-11
Apr-11
Aug-11
Dec-08
Dec-09
Dec-10
Oct-08
Oct-09
Oct-10
Jun-08
Jun-09
Jun-10
Jun-11
Oct-11
Key risks Sharp decline in cement prices Slow down in cement demand
Valuation overview - Sum of Parts Valuation

FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV Paper EBITDA EV /EBITDA Paper business EV Fan EBITDA EV /EBITDA Fan business EV Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) INR mn x INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 523 3.0 1,568 16,011 (691) 16,702 193 87 61 41.7 INR mn x INR mn 253.6 1.5 380 mn tonnes USD/tonne INR Mn 5.0 62 14,062
Our assumptions Cement Volume to grow at a CAGR of ~13% Realizations to increase at a CAGR of 0.5%.
Valuation driver - P/BV, MCap/sales, P/CEPS, EV/EBITDA

14 12 P/BV & Mcap/ Sales 10 8 6 4 2 0 FY10E FY11E FY12E FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 0 15 EV/EBITDA & P/CEPS 10 5 20
P/BV(RHS) P/CEPS(LHS)
MCap/Sales(RHS) EV/EBITDA(LHS)
76
Orient Paper

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Total Liabilities Applications Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Deferred Tax (Net) Miscellaneous Expenses not written off Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis (INR mn) Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
FY09 15,032 3,913 212 4,126 347 3,779 191 3,588 1,273 2,315 314 2,001 FY09 203 6,326 4,623 11,153 8,503 4,658 3,845 6,587 92 1,107 (502) 23 11,153 FY09 3,152 (520) 2,632 (5,026) (2,394) 2,426 40 73 FY09 16.0 12.2 10.3 26.0 15.4 0.7 41.3 43.1 12.0 10.3 1.5 5.1 4.1 1.1 95.6 2.5
FY10 16,198 3,074 163 3,237 550 2,686 345 2,341 748 1,593 1,593 FY10 203 7,564 5,163 12,930 16,365 5,206 11,159 567 471 1,834 (1,103) 12,930 FY10 2,756 (137) 2,619 (1,919) 700 (256) (315) 129 FY10 7.8 (21.5) (31.2) 19.0 9.8 0.6 22.6 22.5 8.3 (31.2) 1.5 7.4 5.4 1.0 68.3 2.5
FY11E 19,130 3,886 179 4,066 776 3,290 334 2,956 976 1,981 1,981 FY11E 193 9,319 4,575 14,087 17,365 5,982 11,383 3,00 171 3,335 (1,103) 14,087 FY11E 3,080 1,318 4,398 (732) 3,666 (1,229) 383 2,819 FY11E 18.1 26.4 24.3 20.3 10.4 0.1 23.2 24.5 10.3 24.3 1.0 6.0 3.4 0.7 50.1 1.6
FY12E 21,935 3,786 181 3,967 789 3,178 149 3,029 1,000 2,030 2,030 FY12E 193 11,123 4,015 15,331 17,465 6,770 10,695 900 171 4,668 (1,103) 15,331 FY12E 2,967 87 3,054 (700) 2,354 (1,144) 210 1,420 FY12E 14.7 (2.6) 2.5 17.3 9.3 (0.1) 19.7 21.7

25,000 20,000 15,000 10,000 FY09 FY10 Net Revenues (LHS) 26.0 19.0 (INR mn) 20.3 17.3 30 20 10 0 FY11E FY12E EBITDA Margin (RHS) (%)

2,500 2,000 (INR mn) 1,500 1,000 500 0 FY09 FY10 Adjusted PAT (LHS) (2.2) (20.4) 2.5 24.3 30 20 10 0 (10) (20) (30) FY11E FY12E PAT Growth (RHS) (%)
Return ratios (%)

50 40 30 20 10 0 FY09 FY10 ROE Source: Company, Elara Securities Estimate FY11E FY12E ROCE 41.3 22.6 22.5 24.5 23.2 21.7 19.7 43.1
Strong return ratios

10.5 2.5 1.0 5.8 2.9 0.5 39.8 1.6
Trading at a discount to its peers despite having strong return ratios
Cement
77
Orient Paper Orient Paper

Stock at 60% discount to its replacement cost albeit superior margins and return ratios Cement business valued at distress EV/tonne of USD62 for its adverse regional mix Reiterate our Buy rating, revise target price to INR87
At the CMP of INR61 per share, the stock is trading at 6x and 5.8x its FY11 and FY12 earnings, respectively. It is trading at an implied EV/tonne of USD 50 and USD 40 its FY11 and FY12 capacities, respectively. Despite having a healthy balance sheet and return ratios, OPI is trading at a steep discount to its peers and replacement cost. Thus we reiterate our Buy rating on the stock with a revised target price of INR 87 per share. We have valued the company on SOTP basis and the companys paper and fan division at EV/EBITDA multiple of 1.5X and 3x respectively. We have valued the cement division at an EV/tonne of USD62/tonne. We have not assigned any value for investments which have a current market value of INR1.4bn We also have not assigned any value to the surplus land. Exhibit 1: Sum of Parts Valuation
FY12E Grey Cement Capacity EV /tonne multiple Grey Cement business EV Paper EBITDA EV /EBITDA Paper business EV Fan EBITDA EV / EBITDA Fan business EV Total EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) INR mn x INR mn INR mn INR mn INR mn mn INR/ share INR/ share (%) 523 3.0 1,568 16,011 (691) 16,702 193 87 61 41.7 INR mn x INR mn 253.6 1.5 380 mn tonnes USD/tonne INR Mn 5.0 62 14,062
78
Orient Paper
Company Description
Orient Paper & Industries Limited is the flagship company of CK Birla Group with cement, paper and electrical business segments. In FY10 company derived 55% of its revenue from cement, 30% from electrical and 15% from paper business. OPIs cement division has a 5mn tonnes capacity with manufacturing facilities at Devapur in Andhra Pradesh and Jalgaon in Maharastra. The locations of cement plants give access to key consumer markets in Maharashtra, Andhra Pradesh and Gujarat. OPI has two paper manufacturing plants at Amlai (in Madhya Pradesh) and Brajrajnagar (in Orissa). The operations at the Brajrajnagar plant, which has an installed capacity to produce 76,000 TPA of paper, have been suspended since 1999. The plant had made a loss of INR 71.6 mn at the EBIT level in FY10. OPI currently has around 850 acres of land in this unit along with fully developed townships, educational institutions and recreational centers. The Amlai plant has a capacity of 95,000 TPA (including 10,000 tonnes of tissue paper capacity). It produces writing, printing and tissue paper. The company sells paper under the brands Orient and Peacock. OPI electrical division is located in Kolkata (in West Bengal) and Faridabad (in Haryana) with an installed capacity of 3.58 mn units per annum. The division sells ceiling fans, portable fans and exhaust fans under the brand name of Orient Fan and Orient PSPO and also exports to countries in the Middle East and the US.

CK Birla, Non-Executive Chairman CK Birla is Non-Executive Chairman of the Board of OPI. He is an industrialist having vast business experience. He holds directorship in companies like Hindustan Motors Limited., National Engineering Industries Limited., AVTEC Limited, Hyderabad Industries Limited., Birlasoft (India) Limited., The Indian Smelting & Refining Company Limited, Birla Associates Private Limited (Singapore), Nigeria Engg.Works Limited (Nigeria), Birlasoft Inc. USA, Birlasoft (U.K.) Limited London, Birla Brothers Private Limited. Manohar Pachisia, Managing Director M L Pachisia is Managing Director and Executive Director of OPI. He has an experience of over 47 years and controls the affairs of the Company as a whole. His directorships include GMMCO Limited., National Engg. Industries Limited.., Birla Buildings Limited.., Soorya Vanijya & Investment Limited., Gwalior Finance Corp. Limited., Birlasoft (India) Limited., National Bearing Company (Jaipur) Limited.., Birlasoft Enterprises Limited., Nigeria Engineering Works Limited. (Nigeria), Rivers Vegetable Oil Company Limited. Michael Bastian, Additional Director Michael Bastian has been appointed as an Additional Director of OPI. Mr. Michael Bastians directorship includes Hindustan Copper Limited., Elder Pharmaceuticals Limited, Artson Engineering Limited.., National Textile Corporation Limited, Indian Oil Corporation Limited.
Cement
79
Orient Paper
Coverage History
70 60 2 50 40 30 20 10 0 1
Jun-08
Jun-09
Jun-10
Jul-08
Jul-09
Apr-08
Apr-09
Feb-09
Aug-08
Aug-09
Feb-10
Apr-10
Jul-10
Aug-10
Mar-09
Dec-08
Dec-09
Mar-10
Jan-09
Sep-08
Sep-09
Jan-10
Sep-10
Oct-08
Oct-09
Nov-08
Nov-09
Oct-10
May-08
May-09
Not Covered
Covered
Date 1 2
Rating
Target Price INR80 INR87
Closing Price INR64 INR61
29-Apr-2010 Buy 02-Nov-2010 Buy

BUY Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5%
ACCUMULATE REDUCE SELL
80
May-10
Nov-10
India | Cement
9 November 2010
Company Update/Target price changed
JK Lakshmi Cement
Cementing its true place
Capacity to go up by 67%, debottlenecking to boost volume JK Lakshmi Limited (JKL) is in the process of increasing its cement capacity by 67% from existing 4.75mn tonnes to 7.95mn tonnes by end of FY13 through a new greenfield plant and debottlenecking of the existing plant. The debottlenecking would enhance cement volume of JKL at a CAGR of ~1% (FY10-12) while the benefit from the greenfield plant is expected to be visible only from end of FY13. Savings from captive power to partly mitigate margin pressure The company is also expanding its captive power capacity to 66 MW by setting up a 12 MW waste heat recovery plant (WHR) and an 18 MW thermal power plant at Sirohi, Rajasthan. For the WHR plant, which will generate carbon credits, the variable cost will be INR0.3-0.4 per unit. Savings from captive power (INR130/tonne) is expected to partly cushion the margins for the company. Enough cash to fund capex, sound debt equity ratio too At the end of FY10, JKL had gross cash and investments of INR7bn (INR 57 per share,) and a comfortable net debt equity ratio of 0.2x. We believe that the cash balance and internal accruals will be sufficient to fund capex plan of the company for the next 1.5 years. Thus we expect the companys gross debt (~INR9.2bn) to remain at current levels up to end of FY12. Not to make losses in current cycle on lower leverage Unlike the last down cycle, we do not expect JK Lakshmi to incur losses (on an annual basis) in the current down cycle as it has lower leverage, and has undertaken cost cutting measures. Despite strong fundamentals and an increase in replacement cost, the stock is trading at a discount to the last down cycle.
Rating : Buy
Target Price : INR78 Upside : 24% CMP : INR63 (as on 2 November 2010) Key data*
Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (INRbn/USDmn) Daily Vol. (3M NSE Avg.) Face Value (INR) 1 USD= INR 44.4
JKLC IN/JKLC.BO 122/122 8/174 201,113 5
Price & Volume

90 80 70 60 50 Oct-09 Feb-10 Vol. in mn (RHS) Jun-10 4 3 2 1 0 Oct-10 JK Laxmi (LHS)
Source: Bloomberg
Share holding (%)

Q3FY10 Q4FY10 Q1FY11 Q2FY11 44.5 20.9 9.5 25.2 44.2 21.2 9.5 25.1 44.2 22.7 9.6 23.5 44.2 19.4 15.3 21.1

Sensex JK Lakshmi Cement Ultratech ACC
3M 12.3 4.3 30.1 28.0
6M 17.0 (9.7) 17.5 17.5
12M 32.1 3.7 51.5 51.9
Valuation
At the CMP of INR63, JKL is trading at 6.4x and 4.8x its FY11 and FY12 earnings respectively. On an EV/tonne basis, it is trading at USD47 and USD55 at its FY11 and FY12 capacities respectively. Despite much stronger fundamentals and an increase in replacement costs, the stock is trading at a discount to the last down cycle. The stock is trading at close to half of its replacement cost and 20% discount to the FY10 book value. Thus we are reiterating our Buy rating on the stock with a revised priced target of INR78/share. We have valued the company at EV/tonne of USD62 on FY12 capacity. Key Financials
Y/E Mar (INR mn) FY08 FY09 FY10 FY11E FY12E Rev 11,077 12,245 14,905 14,420 17,392 YoY (%) 31.3 10.6 21.7 (3.3) 20.6 EBITDA EBITDA (%) 3,513 31.7 3,106 25.4 4,246 28.5 2,852 19.8 3,505 20.2 Adj PAT 2,237 1,786 2,411 1,205 1,606
Source: Bloomberg
Stock performance
140 Rebased to 100 120 100 80 Nov-09 Feb-10 May-10 Aug-10 Sensex Nov-10 JK Laxmi Source: Bloomberg
YoY (%) Fully DEPS 25.6 18.3 (20.2) 14.6 35.0 19.7 (50.0) 9.8 33.3 13.1
RoE (%) 43.5 25.2 27.2 11.6 13.8
P/E (x) 3.5 4.3 3.2 6.4 4.8
EV/tonne (USD) EV/EBITDA 68.2 3.1 49.7 3.3 46.6 2.3 47.0 3.8 54.7 3.6
JK Lakshmi Cement
Valuation trigger
Brownfield cement expansion coming on stream CPPs coming on stream
Investment summary Cement capacity to increase by 67% CPP capacity to increase by 83%
90 80 70 60 50 40 30 20 10 0
Valuation trigger 1. Brownfield cement expansion coming on stream 2. CPPs coming on stream
Key risks

FY12E Capacity EV /tonne multiple EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) mn tonnes USD/tonne INR mn INR mn INR mn mn INR/ share INR/ share (%) 5.3 62 14,890 5,296 9,594 122 78 63 24.0
Our assumptions Cement Volume to grow at a CAGR of ~1% Realizations to increase at a CAGR of 3.7%.

140 120 EV per tonne (USD) 100 80 60 40 20 0 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY04 FY05 (50) 25 (%) 50
(25)
EV/Tonnein USD(LHS)
RoE(RHS)
RoCE (RHS)
82
JK Lakshmi Cement

Income Statement (INR mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Investments Net Working Capital Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) EV/tonne (USD) Dividend Yield (%)
FY09 12,245 3,106 61 3,167 691 2,476 209 2,267 481 1,786 1,786 FY09 612 7,701 7,027 351 15,690 17,605 7,474 10,131 970 889 3,700 15,690 FY09 2,864 253 3,117 (2,246) 871 (670) (410) (209) FY09 10.6 (11.6) (20.2) 25.4 14.6 0.4 25.2 19.3 14.6 (20.2) 2.0 4.3 3.3 0.9 49.7 3.2
FY10 14,905 4,246 93 4,339 800 3,539 230 3,309 897 2,411 2,411 FY10E 612 9,595 9,217 921 20,346 19,036 8,406 10,630 1,820 4,805 3,091 20,346 FY10 3,664 (98) 3,566 (2,307) 1,259 1,229 (3,550) (1,063) FY10E 21.7 36.7 35.0 28.5 16.2 0.2 27.2 21.9 19.7 35.0 2.5 3.2 2.3 0.7 46.6 4.0
FY11E 14,420 2,852 94 2,946 952 1,994 387 1,606 402 1,205 1,205 FY11E 612 10,619 9,217 921 21,369 22,546 9,358 13,189 2,400 4,805 975 21,369 FY11E 2,544 865 3,409 (4,091) (681) (862) 294 (1,249) FY11E (3.3) (32.8) (50.0) 19.8 8.4 0.3 11.6 11.1 9.8 (50.0) 1.8 6.4 3.8 0.8 47.0 2.8
FY12E 17,392 3,505 101 3,606 1,071 2,535 393 2,141 535 1,606 1,606 FY12E 612 12,065 9,217 921 22,815 22,646 10,429 12,218 6,600 3,305 692 22,815 FY12E 3,070 (54) 3,016 (4,300) (1,284) (818) 1,764 (338) FY12E 20.6 22.9 33.3 20.2 9.2 0.4 13.8 12.8 13.1 33.3 1.6 4.8 3.6 0.7 54.7 2.5

20,000 15,000 (INR mn) 10,000 5,000 0 FY09 FY10 Net Revenues (LHS) 10 0 FY11E FY12E EBITDA Margin (RHS) 25.4 28.5 19.8 20.2 20 (%) 30

3,000 2,500 (INR mn) 2,000 1,500 1,000 500 0 FY09 FY10 Adjusted PAT (LHS) (20.2) (50.0) 35.0 33.3 40 20 (%) 0
(20) (40) (60)
FY11E FY12E PAT Growth (RHS)
Return ratios (%)

30 25 20 (%) 15 10 5 0 FY09 FY10 ROE FY11E ROCE FY12E 11.1 19.3 21.9 11.6 13.8 12.8 25.2 27.2
Comfortable debt equity ratio
Trading at a steep discount to the large cap peers as well as to its replacement cost
83
Cement
JK Lakshmi Cement JK Lakshmi Cement

Available at subdued valuation, trading at 45% discount to its replacement cost Valuing cement business at distress EV/tonne of USD62, pricing in all negatives Reiterating our Buy rating, revising target price to INR78
At the CMP of INR63, JKL is trading at 6.4x and 4.8x its FY11 and FY12 earnings respectively. On an EV/tonne basis, it is trading at USD47and USD55 at its FY11 and FY12 capacities respectively. The stock is trading at 13% discount to the distress value of a cement plant (USD 62) despite having strong balance sheet. The stock is trading at 5% discount to its own last down cycle valuations despite much stronger fundamentals. Thus we are reiterating our Buy rating on the stock with revised target price of INR 78 per share. Exhibit 1: EV/tonne based valuations
FY12E Capacity EV /tonne multiple EV Less: Net Debt Target Market Capitalization Diluted Shares outstanding Target Price Current Market Price Potential Upside/(downside) Mn tonnes USD/tonne INR Mn INR Mn INR Mn mn INR/ share INR/ share (%) 5.3 62 14,890 5,296 9,594 122 78 63 24.0
84
JK Lakshmi Cement
Company Description
JK Lakshmi Cement Limited, a mid-sized cement company, is the flagship company of Hari Shankar Singhania group and was earlier known as JK Corp. The company started its cement business in 1982 with a total installed capacity of 5lakhs tonnes pa in Sirohi district of Rajasthan which at present stands at 4.75mn tonnes. The company is planning to increase it to 7.95mn tonnes by end of FY13. The company also has a 36 MW CPP at Sirohi, Rajasthan and 11 RMC units of capacity 0.75mn cubic meters. The major selling markets of the company include Rajasthan, Gujarat, Maharashtra and other North Indian states (viz: J&K, Himachal Pradesh, Punjab, Haryana, Delhi and West UP).

Hari Shankar Singhania, Non-Executive Chairman Hari Shankar Singhania is the Non-Executive Chairman of JK Lakshmi Cement Vinita Singhania, Managing Director, Vinita Singhania is the Managing Director of JK Lakshmi Cement Shailendra Chouksey, Director Shailendra Chouksey, is the Whole Time Director of JK Lakshmi Cement
Cement
85
JK Lakshmi Cement
Coverage History
90 80 70 60 50 40 30 20 10 2 3 1
Jun-08
Jun-09
Jun-10
Jul-08
Jul-09
Apr-08
Apr-09
Feb-09
Aug-08
Aug-09
Feb-10
Apr-10
Jul-10
Aug-10
Mar-09
Dec-08
Dec-09
Mar-10
Jan-09
Sep-08
Sep-09
Jan-10
Sep-10
Oct-08
Oct-09
Nov-08
Nov-09
Oct-10
May-08
May-09
Not Covered
Covered
Date 1 2 3 28-Jul-2010
Rating Buy
Target Price INR100 INR90 INR78
Closing Price INR72 INR63 INR63
29-Apr-2010 Buy
02-Nov-2010 Buy
86
May-10
Nov-10
Elara Securities (India) Private Limited Disclosures & Confidentiality

The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note 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 Elara or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara is under no obligation to update or keep the information current. Neither Elara nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited / the company.
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The information contained in this note is of a general nature and is not intended to address the circumstances particular individual or entity. Although we endeavor to provide accurate and timely information, there can guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the No one should act on such information without appropriate professional advice after a thorough examination particular situation. of any be no future. of the

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Closer to dawn

Global Markets Research

All India Demand & Supply(mn tonnes)

Source: CMA, Elara Securities Estimates

Cement prices improve in major cities

Source: CMIE, Elara Securities Research

Elara Securities (India) Private Limited

Elara Securities (India) Private Limited

Elara Securities (India) Private Limited

The worst is behind us

Capacity addition in listless mode

Source: CMA, Elara Securities Research

Brownfield Maharashtr Mar-10 a /Andhra Pradesh

Madras Cement GrasimShambhupura: Clinker Grinding

4,000 TPD Brownfield Jayanthipur Sep-09 kiln. am 4.4 Brownfield Rajasthan

Source: Capitaline, Elara Securities Research

Q4FY08 Q1FY10 Q4FY08 Q2FY09 Q4FY08 Q1FY10

Source: Elara Securities Research

Elara Securities (India) Private Limited

Effective capacity (LHS) Increase in effective capacity (RHS)

East 15% Central 20%

Exhibit 7: Region wise capacity additions (mn tonnes)

South 51% West 7% Central 6%

FY11 +Capacity additions FY12 +Capacity additions FY13 Total

Source: Elara Securities Estimates

Elara Securities (India) Private Limited

Exhibit 9: Infra-related spending to be strong

Exhibit 10: Share of infra in total demand to go up

Source: Planning Commission, Elara Securities Research

XIth Plan: Investments in road sector

Centre 183.2 194.5 206.7 226.2 263.0

State 175.3 181.5 188.9 206.1 248.2

Private 159.7 171.9 196.4 251.4 288.5

Total 518.2 547.9 592.0 683.7 799.7 3,141.5

Investment in infrastructurein (LHS) Investment as % of GDP(RHS)

Elara Securities (India) Private Limited

Exhibit 15: Credit flow to infra, construction soars

Source: Capitaline, Elara Securities Research

Exhibit 17: HDFCs loan book remains buoyant

Exhibit 14: Build-up in order-book seen for majors

Source: HDFC, Elara Securities Research

Source: CMIE, Elara Securities Research

Elara Securities (India) Private Limited

Source: Planning Commission, Elara Securities Research

Elara Securities (India) Private Limited

Exhibit 25: Monsoon utilization to remain low

Source: CMA, Elara Securities Estimates

Pricing: Downside remains limited

Source: CMA, Elara Securities Estimates

Capacity addition (LHS)

% increase in capacity (RHS)

Exhibit 24: Steady growth in cement dispatches

Source: Capitaline, Company, Elara Securities Research

All India Cement Despatches (LHS)

Elara Securities (India) Private Limited

Exhibit 28: Reliance on imported coal to increase cost

INR per tonne 20 45 138 41 54 83 380

Net debt equity ratio (LHS) % increase in Effective Capacity (RHS)

54.0 31.3 At present Others

Elara Securities (India) Private Limited

Source: Capitaline, Company, Elara Securities Research

Exhibit 32: Implied cement price increase from RoCE (%)

1,506 1.5 1,004 1.35 1,115