Ambuja Cement (AMBCE) | 223 - ICICI...

July 26, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

Higher realisation drives sales growth…

Ambuja’s results were above our estimates. Revenues increased

5.5% YoY (up 5.4% QoQ) to | 3,016.9 crore (above I-direct estimate

of | 2,953.6 crore) led by 5.3% YoY increase in volumes to 6.4 MT

(vs. I-direct estimate of 6.4 MT) and 0.2% YoY increase in realisation

to | 4,736 (vs. I-direct estimate of | 4,625)

EBITDA margin declined 213 bps YoY to 20.6% mainly led by 15.9%

YoY increase in power cost and 19.1% YoY increase in freight cost.

However, margins remained above our estimates. EBITDA per tonne

declined 9.2% YoY to | 977/t (vs. our estimate | 789/t)

Demand to improve on higher infra spend, revival in rural demand…

Better monsoons, hike in minimum support prices and pre-election

spending are expected to lead to better demand from rural regions (that

has remained a laggard till now). This, coupled with higher infra spend, is

expected to drive cement demand. Consequently, we expect cement

volumes to increase at a CAGR of 7.6% in CY17-19E. In addition, we

expect an improvement in pricing to continue in the company’s key

markets, especially in the north led by a pick-up in demand. Hence, we

expect revenues to increase at 10.6% CAGR in CY17-19E.

Capacity expansion to further boost volumes…

Over the past few years, Ambuja had registered muted growth in capacity

expansion (2% CAGR in CY13-17). However, the recent announcement of

capacity expansion of 3.1 MT (10.5% of overall capacity) clinker plant at

Marwar, Rajasthan allays concerns on growth in the medium term. The

company plans to invest | 1,391 crore towards the first phase of 1.7 MT,

which is expected to be commissioned in the second half of 2020.

Master supply agreement with ACC to boost profits

The board has approved master supply agreement (MSA) with ACC for

three years commencing from the date of execution. The proposed

agreement will help unlock synergy between ACC and Ambuja. Under the

agreement, ACC and Ambuja can procure from each other clinker,

cement, raw materials (including fuels, fly ash, slag) & spare parts and

undertake toll grinding in certain plants. This will enable both companies

to lower their lead distance, maximise utilisation of assets as well as spare

inventory. According to the management, this is expected to result in

synergy benefits of ~3-5% of profit before tax.

Capex not adequate to capture growth potential: downgrade to HOLD

Higher infra spend along with a revival in the rural economy is expected

to boost cement demand by 8% in FY18-20E. This, coupled with limited

supply (3% CAGR in FY18-20E) is expected to drive utilisation and pricing.

In order to capture this growth, the company is planning to expand its

capacity by 1.7 MT by CY20. However, we believe the capacity expansion

is not adequate compared to other peers. This will negatively impact the

company’s market share and limit its volume growth. Further, the 1.7 MT

greenfield capacity expansion at US$136/t looks higher and return ratio

dilutive, in our view. Hence, we downgrade the stock from BUY to HOLD

with a revised target price of | 245/share (i.e. at 12.0x CY19E EV/EBITDA

and EV/tonne of US$161).

Rating matrix

Rating : Hold

Target : | 245

Target Period : 12-15 months

Potential Upside : 10%

What’s Changed?

Target Changed from | 285 to | 245

EPS CY18E Changed from | 6.8 to | 6.9

EPS CY19E Changed from | 8.7 to | 8.5

Rating Changed from Buy to Hold

Quarterly Performance

Q2CY18 Q2CY17 YoY (%) Q1CY18 QoQ (%)

Revenue 3,016.9 2,860.0 5.5 2,862.6 5.4

EBITDA 622.3 651.0 -4.4 507.1 22.7

EBITDA (%) 20.6 22.8 -213 bps 17.7 291 bps

PAT 499.3 392.2 27.3 271.8 83.7

Key Financials

| Crore CY16 CY17 CY18E CY19E

Net Sales 9196.6 10446.9 11674.6 12788.5

EBITDA 1692.3 1940.1 2299.8 2805.3

PAT 932.2 1249.6 1377.1 1693.7

Adjusted EPS (|) 4.7 6.3 6.9 8.5

Valuation summary

CY16 CY17 CY18E CY19E

PE (x) 47.5 35.4 32.2 26.1

Target PE (x) 52.2 38.9 35.3 28.7

EV to EBITDA (x) 18.0 15.0 13.0 10.8

EV/Tonne(US$) 155 147 148 146

Price to book (x) 2.3 2.2 2.2 2.1

RoNW (%) 6.7 8.6 9.5 11.4

RoCE (%) 9.5 11.3 14.1 17.2

Stock data

Amount

Market cap | 44280 crore

Debt (CY17) | 33 crore

Cash & Invest (CY17) | 3497 crore

EV | 40816 crore

52 week H/L | 291 / 223

Equity capital | 309.9 crore

Face value | 2

Particular

Price performance (%)

1M 3M 6M 12M

ACC 11.7 -6.3 -14.9 -14.9

UltraTech Cement 7.8 -2.2 -7.2 -1.5

Ramco Cement -0.9 -16.6 -11.5 4.1

Research Analyst

Rashesh Shah

[email protected]

Devang Bhatt

[email protected]

Ambuja Cement (AMBCE) | 223


Source: Company, ICICI Direct Research Variance analysis

Q2CY18 Q2CY18E Q2CY17 YoY (%) Q1CY18 QoQ (%) Comments

Net Sales 3,016.9 2,953.6 2,860.0 5.5 2,862.6 5.4 Higher volume growth drives revenues in the quarter

Other Incomes 191.1 68.8 56.0 241.3 50.7 276.8

Raw Material Expenses 289.6 236.3 237.9 21.7 270.4 7.1 The increase in RM cost was mainly due to increase in fly ash and gypsum cost

Employee Expenses 175.8 172.4 169.7 3.6 169.6 3.7

Change in stock -78.4 0.0 -9.0 N.A -58.6 N.A

Power and fuel 654.7 655.9 564.7 15.9 635.1 3.1 The rise in power & fuel cost was mainly due to higher pet coke prices

Freight 878.4 867.9 737.5 19.1 828.8 6.0 Increase in diesel prices led to higher freight cost and increase in lead distance

Others 474.4 517.2 508.4 -6.7 510.2 -7.0

EBITDA 622.3 503.8 651.0 -4.4 507.1 22.7

EBITDA Margin (%) 20.6 17.1 22.8 -213 bps 17.7 291 bps Higher power and freight cost dented margins

Interest 19.2 26.9 16.5 16.4 25.7 -25.4

Depreciation 136.4 152.1 143.9 -5.2 139.3 -2.0

PBT 657.8 393.5 546.6 20.3 392.8 67.5

Total Tax 158.6 110.2 154.4 2.7 121.1 31.0

PAT 499.3 283.3 392.2 27.3 271.8 83.7

PAT during the quarter increased mainly led by lower depreciation expenses and

higher other income

Key Metrics

Volume (MT) 6.37 6.39 6.05 5.3 6.22 2.4 Improving demand from IHB and infra spend drove volumes

Realisation (|) 4,736 4,625 4,727 0.2 4,602 2.9

EBITDA per Tonne (|) 977 789 1,076 -9.2 815 19.8 Higher input cost dented EBITDA/t

Source: Company, ICICI Direct Research

Change in estimates

CY19E

(| Crore) Old New % Change Old New % Change Comments

Revenue 11,537.1 11,674.6 1.2 12,750.3 12,788.5 0.3 Revenues are expected to increase at a CAGR of 10.6% over CY17-19E

EBITDA 2,259.0 2,299.8 1.8 2,790.3 2,805.3 0.5

EBITDA Margin (%) 19.6 19.7 12 bps 21.9 21.9 5 bps Cost efficiency in power and other cost to drive margins

PAT 1,356.0 1,377.1 1.6 1,733.0 1,693.7 -2.3

EPS (Diluted) (|) 6.8 6.9 1.6 8.7 8.5 -2.3

CY18E


Assumptions

Comments

CY15 CY16 CY17 CY18E CY19E CY18E CY19E

Volume (MT) 21.5 21.1 23.0 25.0 26.6 24.8 26.6 Capacity expansion and macro tailwind to drive volumes

Realisation (|) 4,351 4,343 4,553 4,675 4,815 4,661 4,801 Price improvement in the company's key markets to boost realisation

EBITDA per Tonne (|) 667 780 845 921 1,056 913 1,051 We expect EBITDA/tonne at | 1,056/t in CY19E

EarlierCurrent



Annual Report Analysis

Market share gains in CY17

The company’s volume in CY17 increased 9.0% YoY to 23.0 MT vs.

industry volume growth of 6.0% YoY. Consequently, Ambuja’s utilisation

has increased from 71.5% in CY16 to 77.5% in CY17. Total 70% of

Ambuja’s retail sales came from small towns and villages.

Expansion plans

The Board has approved capacity addition of 1.7 MT (~5% of total

capacity) by setting up a greenfield clinkerisation unit at Marwar Mundwa

in Nagaur district, Rajasthan. The company has earmarked | 137.3 crore

for site development, infrastructure, engineering design, tendering and

contracting of the project. It has also commenced civil construction work

for the ancillary building and is in its finishing stages. Ambuja is also

investing in securing limestone mines and has acquired a new mining

lease at the Maldi Mopar mines for its Bharatpur plant. The company aims

to commence operations at these mines by June 2019. Ambuja has also

acquired new mining lease at Loadhva for Ambujanagar plant in Gujarat

and a new mining lease at the Nandagaon Ekodi mines for its plant in

Maharashtra. Apart from these investments, the company is planning to

set up a railway siding at the Rabriyawas unit in Rajasthan by end of 2019

and operationalise its coal block by 2018.

Higher input cost leads to increase in operating cost/t

The operating cost/t increased 4.0% YoY mainly led by higher fly ash

cost, pet coke prices and diesel prices. However, the company was able

to limit the increase in operating cost due to various cost reduction

measures like reduction in gypsum cost by 2.0%, increase in usage of

alternative fuels by 1.0% to 4.2% and fixed cost optimisation. Going

forward, the cost is further expected to improve due to master supply

agreement (MSA) with Ambuja Cements. The proposed agreement will

help unlock synergy between ACC and Ambuja leading to lower lead

distance and maximise utilisation of assets as well as spare inventory.

Healthy growth in operating cash flow

Operating cash flow increased by | 439 crore in CY17 mainly led by | 317

crore increase in profitability.

Improvement in return ratios

With increase in utilisation (up from 71.5% to 77.5%) and improvement in

operating margins (up from 18.4% to 18.6%) led to increase in RoCE from

9.5% in CY16 to 11.3% in CY17.

Renewal of agreement for payment of technology & knowhow fees to

Holcim Technologies

The company has renewed the technology & knowhow agreement for a

further period of three years effective from January 1, 2018 on the same

terms and conditions except that the proposed fees shall be @1% of the

net sales of the company for each financial year or at such rate as may be

determined by the competent authorities of India and Switzerland under

the Bilateral Advance Pricing Agreement (BAPA). The company has paid

| 102.8 crore (increased from nil in CY12 to 8.2% of PAT in CY17) as

technology know how fees to Holcim Technology. In addition,

remuneration to top management, independent directors and non-

executive directors accounted for 1.4% of PAT.

Increase in EPS drives dividend per share in CY18

Dividend per share (DPS) increased 28.5% YoY to | 3.6/share mainly led

by 34.1% YoY increase EPS.


Company Analysis

Third largest player with no exposure to volatile southern region

Ambuja Cement is the third largest cement manufacturer in India with

cement production capacity of ~29.7 MT. The company has a presence in

all regions except south where the issue of overcapacity persists. Out of

total capacity of ~29.7 MT, highest capacity is in the north and west

region, which is ~12 MT each while capacity in east regions is ~6 MT.

Strong presence in north keeps plant utilisation at healthy levels

Due to the company’s strong focus on the northern region where demand

is continuously rising, Ambuja has been able to maintain higher utilisation

even in a difficult business environment. Along with higher utilisation

level, availability of sea transport and majority of sale through retailers

has helped the company to keep healthy EBITDA margins.

To reach capacity of 34 MT by CY21E

The company is planning to expand its capacity to ~34 MTPA by CY21E.

Out of the new capacity planned, 1.7 MTPA will come up in the northern

region while the central region is expected to see capacity expansion by

3.0 MTPA, respectively.

Exhibit 1: Capex plans

State Region MT

Current Capacity in CY17 29.7

Additions :

Marwar Mundwa, Nagaur Rajasthan North 1.7

Dadri, Gautam Buddha Nagar Uttar Pradesh Central 1.5

Osara, Mandsaur Madhya Pradesh Central 1.5

Total by CY21E 34.4


Lower raw material cost due to lower use of purchased clinker

The company has maintained lower raw material cost compared to the

industry for many years. Raw material cost per tonne for the company

has come down drastically after commissioning of two new clinkerisation

plants at Bhatpara and Rauri in CY10, which reduced the amount of

purchased clinker for the company. Barring CY09, its total RM cost has

consistently remained below industry average.

Exhibit 2: Lower raw material cost per tonne compared to industry

298278

302

388 372 368396

577

642

693 704677 678

305

474

516

0

100

200

300

400

500

600

700

800

CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17

(|

/tonne)

Ambuja Industry


Capacity Share

North

40%

West

40%

East

20%


Expect revenue CAGR of 10.6% during CY17-19E

Revenues have grown at 1.5% CAGR in CY12-17 led by realisation CAGR

of 0.6% and volume CAGR of 0.9% during the same period. For CY17-

19E, we expect sales CAGR of 10.6% with realisation CAGR of 2.8% and

volume CAGR of 7.6% during the same period led by increase in infra

spend by the government. The company is well on track on the capacity

expansion front and will expand current capacity of 29.7 MT to ~34 MT

by CY21E.

Exhibit 3: Expect expansion led revenue CAGR of 10.6% during CY17-19E

9087

99119368 9173

10454

11675

12789

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

CY13 CY14 CY15 CY16 CY17 CY18E CY19E

Sales (| crore)


Exhibit 4: Capacity addition plans

State Region MT

Current Capacity in CY17 29.7

Additions :

Marwar Mundwa, Nagaur Rajasthan North 1.7

Dadri, Gautam Buddha Nagar Uttar Pradesh Central 1.5

Osara, Mandsaur Madhya Pradesh Central 1.5

Total by CY21E 34.4


Exhibit 5: Volume to grow at 7.6% CAGR during CY17-19E

21.6 21.5 21.5 21.1

23.0

25.0

26.6

-2.0

3.0

8.0

13.0

18.0

23.0

28.0


Sales Volumes (MT)


Exhibit 6: Realisation to pick up led by recovery in demand

4207

4601

4351 4343

4553

4675

4815

3800

4000

4200

4400

4600

4800

5000


-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Realisation (|/tonne) -LS Growth (%) -RS


Exhibit 7: Q2CY18 sales volume up 5.3% YoY

4.505.00

6.02 6.05

5.02

5.876.22 6.37

0.0

2.0

4.0

6.0

8.0

10.0

Q3C

Y16

Q4C

Y16

Q1C

Y17

Q2C

Y17

Q3C

Y17

Q4C

Y17

Q1C

Y18

Q2C

Y18

In M

T

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

(%

)

Sales volumes -LHS Growth (%) -RHS


Exhibit 8: Q2CY18 realisations up 0.2% YoY

4477 4449

4251

47274621 4624 4602

4736

3000

3500

4000

4500

5000

Q3C

Y16

Q4C

Y16

Q1C

Y17

Q2C

Y17

Q3C

Y17

Q4C

Y17

Q1C

Y18

Q2C

Y18

(|

)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

(%

)

Realisation-LHS Growth (%) -RHS



Margins to improve led by higher realisation, cost rationalisation

Given the up-tick in demand, we expect operating margins of Ambuja to

improve led by higher realisation and better cost efficiency.

Exhibit 9: Expect EBITDA/tonne of | 1,056 by CY19E

731

864

667

780845

921

1056

0

200

400

600

800

1000

1200


EBITDA/Tonne


Exhibit 10: Margins to improve led by cost efficiency

17.4

19.3

15.4

18.2

19.7

21.9 21.9

10.0

15.0

20.0

25.0

30.0


(%

)

EBITDA Margin (%)


Exhibit 11: Q2CY18 EBITDA/tonne increases 24.5% YoY

1004

684 669 655

1076

706

921

815

977

0

200

400

600

800

1000

1200

Q2C

Y16

Q3C

Y16

Q4C

Y16

Q1C

Y17

Q2C

Y17

Q3C

Y17

Q4C

Y17

Q1C

Y18

Q2C

Y18

EBITDA per Tonne (|)


Exhibit 12: Margins improve due to lower RM cost

15.3 15.0 15.4

22.8

15.3

19.9

22.9

17.720.6

0.0

5.0

10.0

15.0

20.0

25.0Q

2C

Y16

Q3C

Y16

Q4C

Y16

Q1C

Y17

Q2C

Y17

Q3C

Y17

Q4C

Y17

Q1C

Y18

Q2C

Y18

EBITDA Margin (%)


Expect net profit to increase at CAGR of 16.4% over CY17-19E

We expect net margins to improve to 13.2% in CY19E (from 12.0% in

CY17) led by better demand and higher realisation in CY19E. As a result,

we expect net profit to increase at a CAGR of 16.4% over CY17-19E.

Exhibit 13: Profitability trend

1295

1496

808

932

1250

1377

1694

15.0

8.6

10.1

12.0 11.8

14.2

13.2

0

200

400

600

800

1000

1200

1400

1600

1800


| c

rore

7.0

9.0

11.0

13.0

15.0

17.0

19.0

(%

)

Net profit - LS Net profit margin -RS



Outlook and valuations

Higher infra spend along with a revival in the rural economy is expected

to boost cement demand by 8% in FY18-20E. This, coupled with limited

supply (3% CAGR in FY18-20E) is expected to drive utilisation and pricing.

In order to capture this growth, the company is planning to expand its

capacity by 1.7 MT by CY20. However, we believe the capacity expansion

is inadequate compared to other peers. This will negatively impact the

company’s market share and limit its volume growth. Further, the 1.7 MT

greenfield capacity expansion at US$136/t looks higher and return ratio

dilutive in our view. Hence, we downgrade the stock from BUY to HOLD

with a revised target price of | 245/share (i.e. at 12.0x CY19E EV/EBITDA

and EV/tonne of US$161).

Exhibit 14: Fair value calculations (in | crore)

Fair value calculation in | crore

EBITDA Estimates CY19E 2,805.3

Target EV/EBITDA 10.7

Target Enterprise value 30,016.4

Debt 33.1

Balance Cash (post invetsment) 3,497.1

Target equity value 33,480.4

O/s shares post ACC deal 198.6

Fair value of Ambuja [A] 168.6

Cost of Investment in ACC (50% stake) [A] 10,909.9

ACC's fair equity valuation 33,786.0

Valuation of 50% stake [B] 16,893.0

Holding company discount 10.0%

Net value to Ambuja 15,203.7

O/s shares post ACC deal 198.6

Fair value of Investment in ACC [B] 76.6

Fair value per share [A+B] 245


Exhibit 15: Assumptions

| per tonne CY14 CY15 CY16 CY17 CY18E CY19E

Sales Volume (mtpa) 22 22 21 23 25 27

Net Realisation 4601 4351 4343 4553 4675 4815

Total Expenditure 3737 3684 3564 3708 3754 3759

Stock Adjustment 7 12 -14 -28 -55 0

Raw material 388 372 368 396 410 400

Power & Fuel 1052 955 867 973 990 954

Employees 270 274 280 288 287 300

Freight 1137 1166 1171 1251 1303 1250

Others 884 906 892 828 818 855

EBITDA per Tonne 864 667 780 845 921 1056



Exhibit 16: One year forward EV/Tonne

0

2000

4000

6000

8000

10000

12000

14000

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Million $

EV $260 $230 $200 $175 $150 $121


Exhibit 17: Valuation

Sales Growth EPS Growth PE EV/Tonne EV/EBITDA RoNW RoCE

(| cr) (%) (|) (%) (x) ($) (x) (%) (%)

CY16 9196.6 -1.8 4.7 -9.9 47.5 154.9 18.0 6.7 9.5

CY17 10446.9 13.6 6.3 34.0 35.4 147.2 15.0 8.6 11.3

CY18E 11674.6 11.8 6.9 10.2 32.2 148.0 13.0 9.5 14.1

CY19E 12788.5 9.5 8.5 23.0 26.1 145.7 10.8 11.4 17.2



Recommendation History vs. Consensus Estimate

0

100

200

300

400

500

Jul-

18

Jun-

18

May-

18

Mar-

18

Feb-

18

Jan-

18

Nov-

17

Oct-

17

Sep-

17

Jul-

17

Jun-

17

May-

17

Mar-

17

Feb-

17

Dec-

16

Nov-

16

Oct-

16

Aug-

16

Jul-

16

Jun-

16

Apr-

16

Mar-

16

Feb-

16

Dec-

15

Nov-

15

Sep-

15

Aug-

15

Jul-

15

(|

)

0.0

20.0

40.0

60.0

80.0

100.0

(%

)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Key events

Date Event

Sep-11 Acquires 60% shareholding in Dirk India Pvt Ltd, Maharashtra for | 16.51 crore. The company enters into a joint venture for speciality cement manufacturing facility

in Goa with Counto Microfine Products Pvt Ltd

Jun-12 CCI imposes a fine of 50% of annual profit of fisacl year ending 2010 and 2011, a total of | 6000 crore, on 11 cement companies including Amubuja cement for

alleged cartalisaion

Sep-12 The inter-ministerial panel recommends de-allocation of coal blocks held by five companies, including Ambuja Cement

Dec-12 Ambuja Cement discontinues providing monthly production and sales updates citing provision in new accounting norms

Mar-13 Obtains a stay on penalty of | 1163 crore imposed on it by CCI but ordered to deposit 10% of the amount

Jul-13 Holcim Group to consolidate its holding in ACC through Ambuja Cements. The transaction will result in Ambuja holding 50% stake in ACC, in which Holcim India

currently holds 50.01%

Mar-15 Ambuja Cement secures block at Gare-Palma Sector-IV/8 in the state of Chhattisgarh

Feb-16 Ambuja commissions 0.9 mt grinding unit at Sankrail

Aug-16 Ambuja acquires 50.05% stake in ACC

Feb-18 Ambuja plans to expand its capacity by 3.1 MT at Marwar in Rajasthan

Apr-18 Board approves MSA with ACC


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Holcim Group 30-Jun-18 63.1 1,253.2 0.0

2 Life Insurance Corporation of India 30-Jun-18 5.9 116.4 -14.8

3 Capital Research Global Investors 30-Jun-18 2.6 52.2 0.0

4 Capital World Investors 31-Dec-16 2.4 46.7 11.5

5 The Vanguard Group, Inc. 31-May-18 1.4 27.3 0.1

6 GIC Private Limited 30-Jun-18 1.3 25.9 2.8

7 Aberdeen Asset Management (Asia) Ltd. 31-May-18 1.3 25.4 -1.3

8 ICICI Prudential Asset Management Co. Ltd. 30-Jun-18 1.2 24.3 12.1

9 HDFC Asset Management Co., Ltd. 30-Jun-18 1.1 22.5 5.7

10 Reliance Nippon Life Asset Management Limited 30-Jun-18 1.0 19.9 -5.4

(in %) Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Promoter 63.60 63.59 63.56 63.55 63.55

FII 16.74 16.60 17.22 16.45 16.51

DII 11.48 12.21 11.99 12.95 12.79

Others 8.18 7.60 7.23 7.05 7.15

Source: Reuters, ICICI Direct Research

Recent Activity

Investor name Value Shares Investor name Value Shares

ICICI Prudential Asset Management Co. Ltd. 36.7 12.1 Life Insurance Corporation of India -44.9 -14.8

HDFC Asset Management Co., Ltd. 17.4 5.7 Goldman Sachs Asset Management International -18.2 -6.0

GIC Private Limited 8.6 2.8 Reliance Nippon Life Asset Management Limited -16.3 -5.4

IDFC Asset Management Company Private Limited 8.3 2.7 Harding Loevner LP -7.3 -1.7

Caisse de Depot et Placement du Quebec 5.9 1.4 Aberdeen Asset Management (Asia) Ltd. -3.8 -1.3

Buys Sells

Source: Reuters, ICICI Direct Research


Financial summary

Profit and loss statement | Crore

(Year-end March) CY16 CY17 CY18E CY19E

Total operating Income 9,196.6 10,446.9 11,674.6 12,788.5

Growth (%) -1.8 13.6 11.8 9.5

Raw material 746.5 846.5 887.4 1062.4

Power & Fuel 1832.0 2234.2 2472.3 2533.2

Employees 590.9 661.4 716.8 796.8

Freight 2472.8 2872.0 3255.0 3320.0

Others 1884.8 1900.8 2043.3 2270.9

Total Operating Exp. 7,527.0 8,514.8 9,374.8 9,983.2

EBITDA 1,669.6 1,932.0 2,299.8 2,805.3

Growth (%) 16.1 15.7 19.0 22.0

Depreciation 848.9 572.9 589.8 607.1

Interest 74.2 107.2 98.7 107.4

Other Income 510.2 359.1 416.8 400.0

Exceptional items 0.0 0.0 0.0 0.0

PBT 1,256.8 1,611.0 2,028.2 2,490.7

Total Tax 347.2 369.6 651.1 797.0

PAT 909.5 1,241.4 1,377.1 1,693.7

Adjusted PAT 932.2 1,249.6 1,377.1 1,693.7

Growth (%) 15.4 34.0 10.2 23.0

Adjusted EPS (|) 4.7 6.3 6.9 8.5

Source: ICICI Direct Research

Cash flow statement | Crore


Profit after Tax 932.2 1,249.6 1,377.1 1,693.7

Add: Depreciation 848.9 572.9 589.8 607.1

(Inc)/dec in Current Assets -12.0 -841.8 -608.5 -563.2

Inc/(dec) in CL and Provisions 322.8 461.8 -434.5 -434.4

CF from operating activities 2,091.8 1,442.5 923.9 1,303.2

(Inc)/dec in Investments -10,723.3 1,384.3 0.0 0.0

(Inc)/dec in Fixed Assets -641.4 -394.1 -1,100.0 -1,200.0

Others

CF from investing activities -11,364.7 990.2 -1,100.0 -1,200.0

Issue/(Buy back) of Equity 86.8 0.0 0.0 0.0

Inc/(dec) in loan funds 2.9 1.5 0.0 0.0

Dividend paid & dividend tax -654.4 -841.4 -929.3 -929.3

Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0

Others 8,366.5 527.0 0.0 0.0

CF from financing activities 7,801.8 -312.8 -929.3 -929.3

Net Cash flow -1,471.1 2,119.8 -1,105.4 -826.1

Opening Cash 2,848.4 1,377.3 3,497.1 2,391.7

Closing Cash 1,377.3 3,497.1 2,391.7 1,565.5


Balance sheet | Crore


Liabilities

Equity Capital 397.1 397.1 397.1 397.1

Reserve and Surplus 18,640.9 19,576.1 20,023.9 20,788.3

Total Shareholders funds 19,038.0 19,973.2 20,421.0 21,185.4

Total Debt 31.5 33.1 33.1 33.1

Deferred Tax Liability 492.9 1,454.5 654.5 154.5

Total Liabilities 19,562.4 21,460.8 21,108.6 21,373.0

Assets

Gross Block 12,614.3 12,357.6 13,855.5 15,055.5

Less: Acc Depreciation 6,635.6 6,635.6 7,225.4 7,832.5

Net Block 5,978.7 5,722.0 6,630.1 7,223.0

Capital WIP 320.0 397.9 0.0 0.0

Total Fixed Assets 6,298.7 6,119.9 6,630.1 7,223.0

Investments 13,229.0 11,844.7 11,844.7 11,844.7

Inventory 937.5 1,052.5 1,171.4 1,264.7

Debtors 300.1 308.0 371.5 372.8

Loans and Advances 1,041.6 1,668.2 2,067.7 2,536.1

Other Current Assets 34.5 126.9 153.3 153.6

Cash 1,377.3 3,497.1 2,391.7 1,565.5

Total Current Assets 3,691.0 6,652.6 6,155.7 5,892.8

Creditors 2,361.2 2,519.8 2,934.9 3,040.2

Provisions 1,295.0 636.6 587.0 547.2

Total Current Liabilities 3,656.3 3,156.4 3,521.9 3,587.5

Net Current Assets 34.7 3,496.2 2,633.8 2,305.3

Application of Funds 19,562.4 21,460.8 21,108.6 21,373.0


Key ratios


Per share data (|)

Adjusted EPS 4.7 6.3 6.9 8.5

Cash EPS 9.0 9.2 9.9 11.6

BV 95.9 100.6 102.8 106.7

DPS 2.8 3.6 4.0 4.0

Cash Per Share 6.9 17.6 12.0 7.9

Operating Ratios (%)

EBITDA Margin 18.4 18.6 19.7 21.9

PAT Margin 10.1 12.0 11.8 13.2

Inventory days 36.4 34.8 34.8 34.8

Debtor days 11.6 10.6 10.6 10.6

Creditor days 89.4 85.3 85.3 85.3

Return Ratios (%)

RoE 6.7 8.6 9.5 11.4

RoCE 9.5 11.3 14.1 17.2

RoIC 6.9 10.4 12.4 15.2

Valuation Ratios (x)

P/E 47.5 35.4 32.2 26.1

EV / EBITDA 18.0 15.0 13.0 10.8

EV / Net Sales 4.6 3.9 3.6 3.3

Market Cap / Sales 4.8 4.2 3.8 3.5

Price to Book Value 2.3 2.2 2.2 2.1

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 1.0 2.1 1.7 1.6

Quick Ratio 0.6 1.0 1.1 1.2



ICICI Direct Research coverage universe (Cement)

CMP M Cap

(|) TP(|) Rating (| Cr) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E

ACC* 1,525 1800 Buy 28,661 35.0 49.2 59.7 16.7 13.8 10.8 131 121 117 14.0 16.4 19.7 9.9 11.4 13.7

Ambuja Cement* 223 245 Hold 44,280 6.3 6.9 8.5 15.0 13.0 10.8 147 148 146 11.3 14.1 17.2 8.6 9.5 11.4

UltraTech Cem 4,124 4800 Buy 113,163 89.6 116.4 160.2 21.5 16.9 13.5 237 223 210 10.0 12.2 14.9 9.5 11.1 13.4

Shree Cement 17,363 18500 Hold 60,423 397.8 436.3 491.9 23.8 20.8 18.2 307 258 251 15.3 16.2 16.0 15.6 14.9 14.8

Heidelberg Cem 156 180 Buy 3,535 5.9 7.2 8.7 12.3 11.5 10.2 127 126 121 14.8 17.0 19.9 12.8 14.4 15.9

India Cement 115 160 Buy 3,533 3.3 5.1 5.6 9.6 8.7 8.2 72 70 68 5.1 5.7 5.9 1.9 3.0 3.1

JK Cement 805 1150 Buy 5,629 51.3 28.4 46.8 9.7 14.2 10.6 88 88 87 14.6 9.6 12.3 16.7 8.8 13.1

JK Lakshmi Cem 335 440 Buy 3,943 7.1 5.0 7.6 13.2 13.5 11.9 73 66 66 8.8 8.2 9.4 5.8 3.9 5.7

Mangalam Cem 226 275 Hold 603 4.3 4.8 10.3 10.9 11.1 8.6 39 40 41 7.2 6.6 8.9 2.2 2.4 5.0

Star Cement 119 150 Buy 4,988 7.9 6.8 7.3 10.1 10.2 9.3 239 220 213 21.6 19.2 18.6 22.4 16.7 15.6

Ramco Cement704 930 Buy 16,761 23.5 28.4 34.8 16.1 14.2 11.4 179 173 143 10.4 10.7 12.2 13.7 14.9 16.1

Sagar Cement765 900 Buy 1,563 12.9 19.5 28.1 13.1 11.4 9.6 77 64 45 8.1 9.3 10.8 3.4 4.9 6.6

Company

EV/Tonne ($)EV/EBITDA (x)EPS (|) RoCE (%) RoE (%)

Source: Company, ICICI Direct Research, *FY18,FY19E,FY20E is CY17,CY18,CY19


RATING RATIONALE

ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research

assigns ratings to its stocks according to their notional target price vs. current market price and then

categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and

the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st

Floor, Akruti Trade Centre,

Road No. 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

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We /I, Rashesh Shah CA, Darpan Thakkar MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our

personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or

view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:

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underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities

generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts

cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and

employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities

from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities

policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This

report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their

receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific

circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate

the investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affiliates accept no liabilities for any

loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to

change without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have received

compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment

banking or other advisory services in a merger or specific transaction. It is confirmed that Rashesh Shah CA, Darpan Thakkar MBA research analysts and the authors of this report have not received any

compensation from the companies mentioned in the report in the preceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings

from Investment Banking and other business.

ICICI Securities or its subsidiaries collectively do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the

research report.

It is confirmed that Rashesh Shah CA, Darpan Thakkar MBA research analysts and the authors of this report or any of their family members does not serve as an officer, director or advisory board member

of the companies mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. ICICI Securities and affiliates may act upon or make use

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described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and

to observe such restriction.


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We /I, Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately

reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this

report.

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Limited is a Sebi registered Research Analyst with Sebi Registration Number – INH000000990. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has

its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which

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ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking

and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts

and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current.

Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended

temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this

company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This

report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their

receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific

circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate

the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any

loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the

risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to

change without notice.

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment

in the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in

respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

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It is confirmed that Rashesh Shah, CA, and Devang Bhatt, PGDBM Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding

twelve months.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

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Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject

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publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities

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to observe such restriction.

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