Building Materials - Sector Update - Centrum 02072014

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

Cement upturn to continue, paints fully valued We expect cement sector to continue the growth trajectory led by the government’s thrust on infrastructure development. The slowing pace of capacity addition will also lead to improvement in effective utilization rate of the industry offering improved pricing power to manufactures. In the Cement space, our top pick continues to be UltraTech Cement followed by Grasim Industries and ACC. We believe other building materials (tiles and paints) will continue their growth momentum in tandem with improvement in economic activities. However, post recent run-up in the stocks in the Paints sector, we believe further room for upside is limited and downgrade rating to Hold on Asian Paints and Berger Paints.

� Cement sector to benefit from infrastructure push and improvement in utilization rate: We expect cement demand to improve going forward led by our belief that there would be better policy actions in the infrastructure space including faster clearances of new projects and quick re-start of stalled projects. We expect the pace of capacity addition to slow down post FY15E leading to improvement in utilization rate for the sector. Post the decline in industry utilization rate to 72.9% in FY15E against 73.4% in FY14; we expect gradual improvement to 75%/78.9% in FY16E/FY17E. With improvement in economic activities and better GDP growth, we expect growth momentum to continue for Paints and Tiles industry.

� Higher opex to lead to contraction in margins for cement companies; Paints and Tiles to post better numbers in Q1FY15E: Cement prices remained firm during Q1FY15E (~2.4% QoQ increase) which would result in sequential improvement in realization for our coverage universe. Sales volume is expected to increase 8.4% YoY led by 20.1%/10.4%/16% YoY increase in sales volume of Shree Cement/UltraTech/JK Cement. However, we expect average operating margin to contract by 119bps YoY to 18.4% in Q1FY15E led by increase in operating costs (raw materials and freight). We expect better numbers from Paints and Tile companies led by higher volume and prices.

� Budget expectations for the sector: We do not expect major announcements in the Union Budget for the sector though the cement industry is seeking lower excise duty. We expect the status quo to be maintained on excise duty. However, the building materials sector will be an indirect beneficiary of infrastructure development (100 new smart cities, development of freight corridors and national highways).

� Outlook & top picks: We remain largely positive on the sector as we believe earnings will improve going forward led by better demand from the government’s thrust on infrastructure development. However, sharp run-up in stock prices of Paints and Tiles sector leaves little room for further upside and we downgrade our rating to Hold on Asian Paints and Berger Paints. In the cement space, our top pick continues to be UltraTech followed by Grasim and ACC. In the mid-caps space, we like JK Cement. We retain Hold on Shree Cement due to expensive valuations and Sell on India Cements due to lack of upside triggers.

Stock Price Performance (%)*

Company Name 1 Mth 3 Mth 6 Mth 1 Yr

ACC 10.7 6.6 37.3 24.4

Ambuja 2.8 10.1 24.7 21.0

UltraTech 10.4 21.9 51.2 36.7

Grasim 7.3 19.7 26.4 22.7

Shree 4.4 25.6 64.8 51.4

India Cem 18.9 87.2 100.0 106.0

JK Cem 15.6 56.0 98.2 72.6

Kajaria Ceramics (1.5) 51.5 72.4 126.5

Asian Paints 15.9 9.6 20.6 25.1

Berger Paints 19.3 28.4 31.4 28.9

Kansai Nerolac 11.3 29.2 35.1 28.7

Paper Products 17.5 48.9 86.6 117.9

Nifty 5.6 13.6 21.4 29.4

Source: Bloomberg; *as on 01 July, 2014

Revision in target prices

Companies Rating Old TP

(Rs) New TP

(Rs) Up/(down)

side %

ACC Buy 1,620 1,710 15.5

Ambuja Cement Hold 220 230 2.8

Ultra Tech Buy 2,660 3,065 16.5

Grasim Ind Buy 3,750 4,220 23.7

Shree Cement Hold 6,810 7,235 1.1

India Cement Sell 65 73 (38.5)

JK Cement Buy 315 470 21.8

Kajaria Ceramics Hold 440 470 (12.1)

Asian Paints Hold 605 630 7.9

Berger Paints Hold 295 320 8.4

Kansai Nerolac Hold 1,215 1,450 (1.9)

Huhtamaki PPL Buy 170 170 26.6

Source: Company, Centrum Research Estimates

Sanjeev Singh,[email protected]; 91 22 4215 9643

Summary Estimates

Y/E March (Rs mn) Net Sales (Rsmn) EBITDA (Rsmn) EBITDA Margin (%) Adj. PAT (Rsmn)

Q1FY15E YoY (%) QoQ (%) FY15E Q1FY15E YoY (%) QoQ (%) FY15E Q1FY15E YoY (pp) QoQ (pp) Q1FY15E YoY (%) QoQ (%) FY15E

ACC* 29,767 6.5 0.3 1,20,595 4,172 (3.8) 14.2 15,833 14.0 (1.5) 1.7 2,591 0.0 5.0 9,982

Ambuja* 25,619 9.2 (3.0) 99,866 5,612 14.1 (2.8) 18,739 21.9 0.9 0.0 3,652 12.6 (10.0) 11,935

UltraTech 53,290 7.5 (8.6) 2,30,789 10,636 1.4 (6.9) 45,936 20.0 (1.2) 0.4 6,195 (7.9) (16.6) 24,339

Grasim$ 75,375 9.3 (8.6) 3,33,573 12,393 (2.4) (8.5) 55,049 16.4 (2.0) 0.0 5,097 (16.4) (11.6) 21,610

Shree Cement# 16,604 15.2 0.0 67,224 4,017 5.8 (5.7) 15,915 24.2 (2.1) (1.5) 2,429 (14.6) 13.8 8,129

India Cements 12,047 (2.7) 11.5 55,094 1,036 (45.8) 39.7 7,844 8.6 (6.8) 1.7 (367) n/m n/m 827

JK Cement 7,907 20.3 (4.4) 34,098 1,218 33.3 (22.9) 5,429 15.4 1.5 (3.7) 446 44.3 (41.6) 1,161

Kajaria Ceramics 5,314 21.5 1.4 22,497 850 31.9 1.7 3,526 16.0 1.3 0.0 425 64.8 1.0 1,680

Asian Paints 31,820 12.0 (3.8) 1,47,782 5,210 12.1 7.4 23,578 16.4 0.0 1.7 3,081 11.9 4.7 14,968

Berger Paints 9,986 10.0 3.4 43,496 1,024 14.2 (3.3) 4,937 10.3 0.4 (0.7) 536 9.2 (3.1) 2,861

Kansai Nerolac 8,573 8.3 14.8 35,732 1,121 10.6 36.9 4,172 13.1 0.3 2.1 653 7.2 45.4 2,417

Total 2,76,300 9.2 (4.0) 11,90,746 47,291 2.2 (23.1) 2,00,959 17.1 (1.2) (4.2) 25,123 (6.3) (11.4) 99,909

Huhtamaki PPL* 3,120 12.3 7.0 12,311 347 11.7 10.3 1,324 11.1 (0.1) 0.3 173 17.3 10.6 613

Source: Companies, Centrum Research Estimates Note: *Y/E Dec (Data for Q2CY14E and CY14E) – standalone financials, $ consolidated financials; #Y/E June (Data for Q4FY14E)

02 July 2014

Sector Update

INDIA

Building Materials

2 Building Materials

Capacity addition to slow down

Indian cement industry is the 2nd largest in the world with an installed production capacity of ~364mt at FY14-end. Profitability of Indian cement companies reached historically high levels in FY2007, when the average retail price increased by 26% YoY to Rs 207/bag against Rs 164/bag in FY06. RoE of cement companies reached 30% levels then, and cement manufactures increased their installed capacities hoping to ride on the infrastructure boom in the country. The huge investments led to the commissioning of 199mt of new capacities from FY08 to FY14, which distorted the demand-supply dynamics of the industry. Moreover, Indian cement industry has commissioned 303mt of new capacities in the last 21 years, of which 199mt (~66%) were in the last 7 years (FY08 to FY14).

Going forward, we expect a capacity addition of 60.6mt during FY15-FY17E, which will take the installed capacity to 424mt. Installed capacity increased at a CAGR of 10.6% from FY08 to FY14 while despatches grew only at a CAGR of 6.5% in this period. The higher pace of capacity addition created a glut forcing manufactures cut utilization rate. Going forward, we expect installed capacity to grow at a CAGR of 5.3% between FY14-FY17E and with demand growing at 7.9% effective utilization rate of the industry should improve.

Exhibit 1: Capacity addition in Indian cement industry

Source: CMA, Industry, Centrum Research Estimates

We expect the effective utilization rate to improve with declining pace of capacity addition post FY15E and better demand prospects. Post the decline in industry utilization rate to 72.9% in FY15E against 73.4% in FY14; we expect gradual improvement to 75%/78.9% in FY16E/FY17E. However, utilization rate ex-South region is expected to be at 81.4%/85.7% in FY16E/FY17E against 79.9% in FY15E. Apart from that, a few players recently have started to acquire other cement plants which may lead to higher consolidation in the industry and hence, better pricing power to cement manufacturers.

Exhibit 2: Region-wise effective utilization rates

Regions FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

North 111.0 107.5 92.8 97.7 84.0 78.5 79.8 78.5 77.5 80.2 83.9

Central 105.5 103.1 99.9 107.3 99.2 93.9 90.9 86.8 83.7 86.0 91.2

East 98.9 100.6 99.5 95.8 85.8 86.0 87.7 89.7 85.3 82.4 84.3

West 100.2 92.3 98.1 89.8 77.3 75.5 75.0 75.3 75.4 78.3 84.8

South 103.8 101.7 94.7 82.9 71.4 65.7 61.1 59.0 60.2 62.6 65.5

Pan-India average 104.1 101.5 96.2 92.2 80.6 76.4 74.7 73.4 72.9 75.0 78.9

Source: Industry, CMA, Centrum Research Estimates

Demand to improve going forward

Housing construction constitutes around 60-65% of the total cement demand and the balance comes from infrastructure sectors such as roads, railways, ports and power etc, commercial construction and industrial capex. Demand for cement is directly linked to the economy and has high correlation with GDP growth as infrastructure investments and construction activities are major drivers of cement demand and key components of GDP. Further, rural housing, which is a determinant of cement demand, depends on agricultural productivity, which is again a key component of GDP.

4.5 7.5

11.8

8

4.8 5.3

2.5

10.8 15.2

7.8

3.4

7.6 9.7

4.9

33.9

13.2

44.9

45.0

23.2

23.1

15.8

31.4

12.2 17.0

0

15

30

45

60

FY94

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FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

(MT)

CAGR FY08-FY14- 10.6%

CAGR FY14-FY17E- 5.3%


Historical data of the last 19 yrs shows that cement demand in India has increased at the rate of 1.2x (1.29x between FY96-FY2010) the growth rate of GDP. However, this rate dropped sharply to 0.83x between FY11-FY14. Infrastructure growth remains the key for revival of Indian economy in our view. High GDP growth between FY05-FY10 was primarily driven by better growth in Industry and Manufacturing sectors. We believe cement consumption is highly correlated to the growth in industry and manufacturing sectors which is evident from higher volume growth of industry between FY04-FY10. Cement consumption increased at a CAGR of 9.4% between FY04-FY10 which also led to sharp improvement in profitability of cement companies. However, there was a steep slowdown post FY10 and consumption grew at a CAGR for 5% between FY10-FY14.

We believe that the focus of the new government would be on infrastructure revival. The government’s focus on revival in economic activities may also lead to revival in corporate capex cycle. The manifesto of BJP clearly had clearly emphasized higher impetus on infrastructure growth like a) Expediting National Highway construction projects, especially Border and Coastal highways, b) modernizing existing and operational Airports, and building new ones especially connecting smaller towns and all tourism circuits, c) Working on Freight Corridors and expediting Industrial Corridors, d) Launching the Diamond Quadrilateral project - of High Speed Train network (bullet train) and e) development of 100 new smart cities across India.

Exhibit 3: Cement demand growth was lower than historical average during FY11-FY14


Cement prices remain at high levels

Cement prices have remained at higher levels over the last few months, which will benefit the companies going forward. Our interaction with cement dealers suggests that the June-14 pan-India average exit price is ~5.5% YoY higher compared to June -13. In Q1FY15, average pan- India cement price was up 3.4% QoQ.

Exhibit 4: Movement in cement prices


0.0

2.0

4.0

6.0

8.0

10.0

12.0

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

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(%)

Continuous phase of sluggish growth due to low infrastructure spending

250

285

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355

390

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

(Rs/bag)

North Central West South East Pan-India average


Increasing cost of capital and operating costs require higher profitability for new capacities and hence, it is not lucrative for new entrants to set up Greenfield capacities

We believe that rising cost of capital (~US$150/tonne against US$115-120/tonne 3 years back) coupled with increasing operational costs (freight, energy and raw material) dissuades new players from entering the cement business or increase fresh capacity aggressively. Assuming average realization of Rs290/bag, the RoCE of a new Greenfield capacity will be at ~1% at current utilization rate of 80%, which could improve to 3.2% if realization improves to Rs310/bag. Even at a utilization rate of 85% and selling price of Rs350/tonne, RoCE will be only at 7.6% for a new greenfield plant.

Exhibit 5: Profitability analysis of a new Greenfield plant

Plant Capacity (mt) 2.0 2.0 2.0

Capacity Utilization (%) 80 80 85

Cement production (mt) 1.6 1.6 1.7

Capex (Rs mn) 18,000 18,000 18,000

D/E 70:30 70:30 70:30

Debt required (Rs mn) 12,600 12,600 12,600

Interest paid (Rs mn) 1,386 1,386 1,386

Interest per tonne (Rs)- on production 866 866 815

Coal cost (Rs/tonne) 754 754 754

Power cost (Rs/tonne) 405 405 405

Freight cost (Rs/tonne) 1001 1001 1001

Other cost (Rs/tonne) 500 500 500

Employee cost (Rs/tonne) 300 300 300

Raw material cost (Rs/tonne) 573 573 573

Operating cost (Rs/tonne) 3,532 3,532 3,532

Selling price (Rs/tonne) 5,800 6,200 7,000

Excise duty (Rs/tonne) 607 641 708

VAT (Rs/tonne) 725 775 875

LBT/Octroi (Rs/tonne) 232 248 280

Loading, Unloading and dealers' commission (Rs/tonne) 116 124 140

Net Sales (Rs/tonne) 4,120 4,412 4,997

Operating profit (Rs/tonne) 588 880 1,464.90

Interest cost (Rs/tonne) 866 866 815

Cash flow (Rs/tonne) (279) 14 650

EBIT less taxes (per tonne) 93 289 683

RoCE (%) 1.0 3.2 7.6

Assumptions: Cost of setting up a plant is assumed to be US$ 150/tonne and depreciation is calculated on straight line method, considering plant life of 20 years, D/E assumed to be 70:30 with interest rate @11%p.a.

Source: Industry, Centrum Research Estimates

Regulatory hurdles to also delay new capacities

We believe that commissioning of a fresh Greenfield plants has become more challenging due to regulatory hurdles like land acquisition, delay in environmental clearances, coal linkages and limestone availability.

Limestone sourcing: As per the report of the Working Group of Cement Industry for XIIth five-year plan, total cement grade limestone reserve in the country is 89.89bn tonnes and based on the expected growth & consumption pattern, the current reserves are expected to last only for another 35-41 years. The limestone deposits located in Jammu and Kashmir, Himachal Pradesh, Uttarakhand and North-Eastern states of Himalayan region are difficult to exploit because of difficult, hilly terrain and inaccessibility. Though substantial reserves of cement grade limestone deposits are available in these states, constraints on large scale mining such as unstable hill slopes and fragile eco-systems, high seismicity of the region, procurement of fuel and other raw materials due to higher transport cost add up to higher cost of production.

Coal availability and linkages: Post 2007, cement manufacturers have not been granted new coal linkages. Even in cases where linkages have been granted, actual supply against linkages is very poor. Recently, there have been scams in coal block allocation and several blocks which were allotted earlier were cancelled. Given this scenario, we believe that acquiring new linkages will be more difficult going forward and manufacturers will have to import coal for their needs.

Land acquisition issues: In India, land acquisition from farmers for Industrial use is a very sensitive issue. In some states, it has also become a political issue. In the past, there have been instances when


land acquired from farmers was sold to other parties at a premium or the establishment of the industry faced interminable delays causing resentment among farmers. Proposed amendments to the land acquisition bill 1894 will make it more difficult for industries to acquire land.

Environmental clearances: Obtaining environmental clearances for setting up new plants and limestone mining have also become a challenging task for new as well as existing manufacturers. In 2008, the project clearance given to Nirma for a Cement plant in Gujarat was scrapped after the farmers opposed the decision expressing fears that the plant could adversely affect the environment and availability of underground water in the region. In August 2012, Birla Corp Ltd had to stop mining activities at its Chanderia, Rajasthan plant after the Rajasthan High Court ruled that no mining can take place within 10 km of Chittorgarh fort. There were issues with Ambuja Cements plant in Himachal Pradesh due to objections by the Ministry of Environment and Forest.

Paint industry - growth continues despite macro headwinds

The Indian paint industry has shown remarkable resilience despite macro headwinds and growing by 15% over the past eight years, much above the GDP growth rate (1.5-2.5x of the real GDP growth). We believe India continues to enjoy a healthy growth rate backed by steady growth in the decorative segment, consumer shift towards premium products, shortening of re-painting cycle and better demand from Tier II and Tier III (smaller and semi-urban areas). Our interaction and channel checks with dealers and industry participants further validate our view. In such a scenario, we expect the industry to register a revenue growth of 8.5%/10.2%/11.4% in FY14E/FY15E/FY16E.

Despite lower GDP growth in FY14, the top 5 players (Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel India and Shalimar Paints) showed strong growth in FY14 and we believe growth in the decorative segment would have been ~8-9% in the year. We expect growth momentum in the decorative segment to continue over the next few years.

While the decorative paint segment is likely to remain strong, growth in the industrial segment continues to remain under pressure largely due to slowdown in the automotive segment and lower demand from the infrastructure segment (impacts the demand of coil and protective coatings). Automobile industry, the largest consumer of industrial paints, has been marred by the economic slowdown shown by the sharp deceleration in growth in the past two years. Going forward we expect recovery in the automobile industry in FY15E and hence, expect revival in the industrial paints segment.

Top 5 players to continue to grow above the industry growth rate

Top 5 players are growing at a very healthy pace with average growth rate of 2.4x the real GDP growth compared with 1.76x for the industry over the past 15 years. The higher growth rate was largely due to their strong distribution network, brand awareness which has led to shift towards branded products, higher advertisement and promotional expenses and shift towards premium products. We expect the growth momentum for top 5 players to continue on the back of increase in capacity, improvement in per capita GDP and rising brand aspiration.

Exhibit 6: Strong growth for sector to continue Exhibit 7: Expect strong growth for top 5 players

Source: Industry, Centrum Research Estimates Source: Industry, Centrum Research Estimates

1.0

1.4

1.8

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FY15E

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(x)

(%)

Industry growth (%) GDP growth (%)

Factor (RHS) Average (RHS)

1.0

1.6

2.2

2.8

3.4

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Top 5 players (%) GDP growth (%)

Factor (RHS) Average (RHS)


ACC (Rating: Buy; Target price: Rs1,710)

� We expect 6.5% YoY increase in net sales to Rs29.8bn led by 3.9% YoY increase in sales volume to 6.4mt. Realization of the company is expected to increase 0.5% YoY to Rs4,461/tonne. RMC sales is expected to be at Rs1,400mn against Rs1,091mn in Q2CY13.

� EBITDA is expected to decline 3.8% YoY to Rs4.2bn primarily due to higher operating costs. Operating cost/tonne is expected to increase 4.3% YoY led by higher raw material, freight and employee expenses.

� EBITDA margin is expected to be at 14% against 15.5% in Q2CY13 and 12.3% in Q1CY14. EBITDA/tonne is expected to be Rs656 against Rs708 in Q2CY13 and Rs564 in Q1CY14.

� Adjusted PAT is expected to be at Rs2,591mn almost same as last year due to higher other income of Rs1,050mn against Rs908mn in Q2CY13. Adjusted PAT margin is expected to be 8.7% against 9.3% in Q2CY13 and 8.3% in Q1CY14.

Rating and target price

We maintain Buy on the stock with a revised price target of Rs1,710 (earlier: Rs1,620) based on 12x June16E EV/EBITDA.

Exhibit 8: Result expectation

Particulars Q2CY14E Q2CY13 YoY (%) Q1CY14 QoQ (%) CY14E

Sales Volume (mt) 6.4 6.1 3.9 6.5 (1.9) 25.1

Realization/tonne (Rs) 4,461 4,440 0.5 4,352 2.5 4,517

Sales (Rs mn) 29,767 27,952 6.5 29,671 0.3 1,20,595

EBITDA (Rs mn) 4,172 4,335 (3.8) 3,653 14.2 15,833

EBITDA margin (%) 14.0 15.5 12.3 13.1

EBITDA/tonne (Rs) 656 708 (7.4) 564 16.4 631

Adj PAT (Rs mn) 2,591 2,591 0.0 2,468 5.0 9,982

Adj PAT margin (%) 8.7 9.3 8.3 8.3


Ambuja Cements (Rating: Hold; Target price: Rs230)

� We expect Q2CY14 net sales to increase 9.2% YoY to Rs25.6bn. Sales volume is expected to increase 4.4% YoY to 5.7mt. Realization/tonne is expected to improve 4.6% YoY to Rs4,487/tonne.

� EBITDA is expected to increase 14.1% YoY to Rs5.6bn led by higher realization and sales volume. Operating cost/tonne is expected to increase 3.3% YoY to Rs3,504/tonne led by increase in raw material and freight costs. EBITDA margin is expected at 21.9% against 21% in Q2CY13. EBITDA/tonne is expected to be Rs983 against Rs900 in Q2CY13 and Rs953 in Q1CY14.

� Adjusted PAT is expected to increase 12.6% YoY to Rs3.7bn. Adjusted PAT margin is expected at 14.3% against 13.8% in Q2CY13 and 15.4% in Q1CY14.


We maintain Hold rating on the stock with a revised price target of Rs230 (earlier: Rs220) based on 12x June 16E EV/EBITDA and assigning 20% holding company discount post completion of amalgamation with ACC.



Sales Volume (mt) 5.7 5.5 4.4 6.1 (5.8) 23


Sales (Rs mn) 25,619 23,457 9.2 26,398 (3.0) 99,866

EBITDA (Rs mn) 5,612 4,920 14.1 5,776 (2.8) 18,739

EBITDA margin (%) 21.9 21.0 21.9 18.8

EBITDA/tonne (Rs) 983 900 9.3 953 3.1 826

Adj PAT (Rs mn) 3,652 3,242 12.6 4,059 (10.0) 11,935

Adj PAT margin (%) 14.3 13.8 15.4 12.0



UltraTech Cement (Rating: Buy; Target price: Rs3,065)

� We expect net sales to increase 7.5% YoY to Rs53.3bn led by 10.4% YoY increase in sales volume to 11.1mt. Blended realization is expected to decline 2.6% YoY to Rs4,789/tonne. On a sequential basis, we expect 2.5% QoQ increase in blended realization.

� EBITDA is expected to increase 1.4% YoY to Rs10.6bn primarily due to higher sales volume. We believe that the increase in raw material cost and other expense will be offset by decline in energy costs (Rs939/tonne against Rs982/tonne in Q1FY14) resulting in flat operating costs on a per tonne basis (Rs3,875/tonne against Rs3,877/tonne in Q1FY14).

� EBITDA margin is expected to be 20% vs. 21.2% in Q1FY14 and 19.6% in Q4FY14. Blended EBITDA/tonne is expected to be Rs956 against Rs916 in Q1FY14 and Rs1,041 in Q4FY14.

� Depreciation is expected to increase 11% YoY to Rs2.8bn due to the commissioning of new plants in FY14. We expect other income to decline to Rs1.4bn against Rs1.9bn in Q1FY14. Adjusted PAT is expected to decline 7.9% YoY to Rs6.2bn. Adjusted PAT margin is expected to be 11.6% against 13.6% in Q1FY14 and 12.7% in Q4FY14.


We maintain Buy rating on the stock with a revised price target of Rs3,065 (earlier: Rs2,660) based on 12.5x June-16E EV/EBITDA.


Particulars Q1FY15E Q1FY14 YoY (%) Q4FY14 QoQ (%) FY15E

Sales Volume (mt) 11.1 10.1 10.4 12.5 (10.8) 44.6

Realization/tonne (Rs) 4,789 4,918 (2.6) 4,673 2.5 5,174

Sales (Rs mn) 53,290 49,575 7.5 58,319 (8.6) 2,30,789

EBITDA (Rs mn) 10,636 10,491 1.4 11,430 (6.9) 45,936

EBITDA margin (%) 20.0 21.2 19.6 19.9

EBITDA/tonne (Rs) 956 916 4.4 1,041 (8.2) 1,030

Adj PAT (Rs mn) 6,195 6,726 (7.9) 7,424 (16.6) 24,339

Adj PAT margin (%) 11.6 13.6 12.7 10.5


Grasim Industries (Rating: Buy; Target price: Rs4,220)

� Consolidated revenue is expected to increase 9.3% YoY to Rs75.4bn. EBITDA is expected to decline 2.4% YoY to Rs12.4bn primarily due subdued performance in the standalone segment.

� Consolidated EBITDA margin is expected to be 16.4% against 18.4% in Q1FY14. Depreciation is expected to increase 13% YoY to Rs3.9bn due to the commissioning of new capacities in cement and VSF businesses. Interest cost is expected to increase 16% YoY to Rs1.1bn.

� Higher depreciation and interest costs will lead to 16.4% YoY decline in adjusted PAT to Rs5.1bn. Adjusted PAT margin is expected to be 6.8% vs. 8.8% in Q1FY14 and 7% in Q4FY14.

� We expect the company to report standalone revenue of Rs14.1bn, up 22.6% YoY driven by 43% YoY increase in Chemical segment’s revenue and 8% YoY increase in VSF segment’s revenue. Sales volume of VSF is expected to increase 9.7% YoY, whereas, realization is expected to decline 2% YoY during the quarter. Standalone EBITDA is expected to be at Rs1.2bn (down 40.8% YoY) and adjusted profit is expected to be at Rs1bn (down 54% YoY).


We maintain Buy rating on the stock with a revised price target of Rs4,220 (earlier: Rs3,750) assigning 40% holding company discount for its holding in UltraTech and other investments and 4x EV/EBITDA for standalone business.



Sales (Rs mn) 75,375 68,951 9.3 82,459 (8.6) 3,33,573

EBITDA (Rs mn) 12,393 12,705 (2.4) 13,542 (8.5) 55,049

EBITDA margin (%) 16.4 18.4 16.4 16.5

Adj PAT (Rs mn) 5,097 6,100 (16.4) 5,765 (11.6) 21,610

Adj PAT margin (%) 6.8 8.8 7.0 6.5



Shree Cement (Rating: Hold; Target price: Rs7,235)

� We expect net sales to increase 15.2% YoY to Rs16.6bn driven by 30.6% YoY increase in revenue from the cement segment. Revenue from power segment is expected to decline 45% YoY to Rs1.7bn. EBITDA is expected to increase 5.8% YoY to Rs4bn due to improvement in profit from the cement business.

� Sales volume (Cement and Clinker) is expected to increase 20.1% YoY to 3.8mt due to improved demand in the North region. Blended realization is expected to increase 10.5% YoY (and 2.4% QoQ) to Rs3,978/tonne.

� Power sales volume is expected to be 515mn units against 795mn units (from captive power only) in Q4FY13. Power realization is expected to be Rs3.3/kwh against Rs3.9/kwh in Q4FY13.

� EBITDA margin is expected to be at 24.2% against 26.3% in Q4FY13. EBITDA/tonne of cement is expected at Rs1,009 in the quarter against Rs934 in Q4FY13 and Rs1,079 in Q3FY14.

� Depreciation is expected to be at Rs1.7bn against Rs1.3bn in Q4FY13. Led by higher depreciation costs, adjusted profit is expected to decline 14.6% YoY to Rs2.4bn. Adjusted PAT margin is expected to be 14.6% against 19.7% in Q4FY13 and 12.9% in Q3FY14.


We maintain Hold rating on the stock with a revised price target of Rs7,235 (earlier: Rs6,810) valuing the cement business at 12x June16E EV/EBITDA and power business at 0.8x P/BV.


Particulars Q4FY14E* Q4FY13 YoY (%) Q3FY14 QoQ (%) FY15E

Sales Volume (mt) 3.8 3.2 20.1 3.8 (0.7) 14.1


Sales (Rs mn) 16,604 14,414 15.2 16,600 0.0 67,224

EBITDA (Rs mn) 4,017 3,796 5.8 4,261 (5.7) 15,915

EBITDA margin (%) 24.2 26.3 25.7 23.7

EBITDA/tonne (Rs) 1,009 934 8.0 1,079 (6.5) 1,044

Adj PAT (Rs mn) 2,429 2,843 (14.6) 2,135 13.8 8,129

Adj PAT margin (%) 14.6 19.7 12.9 12.1

Source: Company, Centrum Research Estimates * Year end June.

India Cements (Rating: Sell; Target price: Rs73)

� We expect 2.7% YoY decline in net sales to Rs12bn primarily driven by 2.1% YoY decline in realization to Rs4,100/tonne. Sales volume is expected to increase 2.4% YoY to 2.7mt. Revenue from IPL is expected to be at Rs800mn against Rs1.1bn in Q1FY14.

� EBITDA is expected to decline 45.8% YoY to Rs1bn driven by lower realization and higher freight costs. EBITDA margin is expected to be at 8.6% against 15.4% in Q1FY14.

� Blended EBITDA/tonne is expected to be Rs382 vs. Rs721 in Q1FY14 and Rs279 in Q4FY14.

� We expect the company to report a loss of Rs367mn against an adjusted profit of Rs385mn in Q1Fy14 primarily due to sharp decline in operating profits.


We maintain Sell rating on the stock with a revised price target of Rs73 (earlier: Rs65) based on 5x June16E EV/EBITDA.



Sales Volume (mt) 2.7 2.6 2.4 2.7 2.2 11.7

Realization/tonne (Rs) 4,100 4,188 (2.1) 4,009 2.3 4,511

Sales (Rs mn) 12,047 12,384 (2.7) 10,801 11.5 55,094

EBITDA (Rs mn) 1,036 1,910 (45.8) 742 39.7 7,844

EBITDA margin (%) 8.6 15.4 6.9 14.2

EBITDA/tonne (Rs) 382 721 (47.0) 279 36.7 668

Adj PAT (Rs mn) (367) 385 n/m (480) n/m 827

Adj PAT margin (%) (3.0) 3.1 (4.4) 1.5



JK Cement (Rating: Buy; Target price: Rs470)

� We expect net sales to increase 20.3% YoY to Rs7.9bn. Grey cement sales volume is expected to increase 16.3% YoY to 1.5mt led by higher volume from the South based plant (up 24% YoY). Grey cement realization is expected to increase 7.7% YoY to Rs3,988/tonne. Sales volume of white cement is expected to increase 7% YoY to 0.11mt.

� EBITDA is expected to increase 33.3% YoY to Rs1.2bn led by increased sales volume and better realization. On a per tonne basis, Operating cost/tonne is expected to increase 2% YoY during the quarter primarily due to higher raw material and freight costs. EBITDA margin is expected to improve 1.5pp YoY to 15.4%.

� Consolidated EBITDA/tonne is expected to be Rs831 in the quarter against Rs808 in Q1FY14 and Rs965 in Q4FY14.

� Adjusted profit is expected to increase 44.3% YoY to Rs446mn. Adjusted PAT margin is expected to be 5.6% against 4.7% in Q1FY14.


We maintain Buy rating on the stock with a revised price target of Rs470 (earlier: Rs315) based on 7.5x (earlier 6x) June16E EV/EBITDA. We have assigned higher multiple to the company due to better visibility on the volume and earnings growth. The company has maintained utilization rate of ~65% from the South based plant for last 6 months and we expect the volume from this plant to remain higher based on improved demand scenario. We expect the earnings of the company to grow at a CAGR of ~60% between FY14-FY17E led by higher volume growth in grey cement (3mt capacity in the North region is expected to get commissioned by Q3FY15E) and white cement .



Sales Volume (mt) 1.5 1.3 16.3 1.5 (3.4) 5.9

Realization/tonne (Rs) 3,988 3,702 7.7 3,909 2.0 3816

Sales (Rs mn) 7,907 6,574 20.3 8,274 (4.4) 34,098

EBITDA (Rs mn) 1,218 914 33.3 1,581 (22.9) 5,429

EBITDA margin (%) 15.4 13.9 19.1 15.9

EBITDA/tonne (Rs) 831 808 2.9 965 (13.9) 784

Adj PAT (Rs mn) 446 309 44.3 764 (41.6) 1,161

Adj PAT margin (%) 5.6 4.7 9.2 3.4


Kajaria Ceramics (Rating: Hold; Target price: Rs470)

� We expect net sales to increase 21.5% YoY to Rs5.3bn led by 19.8% YoY increase in sales volume to 14.6msm and 1.4% YoY increase in blended realization to Rs365/sqm.

� EBITDA is expected to increase 31.9% YoY to Rs850mn led by increase in sales volume and realization. Energy cost for the company is expected to remain high due to rupee depreciation. We have assumed energy cost to be 19.4% of net sales against 19.1% in Q1FY14.

� Adjusted profit is expected to increase 64.8% YoY to Rs425mn. Adjusted PAT margin is expected to be 8% against 5.9% in Q1FY14 and 8% in Q4FY14.


We maintain Hold rating on the stock with a revised price target of Rs470 (earlier: Rs440) based on 16.5x June16E EPS.



Sales Volume (msm) 14.6 12.2 19.8 14.7 (0.6) 59.9

Realization/sqm (Rs) 365 360 1.4 358 2.0 368

Sales (Rs mn) 5,314 4,374 21.5 5,239 1.4 22,497

EBITDA (Rs mn) 850 645 31.9 836 1.7 3,526

EBITDA margin (%) 16.0 14.7 16.0 15.7

Adj PAT (Rs mn) 425 258 64.8 421 1.0 1,680

Adj PAT margin (%) 8.0 5.9 8.0 7.5



Asian Paints (Rating: Hold; Target price: Rs630)

� We expect consolidated net sales to increase 12% YoY to Rs31.8bn led by domestic revenue growth of 13% YoY. In the domestic business, we expect volume growth to be ~8% and realization growth of ~5% during the quarter.

� EBITDA is expected to increase 12.1% YoY to Rs5.2bn led by increase in sales volume and realization. We expect 70bps YoY decline in gross margin for the company due to higher raw material cost. EBITDA margin is expected to be at 16.4% flat on a YoY basis.

� Depreciation is expected to increase 5% YoY due to commissioning of Khandala plant. Interest cost is expected to be at Rs117mn against Rs86mn in Q1FY14. Adjusted profit is expected to increase 11.9% YoY to Rs3.1bn. Adjusted PAT margin is expected to be 9.7% in the quarter.

Rating and target price change

We downgrade our rating on the stock to Hold considering expensive valuations post recent run-up in the stock price. We have arrived at a price target of Rs630 (earlier: Rs605) valuing the stock at 31x June16E EPS.



Sales (Rs mn) 31,820 28,411 12.0 33,071 (3.8) 1,47,782

EBITDA (Rs mn) 5,210 4,647 12.1 4,851 7.4 23,578

EBITDA margin (%) 16.4 16.4 14.7 16.0

Adj PAT (Rs mn) 3,081 2,752 11.9 2,943 4.7 14,968

Adj PAT margin (%) 9.7 9.7 8.9 10.1


Berger Paints (Rating: Hold; Target price: Rs320)

� We expect consolidated net sales to increase 10% YoY to Rs10bn led by 10% YoY increase in revenue growth in the domestic business. We expect standalone volume growth to be ~5.5% and realization growth to be ~4.5% for the company.

� EBITDA is expected to increase 14.2% YoY to Rs1bn led by increase in sales volume and realization. We expect gross margin to improve by 1.4pp YoY during the quarter. EBITDA margin is expected to be at 10.3% against 9.9% in Q1FY14.

� Depreciation and Interest cost are expected to increase 38% and 27% YoY respectively. Profit is expected to increase 9.2% YoY to Rs536mn.

Rating and target price change

We have revised our rating on the stock to Hold from Buy earlier considering recent run-up in the stock price. We have revised our target price to Rs320 (earlier: Rs295) based on 28x Jun16E EPS.



Sales (Rs mn) 9,986 9,078 10.0 9,660 3.4 43,496

EBITDA (Rs mn) 1,024 897 14.2 1,060 (3.3) 4,937

EBITDA margin (%) 10.3 9.9 11.0 11.4

Adj PAT (Rs mn) 536 491 9.2 553 (3.1) 2,861

Adj PAT margin (%) 5.4 5.4 5.7 6.6



Kansai Nerolac (Rating: Hold; Target price: Rs1,450)

� We expect net sales to increase 8.3% YoY to Rs8.6bn led by ~5% YoY increase in sales volume and 3.5% increase in realization. Sales volume growth is expected to be muted compared to that of Asian Paints and Berger Paints due to slowdown in the industrial segment.

� Gross margin is expected to decline 180bps YoY largely due to pressure in the industrial segment. EBITDA is expected to increase 10.6% YoY to Rs1.1bn led by higher sales volume and realization. We expect 30bps YoY improvement in operating margin to 13.1%.

� Adjusted profit is expected to increase 7.2% YoY to Rs653mn. Adjusted PAT margin is expected to be 7.6% against 7.7% in Q1FY14 and 6% in Q4FY14.


We value the stock at 25x (against 22x earlier) Jun16E EPS as we believe that the company would benefit from expected improvement in the automotive segment. Recently, the government extended excise duty benefits to the automotive sector till December ’14 against June ’14 earlier, which may result in better demand for the sector and in turn, Kansai would benefit due to higher exposure towards this sector. Apart from that, we had increased the target multiple for Asian Paints and Berger Paints considering robust demand in the decorative segment. We maintain Hold on the stock with a revised price target of Rs1,450 (earlier Rs1,215).



Sales (Rs mn) 8,573 7,919 8.3 7,467 14.8 35,732

EBITDA (Rs mn) 1,121 1,014 10.6 819 36.9 4,172

EBITDA margin (%) 13.1 12.8 11.0 11.7

Adj PAT (Rs mn) 653 609 7.2 449 45.4 2,417

Adj PAT margin (%) 7.6 7.7 6.0 6.8


Huhtamaki PPL (Rating: Buy; Target price: Rs170)

� We expect net sales to increase 12.3% YoY to Rs3.1bn led by ~6% YoY increase in sales volume and ~6% YoY increase in realization.

� Gross margin is expected to decline 96bps YoY due to higher raw material costs led by rupee depreciation. EBITDA is expected to increase 11.7% YoY to Rs347mn led by higher sales volume and realization. EBITDA margin is expected to be at 11.1% against 11.2% in Q2CY13.

� Adjusted profit is expected to increase 17.3% YoY to Rs173mn. Adjusted PAT margin is expected to be 5.6% against 5.3% in Q2CY13 and 5.4% in Q1CY14.


We maintain Buy on the stock with a price target of Rs170 valuing the stock at 6x June-16E EV/EBITDA.



Sales (Rs mn) 3,120 2,778 12.3 2,916 7.0 12,311

EBITDA (Rs mn) 347 311 11.7 315 10.3 1,324

EBITDA margin (%) 11.1 11.2 10.8 10.8

Adj PAT (Rs mn) 173 148 17.3 157 10.6 613

Adj PAT margin (%) 5.6 5.3 5.4 5.0



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Appendix A

Disclaimer

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nterprises

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Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn

Buy Upside > 25% Upside > 20% Upside > 15%

Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%

Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager

Registration Nos.

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)

CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012

PMS REGISTRATION NO.: INP000004383

MCX – SX (Currency Derivative segment) REGN. NO.: INE261454230

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Building Materials - Sector Update - Centrum 02072014

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