Cement Sector - Q2FY10 Update - Centrum-061109

7/30/2019 Cement Sector - Q2FY10 Update - Centrum-061109

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Rajan [email protected]+91 22 4215 9640

Impact of price fall to be felt from Q3

We continue to remain Underweight on the cement

sector, given the challenges of overcapacity, price dropand muted despatch growth ahead. Althoughcompanies under our coverage have reported better-than-expected numbers, we expect their valuations totest further lows, as price fall begins to gather pace onthe back of excess capacity. The impact of price fallwould be felt in Q3, in our view.

Results surprise marginally; cement price fall toimpact from Q3FY10: Aggregate net sales atRs102.8bn grew 12% YoY but was flat QoQ. Whileoperating profit was 5.8% higher than our estimate atRs34bn (up 54% YoY and 1% QoQ), adj PAT toosurpassed estimates by 15% at Rs21.35bn (up 56% YoYand 2% QoQ). We expect companies to report a mutedQ3, given the sharper-than-expected drop in cementprices, particularly in the southern and central regions.

Sector underperforms Nifty despite strong results inlast three quarters: Cement stocks under our coverageunderperformed the Nifty by 26% since our initiation inMarch 2009 while the cement component of Niftyunderperformed by 33%. We expect valuations to testfurther lows, on the back of negative newsflow ofcement price correction coupled with muted despatchgrowth on a high base.

Regional dynamics favor exposure to North: Pricemovements in cement have been following a divergenttrend between the northern and southern regions,given the differences in capacity addition andconsolidation levels in these zones. However, lowerconsumption growth has further aggravated industrydynamics in the southern region.

Rising inventory to hamper prices: Cement andclinker inventories have risen from 11 days in March to18.6 days in Sep 2009 (vs 14.3 days in Sep 2008). Actualinventory would still be higher, given that inventory ofcapacity under ramp up is yet to be reported. Risinginventory is a clear sign of price drop, going forward.

Reiterate Underweight stance: We remainunderweight on the sector as we expect newsflow oncement price correction to further impact valuations ofcompanies in the sector. We reiterate Sell on ACC,Ambuja Cements and India Cements and Hold onGrasim Industries, Ultratech and Shree Cement.

Centrum cement index: Performance vsNifty

Centrum Cement Index (Performance Vs Nifty)

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

17-Mar-09

31-Mar-09

14-Apr-09

28-Apr-09

12-May-09

26-May-09

9-Jun-09

23-Jun-09

7-Jul-09

21-Jul-09

4-Aug-09

18-Aug-09

1-Sep-09

15-Sep-09

29-Sep-09

13-Oct-09

27-Oct-09

(%)

Status quo on excise duty and increase

in infraspend led to outperformance ofcement space post annual budget

Note : Centrum cement index is based on totalMarket cap of 6 frontline cement companies

Source: Bloomberg, Centrum Research

Inventory levels on the rise

Inventory Level On Rise

0

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Apr-08

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Sep-09

(Days)

Cement Inventory (Days) Cement and clinker inventory (Days)


Q2FY10 Update 6 November 2009

Please refer to important disclosures/disclaimers inside

Note: *ACC / Ambuja Dec ending; # Shree Cement numbers adjusted for depreciation policy differences; Prices as on 4 Nov 2009Source: Company, Centrum Research Estimates

Cement

INDIA

Cement Sector

Company Name Rating MCap CMP Target % Upside EPS (Rs) PE (x) EV/EBIDTA (x) EV/Ton ($) P/BV (x) ROE (%) ROCE (%)

(Rsbn) Rs Price /Downside FY10E FY11E FY10E FY11E FY10E FY11E FY11E FY11E FY10E FY11E FY10E FY11E

ACC * Sell 137.6 729 707 (4) 87.4 67.3 8.4 10.9 4.5 5.5 93 2.0 31.1 21.8 26.8 17.3

Ambuja Cements * Sell 136.0 89 83 (7) 8.1 8.2 11.0 10.8 6.3 5.6 116 1.8 20.2 18.1 18.4 16.7

Grasim Industries Hold 198.8 2,170 2,622 21 308.8 264.2 7.0 8.2 4.0 4.3 1.4 21.9 15.9 16.2 12.1

Ultratech Cement Hold 91.4 734 884 20 94.3 69.0 7.8 10.6 4.6 5.5 87 1.6 28.3 16.9 18.1 11.8

India Cements Sell 30.6 108 91 (16) 17.3 11.3 6.3 9.6 4.6 5.9 81 0.8 15.3 9.0 10.7 7.2

Shree Cement# Hold 54.8 1,574 1,728 10 280.0 215.9 5.6 7.3 4.3 4.9 84 1.6 42.0 24.2 25.0 16.2


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2 Cement Sector

Table of Contents

Results slightly better; Cement price fall to impact from Q3FY10 ...3

Regional dynamics favor northern exposure ..4

Inventory levels on the rise.5

Muted despatch growth over next 10 months ....5

Overview of quarterly results ...6

Companies

ACC ......7

Ambuja Cements...11

Grasim Industries ..14

UltraTech Cement..19

India Cements....23

Shree Cements...27


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3 Cement Sector

Results slightly better; Cement price fall to impact from Q3FY10

Q2FY10 results broadly met our expectations. Aggregate net sales at Rs102.8bn grew 12% YoYbut remained flat QoQ. Operating profit, however, was 5.8% higher than our estimate at Rs34.3bn(up 54% YoY and 1% QoQ). Adj PAT at Rs21.4bn (up 56% YoY and 2% QoQ) was 15% higher-than-estimated. However, we expect companies to report a muted Q3, given the sharper-than-expected drop in cement prices, particularly in the southern and central regions.

Exhibit 1: Cement sector: Q2 performance

Rsmn Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variance (%)

Net Sales 102,828 91,598 12.3 102,697 0.1 102,011 0.8

EBIDTA 34,303 22,323 53.7 33,812 1.5 32,424 5.8

PAT 21,352 13,667 56.2 20,907 2.1 18,559 15.0

Source: Company, Centrum Research

Sector underperforms broad indices

Despite a satisfying Q2, our cement space (measured by Centrum Cement Index)underperformed Nifty by 26% since our initiation in March 2009. The cement component of Niftyunderperformed by 33%. We expect valuations to test further lows on the back of negativenewsflow on cement price correction, coupled with muted despatch growth on a high base.

Exhibit 2: Centrum cement index: Performance vs Nifty

Centrum Cement Index (Performance Vs Nifty)

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

17-Mar-09

31-Mar-09

14-Apr-09

28-Apr-09

12-May-09

26-May-09

9-Jun-09

23-Jun-09

7-Jul-09

21-Jul-09

4-Aug-09

18-Aug-09

1-Sep-09

15-Sep-09

29-Sep-09

13-Oct-09

27-Oct-09

(%)

Status quo on excise duty and increase

in infraspend led to outperformance of

cement space post annual budget

Note : Centrum cement index is based on total Market cap of 6 frontline cement companies


Exhibit 3: Cement component of Nity: Performance vs Nifty

Cement Component of Nifty (Performance Vs Nifty)

(50)

(40)

(30)

(20)

(10)

0

10

20

17-Mar-09

31-Mar-09

14-Apr-09

28-Apr-09

12-May-09

26-May-09

9-Jun-09

23-Jun-09

7-Jul-09

21-Jul-09

4-Aug-09

18-Aug-09

1-Sep-09

15-Sep-09

29-Sep-09

13-Oct-09

27-Oct-09

(%)

Status quo o n excise duty a nd

increase in infraspend led to

outperformance of cement space

post annual budget



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4 Cement Sector

Exhibit 4: Stock performance to date corroborates positive dynamics in the northern region

As of 4 November 2009

Companies Rating on Initiation (19 March 2009)Absolute

returnOutperformance

vs NiftyOutperformance

vs sector

ACC Sell maintained 32.0 (39.1) (13.1)

Ambuja Cements Reduce later downgraded to sell 33.3 (37.8) (11.9)

Grasim Industries Hold Maintained 49.1 (22.0) 4.0

Ultratech Cement Accumulate later downgraded to hold 54.3 (16.8) 9.2

India Cements Sell maintained 10.4 (60.7) (34.7)

Shree Cement Buy Later downgraded to hold 165.3 94.3 120.2

Orient Paper & Industries Buy Later downgraded to hold 86.3 15.3 41.2

Nifty 71.1

Centrum Cement Index Underweight maintained 45.1 (25.9)


While our cement space as a whole underperformed Nifty by 26%, India Cements (south basedplayer) underperformed sharply at 61% while Shree Cement (a north-based player) outperformedby 94%.The stock performance reflects the difference in operating environment between the tworegions (refer to our initiation report), where we had argued that players with a presence in thenorthern region would enjoy superior pricing power, given lower threat of oversupply and higherconsolidation there.

Regional dynamics favor northern exposure

Cement price movements have been following a divergent trend between the northern andsouthern regions, given the differences in capacity addition and consolidation levels in thesezones (Refer to our initiation, Nadir Not Yet? dated 19 March 2009).

While cement prices were hiked significantly (Rs15-25 a bag) in the northern, central and easternregions during March-July 2009, the southern region saw modest price hikes of Rs 5-10 per bagduring the period. Subsequently when cement prices fell by Rs10-20 per bag across other regionssince July end, the fall in the southern region was substantial (especially in Hyderabad) at Rs40-50per bag. This is reflected in the Q2FY10 cement realization numbers of companies under ourcoverage. Thus, QoQ fall in realization has been higher for companies like India Cements, OPILand Ultratech Cements that have high exposure in the southern markets than peers, as the latterhave exposure to other regions.

Exhibit 5: Realization trend of cement majors

Rs/tonne Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variance (%)

ACC 3,931 3,688 6.6 3,811 3.1 3,841 2.3

ACL 3,872 3,493 10.8 3,798 2.0 3,809 1.6

Grasim 3,689 3,446 7.1 3,664 0.7 3,700 (0.3)

Ultratech 3,669 3,491 5.0 3,702 (1.0) 3,600 2.0

Shree 3,449 3,055 12.9 3,477 (0.8) 3,560 (3.1)

India Cements 3,590 3,633 (1.2) 3,720 (3.5) 3,533 1.6

Orient Paper & Ind 3,114 2,993 4.0 3,246 (4.1) 3,027 2.9


Moreover, lower consumption growth further aggravated the demand supply dynamics in thesouthern region.

Exhibit 6: Region-wise cement consumption

(mn mt) April-August 2009* April-August 2008* YoY (%)

North 13 12 16.1

Central 10 8 29.3

East 12 9 23.1

West 14 13 8.6

South 22 21 5.8

All India 72 63 13.9

*Excluding ACC numbers

Source: CMA


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5 Cement Sector

Inventory levels on the rise

Cement and clinker inventories have risen from 11 days in March to 18.6 days in September 2009(against 14.3 days in September 2008). We believe actual inventory would be higher, as inventoryfrom ramp up of new capacity is yet to be reported. Rising inventory clearly signals a fall incement prices, going forward.

Exhibit 7: Inventory levels on the rise

Inventory Level On Rise

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Apr-08

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Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

(Days)

Cement Inventory (Days) Cement and clinker inventory (Days) Source: CMA, Centrum Research

Muted despatch growth over next 10 months

Even if the industry grows at 9-10%, we believe the high base would keep despatch growthmuted over next 10 months. Given the high base of cement despatch/consumption growth inH2FY09, we expect despatch/consumption growth in H2FY10 to be on the lower side (Exhibit 8).While monthly numbers would hover at 3.2%-7.1% YoY during Nov2009-March 2010 overallgrowth in H2FY10 would taper to 6.2% YoY vs 11.5 % in H1FY10 on our assumption of 8.7%growth for FY10. Even if we were to assume 9.5% growth for the full year, despatch growth forH2FY10 would still remain subdued at 7.7%. Newsflow of tapering despatch growth in H2FY10would be a double whammy for the sector valuation, as it would coincide with news of capacity

ramp up and falling cement prices. This would lead the market to assign a further discount to thesector.

Exhibit 8: Despatch growth scenario for H2FY10/H1FY11E

Monthly Despatches Growth Scenario forH2FY10/H1FY11

Oct Nov Dec Jan Feb Mar H2 Apr May Jun Jul Aug Sep H1

Base Growth (%) --- FY09/FY10 4.1 11.3 12.2 8.3 8.9 10.5 9.2 13.1 10.8 12.8 9.9 16.9 5.7 11.5

Derived Growth assuming 8.7% for full Yr FY10/11 11.3 4.1 3.2 7.1 6.5 4.9 6.2 4.3 6.6 4.6 7.5 0.5 11.7 5.9

Derived Growth assuming 9.5% for full Yr FY10/11 12.8 5.6 4.7 8.6 8.0 6.4 7.7 5.9 8.2 6.2 9.1 2.1 13.3 7.5

Derived Growth assuming 10% for full Yr FY10/11 13.8 6.6 5.7 9.6 9.0 7.4 8.7 6.9 9.2 7.2 10.1 3.1 14.3 8.5


Exhibit 9: Base effect to lower monthly despatch growth (YoY) over next 12 months

High base to lower despatch growth over 12 months

0

2

4

6

8

10

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14

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18

Ap

ril09A

May09A

Jun

e09A

Ju

ly09A

Au

g09A

Sept09A

O

ct-09

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ov-09

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ec-09

J

an-10

F

eb-10

M

ar-10

A

pr-10

M

ay-10

Jun-10

Jul-10

Aug-10

S

ep-10

(% )

Growt h Base Case (8.7%)/Actual Growth at 9.5% for ful l Yr FY10/FY1 1

Growth at 10% for full Yr FY10/FY11

Source: CMA, Centrum Research Estimates


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6 Cement Sector

Overview of quarterly results

ACC (Sell; target price: Rs707): Q3CY09 PAT surged by a robust 54% YoY (10.3% lower QoQ)to Rs4,356mn, 15% higher than our estimate of Rs3,778mn. Net sales grew 10% to Rs19,694mn,in line with our estimate, while operating profit rose 50% YoY to Rs6,679mn on higherrealization and lower costs. Going forward, we expect ACC to get impacted on account ofsharp drop in cement prices in the southern region and Uttar Pradesh (UP).

Ambuja Cements (Sell; target price: Rs83): Q3 adjusted PAT grew 14.1% YoY to Rs2,852mn,1.9% lower than our estimate of Rs2,907mn. Net sales rose 16.2% to Rs16,284mn and EBITDAgrew 11.3% to Rs4,553mn (5.4% below estimate). Higher energy costs, increase in clinkerpurchase and higher other expenses offset the rise in realization. The expected sharp drop incement prices in the western region would impact Ambuja Cements, going forward. Price dropwould be a result of expected supply from the south and diversion of exports to the domesticmarkets. However, lower energy cost and use of indigenous clinker would offset the impact toa great extent.

India Cements (Sell; target price: Rs91): Net sales increased 7% YoY and 4.3% QoQ toRs9,949mn, 2% higher than our estimate. Operating profit at Rs3,032mn (up 1% YoY and 5.9%QoQ) and net profit at Rs1,377mn (down 11% YoY and 6.5% QoQ) were 24% and 20%,respectively, higher than our estimates. Going ahead, India Cements would be impacted on

account of sharp drop in cement prices in the south. Grasim Industries (Hold; target price: Rs2,622): Q2 exceeded expectations, mainly on

account of superior performance in the VSF segment and higher other income. PAT(standalone) grew 60.8% YoY to Rs6.7bn vs our estimate of Rs5.5bn. Net sales rose 12% YoY toRs30.3bn and EBITDA grew 78% to Rs10.6bn. Post restructuring only the VSF business wouldremain under direct control of Grasim, which would become a holding company of Ultratech.

Shree Cement (Hold; target price: Rs1,728): Q2 PAT surged by a robust 153% YoY (1% lowerQoQ) to Rs2, 915mn vs our estimate of Rs2,421mn. Net sales grew 43% YoY to Rs8,996mn butfell about 4.7% short of our estimate on account of lower volumes and realization. Operatingprofit rose 123% YoY to Rs4,082mn (3% higher than estimate) on account of lower energy cost.We expect higher sale of merchant power from Q4FY10 to partially offset the impact of cementprice fall.

Ultratech Cement (Hold; target price: Rs884): Q2 net sales grew 10% YoY (but down 21%QoQ) to Rs15,408mn (our estimate: Rs15,600mn). EBIDTA surged 58% YoY (down 34% QoQ) toRs4,700mn (Rs4,641mn). However, higher other income and lower interest cost resulted in PATgrowing 53% YoY (down 39.9% QoQ decline) to Rs2,509mn, 9.2% above our estimate ofRs2,297mn. We expect Ultratechs operating performance to improve, once Grasim transfers itscement business to Ultratech.


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Sell

Target Price: Rs707

CMP: Rs729*Downside: 3 %*as on 4 November 2009


Greater challenges ahead

ACC reported better-than-estimated Q3 on the back of

higher cement realization and lower other expense.However, the sharp fall in cement prices in the southernand central markets will likely impact its earnings,going forward. We maintain Sell with a target price ofRs707, as capacity overhang would keep valuations inthe sector under check.

Higher realization, lower expenses boost PAT:Q3CY09PAT surged by a robust 54% YoY (10.3% lowerQoQ) to Rs4,356mn vs our estimate of Rs3,778mn. Netsales grew 10% to Rs19,694mn, in line with ourestimate, while operating profit rose 50% YoY toRs6,679mn on higher realization and lower costs.

Sharp correction in prices in the southern andcentral regions to impact earnings: A sharp correctionin cement prices in Andhra Pradesh and retracing ofcement prices from abnormal levels in Uttar Pradesh(UP) would impact the companys earnings, goingforward. We maintain our estimates for CY10.

Valuation Rich; Sell on challenging outlook: Thestock currently trades at CY10E P/E of 10.9x, EV/EBITDAof 5.5x and P/BV of 2.0x. Its assets are valued atUS$93/tonne on CY10E capacity of 30.5mt. Thevaluations appear rich and we reiterate Sell with a targetprice of Rs707 (valuing 10.5x CY10E earnings), in view ofthe challenging industry dynamics and likely earnings

downgrades.

Key Data

Bloomberg Code ACC IN

Reuters Code ACC.BO

Current Shares O/S (mn) 187.7

Diluted Shares O/S(mn) 187.7

Mkt Cap (Rsbn/USDbn) 136.8/2.9

52 Wk H / L (Rs) 929/381

Daily Vol. (3M NSE Avg.) 556,461

Face Value (Rs) 10

1 USD = Rs47.1

One year Indexed Stock Performance

0

20

40

60

80

100120

140

160

180

200

Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09

ACC LIMITED NSE S&P CNX NIFTY INDEX

Price Performance (%)

1M 6M 1Yr

ACC (11.8) 11.3 43.7

NIFTY (5.8) 28.6 57.3

Source: Bloomberg, Centrum Research*as on 4 November 2009

Q3CY09 Update 6 November 2009

Y/E Dec (Rsmn) Q3CY09 Q3CY08 YoY (%) Q2CY09 QoQ (%) Q3CY09E Variance (%)

Net sales 19,694 17,909 10.0 20,813 (5.4) 19,410 1.5

Power and Fuel 3,595 4,370 3,738 3,481 3.0

% of sales 18 24 18 18

Logistics 2,548 2,366 2,547 2,352 8.0

% of sales 13 13 12 12

Other Expenses 3,791 4,326 3,741 4,237 (11.0)

% of sales 19.3 24.2 18 21.8

EBITDA 6,679 4,461 50.0 7,337 (9.0) 6,149 9.0

EBITDA Margin (%) 33.9 24.9 900.0 35.3 (134.0) 31.7 224.0

EBITDA /ton 1,336 821 1,356 1,229 9.0

Dep and amortisation 796 736 784 820 (3.0)Interest 135.1 115.9 159.5 140 (4.0)

EBT 5,748 3,609 59.0 6,394 (10.1) 5,189 11.0

Other income 509 581 570 450 13.0

PBT 6,257 4,190 49.0 6,963 (10.1) 5,639 11.0

Provision for tax 1,900 1,356 40.0 2,107 (9.8) 1,861 2.0

Effective Tax Rate % 30.4 32.4 30.3 33

PAT (adjusted) 4,356 2,834 54.0 4,856 (10.3) 3,778 15.0

NPM (%) 22.1 15.8 629.0 23.3 (121.0) 19.5 266.0

EPS (adjusted) 23.02 15.17 25.8 19.96 15.0



Y/E Dec (Rsbn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) P/BV(x)

CY06 58.5 73.1 16.6 28.3 11.3 229.3 60.0 42.7 29.0 12.2 7.6 4.3

CY07 70.7 20.8 19.3 27.3 12.7 12.6 67.5 34.8 29.1 10.8 6.1 3.3

CY08 77.2 9.2 16.6 21.5 10.7 (15.6) 58.5 23.6 20.9 12.5 6.7 2.9

CY09E 86.4 12.0 26.7 31.0 16.4 53.3 87.4 31.1 26.8 8.4 4.5 2.3

CY10E 86.9 0.5 22.4 26.0 12.6 (23.0) 67.3 21.8 17.3 10.9 5.5 2.0

ource: Company, Centrum Research Estimates

Cement

INDIA

ACC


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8 ACC

Higher realizations, lower costs propel profit growth

ACC reported better-than-expected Q3. On a standalone basis, net sales at Rs19,694mn was inline with estimates, while operating profit was 9% higher than our estimate on account of lowerother expenses (11% lower than estimate). Sales grew 10% YoY on 3.2% YoY volume growth to5.01mn mt and 6.6 % YoY growth in realization to Rs3,931/tonne (2.3% higher than estimate)

Operating profit rose 50% YoY (9% QoQ decline) to Rs6,679mn. EBITDA margin expanded 900bpYoY (contracted 134bp QoQ) to 33.9%. Higher other income (13% higher than estimate) and

lower tax (30.4% of PBT) against our assumption of 33% and 32% in Q3CY08 led PAT to grow by54% YoY (15% above estimate), to Rs4,356mn.

Consolidated net sales grew 9% YoY (5.1% QoQ decline) to Rs20,774mn, on the back of 10%growth in revenue of Rs19,694mn from the cement business and 12.7% YoY decline in ready mixconcrete (RMC) sales at Rs1,177mn. This division reported a loss of Rs1,72.5mn vs Rs2,04.5mn inQ3CY08. Consolidated EBITDA was up 52% YoY to Rs6, 541mn while adjusted PAT grew 61% YoYto Rs4,154mn.

Exhibit 1: Consolidated segmental performance

(Rsmn) Q3CY09 Q3CY08 YoY (%)

Segmental Sales

Cement 19,694 17909 10.0

RMC 11,773 13491 (12.7)

Total 20,774 19,001 9.3

Segmental EBIT

Cement 6,255 4,176 49.8

RMC (173) 9204) (15.6)

Total 6,081 3,972 53.1


Muted profit from Q4CY09 onwards

Robust performance of ACC during Q2CY09 and Q3CY09 was primarily driven by the significantprice hikes effected in the northern and eastern regions and abnormal price hike in UP. Weexpect ACC to report muted profits from Q4CY09 onwards, with cement price in UP beginning toreverse since Q3CY09 end and prices in other regions too softening.

Zonal exposure to worsen post expansion in south and west

ACC is a pan-India player with a near uniform presence across all regions. However, it currentlyderives approximately 30% of sales from the relatively challenging southern and westernmarkets. Post its 7mn tonne expansions at Bargarh (Orissa), Wadi (Karnataka) and Chanda(Maharashtra), its exposure to these regions is expected to rise from 30% to 45% of total sales.This poses higher challenges ahead as these markets are expected to witness oversupply andcement prices here are expected to see a sharper drop (started since Q3CY09 end).

The management indicated that expansion at Bargarh, Orissa has been commissioned duringQ3CY09 and is under trial run. Moreover, for the expansion of its New Wadi project in Karnataka,the satellite grinding unit at Thondebhavi near Bangalore is already undergoing trial runs, thesecond grinding plant at Bellary is likely to get commissioned in Q4CY09 and the clinkerizationplant at Wadi would be ready in Q1CY10. The other major project at Chanda in Maharashtra isexpected to see completion in Q42010 (earlier guidance mid 2010).

Exhibit 2: Rising exposure in southern and western markets

ACC' Zonal Exposure

25.5

18.6

15.7

14.2

26.1

18.7

17.4

23.0

21.9

19.1

0 5 10 15 20 25 30

North

East

South

West

Central

(Percent of total Sale) FY09 Post Expansion Source: Company, Centrum Research


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9 ACC

Rich valuations; Sell on challenging outlook

ACC has underperformed Nifty by 39% and our cement universe by 13% since our initiation witha Sell in March 2009. Currently, the stock trades at CY10E P/E of 10.9x, EV/EBITDA of 5.5x and P/BVof 2.0x. Its assets are valued at US$93/tonne on CY10E capacity of 30.5mt. The valuations appearrich and we reiterate Sell with target price of Rs707 (valuing it 10.5x CY10E) in view of thechallenging dynamics and possible earnings downgrades in future.

Exhibit 3: Valuations rich; reiterate Sell on challenging outlook

ACC Performance Vs Nifty & Cement Space

80

100

120

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200

Mar-09

Mar-09

Apr-09

Apr-09

May-09

May-09

Jun-09

Jun-09

Jul-09

Jul-09

Aug-09

Aug-09

Sep-09

Sep-09

Sep-09

Oct-09

Oct-09

(%)

Nifty Centrum Cement Index Acc



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10 ACC

Financials

xhibit 4: Income Statement/E Mar (Rsmn) CY06 CY07 CY08 CY09E CY10E

evenues 58,512 70,674 77,197 86,458 86,907

rowth in revenues (%) 73.1 20.8 9.2 12.0 0.5

ower and Fuel 9,791 11,986 16,118 15,961 17,207

% of Sales 16.7 17.0 2 0.9 1 8.5 19.8

reight 8,119 9,379 9,975 11,005 11,995% of Sales 13.9 13.3 1 2.9 1 2.7 13.8

ther Expenses 12,206 15,709 18,469 14,881 16,210

% of Sales 20.9 22.2 2 3.9 1 7.2 18.7

BITDA 16,554 19,311 16,624 26,744 22,387

BITDA Margin 28.3 27.3 21.5 30.9 25.8

BIDTA/Ton (Rs) 882 964 779 1,187 914

epreciation 2,610 3,130 3,205 3,559 4,552

BIT 13,944 16,181 13,419 23,185 17,835

nterst expenses 792 744 400 550 990

BIT from operations 13,152 15,437 13,019 22,635 16,844

ther non operating income 1,573 1,718 2,780 1,840 2,003

BT before extra-ordinary items 14,725 17,156 15,799 24,474 18,847

xtra-ordinary income/ (exp) 1,609 2,099 425 - -

BT 16,334 19,254 16,224 24,474 18,847

rovision for tax 3,939 4,981 5,252 8,084 6,227

ffective tax rate 24.1 25.9 32.4 33.0 33.0

AT 12,395 14,273 10,972 16,390 12,620

Minority Interest 41.3 (8.3) (1.9) (0.2) (0.2)

hare of profit in associates 9.0 1.8 23.9 23.9 23.9

AT after minority int. 12,363 14,283 10,998 16,414 12,644

djusted PAT 11,270 12,688 10,708 16,414 12,643

rowth in PAT (%) 229.3 12.6 (15.6) 53.3 (23.0)

AT margin 19.3 18.0 13.9 19.0 14.5


xhibit 5: Balance Sheet/E Mar (Rsmn) CY06 CY07 CY08 CY09E CY10E

hare Capital 1,875 1,878 1,878 1,878 1,878

eserves 29,770 39,744 46,364 58,381 66,628

hareholders' fund 31,645 41,623 48,242 60,259 68,506

Minority Interest 79 81 25 25 25

ebt 7,832 3,147 4,820 4,820 12,820

eferred Tax Liability 3,264 3,380 3,421 3,421 3,421

otal Capital Employed 42,820 48,230 56,508 68,525 84,772

ross Block 49,447 55,923 61,139 84,339 105,139

ccumulated dep. 19,618 21,993 24,536 28,095 32,647

et Block 29,829 33,931 36,603 56,244 72,492

apital WIP 5,515 6,453 16,114 6,114 2,114

otal Fixed Assets 35,345 40,384 52,717 62,358 74,606

nvestments 4,757 7,906 5,169 5,000 2,000

nventories 6,539 7,417 7,993 9,001 9,048

ebtors 2,290 3,058 3,579 4,027 4,048

ash & bank balances 6,225 7,464 9,915 11,008 18,087

oans and Advances 4,486 4,400 5,541 5,541 5,541

otal current assets 19,540 22,340 27,028 29,577 36,724

urrent lia & provisions 16,832 22,413 28,418 28,425 28,572

et current assets 2,708 (74) (1,390) 1,152 8,152

Misc. Expenditure 10 14 11 14 14

otal Assets 42,820 48,230 56,507 68,524 84,772


Exhibit 6: Cash flowY/E Mar (Rsmn) CY06 CY07 CY08 CY09E CY10E

CF from operating

Profit before tax 14,726 17,156 15,822 24,498 18,871

Depreciation 2,610 3,130 3,205 3,559 4,552

Interest expenses/other 660 578 (66) 550 990

OP profit before WC change 17,995 20,864 18,961 28,607 24,413Working capital adjustment (47) (1,299) ( 1,311) 1,449 (80)

Gross cash from operations 18,042 22,163 20,272 27,158 24,493

Direct taxes paid 3,930 1,921 3,193 8,084 6,227

Cash from operations 14,112 20,242 17,079 19,074 18,266

Extraordinary (Inc) 2,047 2,073 178 - -

Cash From Op and EI 16,158 22,315 17,257 19,074 18,266

CF from investing

Dec (Inc) in FA (5,333) (8,319) (15,772) (13,200) (16,800)

Pur (Sale) of Investment (1,392) (2,185) 3 ,999 169 3,000

Cash from investment (6,724) (10,504) (11,773) (13,031) (13,800)

CF from f inancing

Proceeds from sh cap & prem. 216 40 14 - -

Borrowings/ ( Repayments) (1,917) (4 ,393) 1 ,766 - 8 ,000

Interest paid (890) (862) (413) (550) (990)

Div idend paid (1,681) (5,356) (4,351) (4,396) (4,396)

Cash from financing (4,273) (10,571) (2,985) (4,947) 2,613

Net cash increase/ (dec) 5,162 1,240 2,499 1,096 7,079

Source: Company, Centrum Research Estimates

Exhibit 7: Key RatiosY/E Mar CY06 CY07 CY08 CY09E CY10E

Margin Ratios (%)

EBITDA Margin 28.3 27.3 21.5 30.9 25.8

PBIT Margin 26.5 25.3 21.0 28.9 22.8

PBT Margin 25.2 24.3 20.5 28.3 21.7

PAT Margin 19.3 18.0 13.9 19.0 14.5

Growth Ratios (%)

Revenues 73.1 20.8 9.2 12.0 0.5

EBITDA 180.1 16.7 (13.9) 60.9 (16.3)

Net Profit 229.3 12.6 (15.6) 53.3 (23.0)

Return Ratios (%)

ROCE 29.0 29.1 20.9 26.8 17.3

ROIC 34.4 35.2 27.4 35.3 21.9

ROE 42.7 34.8 23.6 31.1 21.8

Turnover Ratios

Asset turnover ratio (x) 1.4 1.5 1.3 1.4 1.2

Working capital cycle (days) (50.1) (61.7) (79.6) (65.0) (65.0)

Avg collection period (days) 13.3 15.8 16.9 17.0 17.0

Avg payment perio d (days) 104.3 115.8 134.4 120.0 120.0

Inventory holding (days) 40.8 38.3 37.8 38.0 38.0

Per share (Rs)

Fully diluted EPS 60.0 67.5 58.5 87.4 67.3

CEPS 79.9 92.7 75.6 106.3 91.5

Book Value 169.2 222.0 257.0 320.9 364.9

DPS 15.0 20.0 20.0 20.0 20.0

Solvency ratios

Debt/ Equity 0.3 0.2 0.2 0.1 0.2

Net Debt/Equity 0.0 (0.2) (0.1) (0.1) (0.1)

Interest coverage 21.6 26.0 43.4 48.6 22.6

Valuation parameters (x)

P/E 12.2 10.8 12.5 8.4 10.9

P/BV 4.3 3.3 2.9 2.3 2.0

EV/ EBITDA 7.6 6.1 6.7 4.5 5.5

EV/ Sales 2.3 1.8 1.7 1.5 1.5

M-Cap/ Sales 2.3 1.9 1.8 1.6 1.6EV/Ton (US$) 144.8 122.2 111.9 97.3 93.3



11/32

Sell

Target Price: Rs83

CMP: Rs89*Downside: 6.7%*as on 4 November 2009

Exceptionals inflate profits

Ambuja Cements (ACL) Q3 was in line, except for

exceptionals of Rs461mn. Going forward, ACL wouldbenefit from lower fuel cost and use of indigenous clinkerafter expansion. However, valuations appear rich;maintain Sell.

Result in line: Q3 adjusted PAT grew 14.1% YoY toRs2,852mn, 1.9% lower than our estimate of Rs2,907mn.Net sales rose 16.2% to Rs16,284mn and EBITDA grew11.3% to Rs4,553mn (5.4% below estimate). Higherenergy costs, increase in clinker purchase and otherexpenses offset the rise in realization.

Exceptionals inflate profits: Reported profit was 9.5%higher than our estimate on account Rs461mn received

as discount on prepayment of outstanding deferred salestax loan.

Cost pressures continue: Energy costs remained highdue to the high cost coal inventory. Going forward, weexpect fuel costs to fall, with the company already havingexhausted the high cost coal inventory and use of clinkerfrom its clinkerization unit.

Valuations rich; Sell: At CMP, the stock trades at 10.8xCY10E EPS, 5.6x EV/EBIDTA and 1.8x P/BV. We estimatethe value of the companys assets at US$116 on a capacityof 22.2mt. Maintain Sell on rich valuations with a targetprice of Rs83, valuing it at 10.1x CY10E EPS.

Key Data

Bloomberg Code ACEM IN

Reuters Code ABUJ.BO

Current Shares O/S (mn) 1,523.2

Diluted Shares O/S(mn) 1,523.2


52 Wk H / L (Rs) 112/50

Daily Vol. (3M NSE Avg.) 3,453,347

Face Value (Rs) 2

1 USD = Rs47.1


0

20

4060

80

100

120

140

160

180

No v-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 No v-09

AMB UJA CEM ENTS L NSE S &P CNX NIFTY INDEX


1M 6M 1Yr

Ambuja (13.0) 8.9 41.4

NIFTY (5.3) 28.6 57.3


Q3CY09 /Earnings change 6 November 2009

Y/E Dec (Rsmn) Q3CY09 Q3CY08 YoY% Q2CY09 QoQ% Q3CY09E Variance %

Net sales 16,284 14,019 16.2 18885 (13.8) 16,187 0.6

Power and Fuel 3,217 3,140 3752 3,080 4.4

% of sales 20 22 20 19 72.3

Logistics 2,978 2,936 3294 2,983 (0.2)

% of sales 18 21 17 18 (13.8)

Other Expenses 2,801 2,466 2719 2,532 10.6

% of sales 17.2 17.6 14.4 15.6 155.9

EBITDA 4,553 4,091 11.3 5208 (12.6) 4,810 (5.4)

EBITDA Margin (%) 28.0 29.2 (122) bps 27.6 38bps 29.7 (175.7)bps

Dep and amortisation 719 654 704 730 (1.5)

Interest 52.10 58.60 52.1 64.8 (19.6)

EBT 3,782 3,378 12 4,451 (15.0) 4,015 (5.8)

Other income 180 333 (46) 281 (36.0) 260 (30.8)

PBT 3,962 3,711 6.8 4,732 (16.3) 4,275 (7.3)

Except. item (reported) 461.60 - - 1.00

Provision for tax 1,238 1,210 2.34 1486 (16.7) 1,368 (9.5)

Effective Tax Rate % 28.0 32.6 31.4 32.0

PAT (reported) 3,185 2,501 27.3 3,247 (1.9) 2,907 9.5

PAT (adjusted) 2,852 2,501 14.1 3,247 (12.1) 2,907 (1.9)

NPM (%) 17.5 17.8 (32.3)bps 17.2 32.6 bps 18.0 (44.4) bps

EPS (adjusted) 1.88 1.65 14.05 2.14 1.91 (1.89)



Y/E dec(Rsbn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY % Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) P/BV(x)

CY06 63 140.6 21 34.0 15 212.1 9.6 34.4 24.0 9.3 5.8 3.9

CY07 56 (10.2) 20 36.3 13 (10.2) 8.6 32.2 28.8 10.4 5.4 2.9

CY08 62 10.7 18 28.5 11 (16.6) 7.2 21.2 19.0 12.4 6.7 2.4

CY09E 69 10.4 19 27.9 12 12.7 8.1 20.2 18.4 11.0 6.3 2.1

CY10E 70 1.7 21 29.4 13 1.8 8.2 18.1 16.7 10.8 5.6 1.8


Cement

INDIA

Ambuja Cements



12/32

12 Ambuja Cements

Q3 inline; Exceptionals inflate profits

Q3CY09 net sales grew 16.2% YoY (13.8% QoQ decline) to Rs16,284mn, driven by 4.8% volumegrowth to 4.16mt and 10.8% increase in realization to Rs3,872/tonne. The increase in the companyspurchase of clinker by 3.7x YoY to Rs1.6bn, 2% YoY rise in energy cost coupled with 14% YoY growthin other expenses curtailed operating profit growth at 11.3% YoY (12.6% QoQ decline) to Rs4,553mn.EBITDA margin contracted 122bp YoY (4bp QoQ) to 28%. Higher depreciation (up 10% YoY), lower

interest cost (down 11% YoY) and lower other income (down 46% YoY and down 36% QoQ) restrictedPBT growth to 6.8% YoY at Rs3,962mn. Exceptional income of Rs461mn due to discount onprepayment of interest free sales tax loan and lower tax (28% of PBT vs32% in Q3CY08) inflatedreported PAT by 27.3% YoY to Rs3,185. Adjusted PAT grew 14.1% YoY to Rs2,852mn.

Increase in clinker purchase and energy cost offset higher realization

ACL increased its purchase of clinker by 3.7x YoY to Rs1.6bn to support the higher volumes during thequarter. Besides, energy cost pressure continued unabated with the companys per tonne energy costduring the quarter having increased to Rs795 vs Rs789 in Q3CY08 (Rs814 in Q1CY09). Other expensestoo rose 7% YoY (19% QoQ) to Rs664/tonne.These costs virtually neutralized the increase inrealization and led to margin contracting 122bp YoY to 28%.

However, going forward, we expect cost pressures to ease, with the company commissioning its ownclinkerization units at Bhatapara in Chattisgarh and Himachal Pradesh. It would also benefit from low

international coal prices after exhausting its high-cost international coal inventory. However, ACL hasalready lost the cost leadership advantage to competition, which translates into a lower premium.

Project expansion status

During the quarter, the company commissioned 15MW power plant at Maratha plant inMaharashtra

Its 4.4mn clinker expansion at Bhatapara in Chattisgarh and Rauri (HP) are expected to becommissioned during Q409 and end CY09, respectively

Two grinding units of 1.5mt each are expected to be commissioned in Q4CY09 and Q1CY10,respectively, at Dadri and Nalagarh in North India

Other projects like the commissioning of its 25MW captive power plant at its Maharashtra unit andpurchase of 3 ships for coastal transportation are expected to be completed by mid 2010

Exhibit 1: Valuations rich; reiterate Sell on challenging outlook

ACL Performance Vs Nifty & Cement Space

80

100

120

140

160

180

200

Mar-09

Mar-09

Apr-09

Apr-09

May-09

May-09

Jun-09

Jun-09

Jul-09

Jul-09

Aug-09

Aug-09

Sep-09

Sep-09

Sep-09

Oct-09

Oct-09

(%)

Nifty Centrum Cement Index Ambuja


ACL has underperformed Nifty by 38% and the Centrum cement space by 12% since our initiationwith a Sell in March 2009. At CMP of Rs89, the stock trades at 10.8x CY10E earnings, 5.6x EV/EBITDAand 1.8x P/BV. Its assets are valued at US$116/ton on CY10E capacity of 22.2mt. The valuationsappear rich and we reiterate Sell with a target price of Rs83 (valuing it at 10.1x CY10E), in view of the

challenging dynamics and possible earnings downgrades in future.


13/32

13 Ambuja Cements

Financials

Exhibit 2: Income Statement

Y/E Dec (Rsmn) CY06 CY07 CY08 CY09E CY10E

Revenues 62,683 56,314 62,347 68,829 69,975

Growth in revenues (%) 140.6 -10.2 10.7 10.4 1.7

Power and Fuel 12,399 10,042 13,257 14,088 13,769

% of Sales 19.8 17.8 21.3 20.5 19.7

Freight 11,719 11,175 12,205 14,070 15,299

% of Sales 18.7 19.8 19.6 20.4 21.9

Other Expenses 10,972 8,580 10,949 10,961 12,043

% of Sales 17.5 15.2 17.6 15.9 17.2

EBITDA 21,331 20,451 17,779 19,183 20,566

EBITDA Margin 34 36 29 28 29

EBIDTA/Ton (Rs) 945 1,221 1,003 1,033 1,008

Depreciation 3,261 2,363 2,598 2,926 4,183

PBIT 18,070 18,088 15,182 16,257 16,383

Interst expenses 1,132 759 321 202 202

PBIT from operations 16,937 17,329 14,861 16,055 16,181

Other non operating income 1,003 1,935 1,754 1,553 1,746

PBT before extra-ordinary items 17,941 19,265 16,615 17,609 17,927Extra-ordinary income/ (exp) 475 7,859 3,083 - -

PBT 18,416 27,124 19,698 17,609 17,927

Provision for tax 3,384 9,433 5,676 5,283 5,378

Effective tax rate 18 35 29 30 30

PAT 15,033 17,691 14,023 12,326 12,549

Minority Interest - - - - -

PAT after minority int. - - - - -

Adjusted PAT 14,617 13,122 10,939 12,326 12,549

Growth in PAT (%) 212 (10) (17 ) 13 2

PAT margin 2 3.3 2 3.3 17.5 17.9 1 7.9


Exhibit 3: Balance SheetY/E Dec (Rsmn) CY06 CY07 CY08 CY09E CY10E

Share Capital 3,034 3,045 3,045 3,045 3,045

Reserves 31,872 43,564 53,680 62,087 70,716

Shareholders' fund 34,917 46,613 56,729 65,135 73,765

Minority Interest

Debt 8,654 3,304 2,887 2,887 2,887

Deferred Tax Liability 3,839 3,784 3,808 3,808 3,808

Total Capital Employed 47,410 53,701 63,423 71,830 80,459

Gross Block 45,425 52,311 57,069 84,086 91,359

Accumulated dep. 20,533 22,712 25,142 28,068 32,251

Net Block 24,892 29,599 31,928 56,018 59,107

Capital WIP 5,419 5,100 15,608 2,500 2,500

Total Fixed Assets 30,311 34,699 47,535 58,518 61,607

Investments 11,331 12,889 3,324 3,324 3,324

Inventories 4,088 5,816 9,398 9,521 9,476

Debtors 950 1,578 2,480 2,780 2,822

Cash & bank balances 3,781 6,426 8,518 8,231 15,026

Loans and Advances 3,887 3,921 6,863 4,499 3,499

Total current assets 12,706 17,741 27,259 25,152 30,918

Current lia & provisions 7,016 11,691 14,738 15,086 15,337

Net current assets 5,690 6,050 12,521 10,067 15,581

Misc. Expenditure 77 62 43 43 43

Total Assets 47,410 53,701 63,423 71,830 80,459


Exhibit 4: Cash flow

Y/E Dec (Rsmn) CY06 CY07 CY08 CY09E CY10E

CF from operating


Depreciation 3,261 2,363 2,598 2,926 4,183

Interest expenses/other 825 (435) (1,015) 202 202

OP profit before WC change 22,503 29,052 21,281 20,737 22,312

Working capital adjustment 463 (1,179) (2,612) (76) 254


Direct taxes paid (4,449) (4,489) (5,924) (5,283) (5,378)


Extraordinary (Inc) (475) (7,859) (3,083) - -

Cash From Op Ex OI 18,042 15,525 9,662 15,378 17,188

CF from investing

Capex (7,564) (5 ,215) (16,415) ( 11,544) (6,273)

Investment 1,238 3,586 13,666 - -


CF from financing

Proceeds from sh cap & prem. 481 323 12 - -Borrowings/ (Repayments) (3,402) (5,253) (434) - -

Interest paid (1,202) (483) (497) (202) (202)

Dividend paid (4,766) (5,831) (3,902) (3,919) (3,919)

Cash from financing (8,889) (11,244) (4,821) (4,121) (4,121)

Net cash increase/ (dec) 2,826 2,652 2,093 (287) 6,794


Exhibit 5: Key RatiosY/E Dec CY06 CY07 CY08 CY09E CY10E

Margin Ratios (%)

EBITDA Margin 34.0 36.3 28.5 27.9 29.4

PBIT Margin 28.8 32.1 24.4 23.6 23.4

PBT Margin 28.6 34.2 26.6 25.6 25.6

PAT Margin 23.3 23.3 17.5 17.9 17.9

Growth Ratios (%)

Revenues 140.6 (10.2) 10.7 10.4 1.7

EBITDA 194.6 15.7 (13.1) 7.9 7.2

Net Profit 212.1 (10.2) (16.6) 12.7 1.8

Return Ratios (%)

ROCE 24.0 28.8 19.0 18.4 16.7

ROIC 37.3 54.7 33.1 22.3 18.7

ROE 34.4 32.2 21.2 20.2 18.1

Turnover Ratios


Working capital cycle (days) 0.5 (7.1) 3.8 3.5 3.5


Avg payment period (days) 40.9 75.8 86.3 80.0 80.0


Per share (Rs)


CEPS 11.8 10.2 8.9 10.0 11.0

Book Value 23.0 30.6 37.3 42.8 48.4

DPS 3.4 2.2 2.2 2.2 2.2

Solvency ratios

Debt/ Equity 0.2 0.1 0.1 0.0 0.0

Net Debt/Equity (0.2) (0.3) (0.2) (0.1) (0.2)



P/E 9.3 10.4 12.4 11.0 10.8

P/BV 3.9 2.9 2.4 2.1 1.8

EV/ EBITDA 5.8 5.4 6.7 6.3 5.6

EV/ Sales 2.1 2.1 2.1 1.9 1.8

M-Cap/ Sales 2.2 2.4 2.2 2.0 1.9EV/Ton (US$) - - - 122.8 116.4



14/32

Hold

Target Price: Rs2,622

CMP: Rs2,170*Upside: 21%*as on 4 November 2009

Rajan [email protected] 22 4215 9640

Robust performance

A robust performance in the cement and VSF divisions

coupled with higher other income drove Grasims Q2PAT 23% above our estimate to Rs6.7bn. We see 20%upside on our revised target price of Rs2,622 fromcurrent levels. The stocks valuation is contingent on theUltratech-Samruddhi merger ratio and we haveconsidered three merger ratio scenarios to value Grasim.Reiterate Hold.

Result surprises: The Q2 result exceeded expectations,mainly on account of the VSF segments superiorperformance and higher other income. PAT (standalone)grew 60.8% YoY to Rs6.7bn vs our estimate of Rs5.5bn.Net sales rose 12% YoY to Rs30.3bn and EBITDA grew78% to Rs10.6bn.

Earnings raised: We raise FY10E EPS by 7.3% to Rs309and FY11E EPS by 7.8% to Rs264 to factor in the superiorperformance in its VSF business.

Robust performance in cement and VSF, higher otherincome drive profit: The VSF divisions EBIDTA grew140% YoY to Rs3.55bn (up 79% QoQ and 36% higher thanour estimate) on the back of 18% volume growth and3.4% YoY (8% QoQ) growth in realization. The cementsegments EBITDA surged 80% YoY to Rs6.8bn on robustvolume growth (23% YoY), higher realization (7.1% YoY)and cost savings. Other income rose 20% YoY to Rs1bn(190% higher than estimate).

Merger ratio key to valuation: The stock currentlytrades at 7.0x FY10E EPS and 8.2x FY11E EPS, 4x and 4.3xEV/EBIDTA and 1.6x and 1.4x P/BV. Its valuation iscontingent on the Ultratech-Samruddhi merger ratio andwe have considered three scenarios of 2:1, 1.8:1 and 1.5:1with 25%, 50% and 25% probability, respectively, to valueGrasim (valued as a holding company). Reiterate Holdwith a revised target price of Rs2,622.

Key Data

Bloomberg Code GRASIM IN

Reuters Code GRAS.BO

Current Shares O/S (mn) 91.7

Diluted Shares O/S(mn) 91.7

Mkt Cap (Rsbn/USDbn) 199/4.2

52 Wk H / L (Rs) 2,940/872


Face Value (Rs) 10

1 USD = Rs47.1


0

50

100

150

200

250

300


GR ASI M I ND S LTD N SE S& P C NX N IFTY I ND EX


1M 6M 1Yr

Grasim Inds. (13.3) 21.2 106.6

NIFTY (5.8) 28.6 57.3


*as on 4 November 2009

Q2FY10/Estimate change 6 November 2009

Y/E March (Rsmn) (Standalone) Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variance (%)

Net sales 30,258 27,005 12.0 30,787 (1.7) 28,906 4.7

EBIDTA 10,582 5,944 78.0 9,187 15.2 9,374 12.9

OPM (%) 35.0 20.3 1,469bp 29.8 513.1 35.8 (82.9)bpDepreciation and amortization 1,358 1,069 1,370 1,349 0.6

Interest expenses 505 288 475 500 1.1

EBT 8,718 4,587 7,342 7,524 15.9

Other income 1,011 844 286 350 189.0

PBT 9,730 5,431 79.1 7,628 27.6 7,874 23.6

Provision for tax 2,986 1236 2322 2,398 24.6

- effective tax rate 30.7 22.8 30.4 30.5 24.3

Exceptional items (as reported) 0 0 3,360 0

PAT (adjusted) 6,743 4,195 60.7 5,305 27.1 5476 23.1

NPM (%) 22.3 14.3 17.2 20.9 137bps


Y/E Mar(Rsbn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY % Fully DEPS RoE (%) RoCE (%) P/BV P/E (x) EV/EBITDA (x)

FY07 140.7 37.6 39.7 28.2 19.7 89.6 214.6 34.5 21.4 4.2 10.1 5.8

FY08 169.7 20.6 49.6 29.2 26.2 33.4 286.2 33.4 21.1 2.8 7.6 4.9

FY09 184.0 8.4 43.3 23.5 21.9 (16.7) 238.5 21.1 15.0 2.1 9.1 5.5

FY10E 201.7 9.6 58.2 28.9 28.3 29.5 308.8 21.9 16.2 1.6 7.0 4.0

FY11E 206.3 2.3 51.1 24.8 24.2 (14.4) 264.2 15.9 12.1 1.4 8.2 4.3


Cement

INDIA

Grasim Industries


15/32

15 Grasim Industries

Earnings raised, maintain Hold

We have raised our estimates (consolidated) for FY10 by 7.3% to Rs309 and for FY11 by 7.8% toRs264 to factor in the better-than-expected performance by the VSF segment.

At CMP, the stock trades at 7.0x FY10E and 8.2x FY11E EPS, 4x and 4.3x EV/EBIDTA and 1.6x and1.4x P/BV. Going forward, the stocks valuation is contingent on the Ultratech-Samruddhi mergerratio. Maintain Hold with a revised target price of Rs2,622, valuing Grasim as a holding companyin three merger ratio scenarios of 2:1,1.8:1 and 1.5:1 with a probability of 25%, 50% and 25%,

respectively.

Exhibit 1: Revised estimates

Y/E March (Rsmn) Revised Earlier Change (%)

FY10E FY11E FY10E FY11E FY10E FY11E

Net sales 201,750 206,342 199,121 203,503 1.3 1.4

EBIDTA 58,250 51,073 55,955 48,594 4.1 5.1

Net profit 28,310 24,227 26,428 22,492 7.1 7.7

EPS (Rs) 309 264 288 245 7.3 7.8

Exhibit 1: Revised VSF performance

Y/E March (Rsmn) Revised Earlier Change (%)

FY10E FY11E FY10E FY11E FY10E FY11E

Net sales 26,735 28,873 24,106 26,034 10.9 10.9EBIDTA 8,822 7,218 4,821 5,207 83.0 38.6

Source: Centrum Research Estimates

Merger ratio key to valuations

We reiterate our Hold on Grasim with a target price of Rs2,622, which provides 21% upside fromcurrent levels. While the SamruddhiUltratech merger ratio would be the key for the stocksvaluation, the correction has rendered the stock attractive. To value Grasim, we have consideredthree scenarios and assigned 25%, 50% and 25% probability for each of these scenarios. We havevalued Grasim as a holding company of Ultratech/other investments and provided 20% holdingcompany discount to Ultratechs target valuation and 30% discount to other investments at CMP.We have assigned a PE multiple of 8x FY10E to value its VSF business. Under three merger ratioscenarios of 2:1, 1.8:1 and 1.5:1 (shares of Samruddhi for one share of Ultratech), and assigning a

probability of 25%, 50% and 25% respectively to these scenarios, we arrive at a fair value ofRs2,622 for Grasim.

Exhibit 2: Three valuation scenarios

Value per share (Rs) Scenario I Scenario II Scenario III

Samruddhi Ultratech merger ratio 2:1 1.8:1 1.5:1

Share in Ultratech (with 20% Holding Company Discount) 1,256 1,261 1,271

Share in Ultratech as Samruddhi shareholder (minority) 473 496 537

Value of strategic investments (0.7x Mcap) 185 185 185

Value of liquid investments (1x) 248 248 248

Value of VSF business (8X FY10E) 427 427 427

Value of Grasim share post restructuring 2,588 2,616 2,668


Grasim has underperformed the Nifty by 22% and outperformed the Centrum Cement Universeby 4% since our initiation with a Hold in March 2009. The stock broadly outperformed the Niftyand our cement space until the announcement of business restructuring on 1 0ctober 2009.


16/32


Exhibit: 3: Grasims performance vs Nifty and Centrum Cement Universe

Grasim Performance Vs Nifty & Cement Space

80

100

120

140

160

180

200

220

Mar-09

Mar-09

Apr-09

Apr-09

May-09

May-09

Jun-09

Jun-09

Jul-09

Jul-09

Aug-09

Aug-09

Sep-09

Sep-09

Sep-09

Oct-09

Oct-09

(%)

Nifty Centrum Cement Index Grasim


Robust growth in cement and VSF segments drive earnings

Standalone Q2 net sales grew 12.4% YoY (down 1.7% QoQ) to Rs30.26bn, driven by the 29.8%YoY increase (3.8% QoQ decline) in cement sales to Rs20.6bn and 18.3% YoY (9.8% QoQ) growthin VSF sales to Rs8.49bn.

EBITDA grew 78.2% YoY and 15.8% QoQ to Rs10.6bn driven by the 80% YoY increase in cementEBITDA and 140% increase in VSF EBIDTA. It should be noted that the results are not comparableYoY as the sponge iron business was sold in Q1FY10.

The cement divisions EBITDA increased 80% YoY to Rs6.83bn on account of higher realizations(up 7.1% YoY and 0.7% QoQ) to Rs3,689/tonne and 23.2% YoY increase (6.6% QoQ decline) involumes to 4.6mt. Cost savings also helped boost EBITDA. EBITDA in the VSF segment grew 140%YoY and 79.1% QoQ to Rs3.55bn on higher volumes (up 18.3% YoY and 9.8% QoQ) and increasedrealizations (3.4% YoY and 8% QoQ growth).

Exhibit 4: Segmental performance (standalone)

Y/E March (Rsmn) Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10 Variance (%)

Cement volumes(mn tonnes) 4.6 3.7 23.2 4.9 (6.6) 4.6 (0.3)

Real ization (Rs/ton) 3,689 3,446 7.1 3,664 0.7 3,700 (0.3)

Net Sales 2,066 1,591 29.8 2,147 (3.8) 2,046 1.0

EBIDTA 683 380 80 740 (7.7) 659 3.6

EBIDTA/Ton (Rs/ton) 1,457 997 1,484 1,410

Margin (%) 33.1 23.9 921 bps 34.5 (141.4)bps 32.2 84bps

VSF volumes (tonnes) 73,993 62,536 18.3 67,419 9.8 70,000 5.7

Realization (Rs/ton) 105,217 101,786 3.4 97,543 7.9 103,000 2.2

Net Sales 849 691 22.9 716 18.6 771 10.1

EBIDTA 355 148 140.2 198 79.1 260 36.7

EBIDTA/Ton (Rs/ton) 47,950 23,618 29,385 37,074Margin (%) 41.8 21 2,040 bps 27.7 1,412bps 34 812bps


Higher depreciation (up 27% YoY to Rs1.36bn), increased interest expenses (75% YoY atRs505mn) and higher other income (up 19% YoY at Rs1.01bn) resulted in a 79.1% growth in PBTto Rs9.73bn. Higher tax provision of Rs2.32bn (up 141% with tax rate of 30.7% of PBT vs 22.8% inQ2FY09) curtailed standalone PAT growth at 60.7% to Rs6.74bn (23% higher than our estimate).

On a consolidated basis, net sales increased 6% YoY to Rs47.43bn, operating profit grew 62% toRs15.4bn and PAT (after minority interest and profit in associates) grew 61% at Rs7.81bn led bybetter performance of its subsidiary, Ultratech.


17/32


Outlook challenging from H2FY10

Cement segment

Grasim has been a prime beneficiary of its expansion in the northern region where the demand-supply dynamics are favourable on account of higher demand, relatively lower capacity additionand higher consolidation in the region. The cement division has higher earnings visibility onaccount of its higher exposure to the northern and central regions, where prices are likely to bestable over a longer period. The company would also benefit from cost efficiencies brought aboutby setting up additional captive power plants (CPPs). However, the correction in cement priceshas already started and the impact on realizations and profit would be felt from Q3FY10 onwards.

Exhibit 5: Grasim: Regional exposure


VSF segment

The VSF segment primarily benefited from strong domestic demand, higher penetration inexports markets, earlier price hikes and fall in input costs of pulp and chemicals,. However, giventhe widening price differential with substitutes like cotton and PSF, a further increase in VSFrealization looks unlikely. On the other hand, the rise in pulp prices would put pressure onmargins, going forward.

Grasim plans to set up 80,000-tonne green-field project at Vilayat, Gujarat, at a cost of Rs10bn tomeet the expected growth in demand for which the commercial production is expected tocommence in FY13. The company has already acquired the land for the project and received therequisite environmental approvals.

Status of expansion plans

During H1FY10, the company augmented its cement capacity to 45.65mt (standalone 22.55mtand UltraTechs 23.1mt) by adding 4.1mt grinding capacity (Shambhupura II, Rajasthan 1.6mt,Aligarh grinding unit 1.3mt under Grasim and 1.2mt at Tadpatri in Ultratech). Further, additional

grinding capacity of 3.1mt is likely to be commissioned in Q3FY10, taking its combined capacityto 48.8mt.

37.5

12.5

15.6

15.6

18.8

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0North

EastWest

SouthCentral

Contribution to sales (%)


18/32


Financials (Consolidated)

Exhibit 6: Income Statement

Y/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

Revenues 140,695 169,739 184,039 201,749 206,342

Growth in revenues (%) 37.6 20.6 8.4 9.6 2.3

EBITDA 39,723 49,598 43,296 58,250 51,073

EBITDA Margin 28.2 29.2 23.5 28.9 24.8

Depreciation 6,100 6,703 8,658 10,397 11,600

PBIT 33,623 42,895 34,638 47,852 39,473

Interest expenses 2,286 2,221 3,105 3,817 3,817

PBT from operations 31,337 40,674 31,534 44,036 35,656

Other non operating income 3,177 4,623 4,532 4,000 4,500

PBT before extra-ordinary items 34,514 45,296 36,066 48,036 40,156

Extra-ordinary income/ (exp) - - - - -

PBT 34,514 45,296 36,066 48,036 40,156

Provision for tax 10,922 14,658 9,914 14,411 12,047

Effective tax rate 31.6 32.4 27.5 30.0 30.0

PAT 23,593 30,639 26,152 33,625 28,109

Minority Interest 3,915 4,565 4,445 5,310 3,883

PAT after minority int. 19,678 26,073 21,708 28,314 24,227

Adjusted PAT 19,678 26,073 21,708 28,314 24,227

Growth in PAT (%) 14.0 15.5 11.9 14.0 11.7

PAT margin 14.0 15.4 11.8 14.0 11.7


Exhibit 7: Balance Sheet

Y/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

Share Capital 917 917 917 917 917

Reserves 64,706 90,462 114,662 142,001 161,392

Shareholders' fund 65,623 91,438 115,701 142,977 162,368

Minority Interest 8,587 12,760 16,704 22,014 25,897

Debt 48,730 55,771 59,162 58,662 58,162

Deferred Tax Liability 11,526 11,575 15,919 17,919 19,919

Total Capital Employed 134,466 171,544 207,485 241,572 266,346

Gross Block 143,718 157,198 210,623 219,772 247,142

Accumulated dep. 60,125 63,397 68,254 74,152 85,751

Net Block 83,593 93,801 142,369 145,620 161,391

Capital WIP 19,572 55,335 19,822 28,223 12,553

Total Fixed Assets 103,165 149,136 162,191 173,843 173,944

Investments 22,719 16,607 35,626 35,626 35,626

Inventor ies 13,581 17,443 22,210 23,491 24,026

Debtors 8,252 10,185 8,239 11,055 12,437

Cash & bank balances 3 ,692 2,903 2,270 21,528 43,009

Loans and Advances 7,479 12,047 12,615 13,615 14,615

Total current assets 33,004 42,578 45,333 69,688 94,087

Current liab & provisions 24,429 36,783 35,685 37,586 37,311

Net current assets 8,575 5,795 9,649 32,102 56,775

Misc. Expenditure

Total Assets 134,467 171,544 207,484 241,572 266,346


Exhibit 8: Cash flow

Y/E Mar (Rs mn) FY07 FY08 FY09 FY10E FY11E

CF from operating


Depreciation 6,100 6,703 8,658 10,397 11,600

Interest expenses/other 712 (382) 67 3,817 3,817OP profit before WC change 41,326 51,617 44,791 62,250 55,573

Working capital adjustment (1,132) (574) (4,657) (3,186) (3,192)




Extraordinary (Inc) - 2,980 - 10,781 4,360

Cash From Op & EI 29,638 39,952 34,625 56,453 46,694

CF from investing

Capex (26,851) (51,181) (26,468) (27,370) (15,800)

Investment (8,168) 5,885 (10,183) - -


CF from financing

Proceeds from sh cap & prem. 3,422 634 438 (62) -

Borrowings/ (Repayments) 11,175 7,201 7,991 (500) (500)

Interest paid (2,286) (3,095) (3,483) (3,817) (3,817)

Dividend paid (5,612) (185) (3,553) (4,836) (4,836)

Cash from financing 6,699 4,555 1,392 (9,215) (9,152)

Net cash increase/ (dec) 1,318 (789) (633) 19,868 21,741


Exhibit 9: Key Ratios

Y/E Mar FY07 FY08 FY09 FY10E FY11E

Margin Ratios (%)

EBITDA Margin 28.2 29.2 23.5 28.9 24.8

PBIT Margin 26.2 28.0 21.3 25.7 21.3

PBT Margin 24.5 26.7 19.6 23.8 19.5

PAT Margin 14.0 15.5 11.9 14.0 11.7Growth Ratios (%)

Revenues 37.6 20.6 8.4 9.6 2.3

EBITDA 92.1 24.9 (12.7) 34.5 (12.3)

Net Profit 89.6 33.4 (16.7) 29.5 (14.4)

Return Ratios (%)

ROCE 21.4 21.1 15.0 16.2 12.1

ROIC 23.4 24.9 16.3 21.0 14.7

ROE 34.5 33.4 21.1 21.9 15.9

Turnover Ratios

Asset turnover rat io (x) 1.0 1 .0 0.9 0 .8 0.8



Avg payment period (days) 63.4 79.1 70.8 68.0 66.0


Per share (Rs)


CEPS 281.1 359.3 332.9 422.2 390.7

DPS 27.5 30.0 30.0 45.0 45.0

Book Value 715.7 997.3 1,261.9 1,559.4 1,770.8

Solvency ratios

Debt/ Equity 0.6 0.5 0.4 0.3 0.3

Net Debt/Equity 0 .3 0.3 0.2 0.0 (0.1)



P/E 10.1 7.6 9.1 7.0 8.2

P/BV 3.0 2.2 1.7 1.4 1.2

EV/ EBITDA 5.8 4.9 5.5 4.0 4.3

EV/ Sales 1.7 1.5 1.4 1.2 1.1

M-Cap/ Sales 1.4 1.2 1.1 1.0 1.0



19/32

Hold

Target Price: Rs884

CMP: Rs734*

Upside: 20%*as on 4 November 2009

Rajan [email protected] 22 4215 9640

Merger ratio key to valuation

Q2 sales and operating profit were in line with ourestimate but lower interest and higher other incomedrove PAT 9% above our estimate. Transfer of Grasimscement business would make Ultratech a pan-Indiaplayer with 20% market share. The stock is attractivelyvalued under three assumed merger ratio scenarios. Wemaintain Hold with a target price of Rs884.

Inline result: Q2 net sales grew 10% YoY (but down 21%QoQ) to Rs15,408mn. EBIDTA surged 58% YoY (down 34%QoQ) to Rs4,700mn (Rs4,641mn). However, higher otherincome and lower interest cost resulted in PAT growing53% YoY (down 39.9% QoQ decline) to Rs2,509mn, 9.2%above our estimate of Rs2,297mn.

Naked cement realization drops; maintain estimates:Though blended realization fell just 0.8% QoQ (up 7.85%YoY) to Rs3,425/tonne, naked realization (blendedrealization minus freight cost per tonne) fell 4.8% QoQ (up5.2% YoY) to Rs2,737/tonne, inline with our estimate ofRs2,727/tonne. We retain FY10E and FY11E earnings.

Samruddhi Cement merger ratio key to valuation:Grasim Industries has spun off its cement assets intoSamruddhi as a precursor to its merger with UltraTech. Webelieve the merger ratio would be key to Ultratechsvaluation. We arrive at a fair valuation of Rs806-Rs945 forUltraTech, assuming a merger ratio of 1.5, 1.8 and 2 sharesof Samruddhi for one share of UltraTech.

Maintain Hold: Assigning a 50% probability to scenario II(merger ratio 1.8) and 25% each to scenario I (2) and III(1.5), we arrive at a target price of Rs884.

Key Data

Bloomberg Code UTCEM IN

Reuters Code ULTC.BO

Current Shares O/S (mn) 124.5Diluted Shares O/S(mn) 124.5


52 Wk H / L (Rs) 920/245


Face Value (Rs) 10

1 USD = Rs47.1


0

50

100

150

200

250

300

Nov-08 Jan- 09 Mar-09 May-09 Jul-09 Sep-09 Nov -09

UL TRAT ECH CEMENT NSE S&P CNX NIFTY INDEX


1M 6M 1Yr

UltraTech (9.9) 29.2 112.3

NIFTY (5.3) 28.6 57.3


Q2FY10 Update 6 November 2009

Y/E Mar (Rsmn) Q2FY10E Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variance (%)

Net sales 15,408 13,962 10.0 19,528 (21.1) 15,600 (1.2)

Power and Fuel 3,162 3,945 (20.0) 3,833 3,118

% of sales 21.0 28.0 (773) bps 20.0 20.0

Logistics 2,861 2,343 22.0 3,049 (6.2) 2605 9.8

% of sales 19.0 17.0 179 bps 16.0 295 bps 17.0 187 (Bps)

Other Expenses 2,772 2,617 2,454 13.0 2,795

% of sales 18.0 18.7 12.6 542 bps 18.0

EBITDA 4,700 2,967 58.0 7,168 (34.4) 4,641 1.3

EBITDA Margin (%) 30.5 21.3 925 bps 36.7 (620) bps 30 75.5 bps

EBITDA /ton 1,130 727 1,355 1,079

Dep and amortisation 967 808 936 1,000

Interest 298.7 308.8 330 390

EBT 3,435 1,851 86.0 5,902 (41.8) 3,251 5.7

Other income 308 278 343 200

PBT 3,743 2,129 75.8 6,245 (40.1) 3451 8.5

Provision for tax 1,234 487 2,067 1,306

Effective Tax Rate ( %) 33.0 22.9 33.1 27.3

PAT (adjusted) 2,509 1,642 53.0 4,178 (39.9) 2,297 9.2

NPM (%) 16.3 11.8 452.4 bps 21.4 (511) bps 14.7 156 bps

EPS (adjusted) 20.2 13.2 33.6 18.5

Source: Company, Centum Research


Y/E Mar (Rsbn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) Fully DEPS RoE (%) RoCE (%) P/BV P/E (x) EV/EBITDA (x)

FY07 49.7 46.8 14.3 28.8 7.8 248.7 63.1 55.9 24.2 5.2 11.6 7.5

FY08 56.2 13.2 17.3 30.8 10.1 28.7 81.1 45.2 23.8 3.4 9.0 6.4

FY09 65.6 16.7 17.2 26.2 9.8 (3.2) 78.6 31.0 18.6 2.5 9.3 6.3

FY10E 72.2 10.0 22.0 30.5 11.7 20.1 94.3 28.3 18.1 1.9 7.8 4.6

FY11E 71.1 (1.5) 17.3 24.3 8.6 (26.9) 69.0 16.9 11.8 1.7 10.6 5.5


Cement

INDIA

UltraTech Cement


20/32

20 UltraTech Cement

Inline results

Q2 net sales grew 10% YoY (but down 21% QoQ) to Rs15,408mn vs our estimate of Rs15,600mn.EBIDTA surged 58% YoY (down 34% QoQ) to Rs4,700mn (our estimate: Rs4,640mn). However,higher other income and lower interest cost resulted in PAT growing 53% YoY (down 39.9% QoQdecline) to Rs2,509mn, 9.2% above our estimate of Rs2,297mn.

Naked realization drops; indicates start of price war

Q2 net sales grew 10% YoY (21% QoQ decline) to Rs15,408mn, mainly due to the 1.8% YoYvolume increase to 4.16mt (down 21% QoQ) and 7.85% YoY increase in blended realization toRs3,425/tonne (down 0.83% QoQ). However, naked realization (blended realization minus freightcost per tonne) dropped 4.85% QoQ to Rs2,737/tonne, which is inline with our estimate ofRs2,727/tonne. Naked realization, the companys realization per tonne after deducting freight costfrom total realization, declined 4.8% QoQ, a clear indication of the emerging price competition inthe cement sector, particularly the southern zone. This also indicates that the companies need tosell in far off market leading to higher lead distances and freight cost.

Significant savings in power and fuel costs (down 20% YoY and 17.5% QoQ) helped offset higherlogistic cost (up 22% YoY and down 6.2% QoQ) and other expenses (up 6% YoY and 13% QoQ).

Operating profit rose 58% YoY (down 34.4% QoQ) to Rs4,700 mn. EBITDA margin expanded 925bp

YoY (and contracted 620bp QoQ) to 30.5%. Lower interest cost (down 3% YoY and 9.4% QoQ),higher depreciation (up 20% YoY) and other income (up 11% YoY) resulted in PBT growing 75.8%YoY (40% QoQ decline) to Rs3,743mn. However, increased tax outgo (up 153% YoY) curtailed PATgrowth to 52.8% YoY (40% QoQ decline) to Rs2,509mn.

Per tonne analysis

While blended realization increased 7.85% YoY (down 0.83% QoQ) to Rs3,425 per tonne, higherlogistics cost per tonne (up 19.86% YoY and 19.32% QoQ) led to naked realization falling 4.86%QoQ (up 5.2% YoY) to Rs2,737/tonne.

Raw material costs increased 14.9% YoY to Rs444, power and fuel costs were down 21.3% YoY and4.91% QoQ due to lower prices of international coal and increased use of captive power. Otherexpenses stood at Rs666/tonne, up 4% YoY and 43.65% QoQ, on account of higher maintenanceexpenses. EBIDTA/tonne increased 55.5% YoY (16.6 % Lower QoQ) to Rs1,130 which was 4.7%

higher than our estimate.

Exhibit 1: Per tonne realization and costs

(Rs/tonne) Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ% Q2FY10E Variance (%)

Blended Realization 3,425 3,176 7.9 3,453 (0.8) 3,333 2.8

Naked Realization 2,737 2,601 5.2 2,877 (4.9) 2,727 0.4

RM 444 387 14.9 428 3.8 428 3.9

Energy 760 966 (21.3) 725 4.9 725 4.9

Logistics 688 574 19.9 576 19.3 606 13.5

Other Exp 666 641 4.0 464 43.7 650 2.5

EBIDTA/Tonne 1,130 727 55.5 1,355 (16.6) 1,079 4.7



21/32

21 UltraTech Cement

Samruddhi Cement merger ratio key to valuation

Grasim Industries has spun off its cement assets into Samruddhi as a precursor to its merger withUltraTech. The merger would transform UltraTech into a 49.8mt pan-India Cement behemoth with20% all-India market share. We believe UltraTech would command a premium over peers onaccount of scale and pan-India exposure.

The merger ratio between Samruddhi Cement and UltraTech would determine the extent ofupside available for UltraTech shareholders. We believe that a fair merger ratio could be 1 share of

Ultratech for 1.8 shares of Samruddhi cement based on a 20% premium to Samruddhi Cementsbook value. We have considered three merger ratios of 2, 1.8 and 1.5 shares of Samruddhi for 1share of UltraTech. Scenario I and II are earnings-accretive for Ultratech Share holders.

Exhibit 2: UltraTechs valuation pre-merger

Valuation Pre Merger EPS (Rs) Fair Value (Rs)

FY10 E FY11E PE 10.25 xFY11E & USD 92

Existing estimates 94 69 707


Exhibit 3: Valuation of UltraTech post Samruddhi merger

Conversion Ratio(x) New EPS (Rs) Fair Value (Rs)

Samruddhi :Ultratech shares FY10 E FY11E

P/E 11.5 x FY11E(A)

EV/Ton of $125(B)

Average ofA and B

Scenario I 2.0:1 103 79 911 980 945

Scenario II 1.8:1 98 75 862 925 893

Scenario III 1.5:1 88 68 778 835 806


Maintain Hold

A re-rating of the stock would lead to the UltraTechs fair valuation going up from 10.2x FY11E to11.5x FY11E and EV/tonne of $92/tonne to $125. Based on the average of 11.5x FY11E and EV/tonneof $125, UltraTech would be fairly valued at between Rs806-Rs945. Assigning a 50% probability to

scenario II, which we consider more likely scenario and 25% each to scenario I and III, we arrive at atarget price of Rs884. We recommend Hold.


22/32

22 UltraTech Cement

Financials

xhibit 4: Income Statement/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

evenues 49,684 56,238 65,636 72,223 71,107

rowth in revenues (%) 46.8 13.2 16.7 10.0 (1.5)

aw Material 4,230 6,227 8,442 8,807 10,456

% of Sales 8.5 11.1 12.9 12.2 14.7

ower and Fuel 11,392 12,542 17,142 14,208 13,869

% of Sales 22.9 22.3 26.1 19.7 19.5

reight 8,880 9,345 10,712 12,409 13,839

% of Sales 17.9 16.6 16.3 17.2 19.5

ther Expenses 7,548 9,200 10,727 12,281 13,055

% of Sales 15.2 16.4 16.3 17.0 18.4

BITDA 14,316 17,308 17,185 22,029 17,300

BITDA Margin 28.8 30.8 26.2 30.5 24.3

BIDTA/Ton (Rs) 837 1,004 942 1,093 831

epreciation 2,287 2,396 3,258 4,042 4,475

BIT 12,030 14,912 13,927 17,988 12,825

nterst expenses 868 757 1,256 1,560 1,360

BT from operations 11,161 14,155 12,671 16,428 11,465

ther non op. income 592 998 1,007 1,100 1,350

BT before extra-ord. items 11,753 15,153 13,678 17,528 12,815

xtra-ordinary income/ (exp) 0 0 0 0 0

BT 11,753 15,153 13,678 17,528 12,815

rovision for tax 3,887 5,038 3,882 5,784 4,229

ffective tax rate 33 33 28 33 33

AT 7,867 10,115 9,796 11,744 8,586

Minority Interest 17.5 14.6 15.6 0 0


djusted PAT 7,849 10,101 9,781 11,744 8,586

rowth in PAT (%) 248.7 28.7 (3.2) 20.1 (26.9)

AT margin 15.8 18.0 14.9 16.3 12.1

ource: Company, Centrum Research Estimate

xhibit 5: Balance Sheet/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

hare Capital 1,245 1,245 1,245 1,245 1,245

eserves 16,437 25,781 34,868 45,738 53,450

hareholders' fund 17,682 27,026 36,113 46,983 54,695

Minority Interest 53 57 68 68 68

ebt 15,786 17,405 21,429 20,929 20,429

eferred Tax Liability 5,621 5,454 7,276 8,276 9,276

otal Capital Employed 39,142 49,942 64,885 76,255 84,467

ross Block 48,199 50,050 74,375 84,375 91,705

ccumulated dep. 22,742 24,795 27,759 31,801 36,276

et Block 25,458 25,255 46,616 52,574 55,429

apital WIP 6,972 22,834 6,783 7,113 8,693

otal Fixed Assets 32,429 48,089 53,398 59,687 64,122

nvestments 4,592 1,467 10,095 10,095 10,095

nventories 4,412 6,197 7,056 7,981 8,298

ebtors 1,739 2,026 1,889 2,137 2,221

ash & bank balances 1,001 1,143 1,047 4,550 8,170

oans and Advances 2,543 3,830 3,908 4,066 4,316

otal current assets 9,695 13,196 13,899 18,733 23,004

urrent lia & provisions 7,574 12,809 12,512 12,264 12,751

et current assets 2,121 387 1,388 6,469 10,254

Misc. Expenditure - - - - -

otal Assets 39,142 49,942 64,881 76,255 84,467

ource: Company, Centrum Research Estimate

Exhibit 6: Cash FlowY/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

CF from operating


Depreciation 2,287 2,396 3,258 4,042 4,475

Interest expenses/other 639 423 974 1,560 1,360

OP profit before WC change 14,679 17,973 17,910 23,129 18,650

Working capital adjustment 738 674 (1,302) (1,578) (165)




Extraordinary (Inc) - - - - -

Cash From Op Ex OI 11,208 13,809 14,479 16,767 15,256

CF from investing

Capex (7,628) (17,921) (8,345) (10,330) (8,910)

Investment (2,838) 3,502 (8,182) - -


CF from financing

Proceeds from sh cap & prem. - - - - -

Borrowings/ (Repayments) 1,310 1,667 3,831 (500) (500)

Interest paid (892) (890) (1,176) (1,560) (1,360)

Dividend paid ( 824) (8) (740) (874) (874)

Cash from financing (406) 769 1,915 (2,934) (2,734)

Net cash increase/ (dec) 335 158 (133) 3,503 3,612

Source: Company, Centrum Research Estimate

Exhibit 7: Key RatiosY/E Mar FY07 FY08 FY09 FY10E FY11E

Margin Ratios (%)

EBITDA Margin 28.8 30.8 26.2 30.5 24.3

PBIT Margin 24.2 26.5 21.2 24.9 18.0

PBT Margin 23.7 26.9 20.8 24.3 18.0

PAT Margin 15.8 18.0 14.9 16.3 12.1

Growth Ratios (%)Revenues 46.8 13.2 16.7 10.0 (1.5)

EBITDA 149.1 20.9 (0.7) 28.2 (21.5)

Net Profit 248.7 28.7 (3.2) 20.1 (26.9)

Return Ratios (%)

ROCE 24.2 23.8 18.6 18.1 11.8

ROIC 26.6 25.8 20.5 21.3 13.8

ROE 55.9 45.2 31.0 28.3 16.9

Turnover Ratios




Avg payment perio d (days) 54.9 82.0 68.6 61.1 64 .6


Per share (Rs)

Fully diluted EPS 63.1 81.1 78.6 94.3 69.0CEPS 81.4 100.4 104.7 126.8 104.9

DPS 4.0 5.0 5.0 6.0 6.0

Book Value 142.0 217.1 290.1 377.4 439.4

Solvency ratios

Debt/ Equity 0.9 0.6 0.6 0.4 0.4

Net Debt/Equity 0.8 0.6 0.6 0.3 0.2

Interest coverage 16.5 22.9 13.7 14.1 12 .7


P/E 11.6 9.0 9.3 7.8 10.6

P/BV 5.2 3.4 2.5 1.9 1.7

EV/ EBITDA 7.5 6.4 6.3 4.6 5.5

EV/ Sales 2.2 2.0 1.7 1.5 1.4

M-Cap/ Sales 1.8 1.6 1.4 1.3 1.3

EV/Ton (US$) 99.9 97.2 86.8

Source: Company, Centrum Research Estimate


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Sell

Target Price: Rs91

CMP: Rs108*Downside: 15.7%*as on 4 November 2009


Fraught with challengesIndia Cements reported better-than-expected Q2 on theback of higher volumes and lower-than-expected declinein realization. Cement prices fell towards the end of Q2(more than anticipated) and we expect to see the impactof this in the forthcoming quarters. We reiterate Sell witha revised target price of Rs91 (earlier Rs114).

Result beats expectation: Net sales increased 7% YoYand 4.3% QoQ to Rs9,949mn, 2% higher than ourestimate. Operating profit at Rs3,032mn (up 1% YoY and5.9% QoQ) and net profit at Rs1,377mn (down 11% YoYand 6.5% QoQ) were 24% and 20%, respectively, higherthan our estimates.

Pricing pressure to reflect from Q3FY10: Cement priceshave fallen sharply in parts of India Cements key markets

and are declining in other regions. The impact of thisdecline would be reflected from Q3FY10.

Revisit of expansion plan to increase capex: IndiaCements capex is slated to increase from Rs8bn toRs15bn over FY10-11E, as it now plans to set up itsplanned 100MW power plant itself. A promoter-controlledentity was to set-up the plant, according to its earlier plan.

Challenges ahead; Maintain Sell: At CMP, the stocktrades at 9.6x FY11E earnings, 5.9x EV/EBIDTA and 0.83xP/BV. Its assets are valued at US$81 on its FY11E capacityof 14.3mt. Given the challenging dynamics in thesouthern zone and low visibility on earnings, we reiterateSell with a revised target price of Rs91, valuing the stock

at 8x FY11E earnings. Switch to Shree Cements (Hold) orUltratech Cements (Hold) and Grasim Industries (Hold).

Key Data

Bloomberg Code ICEM IN

Reuters Code ICMN.BO

Current Shares O/S (mn) 282.5Diluted Shares O/S(mn) 282.5

Mkt Cap (Rsbn/USDmn) 30.5/646.4

52 Wk H / L (Rs) 180/79

Daily Vol. (3M NSE Avg.) 2,142,874

Face Value (Rs) 10

1 USD = Rs47.1


0

50

100

150

200

250


IN DIA CEMEN TS N SE S& P C NX NIFTY IN DEX


1M 6M 1Yr

India C. (17.7) (7.9) 21.1

NIFTY (5.8) 28.6 57.3


Q2FY10/ Target price change 6 November 2009

Y/E March (Rsmn) Q2FY10 Q2FY09 YoY (%) Q1FY10 QoQ (%) Q2FY10E Variation(%)

Net sales 9,949 9,296 7.0 9,535 4.3 9,737 2.2

RM 1,189 946 1123 1,220 (2.5)

% of Sales 12 10 12 13 (57.4)

Power & Fuel 2,442 2,263 2,438 2,439 0.1

% of Sales 25 24 26 25 (50.7)

Logistics 1,459 1,276 1,308 1,463 (0.3)

% of Sales 15 14 14 15 (36.7)

Other Expenses 1,250 1,276 1,566 1,615 (22.6)

% of Sales 13 14 16 17 (402.3)

Operating Profit 3,032 2,991 1.3 2,863 5.9 2,449 23.8

OPM (%) 30 32 (171)bps 30 44bps 25 531bpsDepreciation & amortization 572 498 14.9 571 0.2 583 (1.9)

Interest expenses 374 248 50.7 385 (2.8) 290 29.0

EBT 2,086 2,245 1,908 1,576 32.3

Other income 0 0 (100.0) 68 (100.0) 125 (100.0)

PBT 2,086 2,246 (7.1) 1,976 5.6 1,701 22.6

Extraordinary Item (13) (296) 210 25

Provision for tax 704 608 15.9 755 (6.8) 561 25.4

- effective tax rate 34 31 35 33 2.9

PAT (reported) 1,369 1,343 2.0 1,430 (4.3) 1,165 17.5

Exceptional item (post tax) (8) (203) 137 (17)

PAT (adjusted) 1,377 1,546 (10.9) 1,293 6.5 1,148 19.9

NPM (%) 14 17 (279)bps 14 12 205bps



Y/E Mar (Rsbn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY % Fully DEPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) P/BV

FY07 22.6 46.3 7.3 32.6 4.8 791.4 18.4 41.9 20.9 5.9 6.2 2.0

FY08 30.6 35.6 10.9 35.7 6.7 39.2 23.7 33.1 19.1 4.6 4.0 1.2

FY09 34.3 12.1 10.0 29.1 4.9 (26.8) 17.3 17.5 12.0 6.3 4.8 1.0

FY10E 35.9 4.9 11.0 30.6 4.9 (0.0) 17.3 15.3 10.7 6.3 4.6 0.90

FY11E 35.6 (0.8) 8.8 24.7 3.2 (34.4) 11.3 9.0 7.2 9.6 5.9 0.83


Cement

INDIA

India Cements


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24 India Cement

Result above expectations on higher volumes and realization

Q2 net sales at Rs9,949mn (up 7% YoY and 4.3% QoQ) rose 2% higher than our estimate. Operatingprofit at Rs3,032mn (up 1% YoY and 5.9% YoY) and net profit at Rs1,377mn (down 11% YoY and 6.5%QoQ) were 24% and 20%, respectively, higher than our estimates. Net sales was driven by 14.8% YoYand 13.4% QoQ volume growth to 2.79mt and 1.2% YoY (and 3.5% QoQ) decline in net realization toRs3,590 per tonne. Revenue from shipping freight, Indian Premier League (IPL) and wind power stoodat Rs142mn (vs Rs281.1mn in Q2FY09), Rs79mn (Rs138mn) and Rs7.57mn (Rs49.1mn), respectively.

While power & fuel cost increased 8% YoY, raw material (up 26% YoY) and logistics costs (up 14% YoY)were inline with our estimate. Employee cost (up 44% YoY) was higher than our estimate while otherexpenses (down 18% YoY) came 23% lower than our estimate on account of lower IPL revenue as wellas costs booked on account of IPL and profits reported in shipping freight (Rs37mn) and IPL (Rs54mn).This led to YoY flat operating profit (up 5.9% QoQ) of Rs3,032mn (24% higher than our estimate).Margin contracted 171bp YoY (but up 44bp QoQ) to 30%. Higher depreciation (up 15% YoY toRs572mn) and interest expenses (up 51% YoY to Rs374mn), and provisioning for tax (34% of PBT toRs704mn) resulted in adjusted PAT declining 11% YoY to Rs1,377 mn.

Impact of pricing pressure to be felt Q3FY10 onward

Cement prices fell sharply in parts of India Cements key markets of Andhra Pradesh and declining in

remaining parts of the Southern and Western regions. The impact of this decline would be felt fromQ3FY10. For instance, cement prices in Hyderabad which hovered at Rs220-230/bag until late July2009, corrected to Rs160-170/bag by end September. Prices in India Cements other key markets toocorrected by about Rs20/bag during the same period.

While the full impact of this decline would get reflected in Q3FY10 numbers, price environment in thesouthern and western zones remains challenging, as supply from new capacities is slated to increase.These include, JK Cements (3mt), Kesoram Industries (1.65mt), Dalmia Cement (5mt), Orient Paper &Industries (1.6mt), Bharathi Cements (2.5mt), Zuari Cements (2mt), NCL Industries (1.5mt) and AndhraCements (2mt).

Expansion plans

India Cement commissioned a cement clinkerization facility at its Malkapur and Parli grinding units in

the current year. The kiln at Chilamkur (Tamil Nadu) is being upgraded from 3,600tpd to 4,500tpd.The company expects to add a new line in Rajasthan of 1.5mt by mid 2010. It has taken steps to set-uptwo 100 MW power plants - one in Tamil Nadu and other in Andhra Pradesh. The company has alsointimated that it is in advanced stages of finalizing the acquisition of coal concession in Indonesia tomeet the captive requirements of cement and power generation.

However, India Cements capex would increase from Rs8bn to Rs15bn over FY10-11E, as it now plans toset up its planned 100MW power plant itself. A promoter-controlled entity was to set-up the plant,according to its earlier plan.

Maintain Sell despite sharp underperformance

India Cements has underperformed the Nifty by 61% and Cement Index by 35% since our initiationwith a Sell in March 2009. At CMP, the stock trades at a 9.6x FY11E earnings, 5.9x EV/EBIDTA and 0.83x

P/BV. Its assets are available at US$81 on its FY11E capacity of 14.3mt. Given the challenging dynamicsin the southern zone and low visibility on earnings, we reiterate our Sell rating on the stock with atarget price of Rs91, valuing it at 8x FY11E earnings. We advise investors to switch to Shree Cements(Hold) a play in north India or Ultratech Cements (Hold) and Grasim Industries (Hold) (both pan Indiaplayers).


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25 India Cement

Exhibit 1: India Cement has underperformed Nifty and the Centrum cement index

ICL Performance Vs Nifty & Cement Space

80

100

120

140

160

180

200

Mar-09

Mar-09

Apr-09

Apr-09

May-09

May-09

Jun-09

Jun-09

Jul-09

Jul-09

Aug-09

Aug-09

Sep-09

Sep-09

Sep-09

Oct-09

Oct-09

(%)

Nifty Centrum Cement Index India Cements


Exhibit 2: Peer comparison

India Cement Shree Cement

Capacity 14.31 11.4

Presence South and West North and Central

CMP (Rs) 108 1,574

PE (X) 9.6 7.3

EV/EBIDTA (X) 5.9 4.9

EV/Ton ($) 81 83.4

P/BV (X) 0.83 1.6

Source: Companies, Centrum Research


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26 India Cement

Financials

xhibit 3: Income Statement/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

evenues 22,552 30,578 34,268 35,932 35,638

rowth in revenues (%) 46.3 35.6 12.1 4.9 (0.8)

ower and Fuel 5,488 6,907 8,917 8,326 8,693

% of Sales 24 23 26 23 24

reight 3,588 4,600 4,860 5,319 5,832

% of Sales 15.9 15.0 1 4.2 1 4.8 16.4

ther Expenses 2,735 3,437 4,982 5,139 5,590

% of Sales 12.1 11.2 1 4.5 1 4.3 15.7

BITDA 7,345 10,930 9,962 10,978 8,816

BITDA Margin 32.6 35.7 29.1 30.6 24.7

BIDTA/Ton (Rs) 871 1,185 1,093 1,115 816

epreciation 1,026 1,279 2,033 2,404 2,729

BIT 6,318 9,650 7,928 8,574 6,087

nterst expenses 1,498 1,099 1,122 1,208 1,373

BT from operations 4,820 8,552 6,807 7,366 4,714

ther non operating income 101 275 470 289 432

BT before extra-ordinary items 4,922 8,827 7,276 7,656 5,146

xtra-ordinary income/ (exp) 0 (378) (794) 0 0

BT 4,922 8,448 6,482 7,656 5,146

rovision for tax 131 2,071 2,161 2,586 1,758

ffective tax rate 2.7 24.5 33.3 33.8 34.2

AT 4,790 6,377 4,321 5,069 3,388

Minority Interest


djusted PAT 4,790 6,667 4,879 4,878 3,198

rowth in PAT (%) 791.4 39.2 (26.8) (0.0) (34.4)

AT margin 21.2 21.8 14.2 13.6 9 .0


xhibit 4: Balance Sheet/E Mar (Rsmn) FY07 FY08 FY09 FY10E FY11E

Cement Sector - Q2FY10 Update - Centrum-061109

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