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Indian Cement Sector

A Play on Volume Growth… Size of capacity increase to be the benchmark for determining incremental volume share for players – Invest in players who have well‐defined capex plans and growth oriented strategy!!!

• Elections will sooner or later result in a spurt in demand • Industry cannot afford to break the price discipline • Current profitability is not sufficient enough for a smooth execution of planned capacities • Realistically, utilisations will improve as delays in execution of few capacities are inevitable • Industry remains and will remain focused on minimum required EBITDA/tonne • Valuations will be largely dependent on volume growth potential of cement manufacturers • “Average” profit margins of Tier I and Other cement manufacturers do not always differ very

significantly, though Tier I players command significant and consistent brand premium

“Capacity additions remains in favor of mid‐caps, barring aggressive major UltraTech Cement” Vaibhav Agarwal

Indian Cement Sector Notwithstanding growth; discipline won’t be compromised!

28 January 2013PhillipCapital (India) Pvt. Ltd.

Demand surprise on the cards, given the election era… • It is often argued that elections can trigger the demand substantially. To

verify this theory, we have analysed the demand trends across various states and regions during the pre‐election era / election era.

• The results indicate that this theory is true and on an average, elections can trigger ~15% demand growth.

• Given the upcoming elections across various states of India, we strongly believe, cement demand can surprise us positively in 4QFY13E and FY14E. Over FY13E‐17E, we believe cement demand has the potential to grow by a CAGR of minimum of 7%, even in a worst case scenario. In a best case scenario, demand has a potential to grow at CAGR of +10% over FY13E‐17E.

Cement pricing to remain strong; realistically utilisations will improve • We strongly believe cement prices will remain strong on pan‐India basis.

Going as per the book schedule of capacity additions, utilisations may remain low. However, given the delays / deferrals of new capacities (as cash flows are not strong enough for a smooth execution of all planned additions); realistically we believe utilisations will show signs of improvement hereon.

• Penalty levied by Competition Commission of India (CCI) on eleven cement manufacturers of the Indian cement industry believing these players are forming a cartel to increase prices is keeping and likely to continue to keep cement manufacturers indifferent towards pricing.

• In most cases we have factored in a marginal 5% price hike on an annual basis. Weighted average cement realisations have grown at CAGR of 9.6% between FY04‐12 as against a cost CAGR of 9.0%. Hence, in our opinion a 5% annual price hike is the least we can expect from the industry.

• Strong cement prices is a necessity for the industry to execute smooth capex. In our thesis we will also evaluate a need for a healthy pricing environment and put forward some strong arguments why we expect pricing to remain favorable.

Timely execution of capacity additions will be far lower than actually planned • Industry has created 141 mn tonnes p.a. of new capacity over the last five

years (Since FY07) and another 135 mn tonnes is in pipeline for the next 3 years. If it goes through on time, effectively industry will be adding ~280mn tonnes of capacity over a 10 year time line.

• It is to be noted that the said 135 mn tonnes of new capacity addition is the possible and planned additions by the industry. Actual additions are likely to be materially lower than planned additions on account of the current surplus capacity available and lack of sufficient cash flows to support these additions, as per schedule (Discussed in detail in later sections of this report). Voluntary deferrals will also lead to delayed capex.

• Industry players have now understood the importance of behaving maturely and we will highlight the strong discipline of the industry in various sections of this report. Focused and dedicated cement manufacturers will continue to grow with strong capex while players lacking vision of capacity additions will remain at a clear disadvantage and may ultimately seek an exit.

Companies Covered ACC Ltd. CMP Rs1,331Reco SELLTarget Price Rs1,142 Ambuja Cements CMP Rs199Reco BUYTarget Price Rs255 UltraTech Cement CMP Rs1,918Reco BUYTarget Price Rs2,727 Shree Cement CMP Rs4,456Reco BUYTarget Price Rs5,046 India Cements CMP Rs88Reco BUYTarget Price Rs131 Mangalam Cement CMP Rs155Reco BUYTarget Price Rs217 Dalmia Bharat CMP Rs182Reco BUYTarget Price Rs294 OCL India CMP Rs150Reco BUYTarget Price Rs283 JK Cement CMP Rs331Reco BUYTarget Price Rs485 JK Lakshmi Cement CMP Rs146Reco BUYTarget Price Rs211 HeidelbergCement India CMP Rs50Reco BUYTarget Price Rs81 Report priced as of 25th January 2013 Vaibhav Agarwal (+ 9122 6667 9967 [email protected]

– 2 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / INDIAN CEMENT SECTOR

Table of Contents

Valuation & Operating Matrix ............................................................. 3

Demand: Positive surprise seems very likely ....................................... 4

Overcapacity will remain a long‐term reality ....................................... 13

Capacity Additions ................................................................................ 14

Industry’s Operating Matrix – Simple & Weighted Avg. ..................... 15

Why cement pricing will remain strong? ............................................. 20

Absolute Prices V/s. Absolute Volumes ............................................... 27

High capex makes healthy cement prices a necessity ......................... 30

Cement Prices Vs. Average Capacity Utilisations ................................. 31

Regional Section ................................................................................... 32 North India ............................................................................................................... 33

South India ............................................................................................................... 36

East India .................................................................................................................. 43

West India ................................................................................................................ 49

Central India ............................................................................................................. 53

Companies Covered ACC Ltd. ................................................................................................ 59

Ambuja Cements ................................................................................... 66

UltraTech Cement ................................................................................. 73

Shree Cement ........................................................................................ 81

The India Cements ................................................................................ 87

Mangalam Cement ............................................................................... 93

Dalmia Bharat ....................................................................................... 98

OCL India ............................................................................................... 105

JK Cement .............................................................................................. 111

JK Lakshmi Cement ............................................................................... 118

HeidelbergCement India ....................................................................... 124 Note: Please also refer our separate attachment in the email on Pictorial Depiction of Plants for better and easy understanding of investors of the cement manufacturing process.

– 3 of 133 –


Valuation & Operating Matrix

Company CMP Rating Target Price % Upside / _______EPS, (Rs) ______ _______P/E, x________ (Rs) (Rs) Downside on TP FY13E FY14E FY13E FY14E

ACC Ltd.* 1,331 Sell 1,142 ‐14% 82.4 92.9 16.2 14.3Ambuja Cements Ltd.* 199 Buy 255 28% 12.7 14.8 15.6 13.5UltraTech Cement Ltd. 1,918 Buy 2,727 42% 105.1 129.4 18.2 14.8India Cements Ltd. 88 Buy 131 48% 10.3 14.4 8.6 6.1Shree Cement Ltd. 4,456 Buy 5,046 13% 224.0 330.6 19.9 13.5JK Cement Ltd. 331 Buy 485 47% 39.8 41.6 8.3 8.0Mangalam Cement Ltd. 155 Buy 217 40% 34.6 40.4 4.5 3.8JK Lakshmi Cement Ltd. 146 Buy 211 45% 13.5 13.9 10.8 10.5HeidelbergCement India Ltd.* 50 Buy 81 61% 1.9 4.2 25.9 11.8Dalmia Bharat Enterprises Ltd. 182 Buy 294 61% 35.7 54.6 5.1 3.3OCL India Limited 150 Buy 283 89% 28.1 43.8 5.3 3.4

Company __EV/EBITDA, x__ _EV/Tonne, US$_Target

EV/tonneDiscount/Premium to Replacement Cost at _____Capacity_____ Growth

FY13E FY14E FY13E FY14E FY14E US$150/tonne FY13E FY14E FY14E

ACC Ltd.* 10.1 8.4 148 145 121 ‐19% 29.1 29.1 0%Ambuja Cements Ltd.* 9.5 7.5 182 165 220 47% 27.4 29.5 8%UltraTech Cement Ltd. 11.8 8.7 208 176 243 62% 52.9 63.1 19%India Cements Ltd. 5.6 4.3 62 57 74 ‐51% 15.6 15.6 0%Shree Cement Ltd. 11.0 8.1 214 196 204 36% 13.5 14.5 7%JK Cement Ltd. 5.5 5.9 78 99 123 ‐18% 8.6 8.8 2%Mangalam Cement Ltd. 3.8 3.3 60 48 58 ‐61% 2.0 3.3 63%JK Lakshmi Cement Ltd. 7.8 6.8 117 91 107 ‐28% 5.3 8.0 51%HeidelbergCement India Ltd.* 22.9 7.0 79 72 72 ‐52% 6.3 6.3 0%Dalmia Bharat Enterprises Ltd. 5.5 4.0 52 53 64 ‐57% 13.6 14.1 3%OCL India Limited 5.0 3.9 69 64 65 ‐56% 5.5 6.8 25%

Company _________Volume_________ Growth ______EBITDA/tonne_______ Growth FY13E FY14E FY14E FY13E FY14E FY14E

ACC Ltd.* 24.2 25.6 6% 933 1023 10%Ambuja Cements Ltd.* 22.6 25.6 13% 1231 1318 7%UltraTech Cement Ltd. 48.5 53.9 11% 1052 1234 17%India Cements Ltd. 11.2 11.8 6% 846 914 8%Shree Cement Ltd. 12.7 15.3 20% 1163 1264 9%JK Cement Ltd. 6.5 7.1 11% 1016 1071 5%Mangalam Cement Ltd. 1.9 2.1 14% 859 1020 19%JK Lakshmi Cement Ltd. 4.5 5.2 16% 833 973 17%HeidelbergCement India Ltd.* 3.0 5.1 66% 368 661 79%Dalmia Bharat Enterprises Ltd. 5.7 7.2 26% 1110 1247 12%OCL India Limited 3.6 4.0 13% 1139 1437 26%

Source: PhillipCapital India Research Estimates

*Calendar year end

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Demand: Positive surprise seems very likely Do Elections Really Impact Demand Growth? Spurt in cement demand is often correlated to the pre‐election / election spending by the state / political parties / various governments. We have therefore highlighted the historical variation in cement demand across various states of India during pre‐election / election phase. The same can be elaborated in the table below: State Region Historical average Demand Growth during Pre‐

Election / Election Phase

Madhya Pradesh Central 15.0%Uttar Pradesh Central 9.6%Average ‐ Central India 12.3%

Arunachal Pradesh. East 21.1%Assam East 26.8%Bihar East 44.3%Chhattisgarh East 9.1%Jharkhand East 16.1%Manipur East 10.4%Meghalaya East 31.1%Mizoram East NANagaland East NAOdisha East 15.9%Sikkim East NATripura East NAWest Bengal East 5.7%Average ‐ East India 20.1%

Haryana North 28.7%Himachal Pradesh North 17.3%Jammu & Kashmir* North 1.4%New Delhi North 35.3%Punjab North 13.0%Rajasthan North 6.3%Uttarakhand North 4.5%Average ‐ North India 15.2%

Andhra Pradesh South 21.8%Goa South 14.4%Karnataka South 6.2%Kerala South 8.6%Puducherry South ‐5.7%Tamil Nadu South 5.4%Average ‐ South India 8.5%

Gujarat West 15.9%Maharashtra West 6.4%Average ‐ West India 11.2%

All India Average 14.8%

Source: PhillipCapital India Research

It is clear from the above table that elections do have a significant impact on cement demand growth. Given the upcoming elections in various states of India and based on the historical trends, we will now evaluate the potential of demand growth in the country and the various regions in various scenarios (Optimistic / Realistic / Pessimistic Scenario) over the next five years.

On an average, results indicate thehistorical average demand growthduring pre‐election / election phase is @~15%.

2013 and 2014 will see 17 statesentering election phase (10 states in2013 and 7 states in 2014).

East India has seen the maximumincrease in demand during electionsphase @ 20.1% while South India hasseen the minimal impact @8.5%.

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Optimistic Scenario – Demand Growth – FY13E‐17E In optimistic scenario, the following are our key assumptions: • Demand growth in consumption in states going in for elections – 20% • Demand growth for other states of the country ‐ 8% The following table summarizes our thesis on demand growth in an OPTIMISTIC scenario.

All India North South East West Central

FY13E Demand Projection

Average Contribution by States going in for Elections as % of All India

Consumption / Regional Consumption ‐ (A)

29.30% 49.58% 22.70% 3.93% 37.81% 31.44%

Total Despatches ‐ FY12 (mn tonnes) ‐ (B) 224.8 55.2 67.1 33.9 34.8 33.8

(A*B) = (C ) 65.9 27.4 15.2 1.3 13.1 10.6

Expected consumption growth for States going in for Elections 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Incremental Demand for States going in for Elections (mn tonnes) 13.2 5.5 3.0 0.3 2.6 2.1

Despatches of Other States (mn tonnes) 158.9 27.8 51.9 32.6 21.6 23.2

Expected minimum consumption growth for other States 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Incremental Demand for Other States (mn tonnes) 12.7 2.2 4.2 2.6 1.7 1.9

Total Incremental Demand (mn tonnes) 25.9 7.7 7.2 2.9 4.4 4.0

Demand Growth 11.5% 13.9% 10.7% 8.5% 12.5% 11.8%


Average (FY05‐FY12) Contribution by States going in for Elections as % of All

India Consumption / Regional Consumption ‐ (A)

30.02% 21.21% 28.60% 30.91% 62.19% 0.00%


(A*B) = (C ) 75.3 13.3 21.3 11.4 24.3 ‐


Incremental Demand for States going in for Elections (mn tonnes) 15.1 2.7 4.3 2.3 4.9 ‐





Demand Growth 11.6% 10.5% 11.4% 11.7% 15.5% 8.0%




5.72% 3.03% 0.00% 30.74% 0.00% 0.00%


(A*B) = (C ) 16.0 2.1 ‐ 12.6 ‐ ‐


Incremental Demand for States going in for Elections (mn tonnes) 3.2 0.4 ‐ 2.5 ‐ ‐





Demand Growth 8.7% 8.4% 8.0% 11.7% 8.0% 8.0%




18.92% 0.00% 47.41% 33.15% 0.00% 0.00%


(A*B) = (C ) 57.5 ‐ 42.4 15.2 ‐ ‐


Incremental Demand for States going in for Elections (mn tonnes) 11.5 ‐ 8.5 3.0 ‐ ‐





Demand Growth 10.3% 8.0% 13.7% 12.0% 8.0% 8.0%

Assuming 20% growth in cementconsumption for states going in forelections and 8% growth for otherstates.

– 6 of 133 –





15.98% 25.15% 1.10% 0.28% 0.00% 68.56%


(A*B) = (C ) 53.6 20.5 1.1 0.1 ‐ 32.6


Incremental Demand for States going in for Elections (mn tonnes) 10.7 4.1 0.2 0.0 ‐ 6.5





Demand Growth 9.9% 11.0% 8.1% 8.0% 8.0% 16.2%

Total Demand as at end of FY17E 368.5 90.3 110.0 55.5 56.9 55.3


Demand CAGR in an optimistic scenario (FY13E‐17E)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%



In an optimistic scenario, all Indiademand growth is likely @ CAGR of10.4% p.a.; coincidentally, regionaldemand growth (across all regions) isalso likely @ 10.4% p.a.

– 7 of 133 –


Realistic Scenario – Demand Growth – FY13E‐17E In realistic scenario, the following are our key assumptions: • Demand growth in consumption in states going in for elections – Historical Actual (All

India at 14.8%) • Demand growth for other states of the country ‐ 7% The following table summarizes our thesis on demand growth in a REALISTIC scenario.





29.30% 49.58% 22.70% 3.93% 37.81% 31.44%


(A*B) = (C ) 65.9 27.4 15.2 1.3 13.1 10.6

Actual historical consumption growth for States going in for Elections 14.8% 15.2% 8.5% 20.1% 11.2% 12.3%






Demand Growth 9.3% 11.1% 7.3% 7.5% 8.6% 8.7%




30.02% 21.21% 28.60% 30.91% 62.19% 0.00%


(A*B) = (C ) 73.7 13.0 20.6 11.3 23.5 ‐







Demand Growth 9.3% 8.7% 7.4% 11.0% 9.6% 7.0%




5.72% 3.03% 0.00% 30.74% 0.00% 0.00%


(A*B) = (C ) 15.4 2.0 ‐ 12.4 ‐ ‐







Demand Growth 7.4% 7.2% 7.0% 11.0% 7.0% 7.0%




18.92% 0.00% 47.41% 33.15% 0.00% 0.00%


(A*B) = (C ) 54.6 ‐ 39.3 14.9 ‐ ‐







Demand Growth 8.5% 7.0% 7.7% 11.3% 7.0% 7.0%

Assuming 14.8% (historic actual) growthin cement consumption for states goingin for elections and 7% growth for otherstates.

– 8 of 133 –





15.98% 25.15% 1.10% 0.28% 0.00% 68.56%


(A*B) = (C ) 50.0 19.2 1.0 0.1 ‐ 30.8







Demand Growth 8.2% 9.1% 7.0% 7.0% 7.0% 10.6%



Demand CAGR in a realistic scenario (FY13E‐17E)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%



In a realistic scenario, all India demandgrowth is likely @ CAGR of 8.6% p.a.;demand CAGR is likely to be the highestin East India @ 9.6% and least in SouthIndia @ 7.3%.

– 9 of 133 –


Pessimistic Scenario – Demand Growth – FY13‐17E In pessimistic scenario, the following are our key assumptions: • Demand growth in consumption in states going in for elections – Historical Actuals (All

India at 14.8%) • Demand growth for other states of the country – 6.5% The following table summarizes our thesis on demand growth in a PESSIMISTIC scenario.





29.30% 49.58% 22.70% 3.93% 37.81% 31.44%


(A*B) = (C ) 65.9 27.4 15.2 1.3 13.1 10.6







Demand Growth 8.9% 10.8% 6.9% 7.0% 8.3% 8.3%




30.02% 21.21% 28.60% 30.91% 62.19% 0.00%


(A*B) = (C ) 73.5 13.0 20.5 11.2 23.4 ‐







Demand Growth 9.0% 8.3% 7.1% 10.7% 9.4% 6.5%




5.72% 3.03% 0.00% 30.74% 0.00% 0.00%


(A*B) = (C ) 15.3 2.0 ‐ 12.3 ‐ ‐







Demand Growth 7.0% 6.8% 6.5% 10.7% 6.5% 6.5%




18.92% 0.00% 47.41% 33.15% 0.00% 0.00%


(A*B) = (C ) 54.0 ‐ 38.8 14.7 ‐ ‐







Demand Growth 8.1% 6.5% 7.4% 11.0% 6.5% 6.5%

Assuming historic actual growth ratesfor growth in cement demand for statesgoing in for elections and 6.5% growthrate for other states.

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15.98% 25.15% 1.10% 0.28% 0.00% 68.56%


(A*B) = (C ) 49.3 18.9 1.0 0.1 ‐ 30.3







Demand Growth 7.8% 8.7% 6.5% 6.5% 6.5% 10.5%



Demand CAGR in a pessimistic scenario (FY13E‐17E)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%



In a pessimistic scenario, all Indiademand growth is likely @ CAGR of7.2% p.a.; demand CAGR is likely to bethe highest in East India @ 8.2% andleast in South India @ 5.9%.

– 11 of 133 –


Demand Growth Summary – FY13‐17E Year / Scenario All India North South East West Central

Optimistic

FY13E 11.5% 13.9% 10.7% 8.5% 12.5% 11.8%

FY14E 11.6% 10.5% 11.4% 11.7% 15.5% 8.0%FY15E 8.7% 8.4% 8.0% 11.7% 8.0% 8.0%

FY16E 10.3% 8.0% 13.7% 12.0% 8.0% 8.0%

FY17E 9.9% 11.0% 8.1% 8.0% 8.0% 16.2%

Demand CAGR (FY13E‐17E) 10.4% 10.4% 10.4% 10.4% 10.4% 10.4%

Realistic

FY13E 9.3% 11.1% 7.3% 7.5% 8.6% 8.7%

FY14E 9.3% 8.7% 7.4% 11.0% 9.6% 7.0%

FY15E 7.4% 7.2% 7.0% 11.0% 7.0% 7.0%

FY16E 8.5% 7.0% 7.7% 11.3% 7.0% 7.0%

FY17E 8.2% 9.1% 7.0% 7.0% 7.0% 10.6%

Demand CAGR (FY13E‐17E) 8.6% 8.6% 7.3% 9.6% 7.8% 8.1%

Pessimistic

FY13E 7.5% 8.3% 5.8% 6.8% 6.4% 6.8%

FY14E 7.5% 7.3% 5.6% 9.1% 6.3% 6.5%

FY15E 6.7% 6.6% 6.5% 9.1% 6.5% 6.5%

FY16E 7.1% 6.5% 5.1% 9.3% 6.5% 6.5%

FY17E 7.0% 7.4% 6.5% 6.5% 6.5% 7.1%

Demand CAGR (FY13E‐17E) 7.2% 7.2% 5.9% 8.2% 6.4% 6.7%


To summarize, the range of FY13E‐17E CAGR for all‐India demand is likely between 7.2% ‐ 10.4%. The expected CAGRs (FY13E‐17E) for pan‐India and all regions interestingly remains the same at 10.4% in an optimistic scenario. In a realistic scenario, the all‐India CAGR (FY13E‐17E) is expected at 8.6% with East India’s growth being the highest at 9.6% and South India’s growth lowest at 7.3%. In a pessimistic scenario, the all‐India CAGR (FY13E‐17E) is expected at 7.2% with East India’s growth being the highest at 8.2% and South India’s growth lowest at 5.9%. In other words, we can expect the all‐India demand CAGR (FY13E‐17E) to be at a minimum of 7.2% and can trigger upto 10.4%. As far as demand is concerned, East India is likely to remain the most favorable, followed by North, Central, West and South.

Across all three scenarios we haveanalysed, East India seems to remainmost promising region (as far asdemand is concerned). At pan‐Indialevel, even in a worst case scenario,demand is likely to grow at a CAGR ofminimum of 7.2% over FY13E‐17E

In order of preference as far as demandgrowth is concerned, the most preferredregion is East India, followed by NorthIndia, Central India, West India andSouth India

– 12 of 133 –


Cement Consumption Vs GDP Growth

0.50

0.70

0.90

1.10

1.30

1.50

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

GDP, lhsCement Consumption, lhsCement Consumption Growth / GDP Growth, rhs


Cement Consumption & GDP CAGR’s; Cement Consumption Growth / GDP Growth (FY05‐12)

8.3%

8.8%1.05

0.00

0.30

0.60

0.90

1.20

8.1%

8.2%

8.3%

8.4%

8.5%

8.6%

8.7%

8.8%

8.9%

GDP Cement Consumption Cement Consumption Growth / GDP Growth


FY14E and FY15E very likely to restorethe aberration in Cement Consumption/ GDP ratio with a reasonably highconsumption growth multiple.

CAGRs (FY05‐12) of GDP growth rateand cement consumption growth overFY05‐12 stands @ 8.3% and 8.8%,respectively. Demand recovery seemsvery likely in near term given thesematerially high CAGR’s than the currentgrowth rates.

– 13 of 133 –


Overcapacity will remain a long‐term reality Indian cement industry, in our opinion will continue to be bothered by overcapacity for the next few years and increasing average pan‐India capacity utilisations materially for the industry will remain a challenging task. Existing players and few maiden entrants such as Reliance Cement remain ambitious of adding new capacities, given an opportunity. Consolidation moves by larger players such as UltraTech Cement will be structurally “a very positive move” for the sector. Regional scenarios will differ significantly. Over the next three years, we expect North India capacity utilisations to remain most favorable (~90%) followed by Central and Western regions. South will continue to remain most impacted by overcapacity and utilisations in South India are likely to remain at more or less 60% levels for the next few years. Capacity utilisations in East may drop significantly post FY13E on back of capacity additions. However many of the capacities likely to be added in this region remain questionable with regards to their execution. Overall, we believe there is no complete relief to the industry from over‐capacity in the near term or foreseeable longer term. North, West and Central regions are likely to perform relatively better than other regions of the country.

All India Matrix Summary for FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E CAGR

02‐12CAGR 12‐15E

EOP Cement Capacity (mtpa) 134.4 139.6 144.5 151.6 152.6 158.5 183.9 211.1 251.7 287.2 299.3 358.8 391.5 434.0 8.3% 13.2%Average Cement Capacity (mtpa) 129.8 137.0 141.7 148.6 148.5 157.5 166.3 201.2 232.7 270.6 295.5 314.0 345.1 379.1 8.6% 8.7%Growth YoY 5.6% 3.4% 4.9% ‐0.1% 6.0% 5.6% 21.0% 15.7% 16.3% 9.2% 6.2% 9.9% 9.9% Cement Production (mn tonnes) 102.4 111.3 117.5 127.6 141.8 154.7 168.3 181.4 200.7 210.1 225.3 244.7 266.0 286.9 8.2% 8.4%Growth YoY 8.7% 5.6% 8.5% 11.1% 9.1% 8.8% 7.8% 10.7% 4.7% 7.2% 8.6% 8.7% 7.9% Cement Consumption (mn tonnes) 99.0 107.6 113.9 123.1 135.6 149.0 164.0 177.8 196.6 205.8 221.8 240.8 261.7 282.2 8.4% 8.4%Growth YoY 8.7% 5.8% 8.1% 10.1% 9.9% 10.1% 8.4% 10.6% 4.6% 7.8% 8.6% 8.7% 7.8% Cement Exports (mn tonnes) 3.4 3.5 3.4 4.1 6.0 5.9 3.6 3.2 2.1 2.0 2.0 2.4 2.9 3.4 Average pan‐India cement prices (Rs/bag) 149 138 141 156 166 209 233 239 243 244 271 285 299 314 6.2% 5.0%Growth YoY ‐7.5% 2.7% 10.1% 6.9% 25.7% 11.2% 2.8% 1.5% 0.6% 11.0% 5.0% 5.0% 5.0% Clinker Production (mn tonnes) 88.2 97.3 102.7 109.4 116.3 121.0 129.6 138.4 153.6 158.3 165.9 182.8 200.6 218.4 6.5% 9.6%Growth YoY 10.3% 5.5% 6.6% 6.3% 4.0% 7.1% 6.8% 11.0% 3.1% 4.8% 10.2% 9.7% 8.9% Clinker Exports (mn tonnes) 1.8 3.5 5.6 6.0 3.2 3.1 2.4 2.9 3.1 2.6 1.9 2.3 2.9 3.7 Cement:Clinker, x 1.18 1.19 1.21 1.23 1.26 1.30 1.33 1.34 1.34 1.35 1.37 1.36 1.35 1.34

Average Cement Capacity Utilisation, (%) 79% 81% 83% 86% 95% 98% 101% 90% 86% 78% 76% 78% 77% 76%

State‐Wise Capacity Share – All India

Madhya Pradesh , 8% Uttar Pradesh , 4%

Jharkhand , 3%

Chattisgarh , 5%

West Bengal , 3%

Orissa , 3%

Meghalaya , 1%

Bihar , 0%

Assam , 0%

Rajasthan , 15%

Himachal Pradesh , 3%Haryana , 1%

Delhi , 0%Punjab , 2%Uttarakhand , 1%

Jammu & Kashmir , 0%

Tamil Nadu , 12%

Andhra Pradesh , 16%

Karnataka , 8%

Kerala , 0%

Gujarat , 8%

Maharashtra , 7%


Overcapacity scenario will not change inforeseeable future. Industry will need tocontinue to operate at controlledcapacity utilisations (though utilisationswill be better than current) to ensure astable and healthy pricing environment.

Andhra Pradesh constitutes the largeststate capacity. States of Rajasthan andTamil Nadu follows. These three statesconstitute ~42% of all‐India cementcapacity. Other states with largecapacity chunks include states ofGujarat, Madhya Pradesh, Karnataka,Maharashtra & Chhattisgarh.

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Capacity Additions Indian cement industry has planned ~135 mn tonnes of capacity additions over the next 3 years. The table below highlights the total planned addition of the industry, as a whole till FY15E.

_____________FY13E_____________ _____________FY14E_____________ _____________FY15E_____________ % of Total Row Labels Cent East North South West Cent East North South West Cent East North South West Additions

ABG Cement ‐ ‐ ‐ ‐ 5.8 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 5.8 4%

ACC ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.4 ‐ ‐ ‐ 3.4 3%

Ambuja Cement ‐ ‐ ‐ ‐ 1.2 0.9 ‐ ‐ ‐ ‐ 4.0 ‐ ‐ 6.1 5%

Amrit Cement Ind ‐ ‐ ‐ ‐ ‐ ‐ 1.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.0 1%

Bhavya Cement ‐ ‐ ‐ 1.5 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.5 1%

Birla Corporation 0.3 0.7 1.7 ‐ ‐ ‐ ‐ 2.3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 5.0 4%

BMM Cement ‐ ‐ ‐ 1.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.2 1%

Calcom ‐ 0.9 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.9 1%

Cement Manu. Co. ‐ 3.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.2 2%

Century Textiles 0.4 ‐ ‐ ‐ ‐ ‐ 1.5 ‐ ‐ 3.1 ‐ ‐ ‐ ‐ ‐ 5.0 4%

Chettinad Cement ‐ ‐ ‐ 1.5 ‐ ‐ ‐ ‐ 3.0 ‐ ‐ ‐ ‐ ‐ ‐ 4.5 3%

Dalmia Cement ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.5 ‐ 2.5 2%

Goldstone Cement ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.5 ‐ ‐ ‐ 0.5 0%

HeidelbergCement India 3.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.2 2%

Jaiprakash Associates ‐ ‐ ‐ 5.0 ‐ ‐ ‐ ‐ ‐ ‐ 1.5 ‐ ‐ 5.0 3.0 14.5 11%

JK Cement ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.0 2%

JK Lakshmi Cement ‐ 2.7 0.6 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.3 2%

JSW Cement ‐ ‐ ‐ 2.8 ‐ ‐ ‐ ‐ 1.2 ‐ ‐ ‐ ‐ ‐ ‐ 4.0 3%

KCP ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.8 ‐ 1.8 1%

KJS Cement 2.6 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.6 2%

Lafarge ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.3 ‐ ‐ 2.3 2%

Lalitha Cement ‐ ‐ ‐ 1.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.2 1%

Madras Cement ‐ ‐ ‐ 2.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.0 1%

Mangalam Cement ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.2 1%

Mawmluh Cherra ‐ ‐ ‐ ‐ ‐ ‐ 0.2 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.2 0%

Meghalaya Cement ‐ 0.7 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.7 1%

My Home Industries ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.0 ‐ ‐ ‐ ‐ 3.0 ‐ 6.0 4%

OCL India ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.4 ‐ ‐ ‐ 1.4 1%

R K Marble ‐ ‐ 3.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 3.0 2%

Reliance Cement ‐ ‐ ‐ ‐ 0.7 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 10.7 8%

Revathi Cement ‐ ‐ ‐ ‐ ‐ 2.5 ‐ ‐ ‐ ‐ ‐ 2.5 2%

RNB Cement ‐ 0.3 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.3 0%

Sagar Cement ‐ ‐ ‐ 2.6 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.6 2%

Shiva Cement ‐ ‐ ‐ ‐ ‐ ‐ 1.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.0 1%

Shree Cement ‐ ‐ ‐ ‐ ‐ ‐ 1.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 1.0 1%

Siddhi Vinayak Cement ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.0 ‐ ‐ 2.0 1%

Toshali Cements Pvt ‐ 0.8 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 0.8 1%

UltraTech Cement ‐ 4.8 ‐ 4.4 1.6 ‐ 1.6 ‐ ‐ ‐ ‐ ‐ 3.0 ‐ ‐ 15.4 11%

Zuari Cement ‐ ‐ ‐ 3.4 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ 2.2 2.0 7.6 6%

Grand Total 6.5 14.1 5.3 25.6 8.1 8.7 7.2 6.5 7.2 3.1 1.5 5.3 11.3 14.5 10.0 134.7 100%


It is to be noted, capacity addition in the above table includes all possible capacities (including probable capacities) which may or may not be executed as per timeline or schedule. It also includes capacities which have a probability of being rolled back or not being executed at all. The table above is an exhaustive possible list of expansions and at best industry will add ~135 mn tonnes of capacity by the end of FY15E. We strongly believe Industry will not execute more than 50% of the capacities above as per schedule. We will discuss the reasons for the same in the forthcoming sections of this report.

Significant delays cannot be ruled out inthe capacity additions mentionedabove. We expect that not more than50% of capacities mentioned above willcommission on time.

Originally planned and book schedule ofaddition by the industry (No delayscaptured here).

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Industry’s Operating Matrix – Simple & Weighted Avg. In this section, we will discuss and list down the industry’s overall operating matrix and its behavior since FY04. For the purpose of our calculations, we have collated data for 75% of the industry’s current capacity and have referred to as “Industry”. The following tables will highlight these data points.

Simple Average Operating Matrix

Rs/Tonne FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14ECAGR

FY04‐12

Net Realisation 1,900 2,038 2,342 2,919 3,249 3,431 3,622 3,483 4,010 4,300 4,535 9.8%Total Operating Expenses 1,588 1,684 1,885 2,063 2,205 2,531 2,611 2,861 3,260 3,391 3,493 9.4%Raw Materials 119 142 214 216 208 258 285 283 347 350 357 14.3%Employee Cost 110 103 107 128 165 177 184 204 227 244 253 9.5%Power & Fuel 519 634 617 671 704 841 780 911 998 1,048 1,085 8.5%Freight Cost 373 374 380 419 468 508 534 579 629 686 703 6.7%Stores & Spares 102 108 113 144 156 161 147 162 168 184 188 6.3%Repairs & Maintenance 62 51 88 62 63 80 77 100 90 105 112 4.8%Other Miscellaneous 301 271 366 424 441 507 605 621 801 774 795 13.0%EBITDA 313 354 457 856 1,044 900 1,010 622 750 909 1,042 11.5%

Growth – YoY Net Realisation 7% 15% 25% 11% 6% 6% ‐4% 15% 7% 5%Total Operating Expenses 6% 12% 9% 7% 15% 3% 10% 14% 4% 3%Raw Materials 19% 51% 1% ‐3% 24% 10% 0% 23% 1% 2%Employee Cost ‐6% 4% 19% 29% 8% 4% 11% 11% 8% 4%Power & Fuel 22% ‐3% 9% 5% 19% ‐7% 17% 9% 5% 4%Freight Cost 0% 2% 10% 12% 8% 5% 9% 9% 9% 2%Stores & Spares 5% 4% 28% 8% 4% ‐9% 10% 4% 10% 2%Repairs & Maintenance ‐17% 71% ‐29% 1% 27% ‐3% 29% ‐10% 16% 6%Other Miscellaneous ‐10% 35% 16% 4% 15% 19% 3% 29% ‐3% 3%EBITDA 13% 29% 87% 22% ‐14% 12% ‐38% 21% 21% 15%

Cost / EBITDA as a % of Net Realisation Net Realisation 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Total Operating Expenses 84% 83% 80% 71% 68% 74% 72% 82% 81% 79% 77%Raw Materials 6% 7% 9% 7% 6% 8% 8% 8% 9% 8% 8%Employee Cost 6% 5% 5% 4% 5% 5% 5% 6% 6% 6% 6%Power & Fuel 27% 31% 26% 23% 22% 25% 22% 26% 25% 24% 24%Freight Cost 20% 18% 16% 14% 14% 15% 15% 17% 16% 16% 16%Stores & Spares 5% 5% 5% 5% 5% 5% 4% 5% 4% 4% 4%Repairs & Maintenance 3% 3% 4% 2% 2% 2% 2% 3% 2% 2% 2%Other Miscellaneous 16% 13% 16% 15% 14% 15% 17% 18% 20% 18% 18%EBITDA 16% 17% 20% 29% 32% 26% 28% 18% 19% 21% 23%

Cost Heads as a % of Total Opex Total Operating Expenses 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Raw Materials 8% 8% 11% 10% 9% 10% 11% 10% 11% 10% 10%Employee Cost 7% 6% 6% 6% 7% 7% 7% 7% 7% 7% 7%Power & Fuel 33% 38% 33% 33% 32% 33% 30% 32% 31% 31% 31%Freight Cost 24% 22% 20% 20% 21% 20% 20% 20% 19% 20% 20%Stores & Spares 6% 6% 6% 7% 7% 6% 6% 6% 5% 5% 5%Repairs & Maintenance 4% 3% 5% 3% 3% 3% 3% 3% 3% 3% 3%Other Miscellaneous 19% 16% 19% 21% 20% 20% 23% 22% 25% 23% 23%


75% of industry data referred to as“Industry”

– 16 of 133 –


Weighted Average Operating Matrix

Rs/tonne FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E CAGR

FY04‐12

Net Realisation 1,947 2,135 2,239 2,856 3,284 3,485 3,613 3,439 4,065 4,424 4,701 9.6%Total Operating Expenses 1,620 1,745 1,809 1,956 2,198 2,537 2,564 2,757 3,230 3,406 3,554 9.0%Raw Materials 249 269 404 391 403 503 544 538 648 672 686 12.7%Employee Cost 109 106 103 121 163 164 181 198 226 245 258 9.5%Power & Fuel 536 655 599 634 709 860 774 893 1,007 1,052 1,104 8.2%Freight Cost 327 366 401 431 504 553 562 595 675 752 781 9.5%Stores & Spares 97 105 108 117 122 132 122 126 119 142 145 2.7%Other Miscellaneous 303 244 193 261 297 325 380 407 555 542 580 7.9%EBITDA 327 390 429 901 1,085 948 1,049 682 836 1,018 1,147 12.4%

Growth ‐ YoY Weighted Average Realisation 10% 5% 28% 15% 6% 4% ‐5% 18% 9% 6%Weighted Average Operating Cost 8% 4% 8% 12% 15% 1% 8% 17% 5% 4%Raw Materials 8% 51% ‐3% 3% 25% 8% ‐1% 21% 4% 2%Employee Cost ‐2% ‐3% 17% 35% 0% 10% 10% 14% 9% 5%Power & Fuel 22% ‐9% 6% 12% 21% ‐10% 15% 13% 4% 5%Freight Cost 12% 10% 7% 17% 10% 2% 6% 13% 11% 4%Stores & Spares 9% 3% 9% 4% 8% ‐7% 3% ‐5% 19% 2%Other Miscellaneous ‐19% ‐21% 35% 14% 10% 17% 7% 36% ‐2% 7%EBITDA 19% 10% 110% 21% ‐13% 11% ‐35% 22% 22% 13%

Cost / EBITDA as a % of Net Realisation Net Realisation 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Total Operating Expenses 83% 82% 81% 68% 67% 73% 71% 80% 79% 77% 76%Raw Materials 13% 13% 18% 14% 12% 14% 15% 16% 16% 15% 15%

Employee Cost 6% 5% 5% 4% 5% 5% 5% 6% 6% 6% 5%Power & Fuel 28% 31% 27% 22% 22% 25% 21% 26% 25% 24% 23%Freight Cost 17% 17% 18% 15% 15% 16% 16% 17% 17% 17% 17%Stores & Spares 5% 5% 5% 4% 4% 4% 3% 4% 3% 3% 3%Other Miscellaneous 16% 11% 9% 9% 9% 9% 11% 12% 14% 12% 12%EBITDA 17% 18% 19% 32% 33% 27% 29% 20% 21% 23% 24%

Cost Heads as a % of Total Opex Total Operating Expenses 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Raw Materials 15% 15% 22% 20% 18% 20% 21% 19% 20% 20% 19%Employee Cost 7% 6% 6% 6% 7% 6% 7% 7% 7% 7% 7%Power & Fuel 33% 38% 33% 32% 32% 34% 30% 32% 31% 31% 31%Freight Cost 20% 21% 22% 22% 23% 22% 22% 22% 21% 22% 22%Stores & Spares 6% 6% 6% 6% 6% 5% 5% 5% 4% 4% 4%Other Miscellaneous 19% 14% 11% 13% 13% 13% 15% 15% 17% 16% 16%


From the above table following are our key observations (observations based on Weighted Average calculations): • Net Realisations and Total Operating Expenses FY04‐12 CAGRs (at 9.6% and 9.0%,

respectively) of the industry have grown largely in‐line with each other. Hence, we believe, it will be unfair to hold the industry responsible for cement price escalation.

• EBITDA has grown at a CAGR of 12.4% from Rs327/tonne to Rs836/tonne. • EBITDA margins peaked out in FY08 at ~33%. Current EBITDA margins are ~12% lower

than peak EBITDA margin in FY08. • Raw material costs have seen the highest escalation with a CAGR of 12.7%. Stores and

spares show the least escalation with a CAGR of 2.7%. All other expense heads viz. Employee Cost, Power & Fuel Cost, Freight Cost and Other Expenses have registered CAGR’s in the range of ~8%‐9.5%.

Similar CAGR’s of Net Realisations andOpex suggests it is ‘unfair’ to hold theindustry responsible for cement priceincrease. Raw materials have seen themaximum increase at a CAGR of 12.7%.Also, current EBITDA marginssignificantly lower than the peakmargins for the industry registered inFY08 (@33%).

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Top Players vs. Others

Operating Matrix ‐ Rs/tonne FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

CAGR FY04‐12

Top 3 (Excludes Jaypee Cement) Net Realisation 2,075 2,313 2,397 2,907 3,381 3,569 3,725 3,542 4,112 4,404 4,701 8.9%Total Operating Expenses 1,695 1,866 1,983 2,028 2,324 2,660 2,689 2,804 3,281 3,398 3,565 8.6%Raw Materials 214 288 367 314 358 426 559 491 573 598 627 13.1%Employee Cost 105 109 110 115 134 160 152 188 212 229 246 9.2%Power & Fuel 510 588 577 572 640 816 726 783 961 977 1,010 8.2%Freight Cost 351 371 493 522 560 546 569 580 706 768 817 9.1%Stores & Spares 90 92 94 95 105 121 119 112 90 94 98 0.0%Other Miscellaneous 426 418 341 409 527 590 565 649 739 733 767 7.1%EBITDA 380 447 414 880 1,057 909 1,036 738 831 1,006 1,136 10.3%

Top 4 Net Realisation 1,984 2,203 2,255 2,829 3,230 3,383 3,616 3,456 4,020 9.2%Total Operating Expenses 1,636 1,771 1,826 1,922 2,144 2,429 2,515 2,697 3,241 8.9%Raw Materials 214 288 367 314 358 426 559 491 573 13.1%Employee Cost 105 109 110 115 134 160 152 188 212 9.2%Power & Fuel 510 588 577 572 640 816 726 783 961 8.2%Freight Cost 351 371 493 522 560 546 569 580 706 9.1%Stores & Spares 90 92 94 95 105 121 119 112 90 0.0%Other Miscellaneous 367 323 184 303 347 360 390 543 699 8.4%EBITDA 348 432 429 907 1,086 954 1,101 759 779 10.6%

Impact of Jaypee Cement in Avg. Realisation (91) (110) (142) (78) (151) (186) (109) (86) (92) Diff. in Avg. Opex of Top 3 Vs. Jaypee Cem. 59 94 157 106 180 231 174 107 40 Impact of Jaypee Cement in Avg. EBITDA (31) (16) 15 27 29 45 65 21 (52)

All Other Players (Excluding Top 4) Net Realisation 1,800 1,907 2,278 2,906 3,229 3,432 3,616 3,463 3,981 4,261 4,473 10.4%Total Operating Expenses 1,481 1,581 1,805 2,028 2,170 2,503 2,592 2,865 3,209 3,389 3,466 10.1%Raw Materials 251 238 414 426 409 512 542 568 667 697 692 13.0%Employee Cost 103 96 102 127 169 161 190 207 229 250 256 10.5%Power & Fuel 511 630 605 672 715 850 791 952 1,016 1,074 1,113 9.0%Freight Cost 288 334 379 416 477 540 562 617 662 741 749 11.0%Stores & Spares 94 102 111 128 124 131 124 134 128 159 159 4.0%Other Miscellaneous 235 181 195 261 277 310 382 387 507 468 497 10.1%EBITDA 319 326 473 877 1,059 929 1,024 598 772 873 1,007 11.7%

Diff. in Top 4 & Others in Avg. Realisation 185 296 (23) (76) 1 (49) (1) (7) 39 Diff. in Avg. Opex of Top 4 & Others 155 191 21 (107) (27) (74) (77) (168) 32 Diff. in Top 4 & Others in Avg. EBITDA 30 105 (44) 30 27 25 77 162 7

Impact in Avg. Realisation / tonne

Difference between Top 3 & Others in Industry 275 406 119 2 152 137 108 79 131 Difference between Top 4 & Others in Industry 185 296 (23) (76) 1 (49) (1) (7) 39

Variation in Opex/tonne Difference between Top 3 & Others in Industry 214 121 174 72 125 123 126 47 51 Difference between Top 4 & Others in Industry 155 26 16 (34) (55) (108) (49) (60) 11

Variation in EBITDA/tonne Difference between Top 3 & Others in Industry 61 121 (59) 3 (2) (21) 11 141 59 Difference between Top 4 & Others in Industry 30 105 (44) 30 27 25 77 162 7


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Key observations • Leaders such as ACC Limited, Ambuja Cements and UltraTech Cement clearly command a

premium in realisations as compared to all other cement manufacturers. The premium can be as high as Rs20/bag.

• Realisations of Jaypee Cement have not been favorable to the overall average realisations of top cement manufacturers. The impact of Jaypee Cement to the overall average net realisation of top cement manufacturers has been to the tune of negative ~Rs4‐10/bag.

• We can infer from this that strong branding and advertising does really make a material impact on realisations of cement manufacturers. We strongly believe that companies which intend to create a premium brand value for themselves and which remains focused on its brand premium, will continue to enjoy premium in realisations vis‐à‐vis others. Unified brand identity and having thrust on continuous improvements in supply‐chain management systems are some of the add‐ons which can help cement manufacturers garner better premium.

• Opex/tonne of cement majors is generally a higher (Rs7‐14/bag) than that of the smaller cement manufacturers and this seems higher largely on other expenses front (marketing, advertising, commissions etc.). Freight cost of majors (upto Rs6/bag) also tends to be higher which is indicative of the larger lead distances and market reach for them. On all other expenses front, the expense pattern of the industry is largely similar (Some marginal variations can be observed in other spend heads which does not seem to be very material). The pie below indicates the operating cost structure of the industry in FY12.

• Interesting, no consistent trend can be established in EBITDA/tonne of the top cement manufacturers and the regional leaders / smaller players. This probably, is indicative of the fact that players adopt strategies based on their inherent strengths of location advantage, market reach, local distribution network etc. This is also an indication that majority of the players target a similar EBITDA/tonne. Players having competitive advantage to others generally pass‐on the cost benefits to consumers to ensure a firm market grip in their markets. EBITDA/tonne, in our view remains the base to derive the ultimate cement price. The variation in average EBITDA/tonne does not seem to be higher than Rs7/bag between majors and other players.

Expense Pattern of Industry on Total Cost – FY12

Raw Materials, 20%

Employee Cost, 7%

Power & Fuel, 31%

Freight Cost, 21%

Stores & Spares, 4%

Other Miscellaneous,

17%


Tier I brands clearly command apremium in cement realisation to theextent of ~Rs20/bag. Realisations ofJaypee Cement have not been favorableto sustain the premium of Top Cementmanufacturers. The impact has beennegative to the tune of Rs4‐10/bag.

Expense pattern of the industry playersseems largely similar. Majors tend tospend more on advertising andmarketing activities which increasestheir overall opex.

Power & Fuel is the biggest costfollowed by Freight Cost, Raw Materialsand Other Expenses.

EBITDA/tonne in our opinion remainsthe key in deriving the ultimate cementprice. Cost benefits on account oflocation advantage etc. are generallypassed on…

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Cost / EBITDA structure of the Industry

0%

20%

40%

60%

80%

100%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Raw Materials Employee Cost Power & Fuel Freight Cost

Stores & Spares Other Miscellaneous EBITDA

Industry’s Revenue / Cost / EBITDA CAGR (FY04‐12)

9.6%9.0%

12.7%

9.5%8.2%

9.5%

2.7%

7.9%

12.4%

0%

2%

4%

6%

8%

10%

12%

14%

Realisation

Total Cost

Raw Materials

Employee

Power and

Fue

l

Freight

Stores and

Spares

Other Expen

ses

EBITDA

Industry’s EBITDA & Cost / Revenue ‐ FY12

Operating Cost, 79%

EBITDA, 21%


Operating costs in FY12 accounts for~79% of revenues. This cost structure is~300bps higher than the average coststructure of the industry over FY04‐12.

CAGRs of realisation are not toodifferent from CAGR of expense / cost.Raw materials cost increase is thebiggest concern for the industry.

Cost Structure of the industry hasremained largely similar in our period ofanalysis (FY04‐12). On an average thematrix structure is as: Raw Materials(15%), Employee Cost (5%), Power & Fuel(25%), Freight Cost (16%), Stores & Spares(4%), Other Miscellaneous (11%) andEBITDA (24%).

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Why cement pricing will remain strong? We strongly believe that cement prices in the country will continue to hold strong. Industry is expected to behave in a much more disciplined and matured fashion given the pipeline of capex for the industry. Though utilisations will improve, it will be kept at relatively low and favorable levels to ensure a healthy pricing scenario. Here we will analyse in detail the behavioral pattern of the industry and its players. We will highlight the reasons for a favorable cement pricing environment largely on the following grounds: • Behavioral patterns of various players of the industry (largely in terms of despatches and

relative movement in despatches). • Absolute cement prices Vs. absolute cement volumes (Historical trends and key

observations from these trends). • High capex commitment will mean healthy cement prices or shelving off of new

capacities. In this section, we will plot the behavioral patterns of Top Players Vs. Other Players on all‐India and Regional basis to understand the sync in overall industry’s despatch pattern which will ultimately support cement prices. In our regional study, we have also highlighted the behavioral pattern in the key states of the region. We can clearly see that, in most cases the behavior of cement companies have been favorable to a healthy pricing environment. The sync in behavioral pattern will be more visible post Oct‐09 in most cases. It is also to be noted that Cement Manufacturers’ Association (CMA) which was the representative body of the Indian Cement Industry has stopped publishing monthly production/despatch and related data from June 2012 onwards. Also many of the top cement producers of the country have opted to stop publishing monthly cement production and despatch data. Hence in all our analysis, the data considered has been until the period ending May 2012 (till the time CMA published such data). Though, the decision to not publish monthly data will make research analysis a cumbersome process, the industry is likely to remain in a safe position avoiding any allegations of cartelisation. Despatches of Top 15 Vs. All Others (‘000 tonnes)

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

April 05

Aug 05

Dec

05

April 06

Aug 06

Dec

06

April 07

Aug 07

Dec

07

April 08

Aug 08

Dec

08

April 09

Aug 09

Dec

09

April 10

Aug 10

Dec

10

Apr 1

1

Aug 11

Dec11

April 12

Despatches from other players, lhs Total Despatches of Top 15 Players, rhs


Industry is expected to continue tobehave maturely keeping utilisations atfavorable levels and thereby ensuring ahealthy pricing scenario. Behavioralstudy of the industry suggests industryis well capable of showcasing such anintelligent and mature behavior.

No monthly data publication fromCement Manufacturers’ Association ofIndia (CMA) and majority of the othercement manufacturers makes dataanalysis a practically impossible processthereby avoiding any allegations ofcartelisation.

The adjoining graph highlights therelative despatch movement of Top 15and other players of the industry. Thegap between the two lines indicates therelative behavior of these twocategories of players. Clearly, in orderto avoid price wars with low capacityutilisation, the sync between these twocategories of players has seen amaterial improvement which makes ussurer of a healthy pricing environment.

– 21 of 133 –


Likewise, we take a similar account of the behavior of the top players and regional leaders on a region‐wise and state‐wise basis in the graphs below. North India 22% of All India Capacity; Key states – Rajasthan

900

1,400

1,900

2,400

2,900

3,400

3,900

500

700

900

1,100

1,300

1,500

1,700

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 5 in North India, RHS

Rajasthan (66% of North India; 15% of All India Capacity)

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

400

450

500

550

600

650

700

750

800

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 5 in Rajasthan, RHS

South India 36% of All India capacity; Key States – Andhra Pradesh, Tamil Nadu and Karnataka

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

1,000

1,500

2,000

2,500

3,000

April

05Ju

l y 05

Oct 0

5Ja

n 06

A pril

06Ju

l y 06

Oct 0

6Ja

n 07

A pril

07Ju

l y 07

Oct 0

7Ja

n 08

A pril

08Ju

l y 08

Oct 0

8Ja

n 09

A pril

09Ju

l y 09

Oct 0

9Ja

n 10

A pril

10Ju

l y 10

Oct 1

0Ja

n 11

A pr 1

1Ju

l y 11

Oct 1

1Ja

n 12

Others, LHS Top 5 in South India, RHS


As demand‐supply matrix remainedfavorable in the state (till FY10), therewas no need for a sync in behaviors ofTop and Other players in the region.However, the players have showcasedtremendous sync to ensure pricingstability post FY10 as seen in theadjoining graph.

A very closely knit region as we canhardly identify lapse in behavior of theTop and the smaller players. Pricing hastherefore always remained largelystable in this region. Any unprecedenteddrop in pricing has seen an immediaterecovery.

More than proportionate increase inproduction / despatches by otherplayers led to price corrections in SouthIndia in FY10. Players have since thenshowcased phenomenal discipline toensure a stable pricing environment inthe region.

– 22 of 133 –


Andhra Pradesh (44% of South India; 16% of All India Capacity)

600

800

1,000

1,200

1,400

1,600

1,800

400

600

800

1,000

1,200

1,400

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 5 in Andhra Pradesh, RHS

Tamil Nadu (34% of South India; 12% of All India Capacity)

500

700

900

1,100

1,300

1,500

1,700

300

500

700

900

1,100

1,300

1,500

1,700

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 3 in Tamil Nadu, RHS

Karnataka (22% of South India; 8% of All India Capacity)

400

450

500

550

600

650

700

750

800

850

900

200

250

300

350

400

450

500

550

600

650

700

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Karnataka, RHS


Indiscipline and deviation from sync inour opinion is the key for the price crashthis region has witnessed. The constantoverlap of despatch patterns of Top 15and Other players post this bloodbathsuggests these players have nowlearned a lesson, though the hard way.Capacity‐demand matrix in AndhraPradesh continues to remain the coreproblem of South India.

Tamil Nadu has been a relatively stablestate in terms of pricing. Looking at thesurplus scenario in Andhra Pradesh,there was no other option but to dropcapacity utilisations. The graphindicates that players are moving intandem and thereby risk of a price‐correction seems unlikely.

Karnataka is a much more consolidatedstate of South India with only 6operational players. To accommodateother regional capacities, this state hasalso seen a drop in capacity utilisations.The Top and Other players in the stateare making serious attempts to remainin tandem to ensure a risk‐free pricingenvironment.

– 23 of 133 –


East India 14% of All India Capacity; Key States – Chhattisgarh, Orissa, Jharkhand & West Bengal

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

200

300

400

500

600

700

800

900

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 5 in East India, RHS

Chhattisgarh (35% of East India; 5% of All India Capacity)

200

250

300

350

400

450

500

550

600

650

700

200

250

300

350

400

450

500

550

600

650

700

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Chattissgarh, RHS

Orissa (19% of East India; 3% of All India Capacity)

90

120

150

180

210

240

270

300

330

50

100

150

200

250

Mar 12

June

05

Sept 05

Dec

05

Mar 06

June

06

Sept 06

Dec

06

Mar 07

June

07

Sept 07

Dec

07

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

June

11

Sept 11

Dec

11

Others, LHS Top in Orissa, RHS


Smaller and Other Players have beenslowly spoiling the regional discipline inthis region. We cannot see any majordeviation in the despatch pattern of theTop players here. However, we believethe smaller players will sooner or laterfall in sync with the larger players andconsolidation will also play a vital rolehere. As we can see the overalldespatch size of smaller players is nowpretty much the same as the despatchesof larger players.

The most well behaved state in EastIndia. We can hardly point out anymaterial deviations in the despatchpattern of the Top and Other players inthis state.

A fairly consolidated state with onlythree cement manufacturers (allregional / national leaders) makesbehavioral sync much easier. Hence, arisk of price war in this state remainsminimal. The Top player in Orissa (OCLIndia) has significantly increased itsmarket share supported by a four‐foldcapacity increase.

– 24 of 133 –


Jharkhand (19% of East India; 3% of All India Capacity)

120

160

200

240

280

320

360

400

80

120

160

200

240

280

Mar 12

June

05

Sept 05

Dec

05

Mar 06

June

06

Sept 06

Dec

06

Mar 07

June

07

Sept 07

Dec

07

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

June

11

Sept 11

Dec

11

Others, LHS Top in Jharkhand, RHS

West Bengal (18% of East India; 3% of All India Capacity)

60

90

120

150

180

210

240

270

300

330

360

100

150

200

250

300

350

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in West Bengal, RHS

West India 15% of All India Capacity; Key States – Gujarat & Maharashtra

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

2,700

300

400

500

600

700

800

900

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 5 in West India, RHS


Relatively unorganized and unmatchedsync between the Top and Otherplayers, though this state also has onlythree active cement producers. Lafargeis the largest capacity in this state.

A state with a erratic behavioral syncamongst the Top and Other players. Allthe players in this state are renownedcement manufacturers. Though we cansense some serious attempts by theseplayers to fall in sync, larger players ofthe state will need to demonstrate morematurity here.

A region very similar to North India asfar as behavioral discipline is concerned.This is despite the fact that manycement channel partners and cementmanufacturers believe that all theexcess production of adjoining regions isdumped here. The sync we see in thisregion is simply commendable! Weforesee minimal price risk in this regionbased on the conduct depicted by theproducers of this region.

– 25 of 133 –


Gujarat (56% of West India; 8% of All India Capacity)

400

500

600

700

800

900

1,000

1,100

200

300

400

500

600

700

800

900

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Gujarat, RHS

Maharashtra (44% of West India; 7% of All India Capacity)

400

450

500

550

600

650

700

750

800

850

900

200

250

300

350

400

450

500

550

600

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Maharashtra, RHS

Central India 12% of All India Capacity; Key States – Madhya Pradesh & Uttar Pradesh

700

900

1,100

1,300

1,500

1,700

1,900

700

800

900

1,000

1,100

1,200

1,300

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 3 in Central India, RHS


Though behavior of the Top players inthe state remained aggressive till midFY10, during tough times, players havenot disappointed. We can see howplayers have chosen to fall in sync witheach other, since latter half of FY10.

The adjoining graph suggests that smallplayers here move out of sync at regularintervals. We believe this is a key reasonwhy cement pricing in Central India hasremained erratic and unstable at mosttimes. Also, given the locationdisadvantage of this region (as internaltransfers may happen from acrossIndia), pricing risk is something whichcannot be avoided completely. Howeverwe believe, sooner or later the syncpattern in this region will improve.

West India is supposed to be one of themost stable markets for cement in India,as far as pricing is concerned. Playershave shown tremendous maturity intough times and whenever necessary.Like in Gujarat, in the adjoining graphwe can never see a consistent deviationin relative behavior of players.Corrective action is taken immediatelywhenever necessary.

– 26 of 133 –


Madhya Pradesh (65% of Central India; 8% of All India Capacity)

400

500

600

700

800

900

1,000

700

800

900

1,000

1,100

1,200

1,300

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Madhya Pradesh, RHS

Uttar Pradesh (35% of Central India; 4% of All India Capacity)

‐

100

200

300

400

500

600

700

200

250

300

350

400

450

500

550

600

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Others, LHS Top 2 in Uttar Pradesh, RHS


Smaller players very clearly need todepict more discipline in this region inorder to minimize risks of pricefluctuations. The adjoining graph alsosuggests that these smaller playershave lately understood the importanceof such sync as we can see theirdespatches contracting to largermanufacturers.

Much more disciplined and well‐behaved state (as compared to MadhyaPradesh). The adjoining graph clearlysuggests that the players here are muchmore mature in their behavior andunderstand the pricing risk on deviatingfrom their sync.

– 27 of 133 –


Absolute Prices V/s. Absolute Volumes In order to ensure reasonable returns on investments and a healthy pricing scenario, it is important that the despatch pattern of the industry supports such an environment. As highlighted in our previous sector report, cement volumes continue to move in a manner which supports a healthy pricing environment. Although average capacity utilisation is a very important factor / indicator and prices (in a longer term) tend to move in tandem with average capacity utilisations, we have plotted the movement of average prices as against the absolute despatch volumes to figure out if the supply can be supervised in order to maintain prices: We have bifurcated the recent past into two different periods, as under: Period I (period of capacity constraint): April ’05 ‐ February ’08: This was the period when industry faced a capacity constraint and hence, production remained curtailed to the extent of maximum possible output from the available capacity. This is highlighted in Period I below. We can clearly see that average prices kept on increasing as the industry kept on producing to the best possible capacity utilisations. Period II (period of over capacity): March ’08 – May ’12 (CMA stopped publishing data post May’ 12): This period analyses the behavior of the industry as and when capacity started building up, which happened from March ‘08 onwards. It is very interesting to note and study the Period II graph below. The following are the key observations which one can make out very clearly. • Most times, whenever the prices are on a spurt, the despatch volumes were curtailed

initially in order to support the upward movement. • As and when the prices increased further, the volumes increased and the industry has

tried at most times to maximize the despatches at higher cement prices. • Most times, when the industry saw prices correcting, the volumes were also curtailed in

order to minimize its impact on profitability and put a check on the falling prices.

All India Period I Period II

10

11

12

13

14

15

16

150

160

170

180

190

200

210

220

230

240

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08

Cement Price (Rs/bag), LHS

Despatch volumes (mn tonnes)

Available capacity (mn tonnes)

13

15

17

19

21

23

25

27

210

220

230

240

250

260

270

280

290

300

310

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12





Looking at the absolute despatchpatterns of the industry, it seemsindustry is well capable of supervisingdespatches which ultimately ensures astable and healthy pricing environment.This section highlights behavior ofabsolute despatches of the industry intime of capacity constraint and duringover‐capacity (on both, pan‐India andregional basis).

– 28 of 133 –


We observe that our examination in Period II holds significance and is largely true for all the different regions of the industry as depicted in the following graphs. Hence we remain confident of a healthy pricing scenario in the industry in the long run. However, short term and marginal blips cannot be completely ruled out as few new large players are yet to make their presence felt.

Northern Region Period I Period II

2.2

2.4

2.6

2.8

3.0

3.2

150

160

170

180

190

200

210

220

230

240

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08

Cement Price (Rs/bag), LHSDespatch volumes (mn tonnes)Available capacity (mn tonnes)

2.8

3.2

3.6

4.0

4.4

4.8

5.2

5.6

6.0

210

220

230

240

250

260

270

280

290

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12


Southern Region Period I Period II

10

11

12

13

14

15

16

150

160

170

180

190

200

210

220

230

240

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08




4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

190

210

230

250

270

290

310

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12



– 29 of 133 –


Eastern Region Period I Period II

1.3

1.5

1.7

1.9

2.1

2.3

150

160

170

180

190

200

210

220

230

240

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08


1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

210

230

250

270

290

310

330

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12


Western Region Period I Period II

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

150

160

170

180

190

200

210

220

230

240

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08


1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

190

200

210

220

230

240

250

260

270

280

290

300

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12


Central Region Period I Period II

1.5

1.7

1.9

2.1

2.3

150

160

170

180

190

200

210

220

230

April 05

June

05

Aug 05

Oct 05

Dec

05

Feb 06

April 06

June

06

Aug 06

Oct 06

Dec

06

Feb 07

April 07

June

07

Aug 07

Oct 07

Dec

07

Feb 08


1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

3.5

200

210

220

230

240

250

260

270

280

290

Mar 08

June

08

Sept 08

Dec

08

Mar 09

June

09

Sept 09

Dec

09

Mar 10

June

10

Sept 10

Dec

10

Mar 11

Jun 11

Sept 11

Dec

11

Mar 12



– 30 of 133 –


High capex makes healthy cement prices a necessity Cement manufacturers still have huge capex lined up for the next three years. Our check also makes us believe that major chunk of the said capex of 135 mn tonnes over the next three years is already committed and equipment order has also been placed for many of these upcoming capacities. The table below highlights the minimum amount of operating cash flow/tonne required by the industry to sustain the said capacity addition. Committed Capex for the Industry till FY15 Committed Capex for the Industry till FY15 FY13E FY14E FY15E

Capacity Addition 59.50 32.73 42.49Projects Called Off 10% 10% 10%Assumption of Deferred Project 20% 20% 20%Effective Capacity Addition 43 34 36Capital Cost (US$) 130 140 150Currency Exchange 55 55 55Capital Cost (INR) 7,150 7,700 8,250Committed Capex Assuming Year of Operationalising Plant FY13E 35% FY14E 40% 35%FY15E 25% 40% 35%Cash Outflow committed for Capex (INR mn) 288,032 212,782 105,359Sale Estimate 241 262 282Contribution/tonne towards fresh Capex 1,196 813 373Interest Cost 80 64 38Debt Repayment 121 185 222Operating Cash Flow Requirement Per Tonne 1,397 1,062 633


Weighted average EBITDA/tonne for the industry in FY12 was at Rs836 which is much lower than the required operating cash flow/tonne of Rs1,397. Hence it is obvious that more than usual delays in capacity additions, ramp‐up or even shelving off of new projects seems very likely and cannot be completely ruled out. To look it at the other way, assuming a minimum of 15% expected Return on Equity, the following table summarises the current status of the industry. We have evaluated the possible increase/decrease in cement realisation in the table below in two different scenarios. Scenario I evaluates the status of the industry as it is currently. In Scenario II, we have assumed a 15% savings in operating cost of the industry. This is based on the assumption that the new capacities of the industry are much more efficient than the old capacities.

Minimum EBITDA required by the industry Scenario – I (Current)

Scenario II ‐ Assuming 15% Saving

in Operating Cost

Minimum expected RoE 15% 15%PAT 358 358Interest Cost 477 477Depreciation 358 358EBITDA 1,192 1,192Operating Cost as in FY12 (Adjusted for CAGR of FY04‐12) 3,521 2,993Net Realisation 4,712 4,184Current Realisation 4,065 4,065Potential Upside in Realisation 16% 3%


From both of the above scenarios above, it comes out that the industry is not in a position to cut down on cement prices. As on date the minimum expected range for cement price hikes for the industry comes at 3‐16% YoY. In most of our estimates we have factored in a mere 5% YoY increase in cement prices.

Industry cannot afford low cementprices as its capex commitment is stillhuge. Healthy pricing is therefore anundisputed necessity.

Industry’s weighted average EBITDA(FY12) at Rs836 is much lower than theminimum required EBITDA of Rs1,397 tosustain committed capacity additions.Though capacities are committed delaysand deferrals are bound to be muchlonger / prolonged than expected. Spillover on FY14E and FY15E will result in asimilar scenario in these years therebymaking price corrections very unlikely

If the minimum RoE expectations are15% for the industry, given the currentcost structure, a 16% upside inrealisation is quite possible. Also, takingaccount of technology benefits andassuming the same RoE, price cuts areruled out.

– 31 of 133 –


Cement Prices Vs. Average Capacity Utilisations Traditionally capacity utilisations have always been looked upon to derive the strength of the pricing scenario. Though this argument holds true in the longer term, cement pricing in the recent past few years has not really been dependent on capacity utilisations. The following graphs highlight the trends of cement pricing and capacity utilisations on all‐India and regional basis.

All India North India

60%

70%

80%

90%

100%

110%

120%

160

180

200

220

240

260

280

300

320

April 05

Sept 05

Feb 06

July 06

Dec

06

May 07

Oct 07

Mar 08

Aug 08

Jan 09

June

09

Nov

09

April 10

Sept 10

Feb 11

July 11

Dec

11

May 12

Average Price (Rs/bag), LHSCapacity Utilisations, RHS

60%

70%

80%

90%

100%

110%

120%

160

180

200

220

240

260

280

300

April 05

Sept 05

Feb 06

July 06

Dec

06

May 07

Oct 07

Mar 08

Aug 08

Jan 09

June

09

Nov

09

April 10

Sept 10

Feb 11

July 11

Dec

11

May 12


South India East India

50%

60%

70%

80%

90%

100%

110%

120%

140160180200220240260280300320

April

05Au

g 05

Dec 0

5Ap

ril 06

Aug 0

6De

c 06

A pril

07Au

g 07

Dec 0

7A p

ril 08

Aug 0

8De

c 08

A pril

09Au

g 09

Dec 0

9A p

ril 10

Aug 1

0De

c 10

Apr 1

1Au

g 11

Dec 1

1Ap

r 12


50%

60%

70%

80%

90%

100%

110%

120%

160

180

200

220

240

260

280

300

320

340

360

April 05

Sept 05

Feb 06

July 06

Dec

06

May 07

Oct 07

Mar 08

Aug 08

Jan 09

June

09

Nov

09

April 10

Sept 10

Feb 11

July 11

Dec

11

May 12


West India Central India

50%

60%

70%

80%

90%

100%

110%

120%

150

170

190

210

230

250

270

290

310

April 05

Sept 05

Feb 06

July 06

Dec

06

May 07

Oct 07

Mar 08

Aug 08

Jan 09

June

09

Nov

09

April 10

Sept 10

Feb 11

July 11

Dec

11

May 12


50%

60%

70%

80%

90%

100%

110%

120%

140

160

180

200

220

240

260

280

300

April 05

Sept 05

Feb 06

July 06

Dec

06

May 07

Oct 07

Mar 08

Aug 08

Jan 09

June

09

Nov

09

April 10

Sept 10

Feb 11

July 11

Dec

11

May 12



Theoretically prices should move intandem with utilisations. Though thiswill hold true over the longer term, wehave seen that cement prices in shortterm are really not a function ofutilisations. Rather cement pricingbecomes more dependent on behavioralaspects of cement manufacturers.

– 32 of 133 –


Regional Section Cement Industry in India is largely distributed in five distinct regions – North, South, East, West & Central India. Capacity Share – All‐India

Central, 12%

Eastern, 14%

Northern, 22%

Southern, 36%

Western, 15%

6 year growth CAGR (Despatch) of All‐India and all five regions

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

All India Central East North South West


In this section, we will identify the key dynamics of each of these regions on set parameters like market participants, capacity share by each player, level of consolidation, average capacity utilisation, consumption pattern etc.

Industry is divided in five different anddistinct regions viz. South, North, East,West and Central India.

South India remains the largest capacityfollowed by North, West, East & CentralIndia.

All India’s 6 year growth CAGR (FY06‐12) is at ~8.2%. North India hasrecorded the maximum growth at10.9% CAGR while West India hasrecorded the lowest at 5.7%.

– 33 of 133 –


North India Rajasthan, Himachal Pradesh, Haryana, Punjab, Uttarakhand, Jammu & Kashmir Chandigarh and Delhi together comprise the North Indian Region. This region has about 35 cement plants (15 cement players) and accounts for ~22% of all‐India capacity. North India continues to remain most favorable region as far as the demand supply balance is concerned. In this section we will analyse various parameters of the North India region including a state wise analysis of the region. Players in North Indian Markets – Capacity Share

ACC Ltd.

Ambu

ja Cem

ents

Binani Cem

ent

Birla Co

rp CCI

India Ce

ments

J & K Cem

ent

Jaypee

Group

JK Cem

ent

JK Lakshmi Cem

ent

Khyber Indu

s. (P)

Ltd.

Mangalam Cem

ent

Shree Ce

ment

Shriram Cem

ent

UltraTech

Cem

ent

0%

5%

10%

15%

20%

25%

State Wise Capacity Share of North India

Rajasthan , 66%

Himachal Pradesh , 16%

Haryana , 4%

Delhi , 0%

Punjab , 7%Uttarakhand , 6%

Jammu & Kashmir , 1%


North India is the most favorable regionin terms of capacity utilisations. Thisregion accounts for 22% of all‐Indiacapacity. There are about 35 cementplants in this region (15 cementplayers).

Shree Cement is the largest capacity inNorth India with 20% capacity share.UltraTech Cement, Ambuja Cement, ACCLtd., Jaypee Cement also enjoysignificant capacity share here.

Rajasthan is the largest state capacity inthis region followed by Himachal Pradesh.19 of the 35 cement plants in the regionare located in Rajasthan and 6 inHimachal Pradesh. There are 15 cementplayers in North India (11 in Rajasthan, 4in Himachal Pradesh, 3 in Uttarakhand, 2in Haryana, 2 in Punjab & 2 in Jammu &Kashmir).

– 34 of 133 –


Average Capacity Utilisations in North India

60%

80%

100%

120%

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Average Capacity Per Plant Vs. Average Capacity Per Player (‘000 tonnes)

‐

50

100

150

200

250

300

350

400

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12

Average Capacity Per Plant

Average Capacity Per Player

Consumption Pattern – North India – FY12

Uttarakhand, 6%

Haryana, 25%

Punjab, 15%

Rajasthan, 36%

Himachal, 2%

Chandigarh, 0%

Delhi, 13%J&K, 2%


Capacity utilisations in North India haveremained favorable at most times. Thelowest utilisation in this region sinceApril 05 is at 68% and the maximumachieved is at 119%. Utilisations in thisregion are likely to remain favorable at+90% in foreseeable future.

This statistic indicates the level ofconsolidation in the region. We can seethat the average capacity per player isgoing significantly higher than theaverage capacity per plant. Thisindicates a favorable consolidationactivity in the region. Average capacitylevel of per player has moved up from1.74mn tonnes p.a. to currently 4.45mntonnes p.a. while average capacity perplant has moved up from 0.74mntonnes p.a. to 1.91 mn tonnes p.a.

Rajasthan accounts for ~36% of theregional consumption followed byHaryana, Punjab and Delhi.

– 35 of 133 –


Consumption Growth in North India ‐ FY12

‐70%

‐60%

‐50%

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

Inter‐Region transfer from North India (‘000 tonnes)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer from state of Rajasthan (‘000 tonnes)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Except for Himachal Pradesh andChandigarh, North India has recordedfavorable and fairly robust growth ratesacross its consuming centers in FY12.

North India has always been a supplierof cement to other regions. The supplieshave grown 12x (from base minimum)from North India.

Transfers from Rajasthan have grownby 2.3x (from base minimum),materially lower than the overalltransfer from the region, as a whole.

– 36 of 133 –


Inter‐region transfer from state of Himachal Pradesh (‘000 tonnes)

(900)

(800)

(700)

(600)

(500)

(400)

(300)

(200)

(100)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer to / from state of Punjab (‘000 tonnes)

(100)

(50)

‐

50

100

150

200

250

300

350

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer to / from state of Uttarakhand (‘000 tonnes)

(100)

(50)

‐

50

100

150

200

250

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12


Transfers from Himachal Pradesh seen agrowth of ~4.4x (from base minimum),double than that of Rajasthan andlower than average of the region as awhole.

Punjab has been deficient state at mosttimes. Supplies to Punjab have grownalmost 5x to 0.29 mn tonnes p.m. (atpeak).

Uttarakhand has recently turned to be aself‐sufficient state for cement. Frompeak intake of 0.23 mn tonnes ofcement p.m. the state is now supplying~0.05mn tonnes p.m. of cement.

– 37 of 133 –


Inter‐region transfer to state of Haryana (‘000 tonnes)

‐

100

200

300

400

500

600

700

800

900

1,000

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer to Delhi (‘000 tonnes)

‐

100

200

300

400

500

600

700

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Expected & Possible Capacity Additions in North India Mn tonnes per annum FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Beginning capacity 29.1 31.0 40.7 46.9 54.2 65.8 66.8 72.0 76.8Additions during the year 1.9 9.7 6.2 7.3 11.6 1.0 5.3 4.8 11.3ACC Ltd. 0.9 0.9Ambuja Cements Ltd. 0.4 1.0 0.1 1.5 0.0 4.0Binani Cement Ltd. 3.8 0.3Birla Corp Ltd. 1.7 2.3UltraTech Cement 1.9 1.6 4.7 3.0India Cements 1.8Jaiprakash Associates 1.0 2.9 0.5 1.0JK Cement Ltd. 0.6 0.4 3.0JK Lakshmi Cement 1.2 0.8 0.6Khyber Indus.(P) Ltd. 0.3Lafarge India 2.3Mangalam Cement 1.0 0.0 1.2R K Marble 3.0Siddhi Vinayak Cement Limited (SVCL ‐ Nirma) 2.0Shree Cement 4.6 4.3Shriram Cements 0.2Average Capacity 30.7 34.3 46.4 49.8 62.0 66.0 66.1 75.4 81.3YE Capacity 31.0 40.7 46.9 54.2 65.8 66.8 72.0 78.5 89.8


23mn tonnes p.a. of additions is likely inthis region which is ~35% of currentregional capacity.

Transfers to Haryana have increased 3xfrom 0.3mn tonnes p.m. to 0.9 mntonnes p.m.

Transfers to Delhi have increased 3xfrom 0.2 mn tonnes p.m. to ~0.6mntonnes p.m. Delhi is a majorconsumption centre in North India(~13%).

– 38 of 133 –


South India Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Pondicherry, Andaman and Nicobar and Goa together comprise the South Indian Region. This region has about 55 cement plants (22 cement players) and accounts for 36% of all‐India capacity. South India will continue to remain the most uncertain, unpredictable and unfavorable region as surplus capacity remains abundant (especially Andhra Pradesh) and everything largely depends only on price discipline. In this section we will analyse various parameters of the South India region including a state wise analysis of the region. Players in South India Markets – Capacity Share

ACC Ltd., 9% Andhra Cements, 1% Anjani Portland

Cement, 1%

Bagalkot Udyog Ltd./Kanoria Industries, 0%

CCI Ltd., 1%

Chettinad Cement, 10%

Dalmia Cement, 8%

HeidelbergCement India Ltd, 1%

India Cements, 12%

JK Cement, 3%KCP Ltd., 2%Kesoram Ind, 7%Madras Cements,

11%

Malabar Cement, 1%

My Home Ind, 3%

Orient Paper & Ind Ltd, 3%

Panyam Cement, 1%

Penna Cement, 6%

Rain Industries, 4%

Tamil Nadu Cement, 1%

UltraTech Cement, 12%

Zuari Cement, 3%

State Wise Capacity Share of South India

Tamil Nadu , 34%

Andhra Pradesh , 44%

Karnataka , 22%

Kerala , 1%


South India has ~55 cement plants (22cement players) and accounts for 36%of all‐India capacity. This region willcontinue to remain the most uncertain,unpredictable and unfavorable regionas surplus capacity remains abundant,especially in State of Andhra Pradesh.

India Cements and UltraTech Cementare the largest regional capacities here.Apart from these there are numerousother players as seen in the adjoiningpie. Some other significant players hereare Madras Cement, Chettinad Cement,Dalmia Cement and ACC Ltd.

Andhra Pradesh is the largest statecapacity (26 cement factories) in theregion followed by Tamil Nadu (19cement factories) and Karnataka (8cement factories). In terms of players,there are about 15 players in AndhraPradesh, 7 in Tamil Nadu, 6 inKarnataka and 1 in Kerala.

– 39 of 133 –


Average Capacity Utilisations in South India (‘000 tonnes)

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12


-

50

100

150

200

250

300

350

400

450

April

05Ju

ly 05

Oct 0

5Ja

n 06

April

06Ju

ly 06

Oct 0

6Ja

n 07

April

07Ju

ly 07

Oct 0

7Ja

n 08

April

08Ju

ly 08

Oct 0

8Ja

n 09

April

09Ju

ly 09

Oct 0

9Ja

n 10

April

10Ju

ly 10

Oct 1

0Ja

n 11

Apr 1

1Ju

ly 11

Oct 1

1Ja

n 12

Average Capacity Per PlantAverage Capacity Per Player

Consumption Pattern – South India – FY12

Andhra Pradesh, 25%

Tamil Nadu, 37%

Karnataka, 22%

Kerala, 15%

Pondicherry, 1%

Andaman & Nicobar, 0% Goa, 1%


Utilisations in South India have been amatter of great concern since the lastfew years and is likely to remain so.South India is surviving today purely ona very mature player discipline. Thoughin good times this region has seen peakutilisations as high as 112% bututilisations in tough times have droppedto as low as 50%. Utilisations in thisregion are expected to remain at lowlevels for few more years and thisregion will continue to remain a bet onbehavior of players.

South India market has also seen fairamount of consolidation. Averagecapacity per player has moved up from2.09 mn tonnes p.a. to 4.81 mn tonnesp.a. while average capacity per planthas increased from 0.83 mn tonnes p.a.to 1.93 mn tonnes p.a.

Tamil Nadu is the largest consumptioncentre of South (37%) followed byAndhra Pradesh, Karnataka, Kerala,Pondicherry & Andaman & Nicobar.

– 40 of 133 –


Consumption Growth in South India ‐ FY12

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

South

Andh

ra Prade

sh

Tamil Nadu

Karnataka

Kerala

Pond

icherry

Andaman

& Nicob

ar

Goa

Inter‐Region transfer from South India (‘000 tonnes)

(2,000)

(1,800)

(1,600)

(1,400)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer from state of Andhra Pradesh (‘000 tonnes)

(1,800)

(1,600)

(1,400)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Andhra Pradesh has been a consistentlackluster consumption centre of SouthIndia. Except for Andhra Pradesh, allother major consumption centers haverecorded positive growth rates.

Transfers from South India haveincreased 6x (from base minimum), halfof growth of transfers from North Indiain the similar period.

Transfers from Andhra Pradesh havegrown by 3.2x (from base minimum), halfof the growth rate of external transfersfrom South India.

– 41 of 133 –


Inter‐region transfer from / to state of Tamil Nadu (‘000 tonnes)

(500)

(400)

(300)

(200)

(100)

‐

100

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer to / from state of Karnataka (‘000 tonnes)

(600)

(500)

(400)

(300)

(200)

(100)

‐

100

200

300

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer to state of Kerala (‘000 tonnes)

‐

100

200

300

400

500

600

700

800

900

1,000

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


The transfers from this particular statehave remained cyclical in nature.Though at most times transfers havehappened externally (at maximum of0.45 mn tonnes p.m.), recently the statehas even accepted intakes of marginalquantities of cement. In our opinion,this state has played a role of abalancing factor as far as transfers areconcerned.

Transfers to Kerala have increased by2.3x. Kerala has been a cement deficientstate and the state has only seen inflowsof cement. However, given the size ofconsumption of this state, the size ofgrowth is not really material.

Karnataka has been a fairly self sufficientstate. Though the state has taken intakeof marginal quantities at times, the statehas remained a supplier at most times.The state supplies almost 0.5mn tonnes ofcement p.m. (at peak).

– 42 of 133 –


Expected & Possible Capacity Additions in South India Mn tonnes per annum FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Beginning capacity 49.7 52.2 57.5 72.0 92.4 104.3 105.9 131.5 138.7Additions during the year 2.5 5.4 14.4 20.4 11.9 1.7 25.6 7.2 14.4ACC Ltd. ‐0.3 0.7 3.6 Andhra Cements ‐0.3 Anjani Portland Cement Ltd. 1.2 Bagalkot Industries 0.0 Bhavya Cements Ltd. 1.5BMM Cements Ltd. 1.2Chettinad Cement 2.0 4.4 2.3 1.5 3.0Dalmia Cement 2.3 0.5 5.0 2.5India Cements 0.8 1.1 2.2 Jaiprakash Associates 5.0 5.0JK Cement 3.0 JSW Cement 2.8 1.2KCP 0.1 1.7 1.8Kesoram Industries 2.0 0.8 1.7 Lalitha Cement 1.2Madras Cement 3.5 1.2 1.6 2.0My Home Industries 1.2 0.4 3.0 3.0Orient Paper 0.8 0.6 Penna Cement 2.0 2.0 Rain Industries 0.5 2.5 Sagar Cement 2.6UltraTech Cement 0.6 1.3 2.4 1.2 4.4Zuari Cement 3.4 2.1Average Capacity 51.9 54.9 65.8 84.0 99.5 105.4 117.9 131.5 140.0YE Capacity 52.2 57.5 72.0 92.4 104.3 105.9 131.5 138.7 153.2


~47 mn tonnes of new capacityadditions are possible and likely in thisregion. This accounts for ~45% ofcurrent regional capacity.

– 43 of 133 –


East India Assam, Meghalaya, Bihar, Jharkhand, Odisha, West Bengal & Chhattisgarh together comprise the East Indian Region. This region has about 34 cement plants (14 cement players) and accounts for 14% of all‐India capacity. East India has been a evolving and developing region as far as behavior of cement manufacturers is concerned. The region has recently seen some major consolidation moves, which is likely to make the region far more stable as far as player behavior is concerned. In this section we will analyse various parameters of the East India region including a state wise analysis of the region. Players in East India Markets – Capacity Share

ACC Ltd., 14%

Ambuja Cements, 13%

Birla Corp. Ltd., 4%

CCI Ltd., 0%

Cement Manu. Co. Ltd., 3%

Century Textiles, 5%

Jaypee Group, 10%Kalyanpur Cement, 2%

Lafarge India (P) Ltd., 18%

Madras Cements, 2%

Mawmluh Cherra, 0%

Meghalaya Cements Ltd., 1%

OCL India Ltd., 12% UltraTech Cement, 15%

State Wise Capacity Share of East India

Jharkhand , 19%

Chattisgarh , 35%West Bengal ,

18%

Orissa , 19%

Meghalaya , 5%

Bihar , 2% Assam , 0%


East India has 34 cement plants (14cement players) and accounts for 14%of all‐India capacity. This region is anevolving and a developing region as faras behavior of players is concerned.Recent consolidation moves in thisregion is likely to make players moremature. Growth rates are expected tobe robust.

Lafarge is the largest capacity in EastIndia with 18% capacity share. Othersignificant players in this market includenames like ACC Ltd., Ambuja cements,Jaypee Group, OCL India (Dalmia BharatLtd. recent acquisitions are not capturedin the adjoining pie) and UltraTechCement.

Chhattisgarh is the largest statecapacity in the region (8 cementfactories) followed by Jharkhand (4cement factories), Orissa (6 cementfactories) and West Bengal (8 cementfactories). In terms of numbers ofplayers, the region has in total of 14players (3 in Jharkhand, 5 inChhattisgarh, 6 in West Bengal, 3 inOdisha, 3 in Meghalaya, 1 in Bihar and1 in Assam).

– 44 of 133 –


Average Capacity Utilisations in East India

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12


‐

50

100

150

200

250

300

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12



Consumption Pattern – East India – FY12

Assam7%

Meghalaya1%

Bihar23%

Jharkhand9%

Orissa20%

West Bengal25%

Chhattisgarh13%

Others2%


Reflecting the regional’s immaturebehavior, utilisations in East India haveremained cyclical in nature. The peakand minimum utilisations of this regionhas been at 112% and 66%, respectively.Utilisations may correct further in thisregion given the pipeline of capacityadditions. However, as players becomemore mature with consolidation in theregion, pricing risk remains fairly low.

Like other regions, this region has alsowitnessed reasonable amount ofconsolidation. Average capacity perplayer has doubled from 1.56mn tonnesp.a. to currently 3.12mn tonnes p.a.Average capacity per plant has alsoseen similar movement from 0.64mntonnes p.a. to 1.28 mn tonnes p.a.

West Bengal is the largest consumptioncentre of the region followed by Bihar,Orissa, Chhattisgarh, Jharkhand, Assamand Meghalaya.

– 45 of 133 –


Consumption Growth in East India ‐ FY12

‐25.0%

‐20.0%

‐15.0%

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Inter‐Region transfer to East India (‘000 tonnes)

‐

100

200

300

400

500

600

700

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐Region transfer to West Bengal (‘000 tonnes)

‐

50

100

150

200

250

300

350

400

450

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Most of the major consumption centers(except Jharkhand) in East India haverecorded favorable growth rates.Consumption growth in this region islikely and expected to be robust.

East India has always been a deficientregion. Inflows to the region haveincreased. Comparing the baseminimum intake of 31,000 tonnes p.m.,peak inflows have increased 20x toalmost 0.6mn tonnes p.m. The increaseof inflows to East India is also indicativeof the growing demand in this region.

West Bengal inflows have seen agrowth of 4x from base minimum from~0.1 mn tonnes p.m. to 0.4 mn tonnesp.m.

– 46 of 133 –


Inter‐region transfer to state of Bihar (‘000 tonnes)

‐

100

200

300

400

500

600

700

800

900

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer to state of Odisha (‘000 tonnes)

‐

50

100

150

200

250

300

350

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer from state of Chhattisgarh (‘000 tonnes)

(900)

(800)

(700)

(600)

(500)

(400)

(300)

(200)

(100)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Inflows to state of Bihar has also seen asimilar growth of 4x from baseminimum from 0.21 mn tonnes p.m. to 0.84 mn tonnes p.m.

Inflows to state of Orissa have seen amulti‐fold growth from almost Nil (Baseminimum) to 0.32 mn tonnes p.m.

Chhattisgarh has been one of thesupplying states in East India. Supplieshave grown ~2x from 0.36 mn tonnesp.m. to ~0.79 mn tonnes p.m. Thoughthe base may be different, aninteresting point to be noted here isthat the growth in the major supplyingstate is just 2x as compared to multifoldgrowth in states taking intake.

– 47 of 133 –


Inter‐region transfer from state of Jharkhand (‘000 tonnes)

(350)

(300)

(250)

(200)

(150)

(100)

(50)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer to state of Assam (‘000 tonnes)

‐

50

100

150

200

250

300

350

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12

Inter‐region transfer from / to state of Meghalaya (‘000 tonnes)

(150)

(100)

(50)

‐

50

100

150

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12


State of Meghalaya which was earlierdeficient is now self‐sufficient for itscement requirement. The state is nowsupplying almost 0.1 mn tonnes ofcement p.m.

Inflows to state of Assam haveincreased almost 10x from baseminimum 33,000 tonnes p.m. to almost0.3mn tonnes p.m.

Jharkhand has been another supplyingstate in the region and supplies havegrown ~6x from 0.05mn tonnes p.m. to~0.6 mn tonnes p.m.

– 48 of 133 –


Expected & Possible Capacity Additions in East India Mn tonnes per annum FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Beginning capacity 23.1 24.0 27.5 30.3 36.5 36.5 43.7 57.7 64.9Additions during the year 1.0 3.5 2.8 6.2 0.0 7.2 14.1 7.2 5.3ACC Ltd. 0.3 1.1 3.4Ambuja Cements 1.0 1.6 1.1 0.9Amrit Cement Industries 1.0Birla Corp 0.7Calcom 0.9Cement Mfg. Co. Ltd. (Star Cement) 1.1 0.2 3.2Century Textiles 0.3 1.5UltraTech Cement 0.4 4.8Goldstone Cements Ltd. 0.5Jaiprakash Associates 4.3 JK Lakshmi Cement Ltd 2.7Lafarge 0.2 1.4 1.2 Meghalaya Cement / Topcem 0.4 ‐0.1 0.4 0.7Madras Cement 1.0 Mawmluh Cherra 0.2RNB Cements Pvt. Ltd. 0.3Shiva Cement 1.0Shree Cement 1.0Toshali Cements Pvt Limited 0.8UltraTech Cement 0.7 0.0 1.6OCL India 0.5 0.9 2.6 1.4Average Capacity 23.7 25.1 29.2 34.3 36.5 41.9 43.8 58.1 67.7YE Capacity 24.0 27.5 30.3 36.5 36.5 43.7 57.7 64.9 70.2


~26 mn tonnes of capacities are likely tobe added in East India. However, manyof these capacities, especially by smallerplayers remains questionable with regards to their execution and this willbe a cushion to the East Indiautilisations.

– 49 of 133 –


West India Maharashtra and Gujarat together comprise the West Indian Region. This region has about 22 cement plants (12 cement players) and accounts for 15% of all‐India capacity. West India has been one of the most disciplined and stable regions, known for its price stability. This region is also amongst the most consolidated markets of the country. In this section we will analyse various parameters of the West India including a state wise analysis of the region. Players in West India Markets – Capacity Share

ACC Limited, 9%

Ambuja Cements, 24%


HeidelbergCement India Limited, 2%

HMP Cement, 0%

India Cements, 2%Jaypee Group, 10%

JK Lakshmi Cement, 1%

Mehta Group, 6%

Orient Paper & Industries Ltd., 4%

Sanghi Industries, 6%

Shree Digvijay Cement, 2%


State Wise Capacity Share of West India

Gujarat , 56%

Maharashtra , 44%


West India has been amongst one of thestable regions, atleast as far as cementpricing is concerned. This region hasabout 22 cement plants and 12 cementplayers and it accounts for 15% of All‐India capacity.

UltraTech Cement is the largest cementcapacity here with28% capacity share.Other major players include names likeAmbuja Cements, ACC Limited andJaypee Cement.

Gujarat (13 factories; 7 players) isahead of Maharashtra (9 factories; 7players) by 12% in terms of capacity.

– 50 of 133 –


Average Capacity Utilisations in West India

50%

70%

90%

110%

130%

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12


‐

50

100

150

200

250

300

350

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12



Consumption Pattern – West India – FY12

Gujarat, 42%

Maharashtra, 58%


Utilisations have remained fairly cyclicalin this region. The lowest recordedutilisation was at 61% while the peakwas at 113%. Utilisations are expectedto remain fairly favorable in this region.Thus pricing risk in this region seems tobe minimal. Infact, North and West arethe only two fundamentally very strongregions for the next couple of years.

This region is already fairlyconsolidated. Average capacity perplayer has increased from 2.4 mntonnes p.a. to 3.81 mn tonnes p.a. whileaverage per plant has moved from 1.31mn tonnes p.a. to 2.08 mn tonnes p.a.

Consumption pattern of the region isalmost the reverse of the capacity pattern.Maharashtra is ahead of Gujarat in termsof consumption by ~16%.

– 51 of 133 –


Consumption Growth in West India ‐ FY12

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

West Gujarat Maharashtra

Inter‐Region transfer from / to West India (‘000 tonnes)

(200)

‐

200

400

600

800

1,000

1,200

1,400

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer to state of Maharashtra (‘000 tonnes)

‐

200

400

600

800

1,000

1,200

1,400

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Consumption growth rates haveremained robust in West India and arelikely to remain so. This region hasnever suffered from consumptionproblem. Infact some of our dealerchecks suggests that West India hasbeen a dump yard for other regions.Interestingly, prices have remainedbuoyant as well at most times.

From being a almost self‐sufficientregion in 2005 the region is nowdependent on other region to the extentof almost 1.4mn tonnes p.m. This isindicative of the robust growth thisregion has seen in the past few years.

Maharashtra has always been deficientof cement. From base minimum intakeof 0.3 mn tonnes p.m., the intake hasnow increased to almost 1.3mn tonnesp.m.

– 52 of 133 –


Inter‐region transfer from / to state of Gujarat (‘000 tonnes)

(700)

(600)

(500)

(400)

(300)

(200)

(100)

‐

100

200

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Expected & Possible Capacity Additions in West India Mn tonnes per annum FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Beginning capacity 28.7 28.7 31.6 34.2 38.4 44.5 45.7 53.8 56.9Additions during the year 0.0 2.9 2.6 4.1 6.1 1.2 8.1 3.1 12.0Ambuja Cements 1.0 2.1 1.2 ACC 3.0 ABG Cement 5.8Century Textiles 0.4 3.1UltraTech Cement 1.3 1.6India Cements 1.1 Mehta Group 0.3 Reliance Cement 0.7 5.0Jaiprakash Associates 2.7 2.1 3.0JK Lakshmi Cement 0.5 Orient Cement 0.2 1.0 Zuari Cement 2.0Average Capacity 28.7 29.0 32.4 36.5 39.8 45.3 45.9 53.8 56.9YE Capacity 28.7 31.6 34.2 38.4 44.5 45.7 53.8 56.9 66.9


Contradictorily, Gujarat being excess oncapacity has been a supplier of cementat most times. Being a coastal region, alarge chunk of export is also handledfrom Gujarat ports, though the quantityis negligible when compared to all‐Indiaconsumption. However, externaltransfers from state of Gujarat areseeing a sharp decline from 0.57mntonnes (at peak) to almost Nil (Infact attimes even Gujarat has importedcement). There can be no betterargument to support the robust growthof Gujarat.

~21 mn tonnes of new capacities areplanned in this region which is ~46% ofcurrent capacity. However, few largecapacity additions are running slow onexecution and this will be a relief to theregional capacity utilisations.Consolidation moves by cement majorsalso seems likely in this region.

– 53 of 133 –


Central India Uttar Pradesh and Madhya Pradesh together comprise the Central Indian Region. This region has about 21 cement plants (8 cement players) and accounts for 12% of all‐India capacity. Central India has been a relatively unstable region on pricing front despite high capacity utilisations. This is largely on account of its geographical disadvantage. Consolidation in adjoining markets is something that will help Central India getting more stable. Given the growing maturity of cement manufacturers, we do not foresee any major reason for worry for this region. In this section we will analyse various parameters of the Central India including a state wise analysis of the region. Players in Central India Markets –Capacity Share

ACC Limited, 13%

Ambuja Cements Ltd., 4%

Birla Corp, 6%


HeidelbergCement India Ltd., 4%

Jaypee Group, 36%

Prism Cement, 16%


State Wise Capacity Share of North India

Uttar Pradesh, 67%

Madhya Pradesh, 33%


Central India has been a relativelyunstable region on account of itsgeographic disadvantage. It has 21cement plants (8 cement players) andaccounts for 12% of All‐India capacity.Consolidation in adjoining regions willbe a boon to Central India. Thoughutilisations have always remained veryhealthy here prices have been verycyclical. With growing size and evolvingmaturity of players, we expect less risksand reasons for worry for this region.

Jaypee Group is the largest cementcapacity in Central India with 36%capacity share. Other major playersincludes names of Prism Cement, ACCLimited, UltraTech Cement, AmbujaCements, Century textilesHeidelbergCement India and Birla Corp.

Uttar Pradesh (11 factories; 6 players)accounts for 2/3rd of the capacity whileMadhya Pradesh (10 factories; 7players) accounts for the rest.

– 54 of 133 –


Average Capacity Utilisations in Central India

70%

90%

110%

130%

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12


‐

50

100

150

200

250

300

350

400

450

April 05

July 05

Oct 05

Jan 06

April 06

July 06

Oct 06

Jan 07

April 07

July 07

Oct 07

Jan 08

April 08

July 08

Oct 08

Jan 09

April 09

July 09

Oct 09

Jan 10

April 10

July 10

Oct 10

Jan 11

Apr 1

1July 11

Oct 11

Jan 12



Consumption Pattern – Central India – FY12

Uttar Pradesh, 67%

Madhya Pradesh, 33%


Capacity utilisations have alwaysremained very healthy in Central Indiaas we can see in the adjoining graph.The minimum this region has touched is75% and the maximum is of 122%. Thisregion is a classic example to elaboratethe fact that though utilisations areimportant for cement pricing, it is notthe only driving force. More importantlypricing also depends on marketdynamics, behavior of cementmanufacturers and the maturity shownby them in the environment in whichthey operate. We expect more stabilityin cement pricing as players becomemore big and mature. Utilisations arelikely to remain high in this region.

Elaborating on the growingconsolidation in the Central Indiamarkets, average capacity per playershas increased from 2.75mn tonnes p.a.to 4.65 mn tonnes p.a. while averagecapacity per plant has increased from1.05mn tonnes p.a. to 1.77 mn tonnesp.a. It is to be noted exiting players inthis market have brought in morequantum of consolidation, as can beseen from the adjoining graph.

Consumption pattern of Central India isquite similar to that of the capacitydistribution. Uttar Pradesh accounts for2/3rd of the cement consumption andthe rest is consumed by MadhyaPradesh.

– 55 of 133 –


Consumption Growth in Central India ‐ FY12

9.6%

9.6%

9.6%

9.6%

9.7%

9.7%

9.7%

9.7%

9.7%

9.8%

Central Uttar Pradesh Madhya Pradesh

Inter‐Region transfer to / from Central India (‘000 tonnes)

(400)

(300)

(200)

(100)

‐

100

200

300

400

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Inter‐region transfer from state of Madhya Pradesh (‘000 tonnes)

(1,400)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

‐

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oc t 11

Jan 12


Consumption growth in Central Indiahas remained quite robust. This againelaborates the importance of playerdiscipline to ensure stable pricingenvironment. Prices in Central Indiahave seen fair amount of fluctuationsdespite a robust growth rate andhealthy utilisation. Consumption growthhere is likely to remain reasonably high.

Madhya Pradesh has always been onthe supplying end. Supplies haveremained almost stagnant from thisregion at ~0.7‐0.9mn tonnes p.m. Thisstagnancy is also indicative ofopportunity loss and disadvantage ofCentral India, as players, in otherregions have never really allowedplayers here to grow outside theirterritory.

This region pays the price of itsgeographic disadvantage as playersfrom all over India have the likelihoodof dumping excess production here.Central India has been a suppliersometimes while on other occasions ithas been the receiver of cement fromother regions. In other words, CentralIndia has played the role of a balancingfactor many times for its adjoiningregions and the same can be easily seenin the adjoining graph.

– 56 of 133 –


Inter‐region transfer from state of Uttar Pradesh (‘000 tonnes)

‐

200

400

600

800

1,000

1,200

1,400

April 05

July 05

Oct 05

Jan 06

Ap

ril 06

July 06

Oct 06

Jan 07

Ap

ril 07

July 07

Oct 07

Jan 08

Ap

ril 08

July 08

Oct 08

Jan 09

Ap

ril 09

July 09

Oct 09

Jan 10

Ap

ril 10

July 10

Oct 10

Jan 11

Ap

r 11

July 11

Oct 11

Jan 12

Expected & Possible Capacity Additions in Central India Mn tonnes per annum FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

Beginning capacity 22.0 22.5 26.5 27.8 30.3 36.2 37.2 43.7 52.4Additions during the year 0.0 0.5 4.0 1.2 2.6 5.9 1.0 6.5 8.7 1.5ACC Ltd. 0.8 Ambuja Cements 1.5 1.2Birla Corp 0.30Century Textiles 0.8 0.40UltraTech Cement 1.3 1.3 HeidelbergCement India Ltd. 3.2Jaiprakash Associates 0.5 1.9 0.4 1.6 1.0 1.0 1.5KJS Cement Pvt. Ltd. 2.6Prism Cement ‐0.5 3.6 Revathi Cement 2.5Reliance Cementation (ADAG) 5.0Average Capacity 22.0 22.5 23.0 27.4 28.1 32.8 37.0 40.3 44.3 53.2YE Capacity 22.0 22.5 26.5 27.8 30.3 36.2 37.2 43.7 52.4 53.9

Source: PhillipCapital India Research.

Contrarian to Madhya Pradesh, UttarPradesh has been always on thereceiving end. However, peak inflows toUttar Pradesh have grown by 2x (frombase minimum) from 0.6mn tonnes p.m.to 1.2mn tonnes p.m. which is indicativeof the advantage taken by players ofother regions to increase despatches tothis region. Though Central India’sgeographic disadvantage will always bea matter of concern, the growing size ofcapacities is what that brings in moreconfidence in evolving maturity of theplayers.

~45% capacity addition is likely andpossible in Central India. New entrantslike Reliance Cement are about to maketheir presence felt soon. However wefeel confident of rational behavior asthese large size new entrants are awareof the pricing gimmick. It is verydifficult, rather practically impossible tomove to Tier I pricing once a brand islaunched in Tier II category. Largeplayers and new entrants of this marketare well aware of this and it is veryunlikely that they will play the pricinggame to ensure market share. Weforesee lot of changes for better in thedynamics of the Central India markets.

– 57 of 133 –


Companies Section

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– 59 of 133 –

ACC Ltd. Bound to lose ground – “Structural de‐rating” on the cards

CEMENT: Company Update 28 January 2013

PhillipCapital (India) Pvt. Ltd.

ACC Ltd. (ACC) remains fundamentally overvalued in our view and is our Top Sell in the large cap cement space. Lack of capacity additions will make it difficult for ACC to deliver any significant and material volume growth CY12E onwards. 9MCY12, ACC delivered a volume growth of mere 2.2% YoY. We have factored in a volume growth of 5.6% YoY in CY13E. Low volume growth in our view is a clear and visible barrier to ACC’s earnings potential, atleast for the next couple of years. Any delays in Jamul project will further suppress volume growth potential. We rate ACC as a Sell, as we believe there is a clear lack of visibility / strategy on the roadmap of ACC’s next phase of capacity expansion and the company is bound to consistently lose ground to other cement majors / regional leaders.

Investment Rationale • Though ACC’s despatch mix is fairly balanced across various regions of the

country (except West India), ACC’s capacity ratio in South India (to its total capacity) is the highest. South India continues to remain the most unpredictable region on account of the huge capacity surplus.

• Capacity utilisation of ACC at 83% is already way ahead of industry’s average utilisation at ~76%. No further capacity addition leaves very limited room for ACC to increase its utilisation to trigger volume growth.

• Slowly and steadily shrinking gap in premium in cement realisations to the consistently growing major UltraTech Cement. No capacity creation will ultimately lead to loss of bargaining power of ACC to its peers. We strongly believe, in a couple of years, UltraTech Cement should command the maximum premium in cement realisations vis‐à‐vis any other cement major. With lack of capacity addition, it also seems very likely that ACC will start losing its market share to its peers.

• Lack of strategy to add capacities and increased royalty payments to Holcim with idle cash on books clearly indicates limited longer term growth potential. Stock de‐rating inevitable with losing market share and muted volume growth.

Risks • Delays in announced refurbishment of Jamul plant. Our checks suggest a

considerable delay in execution of this project cannot be ruled out. The project is scheduled to take off by 1QCY15.

• Shift of focus from pricing to volumes can further deteriorate ACC’s margins and earnings.

Valuation • We believe ACC is fundamentally overvalued at CMP of Rs1,331. We have

valued ACC at an EV/EBITDA multiple of 7.0x on CY13E earnings. • At current market price of Rs1,331, the stock of ACC trades at 16.2x & 14.3x

P/E; 10.1x & 8.4x EV/EBITDA; 148 & 145 US$ EV/tonne on CY12E and CY13E earnings, respectively. We have assigned a mid cycle valuation multiple (7.0x EV/EBITDA on CY13E earnings) for ACC Ltd, given the low potential of ACC’s volume growth. At our price target of Rs1,142, the stock of ACC will trade at 13.9x & 12.3x P/E; 8.5x & 7.0x EV/EBITDA; 125 & 121 US$ EV/tonne on CY12E and CY13E earnings, respectively.

SELL ACC IN | CMP Rs 1,331

TARGET Rs 1,142 (‐14%) Company Data

O/S SHARES (MN) : 188MARKET CAP (RSBN) : 250MARKET CAP (USDBN) : 4.752 ‐ WK HI/LO (RS) : 1515 / 1105LIQUIDITY 3M (USDMN) : 7.1FACE VALUE (RS) : 10

Share Holding Pattern, %

PROMOTERS : 50.3FII / NRI : 20.2FI / MF : 10.6NON PRO CORP. HOLDINGS : 5.3PUBLIC & OTHERS : 13.5

Price Performance, % 1mth 3mth 1yr

ABS ‐5.7 ‐5.0 13.3REL TO BSE ‐10.1 ‐12.2 ‐6.0

Price Vs. Sensex (Rebased values)

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ACC BSE Sensex

Source: Bloomberg, Phillip Capital Research

Other Key Ratios

Rs mn CY11 CY12E CY13E

Net Sales 100,123 111,312 123,278EBITDA 16,961 22,613 26,190Net Profit 13,008 15,481 17,466EPS, Rs 69.2 82.4 92.9PER, X 19.2 16.2 14.3EV/EBIDTA, % 13.3 10.1 8.4EV/Net Sales, x 2.3 2.1 1.8ROE, % 19.6 21.2 21.6Source: PhillipCapital India Research Est. Vaibhav Agarwal (+ 9122 6667 9967) [email protected]

– 60 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / ACC LTD / COMPANY UPDATE

Low capacity creation bound to de‐rate valuations “ACC” used to be a name synonymous with cement in India and to some extent, even today it is. However, we believe this synonymy is now losing its importance as the consistently growing major – “UltraTech Cement” is a name which is over‐ruling ACC’s brand power. ACC accounts for ~10% capacity share of the country. ACC’s capacity and despatch mix on a regional basis is elaborated below: Capacity Share of ACC

North, 19%

South, 33%East, 20%

West, 13%

Central, 15%

Despatch Share of ACC

Central, 22%

Eastern, 21%

Northern, 26%

Southern, 26%

Western, 5%


ACC is at a clear risk of losing market share to its peers in the near term as the company does not seem to be in a hurry to add any new capacities. The only project announced by ACC is the refurbishment of its plant in Jamul in Chhattisgarh, East India. The project involves phasing out of the existing clinkering and grinding lines at Jamul and setting up of a new clinker line of 2.79 mn tonnes per annum and a grinding facility of +4mn tonnes per annum (includes split grinding units). The project is scheduled to be implemented in a phased manner by 1QCY2015. ACC’s peers viz. UltraTech Cement, we believe is far more aggressive in its capacity expansion plan and has a set road‐map for its next phase of expansion. Our sources also suggest us that there may be delays in refurbishment of the Jamul unit. We believe, this is clearly a material risk for ACC and if the company has to fall in line with the production discipline of the industry it cannot afford to increase its capacity utilisation significantly from current levels, unless the industry’s utilisation improve at a consolidated level.

Capacity share remains highest in southIndia; largely balanced across all otherregions of the country. Lack of strategyin capex execution will mean ACC’scapacity mix is unlikely to changematerially in foreseeable future.

Barring West India, despatch mixremains fairly balanced across all otherregions of the country. However, withno capacity expansions, overall marketshare of ACC is very likely to beimpacted negatively. Also, it is to benoted that since ACC’s despatches arefairly distributed across parts of India,the company cannot afford to goagainst the industry discipline as anysuch move is likely to have a reasonableimpact on its profitability.

“ACC” losing its synonymy to “Cement”to UltraTech Cement – A clear dangersignal to ACC!

– 61 of 133 –


Behavior of ACC Ltd. All India

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A very well‐disciplined player on pan‐India basis as can be seen fromadjoining graph. Hence, any significantramp‐up in its overall capacityutilisation seems unlikely, unlessindustry’s overall utilisation improves.

Moving in‐line with discipline of NorthIndia by toning down its despatches tomatch with industry pattern in toughtimes.

Attempting rigorously to ensure ahealthy and disciplined behavior inSouth India. This also indicates thatthere is no scope available to ACC toramp up capacity utilisations in thisregion (ahead of the region).

– 62 of 133 –


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Toned down to match the regionalpattern and now moving in‐line.

Though it has the lowest mix of its totaldespatches in West India, themovement of ACC’s despatches here isexactly in‐line with the regionaldiscipline. This highlights theimportance of West India to ACC,though West India may form a smallportion of ACC’s overall despatches.

ACC’s despatches in Central India havebeen aggressive. However, in times ofnecessity, it can be clearly seen that thedespatches have been toned down tomatch the regional pattern.

– 63 of 133 –


Our concerns are that in order to fall in line with the discipline of the industry, ACC will not be able to push its capacity utilisations materially beyond current levels. As we can clearly see from the all‐India and regional graphs above, ACC has done its best to deliver performance in line with the industry trends. Except for some variations in its despatches in South and Central India, in all the other regions (including industry as a whole), despatches of ACC have been in line with that of the industry trend. We expect ACC’s volume growth to remain lower than growth of its key peer – “UltraTech Cement” at 2.1% & 5.6% for CY12E and CY13E, respectively. Rating & Price Target Rating SELL

CY13E EBITDA (Rs mn) 26,190CY13E EBITDA margin, % 21%CY13E EBITDA/Share (Rs) 139Target EV/EBITDA (x) 7.0Target EV/Share (Rs) 976Net debt/Share (166)Equity fair value/Share (Rs) 1,142% upside ‐14%CY13E Implied target EV/Tonne (US$) 121CY13E Implied Target P/E (x) 12.3 CY13E EV based on CMP (Rs mn) 218,962CY13E Capacity (EOP, mtpa) 29.1CY13E EBITDA (Rs mn) 26,190CY13E EV/EBITDA (x) 8.4CY13E P/E (x) 14.3CY13E EV/tonne (US$) 145


Valued at 7.0x EV/EBITDA. We havevalued ACC at mid cycle valuationstaking into consideration the lowvolume growth potential of thecompany. Implied target EV/tonnevaluation is at ~US$121 which is ~10‐15% discount to current replacementcost. It is also to be noted that ACC’scapacities are much older thancapacities of its peers and hence to thatextent the resources are moreexhausted at ACC Ltd.

– 64 of 133 –


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– 65 of 133 –


Financials

Income Statement Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Net sales 82,588 100,123 111,312 123,278

Growth, % ‐3 21 11 11

Total income 82,588 100,123 111,312 123,278

Operating expenses ‐67,183 ‐83,162 ‐88,699 ‐97,087

EBITDA (Core) 15,405 16,961 22,613 26,190

Growth, % (37.4) 10.1 33.3 15.8

Margin, % 18.7 16.9 20.3 21.2

Depreciation ‐4,277 ‐5,100 ‐5,433 ‐6,034

EBIT 11,128 11,861 17,180 20,156

Growth, % (37.4) 10.1 33.3 15.8

Margin, % 18.7 16.9 20.3 21.2

Interest paid ‐147 244 392 692

Other Non‐Operating Income 3,173 2,948 3,931 4,127

Pre‐tax profit 14,189 15,163 21,613 25,085

Tax provided ‐3,414 ‐2,155 ‐6,132 ‐7,619

Profit after tax 10,776 13,008 15,481 17,466

Net Profit 10,775 13,008 15,481 17,466

Growth, % (31.1) 20.7 19.0 12.8

Net Profit (adjusted) 10,775 13,008 15,481 17,466

Unadj. shares (m) 188 188 188 188

Wtd avg shares (m) 188 188 188 188

Balance Sheet Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Cash & bank 10,856 16,599 13,927 23,376

Debtors 2,494 3,392 3,771 4,177

Inventory 9,259 11,129 12,373 13,703

Loans & advances 4,453 5,483 6,095 6,750

Other current assets 569 157 175 194

Total current assets 27,630 36,761 36,342 48,200

Investments 14,069 12,931 12,931 12,931

Gross fixed assets 84,581 100,322 116,274 124,274

Less: Depreciation ‐31,515 ‐36,258 ‐41,691 ‐47,725

Add: Capital WIP 15,642 4,407 5,000 5,000

Net fixed assets 68,708 68,472 79,583 81,549

Total assets 110,407 118,164 128,856 142,680

Current liabilities 22,140 27,452 30,520 33,801

Provisions 16,535 10,554 11,734 12,995

Total current liabilities 38,674 38,006 42,254 46,796

Non‐current liabilities 8,908 10,346 10,346 10,346

Total liabilities 47,582 48,352 52,599 57,141

Paid‐up capital 1,880 1,880 1,880 1,880

Reserves & surplus 60,928 67,911 74,356 83,638

Shareholders’ equity 62,825 69,812 76,257 85,539

Total equity & liabilities 110,407 118,164 128,856 142,680


Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Pre‐tax profit 14,189 15,163 21,613 25,085

Depreciation 4,277 5,100 5,433 6,034

Chg in working capital 5,004 ‐4,055 1,994 2,133

Total tax paid ‐3,292 ‐584 ‐6,132 ‐7,619

Other operating activities 1 70 ‐3,354 0

Cash flow from operating activities 20,180 15,694 19,554 25,632

Capital expenditure ‐7,626 ‐4,864 ‐16,544 ‐8,000

Chg in investments ‐2,148 1,138 0 0

Cash flow from investing activities ‐9,774 ‐3,727 ‐16,544 ‐8,000

Free cash flow 10,406 11,968 3,010 17,632

Equity raised/(repaid) 2 3 0 0

Debt raised/(repaid) ‐430 ‐132 0 0

Dividend (incl. tax) ‐6,668 ‐6,095 ‐5,682 ‐8,184

Cash flow from financing activities ‐7,095 ‐6,224 ‐5,682 ‐8,184

Net chg in cash 3,311 5,744 ‐2,672 9,449

Valuation Ratios & Per Share Data CY10 CY11 CY12E CY13E

EPS, Rs 57.3 69.2 82.4 92.9

BVPS, Rs 334.2 371.4 405.7 455.1

DPS, Rs 30.5 28.0 26.1 37.6

Return on assets (%) 10.3 11.2 12.3 12.5

Return on equity (%) 17.7 19.6 21.2 21.6

Return on Invested capital (%) 19.1 23.4 24.4 25.3

RoIC/Cost of capital (x) 2.4 2.9 3.0 3.1

RoIC ‐ Cost of capital (%) 11.0 15.3 16.3 17.3

Return on capital employed (%) 13.0 14.4 16.1 16.4

Cost of capital (%) 8.1 8.1 8.1 8.1

RoCE ‐ Cost of capital (%) 4.9 6.3 8.0 8.4

Asset turnover (x) 1.3 1.6 1.7 1.7

Sales/Total assets (x) 0.8 0.9 0.9 0.9

Sales/Net FA (x) 1.2 1.5 1.5 1.5

Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)

Receivable days 11.0 12.4 12.4 12.4

Inventory days 40.9 40.6 40.6 40.6

Current ratio (x) 1.2 1.3 1.2 1.4

Quick ratio (x) 0.8 0.9 0.8 1.0

Interest cover (x) 75.8 n/a n/a n/a

Dividend cover (x) 1.9 2.5 3.2 2.5

PER (x) 23.2 19.2 16.2 14.3

Price/Book (x) 4.0 3.6 3.3 2.9

EV/EBIT (x) 15.0 13.3 10.1 8.4

EV/NOPLAT (x) 19.2 15.2 13.9 11.8

EV/CE 2.6 2.5 2.3 2.0

EV/IC (x) 3.8 3.6 3.4 3.0

– 66 of 133 –

Ambuja Cement Volume growth to surprise positively in near term…



Ambuja Cements Ltd. (Ambuja), another Holcim‐controlled major is fairly better placed than its sister concern – ACC Limited. With a relatively better operating structure and reasonable potential to increase volumes upto 13% YoY in CY13E, we believe Ambuja remains an attractive pick. We upgrade Ambuja to Buy with a revised price target of Rs255/‐. However, on a longer term basis, even volumes of Ambuja are at a risk of muted growth unless and until new capacities are put into operation. Ambuja is working on certain Brownfield capacity expansions apart from a Greenfield project at Marwar Mundwa, Rajasthan, North India to increase capacity by +4mn tonnes p.a. Though CY13E seems to be a smooth journey for Ambuja, volume growth for CY14E and CY15E will remain questionable.

Investment Rationale • Ambuja Cements had recently commissioned (CY11) new capacities of

~2.4mn tonnes. This provides a larger cushion for Ambuja to post a volume growth better than that of its sister concern – ACC Limited. Over 9MCY12, Ambuja has posted a volume growth of ~6% YoY (Vs. ACC’s ~2% growth).

• Ambuja’s volume growth for CY12E is likely to be in‐line with the industry trend. Greenfield planned expansion of Ambuja at Marwar‐Mundwa (District – Nagaur, Rajasthan) of +4mn tonnes p.a. (as it happens) will provide further cushion to Ambuja to increase its volume (execution likely to be faster).

• Ambuja’s regional exposure is skewed in favor of North and West India. Utilisations in North India are expected to remain +90% levels for the next few coming years. In West India, though utilisations may remain in–line with industry, prices in West India are very unlikely to see major fluctuations. West India has been one of the most stable and a firm region as far as cement pricing is concerned.

Risks • Delays in announcement of new capacities may risk Ambuja’s volume growth

in the longer term. Ambuja’s only competitive advantage Vs. ACC in near term is that – Ambuja’s capacity are newer and hence it is yet to take the full advantage of its new capacity creation.

• Losing focus to create further more capacities (post current planned expansions) will also put Ambuja Cements at similar risk of loss of market share to peers, in the longer term.

Valuation • Ambuja continues to remain attractive on CY13E earnings. We upgrade

Ambuja Cements to a BUY with a price target of Rs255/‐. • We have valued Ambuja at an EV/EBITDA multiple of 10x on CY13E earnings. • At the current market price of Rs199, the stock of Ambuja trades at 15.6x &

13.5x P/E; 9.5x & 7.5x EV/EBITDA; 182 & 165 US$ EV/tonne on CY12E and CY13E earnings, respectively. Assigned multiple is better than ACC taking into account Ambuja’s better profit margins, volume growth potential & vision / strategy at Ambuja Cements (as compared to ACC Ltd.). At our price target of Rs255, the stock will trade at 20.0x & 17.2x P/E; 12.6x & 10.0x EV/EBITDA; 241 & 220 US$ EV/tonne on CY12E and CY13E earnings, respectively.

BUY ACEM IN | CMP Rs 199

TARGET Rs 255 (+28%) Company Data



PROMOTERS : 50.7FII / NRI : 31.3FI / MF : 10.6NON PRO. CORP. HOLDINGS : 0.5PUBLIC & OTHERS : 6.9


ABS ‐0.5 ‐3.4 14.3REL TO BSE ‐4.9 ‐10.5 ‐5.1


70

90

110

130

150

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190


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Other Key Ratios



– 67 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / AMBUJA CEMENT / COMPANY UPDATE

Volume growth likely to be a positive surprise Ambuja seems to be fairly better placed than its sister concern ACC Limited. Ambuja has recently commissioned new capacities of ~2.4 mn tonnes. In a scenario of volume and price discipline, volume growth of a cement company is directly linked to the new capacity creation by the company. Moreover, capacities and despatches of Ambuja cements are more skewed towards West and North. While North India is a region with most favorable utilisations; West India is known for its rational behavior towards cement pricing and utilisations. In our view Ambuja possesses minimal threat of any set back to its earnings growth, atleast till the end of CY13E. Capacity Share of Ambuja

North, 33%

East, 21%

West, 41%

Central, 5%

Despatch Share of Ambuja

Central, 6%

Eastern, 20%

Northern, 34%

Western, 41%


Largely skewed capacity share in Westand North India (Two of the mostpreferred regions in the country andlikely to remain so, atleast for a coupleyears). No presence in South.

Similar despatch mix in all regions ofthe country. ~75% of despacthes inNorth & West India (Regions which arevery likely to post favorable outcomesin foreseeable future).

Volume growth upto 13% in CY13E islikely to be a positive surprise withAmbuja Cements.

– 68 of 133 –


Ambuja Cements commands the highest premium in realisations Vs. Peers (Rs/tonne)

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UltraTech Ambuja Cement ACC

Ambuja enjoys the highest brand premium Vs. peers and the same can be seen from graph above. Though, UltraTech is inching closer to ACC and Ambuja in price realisations, brand premium will help Ambuja deliver better operating margin Vs. peers, atleast in near term. Behavior of Ambuja Cements All India

1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200

9,200

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Ambuja Cements, rhs


At most times, Ambuja has commanded/ continues to command the maximumpremium in cement realisations. In ourview, this along with a superior coststructure is one of the key reasons forthe valuation premium the companyhas consistently enjoyed.

A very well‐disciplined player on pan‐India basis at all given times; Moveshave been marginally higher(sometimes) than industry which webelieve, is largely on account of itsbrand premium.

– 69 of 133 –


North India

400

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Other players, lhsAmbuja Cements, rhs

West India

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450

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Ambuja Cements, rhs

East India

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April

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Oct 0

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April

12



Taking advantage of being amongregional leaders with strong brand;though despatches have not alwaysbeen in‐line, we can see a seriousattempt to tone down to match industrybehavior since mid 2010.

In sync with regional discipline of WestIndia at all times, West India is ofsignificant importance to Ambuja asthis company is the second largestplayer in the region; dispatching +40%of its production to this region.

East India is another region of significantimportance to Ambuja (erstwhile AmbujaCement Eastern merged with Ambuja inearly May 2006). This is one of the bestsync patterns one can observe in anyregion.

– 70 of 133 –


Central India

80859095100105110115120125130

220023002400250026002700280029003000310032003300

Mar

10Ap

ril 10

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12



Rating & Price Target Rating BUY

CY13E EBITDA (Rs mn) 33,774CY13E EBITDA margin, % 28%CY13E EBITDA/Share (Rs) 22Target EV/EBITDA (x) 10.0Target EV/Share (Rs) 219Net debt/Share (35)Equity fair value/Share (Rs) 255% upside 28%CY13E Implied target EV/Tonne (US$) 220CY13E Implied Target P/E (x) 17.2 CY13E EV based on CMP (Rs mn) 252,223CY13E Capacity (EOP, mtpa) 29.5CY13E EBITDA (Rs mn) 33,774CY13E EV/EBITDA (x) 7.5CY13E P/E (x) 13.5CY13E EV/tonne (US$) 165


Central India has been a fairly newterritory for Ambuja, where alsoAmbuja is making serious attempts tofall in‐line with regional discipline.

We have valued Ambuja Cements at10.0x EV/EBITDA multiple on CY13Eearnings. We believe, Ambuja Cementsdeserves a much better multiple thanACC, given Ambuja’s favorable capacitymix across regions and better profitmargins. No exposure to South India isthe biggest advantage to AmbujaCements. At our price target the stockwill trade at US$ 220/tonne.

– 71 of 133 –



PE band

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– 72 of 133 –


Financials


Net sales 73,902 85,312 101,783 121,396

Growth, % 4 15 19 19

Total income 73,902 85,312 101,783 121,396


EBITDA (Core) 18,230 19,064 27,829 33,774

Growth, % (2.3) 4.6 46.0 21.4

Margin, % 24.7 22.3 27.3 27.8

Depreciation ‐3,872 ‐4,462 ‐4,833 ‐5,033

EBIT 14,358 14,603 22,996 28,741

Growth, % (2.3) 4.6 46.0 21.4

Margin, % 24.7 22.3 27.3 27.8

Interest paid ‐487 ‐535 ‐692 ‐692


Pre‐tax profit 16,347 17,255 26,539 33,945

Tax provided ‐3,983 ‐4,738 ‐6,962 ‐11,202

Profit after tax 12,364 12,517 19,577 22,743

Net Profit 12,364 12,517 19,577 22,743

Growth, % 1.6 1.2 56.4 16.2


Extraordinary items: Gains/(Losses) 265 ‐243 ‐2,791 0

Unadj. shares (m) 1,530 1,534 1,540 1,540

Wtd avg shares (m) 1,527 1,532 1,537 1,540

Balance Sheet Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Cash & bank 17,484 20,754 33,845 47,233

Debtors 1,282 2,478 2,956 3,526

Inventory 9,019 9,278 11,069 13,202

Loans & advances 3,403 5,636 6,723 8,019



Investments 6,211 8,060 8,060 8,060



Add: Capital WIP 9,307 5,796 3,000 6,000

Net fixed assets 65,627 68,453 66,153 67,120

Total assets 103,191 114,902 129,099 147,508


Provisions 10,966 11,069 13,205 15,750




Paid‐up capital 3,060 3,069 3,080 3,080





Cash Flow Y/E Dec, Rs mn CY10 CY11 CY12E CY13E

Pre‐tax profit 16,347 17,255 26,539 33,945

Depreciation 3,872 4,462 4,833 5,033

Chg in working capital 3,677 ‐637 1,827 2,176

Total tax paid ‐3,532 ‐3,608 ‐6,962 ‐11,202

Other operating activities 0 0 ‐2,791 0



Chg in investments 1,059 ‐1,849 0 0

Other investing activities 800 251 0 0


Free cash flow 14,269 8,585 20,914 23,952


Debt raised/(repaid) ‐1,007 45 0 0



Net chg in cash 8,677 3,270 13,092 13,387


EPS, Rs 8.1 8.2 12.7 14.8

BVPS, Rs 48.0 52.7 58.3 66.1

DPS, Rs 2.6 3.2 4.4 5.9

Return on assets (%) 13.2 11.8 16.4 16.8

Return on equity (%) 17.9 16.3 23.0 23.8





Cost of capital (%) 7.9 7.9 7.9 7.9

RoCE ‐ Cost of capital (%) 7.1 5.7 11.2 11.8



Sales/Net FA (x) 1.2 1.3 1.5 1.8


Inventory days 44.5 39.7 39.7 39.7

Current ratio (x) 2.4 2.4 2.9 3.2

Quick ratio (x) 1.7 1.8 2.3 2.6

Interest cover (x) 29.5 27.3 33.2 41.5


PER (x) 24.6 24.4 15.6 13.5

Price/Book (x) 4.1 3.8 3.4 3.0

EV/EBIT (x) 15.8 14.6 9.5 7.5

EV/NOPLAT (x) 20.2 19.4 12.7 11.2

EV/CE 3.2 2.8 2.4 2.0

EV/IC (x) 4.5 4.1 3.8 3.7

– 73 of 133 –

UltraTech Cement Entering a league where none of the peers will possibly reach



UltraTech Cement (UltraTech), pan‐India cement major is our top large cap pick in the sector. UltraTech’s aggression in capacity creation (highest in sector) and vision to strengthen its footprint across markets is clearly visible and will be the key reason to trigger its growth. Realisation gap between UltraTech and price leaders (ACC and Ambuja) has also seen a diminishing trend. We strongly believe UltraTech’s emergence as a sector leader will distinctly surpass all other majors, thereby further re‐rating stock valuations. Investment Rationale • UltraTech is the only cement major with a defined road map to increase its

capacity share and has planned the largest quantum of expansion amongst all cement players (~12% of total expansions from FY12‐15E), with a clear vision to increase market share across regions. Resultantly, UltraTech’s volume growth is bound to be higher than peers. With an aim to protect market share (rather grow market share consistently), UltraTech has laid a clear vision of adding a minimum of 5mn tonnes p.a. of capacities every year. This vision is clearly lacking in other cement majors

• White cement business, putty and RMX business will remain additional strengths on the overall product offering. UltraTech is equally focused on all of its other business segments to enable it to emerge as the business leader across all segments of its product offering.

• Capacity creation is becoming a more tedious task with bottlenecks of clearances, land acquisitions and lack of mining leases. Capacities are bound to re‐rate further as capital costs turn expensive with scarce resources. Being the largest capacity in the cement industry with a significant gap to second in size (~30mn tonnes), UltraTech is bound to consistently command highest premium in valuations.

Risks • Delays in capex execution. • Deployment of funds in expensive acquisitions, if any. UltraTech has clearly

indicated that it will continue to evaluate rational inorganic acquisition opportunities, if any. Complete management control is one of the key considerations for UltraTech to pursue any inorganic growth opportunities.

Valuation • We have valued UltraTech at 12x EV/EBITDA on FY14E earnings (~20%

premium to nearest growing competitor – Ambuja Cement). • It is to be noted that UltraTech’s capacities are newer as compared to

capacities of other cement majors (oldest capacity of UltraTech was commissioned in 1982). This also means that the resources required to support the capacity are relatively far less unexplored as compared to others.

• At the current market price of Rs1,918, the stock trades at 18.2x & 14.8x P/E; 11.8x & 8.7x EV/EBITDA; 208 & 176 US$ EV/tonne on FY13E and FY14E earnings, respectively. At target price of Rs2,727, the stock will trade at 25.9x & 21.1x P/E; 16.1x & 12.0x EV/EBITDA; 285 & 243 US$ EV/tonne on FY13E and FY14E earnings, respectively.

BUY UTCEM IN | CMP Rs 1,918

TARGET Rs 2,727 (+42%) Company Data





ABS ‐1.9 ‐6.1 55.0REL TO BSE ‐6.3 ‐13.3 37.3


50

70

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110

130

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170

190


UltraTech BSE Sensex


Other Key Ratios

Rs mn FY12 FY13E FY14E


– 74 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / ULTRATECH CEMENT / COMPANY UPDATE

No stoppage in capacity creation; clear market leader UltraTech Cement (UltraTech) is the largest capacity of grey cement in the country with an installed capacity of 48.8 mn tonnes p.a. (16% of Pan‐India Capacity). It is the only cement major with a clear and defined roadmap towards its next phase of capacity expansion, capitalizing on every possible opportunity. Of the total planned expansions of ~135mn tonnes in the country, 12% is by UltraTech (highest in the sector). While all the other majors are bound to lose market share with low capacity expansions, UltraTech is the only major whose vision to grow in‐line with market will help it maintain its capacity share despite all of the 134 mn tonnes of expansions coming in force. In other words, in the longer, UltraTech remains the only potential cement major to deliver a long term average growth in tandem with the industry growth and lack of capacity is not likely to be a concern for the company at any given point of time. Diminishing gap in Grey Cement realisation of UltraTech Vs. ACC and Ambuja:

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UltraTech Ambuja Cement ACC


Ambuja Cements and ACC Limited have consistently commanded and still command a premium in cement realisation vis‐à‐vis other players in the industry. However, in the recent past, the gap between realisations of Ambuja Cements, ACC Limited and UltraTech has seen a diminishing trend as seen in the graph above. While ACC Limited and Ambuja Cements are at a risk of limited volume growth on account of capacity constraints, the same is not likely to be the case with UltraTech. With realisation gap diminishing and volumes increasing, UltraTech is very likely to deliver relatively much higher growth than its peers on a sustainable basis in the longer term. Volume growth of UltraTech is expected to be at ~11% for FY14E and this growth rate is unlikely to slow down given the pipeline of capacity creation at UltraTech.

Realisations of UltraTech are movingcloser to that of its closest peers (viz.ACC ltd. and Ambuja Cements Ltd). Westrongly believe with increasingcapacity and strong footholds acrossthe country, very soon UltraTech maycommand a premium in realisations tomost of its peers.

UltraTech’s Vision: Add minimum of5mn tonnes p.a. of new capacity everyyear; 12% of new capacity creation inthe country is going to be by UltraTechCement.

Volumes likely to grow by ~11% inFY14E. Volume growth is unlikely totone down given the pipeline ofcapacities to be added.

– 75 of 133 –


Current Capacity Share of UltraTech

North, 23%

South, 26%

East, 14%

West, 26%

Central, 11%

Expected Capacity Share of UltraTech (FY15E)

North, 22%

South, 27%East, 20%

West, 22%

Central, 9%

Despatch Share of UltraTech

Central, 11%

Eastern, 17%

Northern, 21%Southern, 23%

Western, 28%


Widespread pan‐India capacities;Leader in West India and amongst theleading players in other regions of thecountry.

Much better and evenly balancedcapacity share, as and when expansionsexpected by end of FY15E commission.

Well spread despatch mix acrossregions of the country; ~49% of currentdespatches in North and West India(regions with least concerns of price‐wars).

– 76 of 133 –


Behavior of UltraTech Cement All India

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Industry, lhsUltraTech Despatches, rhs

North India

200

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Other players, lhsUltraTech, rhs

South India

4004505005506006507007508008509009501000

2700

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Like peers (ACC Ltd. and AmbujaCements), a very well‐disciplined playeron pan‐India basis, largely moving insync with industry.

Aggressively increasing despatches inNorth India and also making sure itmoves in sync with the regional trend intimes of need.

Outstandingly following the regionalsync since the time South India hasrecovered from the bloodbath. Largeplayers like UltraTech play thebalancing force to ensure that pricingdiscipline remains intact as they havemuch larger investments at stake.

– 77 of 133 –


East India

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UltraTech, rhs


Attempting to be in‐line with theregional discipline but really exactlyfalling in‐line. We believe, this is largelyon account of the fragmented nature ofthis region. As and when capacitiesconsolidate, the behavior is likely toimprove.

Moving completely in sync with theregional pattern in West India.UltraTech is the leading manufacturerin this region (28% share) and hencealso the trendsetter.

Attempting its level best to fall again in‐line with the regional discipline. Majorslike UltraTech can afford to go in for aproduction cut to restore the regionalpricing discipline, as and when theysense disturbances.

– 78 of 133 –



FY14E EBITDA (Rs mn) 66485FY14E EBITDA margin, % 25FY14E EBITDA/Share (Rs) 243Target EV/EBITDA (x) 12.0Target EV/Share (Rs) 2,911Net debt/Share 184Equity fair value/Share (Rs) 2,727% upside 42%FY14E Implied Target EV/tonne (US$) 243FY14E Implied Target P/E (x) 21.1 FY14E EV based on CMP (Rs mn) 578359FY14E Capacity (EOP, mtpa) 63.1FY14E EBITDA (Rs mn) 66485FY14E EV/EBITDA (x) 8.7FY14E P/E (x) 14.8FY14E EV/tonne (US$) 176


We have valued UltraTech Cement at anEV/EBITDA multiple of 12.0x on FY12earnings. We strongly believe,UltraTech Cement’s set roadmap forcapacity growth will result incontinuous re‐rating of its valuationmultiples. Our target multiple impliesan EV/tonne of US$243/tonne.UltraTech Cement in our opinion is setto enter a league which will bepractically impossible to catch up withfor any of its closest peer. Further re‐rating of stock valuations remainsinevitable with a minimum of 5mntonnes capacity addition (~10% oncurrent base) every year.

– 79 of 133 –



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– 80 of 133 –


Financials

Income Statement Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Net sales 136,912 186,606 222,772 267,981

Growth, % 91 36 19 20

Total income 136,912 186,606 222,772 267,981


EBITDA (Core) 25,705 36,188 51,003 66,485

Growth, % 29.5 40.8 40.9 30.4

Margin, % 18.8 19.4 22.9 24.8

Depreciation ‐8,130 ‐9,629 ‐10,118 ‐12,293

EBIT 17,575 26,559 40,885 54,192

Growth, % 29.5 40.8 40.9 30.4

Margin, % 18.8 19.4 22.9 24.8

Interest paid ‐2,995 ‐2,564 ‐5,231 ‐9,289


Pre‐tax profit 17,476 29,204 41,263 50,780

Tax provided ‐3,866 ‐9,481 ‐12,520 ‐15,408

Profit after tax 13,611 19,723 28,743 35,373

Net Profit 13,674 19,783 28,815 35,461

Growth, % 24.7 44.7 45.7 23.1


Unadj. shares (m) 274 274 274 274

Wtd avg shares (m) 274 274 274 274

Balance Sheet Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Cash & bank 1,901 2,129 2,129 2,129

Debtors 8,248 10,888 12,708 15,287

Inventory 20,935 21,980 25,655 30,862

Loans & advances 10,263 11,047 12,894 15,511


Investments 35,139 50,356 50,356 50,356



Add: Capital WIP 12,019 19,397 83,578 20,000

Net fixed assets 135,064 147,100 206,982 214,689

Non‐current assets 4,713 5,444 5,444 5,444

Total assets 216,263 248,943 316,168 334,277


Provisions 5,860 7,091 8,277 9,957




Paid‐up capital 2,740 2,741 2,741 2,741





Cash Flow Y/E Mar, Rs mn FY11 FY12 FY13E FY14E

Pre‐tax profit 17,476 29,204 41,263 50,780

Depreciation 8,130 9,629 10,118 12,293

Chg in working capital ‐6,118 ‐5,503 ‐1,368 ‐1,925

Total tax paid 5,079 ‐9,446 ‐12,520 ‐15,408



Chg in investments ‐18,772 ‐15,217 0 0

Other investing activities 46,985 4,591 0 0


Free cash flow ‐38,229 ‐8,405 ‐32,507 25,741

Equity raised/(repaid) 1,524 ‐48 0 0

Debt raised/(repaid) 39,338 11,169 35,491 ‐22,069


Cash flow from financing activities 39,014 8,633 32,507 ‐25,741

Net chg in cash 784 228 0 0

Valuation Ratios & Per Share Data FY11 FY12 FY13E FY14E

EPS, Rs 49.9 72.2 105.1 129.4

BVPS, Rs 388.5 467.9 561.9 677.6

DPS, Rs 6.0 8.0 9.6 11.8

Return on assets (%) 10.4 9.2 11.4 12.8

Return on equity (%) 17.9 16.9 20.4 20.9





Cost of capital (%) 13.3 12.7 12.6 12.9

RoCE ‐ Cost of capital (%) (1.2) (2.2) 0.3 1.6



Sales/Net FA (x) 1.5 1.3 1.3 1.3

Working capital/Sales (x) 0.1 0.1 0.1 0.1


Inventory days 55.8 43.0 42.0 42.0

Current ratio (x) 1.3 1.6 1.5 1.5

Quick ratio (x) 0.7 0.8 0.8 0.8

Interest cover (x) 5.9 10.4 7.8 5.8

Dividend cover (x) 8.3 9.0 11.0 11.0

PER (x) 38.4 26.6 18.2 14.8

Price/Book (x) 4.9 4.1 3.4 2.8

EV/EBIT (x) 21.8 15.6 11.8 8.7

EV/NOPLAT (x) 25.7 21.2 15.6 11.3

EV/CE 3.0 2.6 2.1 2.0

EV/IC (x) 5.7 3.7 3.1 2.5

– 81 of 133 –

Shree Cement Hungry North Indian



Shree Cement Limited (SCL) is the leading cement producer of North India with an installed capacity of ~13.5mn tonnes p.a. (1/5th capacity share). They have now also diversified into power with ~400MWs of power capacity available for merchant sale. SCL remains amongst the most effective cost producer of cement with a consistently high EBITDA/tonne (Rs1,087 in cement business since FY05). This company has seen the most aggressive capacity expansion in entire North India region. Installed capacity has grown at a CAGR of ~27% between FY04‐FY11 at existing operations. SCL’s cement plant at Ras is the only cement plant globally to have six clinker lines at the same location, adding two further lines to take the count to eight. SCL is very likely to continue to maintain its leadership position comfortably in North India. SCL remains a preferred North‐Indian pick. Investment Rationale • Most cost effective producer of cement in North India with an average

EBITDA margin of 33% since FY05 (EBITDA/tonne of Rs1,087). • Business model still largely dependent on cement. Power likely to contribute

only 8‐10% of EBITDA in FY14E earnings. • Further strengthening its footprints in North India with two more clinker lines

at its existing site at Ras of 2mn tonnes each. We expect these clinker capacities to be operational by end of 2QFY14.

• SCL will address the risk of concentration of capacities at one location very shortly. SCL is in final stages of completing its pre‐project activities and will shortly announce its firm plans of an integrated Greenfield expansion in Chhattisgarh and grinding unit in state of Bihar. Karnataka is another state where SCL may go ahead with a Greenfield expansion and make an entry in South India.

Risks • Large concentration of capacities at single location in North India (distance

between Beawar and Ras units being insignificant). SCL’s regional exposure is skewed to North currently and is likely to remain so for next couple of years.

• Though, power sale volumes are likely to grow by ~65% at ~2.2bn units in FY13E, no major volume growth can be expected in power segment in FY14E. With increasing availability of power, EBITDA/unit in this segment remains at a risk of contraction. We expect SCL to deliver an EBITDA/unit of ~0.71 paise and 0.75 paise in FY13E and FY14E, respectively.

• Delays in capex announcement in East & South India will be a potential threat to the overall volume growth of SCL, in the longer term.

Valuation • We have valued SCL at EV/EBITDA multiple of 8.0x and 6.0x on FY14E cement

and power earnings, respectively. Considering the leadership position of SCL in North India and favorable outlook for capacity utilisations of the region, we believe this multiple is fair.

• At CMP the stock of Shree Cement trades at 19.9x & 13.5x P/E, 11.0x & 8.1x EV/EBITDA and US$ 214 & 196 EV/tonne on FY13E & FY14E earnings, respectively. Our target price implies target valuation of US$204 FY14E.

BUY SRCM IN | CMP Rs 4,456

TARGET Rs 5,046 (+13%) Company Data





ABS 0.3 6.1 103.4REL TO BSE ‐4.1 ‐1.1 85.7


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– 82 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / SHREE CEMENT / COMPANY UPDATE

The master of capex execution has not finished yet… Shree Cement Limited (SCL) is the largest capacity in North India with a capacity of 13.5 mn tonnes p.a. (~20% of North India). SCL remains a master of execution and a leader in technology improvements in manufacturing process of cement. SCL has also ventured into power segment by installing two mega power plants at Shree Mega Power of 150 MWs each. They are now setting up two more clinker lines with the existing six lines at the Ras unit. This unit of SCL stands up for its unique identity of six clinker lines in one location, one of its kinds in the world. Going forward, SCL is expected to set up a grinding unit in Bihar and an integrated plant in Chhattisgarh and Karnataka. Though, no formal announcements have yet been made on the Karnataka plans of SCL, they are in final stages of completing their pre‐project activities at these sites. We believe, these capacities may pop up in the next 3‐4 years of time span. The two new clinker lines at Ras (Unit No. 9 and 10) totaling to 4 mn tonnes p.a. of clinker capacities is likely to be operational by 2QFY14. Revenue Contribution from Cement & Power

97% 95% 91% 90% 84% 86%

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` EBITDA Contribution / Margin from Cement & Power

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Two additional clinker lines at Ras likelyto be operational by end of 2QFY14E.Shree Cement’s Ras site will have 8clinker lines, only site in the world tohave so.

Revenue contribution from power likelyto stabilise at 14‐16%. Focus areas willremain increase in cement volumes forShree Cement as new cement capacitygets announced shortly.

Cement segment will continue toremain the key EBITDA driver for ShreeCement with more than 90%contribution of overall EBITDA.

– 83 of 133 –


Volume Growth in Cement Segment CAGR 04‐12 – 19%

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Behavior of Shree Cement North India

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Shree Cement

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Industry ‐Other Players,lhsShree Cement, rhs


Except for FY11 when Shree Cement’scement volume remained flat YoY, thiscompany has never recorded lower thandouble digit YoY volume growth (SinceFY04, time when it started itsaggressive and consistent capex plans).Volumes are likely to continue to recorddouble digit growth rates in FY13E andFY14E. A classic example of howconsistent capex can trigger volumegrowth.

Shree Cement has clearly followed adespatch pattern in‐line with thedespatches of North India. ShreeCement is amongst the largest capacityof North India and largely all of itsproduce is sold in this region. ShreeCement therefore cannot afford to goagainst the regional discipline of Northand the same is clearly visible in theadjoining graph.

All of the clinker production and majorchunk of the cement capacities arelocated in Rajasthan itself. At any givenpoint of time, Shree Cement has notincreased its productiondisproportionate to the production byother players in the state. Shree Cementhas been a clear discipline follower inthis state. Infact in tough times, ShreeCement has played a crucial role bykeeping its production under check toensure a healthy and disciplinedregional scenario.

– 84 of 133 –


Uttarakhand

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FY14E Cement EBITDA (Rs mn) 17866FY14E Cement EBITDA margin, % 29FY14E EBITDA/Share (Rs) 513Target EV/EBITDA (x) 8.0Target EV/Share (Rs) ‐ A 4103FY14E Power EBITDA (Rs mn) 1673FY14E Power EBITDA margin, % 17FY14E EBITDA/Share (Rs) 48Target EV/EBITDA (x) 6.0Target EV/Share (Rs) ‐ B 288Target EV/Share (A+B) 4391Net Debt/Share ‐655Equity Fair Value/Share (Rs) 5,046% upside 13%FY14E Implied Target EV/tonne (US$) 204


Shree Cement has been a new entrant inthis state and hence establishing a syncwith the regional discipline will take itsown time. However, we can clearlymake out that the company has madeserious attempts to be in‐line with theregional sync.

We have valued Shree Cement at 8.0xEBITDA on cement earnings and 6.0xEBITDA on power earnings. At ourtarget price the stock will trade atUS$204 EV/tonne on FY14E earnings.Valuation multiples have seen aconsistent re‐rating for Shree Cement asdepicted in the band charts on thefollowing page.

– 85 of 133 –



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– 86 of 133 –


Financials


Net sales 35,119 58,981 58,704 71,388

Growth, % ‐3 68 0 22

Total income 35,119 58,981 58,704 71,388


EBITDA (Core) 8,856 16,458 15,176 19,539

Growth, % (41.1) 85.8 (7.8) 28.7

Margin, % 25.2 27.9 25.9 27.4

Depreciation ‐6,758 ‐8,731 ‐4,917 ‐5,529

EBIT 2,099 7,727 10,259 14,010

Growth, % (41.1) 85.8 (7.8) 28.7

Margin, % 25.2 27.9 25.9 27.4

Interest paid ‐1,709 ‐2,354 ‐2,129 ‐1,430


Pre‐tax profit 1,103 6,878 9,785 14,429

Tax provided 994 ‐693 ‐1,982 ‐2,911

Profit after tax 2,097 6,185 7,804 11,519

Net Profit 2,097 6,185 7,804 11,519

Growth, % (69.0) 194.9 26.2 47.6


Unadj. shares (m) 35 35 35 35

Wtd avg shares (m) 35 35 35 35


Cash & bank 4,608 4,590 4,590 4,590

Debtors 1,082 1,811 1,802 2,192

Inventory 4,042 5,033 5,010 6,092

Loans & advances 4,431 5,680 5,653 6,875




Add: Capital WIP 10,278 967 3,000 3,001

Net fixed assets 21,949 16,178 20,261 21,733

Non‐current assets 12,189 25,737 25,737 25,737

Total assets 48,302 59,029 63,052 67,218


Provisions 568 808 1,020 1,505




Paid‐up capital 348 348 348 348






Pre‐tax profit 1,103 6,878 9,785 14,429

Depreciation 6,758 8,731 4,917 5,529

Chg in working capital 5,213 ‐12,604 ‐215 ‐332

Total tax paid 395 ‐667 ‐1,982 ‐2,911





Free cash flow 1,956 ‐138 3,991 9,714

Debt raised/(repaid) ‐983 ‐929 ‐2,821 ‐8,818

Dividend (incl. tax) ‐529 ‐568 ‐808 ‐1,020


Net chg in cash 444 ‐1,634 362 ‐123


EPS, Rs 60.2 177.5 224.0 330.6

BVPS, Rs 570.1 784.8 983.0 1,274.0

DPS, Rs 16.3 23.2 29.3 43.2

Return on assets (%) 6.6 14.3 15.0 19.1

Return on equity (%) 11.0 26.2 25.3 29.3





Cost of capital (%) 9.2 9.0 8.7 8.3

RoCE ‐ Cost of capital (%) (1.1) 9.1 10.4 16.3



Sales/Net FA (x) 1.8 3.1 3.2 3.4

Working capital/Sales (x) 0.0 (0.0) (0.0) (0.0)


Inventory days 42.0 31.1 31.1 31.1

Current ratio (x) 1.6 1.3 1.3 1.2

Quick ratio (x) 1.1 0.9 0.9 0.9



PER (x) 74.0 25.1 19.9 13.5

Price/Book (x) 7.8 5.7 4.5 3.5

EV/EBIT (x) 19.3 10.3 11.0 8.1

EV/NOPLAT (x) 17.3 10.8 12.7 9.5

EV/CE 4.4 3.7 3.3 3.1

EV/IC (x) 8.0 8.6 9.1 7.4

– 87 of 133 –

The India Cements A very patient South Indian!



The India Cements Limited (ICL) is the largest cement manufacturer in South India with ~12% capacity share. The company had recently forayed in the North Indian markets with setup of a 1.8mn tonne capacity in Rajasthan. ICL is also the owner of the Chennai Super Kings Team in The Indian Premier League. In our view, ICL has inherent strengths of delivering outstanding operating performances and we believe the stock is grossly undervalued currently, given the size of its capacity. Investment Rationale • Largest capacity in South India with a very well disciplined approach to

regional equilibrium. • Exploring and evaluating Brownfield expansion opportunities. Though

expansions will not make much sense immediately, but will certainly help as and when demand moves closer to capacity in South India. ICL is also looking forward to expansions in East India and a second production line at its existing plant in Rajasthan, as well.

• Commissioning of both captive power plants of ~50MWs each along with the existing tied up power supplies will make ICL largely self dependent for power requirements. ICL will have a consolidated power capacity close to 170Mws post commissioning of its 50MW power plant in Andhra Pradesh by end of FY13E (Tamil Nadu 50MW already commissioned).

• Mining operations at Indonesia have been commenced and shipments are likely 4QFY13E onwards. ICL had earlier indicated a savings of US$15‐20/tonne of coal, the Indonesian operations begin full swing production.

• Given no further incremental capex is announced, ICL debt levels are likely to start correcting from FY14E onwards. Net Debt:Equity likely to correct from 0.63x in FY13E to 0.44x by end of FY14E.

Risks • No immediate trigger for volume growth in ICL. Earnings growth will remain

largely dependent on cement prices and cost savings. Volume growth is unlikely to be more than 6% YoY for FY13E and FY14E.

• Delays in commissioning of power plants / coal shipment arrival from Indonesia.

• No further capex announcement at an appropriate time may hamper the volume growth in longer term, especially when South India turns favorable.

Valuations • We have valued ICL at 5.5x EV/EBITDA. Given the fact that ICL is the largest

capacity of South India and taking into account the current disciplined approach of South Indian players, we believe this is a fair target multiple.

• At CMP of Rs88, the stock of ICL trades at 8.6x and 6.1x P/E, 5.6x and 4.3x EV/EBITDA and US$ 62 & 57 on FY13E and FY14E, respectively. At our price target of Rs 131, the stock of ICL will trade at 12.7x & 9.0x P/E, 7.0x & 5.5x EV/EBITDA and US$ 78 and 74 EV/tonne on FY13E and FY14E earnings, respectively. Our target valuations still imply a 50% discount to replacement cost. ICL is likely to gain the maximum, as and when South India recovers.

BUY ICEM IN | CMP Rs 88

TARGET RS 131 (+48%) Company Data





ABS 1.6 ‐10.6 8.0REL TO BSE ‐2.8 ‐17.8 ‐9.7


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– 88 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / THE INDIA CEMENTS / COMPANY UPDATE

Awaiting good times… The India Cements Ltd. (ICL) is the largest capacity in South India (12% of South India’s total capacity). Recently, ICL also forayed in North Indian markets with a 1.8mn tonne p.a. capacity in Rajasthan (~3% of North India’s total capacity). ICL is also the owner of the Chennai Super Kings Team in The Indian Premier League. ICL has been consistently operating at low capacity utilisations as demand growth in South India remains subdued. Being the largest capacity in South India, ICL cannot afford to go against the regional capacity utilisations at it can significantly hamper the overall pricing discipline. Expecting good times to return back to South India in a couple of years, ICL is in the process of exploring further capacity additions with Brownfield expansion at its existing plants in South. Though it is very unlikely that ICL will increase volumes by going against the regional discipline of the region, ICL does not want to miss out on any volume growth opportunities as and when the utilisation in this region improves. Resultantly, it is exploring Brownfield expansion opportunities in South India. ICL is also putting efforts to get approvals / acquire land to expand its Rajasthan capacity with a similar second line. Behavior of India Cements All India

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Largest capacity of South Indiaaccounting for 12% share of this region.

Currently exploring Brownfieldopportunities in South India. Efforts arealso in place for an expansion of secondline at Rajasthan plant.

India Cements has clearly made seriousefforts to ensure a healthy pricingscenario in South India. We can clearlymake out the disproportionate cut indespatches of India Cements vis‐à‐visindustry’s despatches in the adjoininggraph. Though this has impactednegatively to India Cements in nearterm, we strongly believe ICL will get itscompensation as and when thesituation improves in South.

India Cements capacities are largelyskewed in South India. Though pan‐India comparison Vs. India Cementsmay not make much sense, still we canclearly make out that the company haslargely followed the industry’s overallvolume discipline.

– 89 of 133 –


Andhra Pradesh

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Andhra Pradesh has been the biggestdisappointment for India with the smallplayers distorting the market stabilityat regular intervals. India Cements hasshown tremendous maturity with itsrational behavior as can be seen fromthe adjoining graph. This to a largeextent ensured minimization of pricingdistortion. Scope for improvement inutilisations here remains multifold asand when the scenario turns around.

In North India, India Cements has notbeen able to establish sync with theoverall despatches yet. It is to be notedthat capacity of India Cements isrelatively new and very small ascompared to the overall capacity baseof North India (~2.7% of North Indiancapacity). However, we do believe indue course of time despatches of IndiaCements in this region will also fall in‐line with the overall despatches.

Like other states, India Cement’sdespatches in Tamil Nadu have also notseen moving disproportionate to thedespatches of the state. India Cementshas clearly maintained a muchdisciplined pattern of despatches andeven sacrificed market share to otherplayers in order to ensure a healthydemand‐supply matrix.

– 90 of 133 –


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FY14E EBITDA (Rs mn) 10825FY14E EBITDA margin, % 19FY14E EBITDA/Share (Rs) 35Target EV/EBITDA (x) 5.5Target EV/Share (Rs) 194Net Debt/Share 63Equity Fair Value/Share (Rs) 131% upside 48%FY14E Implied Target EV/tonne (US$) 74FY14E Implied Target P/E (x) 8.6 FY14E EV based on CMP (Rs mn) 46442FY14E Capacity (EOP, mtpa) 15.6FY14E EBITDA (Rs mn) 10825FY14E EV/EBITDA (x) 4.3FY14E P/E (x) 6.1FY14E EV/tonne (US$) 57


Comparing only Rajasthan todespatches of India Cements in NorthIndia will also not make muchdifference. The despatch patterns ofIndia Cements vs. Rajasthan and NorthIndia are almost similar and so are thearguments. It is to be noted thatRajasthan is the largest capacity ofNorth India accounting for 66% of NorthIndia’s capacity (~15% of All IndiaCapacity).

We have valued India Cements at 5.5xEV/EBITDA multiple on FY14E earnings.We believe, the multiple is quitereasonable given the size of capacity ofIndia Cements and its adherence toregional discipline of South India.

– 91 of 133 –



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– 92 of 133 –


Financials


Net sales 35,387 44,936 50,542 56,765

Growth, % ‐6 27 12 12

Total income 35,387 44,936 50,542 56,765


EBITDA (Core) 3,508 8,050 9,451 10,825

Growth, % (52.0) 129.5 17.4 14.5

Margin, % 9.9 17.9 18.7 19.1

Depreciation ‐2,510 ‐2,855 ‐3,240 ‐3,386

EBIT 998 5,195 6,212 7,439

Growth, % (52.0) 129.5 17.4 14.5

Margin, % 9.9 17.9 18.7 19.1

Interest paid ‐1,506 ‐3,296 ‐3,155 ‐2,660


Pre‐tax profit 777 3,523 4,747 6,637

Tax provided ‐227 ‐888 ‐1,424 ‐1,991

Profit after tax 550 2,635 3,323 4,646

Net Profit 550 2,555 3,153 4,437

Growth, % (81.8) 364.6 23.4 40.7

Net Profit (adjusted) 550 2,555 3,153 4,437

Extraordinary items: Gains/(Losses) 103 80 170 209

Unadj. shares (m) 307 307 307 307

Wtd avg shares (m) 307 307 307 307


Cash & bank 509 122 122 122

Debtors 2,633 2,473 2,781 3,124

Inventory 5,325 5,627 6,329 7,108

Loans & advances 11,184 20,393 20,893 21,393



Investments 3,372 4,313 4,313 4,313



Add: Capital WIP 15,542 1,704 2,000 1,000

Net fixed assets 59,272 53,772 54,235 51,256

Total assets 82,499 86,784 88,758 87,400





Paid‐up capital 3,072 3,072 3,072 3,072






Pre‐tax profit 777 3,523 4,747 6,637

Depreciation 2,510 2,855 3,240 3,386

Chg in working capital ‐242 ‐5,279 564 708

Total tax paid ‐227 ‐888 ‐1,424 ‐1,991

Cash flow from operating activities 2,818 211 7,127 8,740

Capital expenditure ‐8,669 2,083 ‐4,266 ‐970

Chg in investments 1,761 ‐941 0 0


Cash flow from investing activities ‐6,833 1,194 ‐4,266 ‐970

Equity raised/(repaid) ‐59 ‐1,779 0 0

Debt raised/(repaid) 4,351 645 ‐1,960 ‐6,511

Dividend (incl. tax) ‐537 ‐714 ‐900 ‐1,259

Cash flow from financing activities 3,755 ‐1,792 ‐2,860 ‐7,770

Net chg in cash ‐259 ‐387 0 0


EPS, Rs 1.8 8.3 10.3 14.4

BVPS, Rs 129.9 128.9 135.0 144.2

DPS, Rs 1.7 2.3 2.9 4.1

Return on assets (%) 1.9 5.6 6.1 7.2

Return on equity (%) 1.4 6.4 7.8 10.3



RoIC ‐ Cost of capital (%) (4.9) 0.5 1.6 3.7


Cost of capital (%) 9.0 9.0 8.9 8.7

RoCE ‐ Cost of capital (%) (6.7) (2.3) (1.4) 0.5



Sales/Net FA (x) 0.6 0.8 0.9 1.1



Inventory days 54.9 45.7 45.7 45.7

Current ratio (x) 1.6 1.8 1.7 1.6

Quick ratio (x) 1.2 1.5 1.3 1.2



PER (x) 49.2 10.6 8.6 6.1

Price/Book (x) 0.7 0.7 0.7 0.6

EV/EBIT (x) 15.4 6.8 5.6 4.3

EV/NOPLAT (x) 16.4 7.7 6.6 5.3

EV/CE 0.8 0.8 0.7 0.7

EV/IC (x) 0.9 0.9 0.8 0.8

– 93 of 133 –

Mangalam Cement Changing gears to deliver performance!



Mangalam Cement (MGC) is one of the small cement capacities (2mn tonnes p.a.; ~3% of North India’s capacity) based out of Rajasthan, North India. The company is set to increase its capacity by ~63% by end of 1HFY14E. With this expansion in place, double digit volume growth becomes obvious in FY14E and FY15E. MGC, in our view remains an attractive buy opportunity in small cap cement. There is also a bright possibility of re‐rating in stock valuations with capacity increase. Investment Rationale • Volume growth to trigger from FY13E onwards. FY13E and FY14E volumes

likely to grow by 14% YoY, each year. Volume trigger can be much higher in FY15E, as capex of MGC is likely to be completed by mid FY14E.

• Usage of pet coke in kiln operations of MGC has significantly reduced the consumption of high grade limestone from 16% to ~8‐9% thereby resulting in significant cost savings. Raw material cost/tonne for MGC has seen a reduction of 18% YoY in FY12.

• Usage of pet coke in its fuel mix (Since October 2011) has also enable MGC to improve the quality of its clinker production. Resultantly, MGC has been able to blend higher quantity of fly‐ash and increase its overall volumes. Blending ratio for MGC increased dramatically in FY12 to 1.33x (1.18x in FY11). We expect blending for MGC to slowly stabilize at +1.26x.

• MGC is relatively calm and a considerably conservative player compared to other cement manufacturers. MGC has been scouting for sites and evaluating capacity expansions for long duration of time (nearly 2‐3 years) before it finally announced the expansion at its existing site. Being a small capacity MGC is very unlikely to compromise on volumes to ensure a healthy regional pricing environment.

Risks • Pet coke has been a new fuel to the kilns of MGC. Though, MGC has been

largely successful in usage of pet coke as a fuel input, the sustainability and long term success of this business model is yet to be seen and felt with MGC.

• Any delays in capacity expansion / project execution will eventually hamper the volume growth of MGC.

• Conservative approach to capacity expansion may be a longer term risk to the existing market share of MGC in its current markets.

Valuations • We have valued MGC at 4.0x EV/EBITDA on FY14E earnings. We believe,

given the size of capacity of MGC and low risks in its business profile, the target valuation multiple is justified. We also believe, as and when MGC’s expansion stabilizes a marginal re‐rating of stock valuations is very likely. Depending on operational performance of MGC and its consistency (post expansion), further re‐rating of stock valuations cannot be ruled out.

• At the current price of Rs155, MGC trades at 4.5x and 3.8x P/E, 3.8x and 3.3x EV/EBITDA and US$ 60 & 48 on FY13E and FY14E earnings, respectively. At our price target of Rs217, MGC will trade at 6.3x and 5.4x P/E, 4.7x and 4.0x EV/EBITDA and US$ 75 & 58 on FY13E and FY14E earnings, respectively.

BUY MGC IN | CMP Rs 155


O/S SHARES (MN) : 27MARKET CAP (RSBN) : 4.1MARKET CAP (USDBN) : 0.152 ‐ WK HI/LO (RS) : 193 / 99LIQUIDITY 3M (USDMN) : 0.2FACE VALUE (RS) : 10




ABS ‐13.2 ‐7.8 51.5REL TO BSE ‐17.6 ‐15.0 33.8


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Net Sales 6,308 7,680 9,591EBITDA 1,035 1,723 2,460Net Profit 560 922 1,079EPS, Rs 21.0 34.6 40.4PER, X 7.4 4.5 3.8EV/EBIDTA, % 3.8 3.8 3.3EV/Net Sales, x 0.6 0.8 0.9ROE, % 13.5 19.9 20.4Source: PhillipCapital India Research Est. Vaibhav Agarwal (+ 9122 6667 9967) [email protected]

– 94 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / MANGALAM CEMENT / COMPANY UPDATE

Addressing bottlenecks… Mangalam Cement (MGC) is a small capacity in Rajasthan (2 mn tonnes p.a.; ~3% of North India capacity) and is all set to increase its capacity by 63% by mid FY14E. Double digit volume growth with this capacity expansion becomes inevitable with MGC and we expect, MGC will comfortably post a volume growth of +14% in FY13E and FY14E, each. MGC is currently undergoing a clinker capacity expansion by 0.5mn tonnes in its existing clinker lines (expansion of 1500TPD across two lines) and is also setting up a new grinding unit of 1.2mn tonnes p.a. at its existing site. This project is being executed at a capex of Rs4.75bn (Targeted Debt at Rs3bn). FY13E estimated spend is at Rs3bn and rest over FY14E. The expanded capacity of MGC will be at 3.2 mn tonnes p.a. Since October 2011, MGC has started using pet coke in kiln operations. This had an immediate impact of reduction of fuel consumption in kiln operations (pet coke consumption reduced from 17.5% to 10% in Unit I and from 14.9% to 9% in Unit II) and also reduced the consumption of high grade limestone which is used as a sweetener to raw meal (Consumption reduced from 15% to 5% in Unit I and from 15.33% to 7.39% in Unit II). This is clearly also evident in the reducing raw material cost of MGC in FY12 (raw material cost/tonne declined by 18% YoY). Moreover this also helped MGC to increase their fly ash blending which ultimately helped volumes. Increase in blending at MGC

1.05

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FY05 FY06 6MFY07 FY08 FY09 FY10 FY11 FY12


We strongly believe, these steps taken by MGC will help address its inherent bottlenecks and significantly improve and stabilize its cost structure. We expect MGC to post an EBITDA of Rs1,020/tonne in FY14E. MGC has already registered an EBITDA of Rs792/tonne in 1HFY13E. With volume growth and improvement in efficiencies, we believe, MGC is surely capable of crossing the Rs1,000/tonne EBITDA mark in FY14E.

Double digit volume growth on thecards, expect an easy growth of +14% involumes in FY13E and FY14E,respectively.

Substitution of fuel from coal to petcoke has resulted in significantimprovement of operational efficienciesas well the blending ratio.

Blending ratio has shot up to industryaverage levels of +1.30x; this issomething which Mangalam Cementwas looking forward to since very long.

EBITDA/tonne likely to touch theRs1,000/tonne mark as operationalefficiencies improve coupled withvolume growth.

– 95 of 133 –


Behavior of Mangalam Cement North India

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FY14E EBITDA (Rs mn) 2460FY14E EBITDA margin, % 26FY14E EBITDA/Share (Rs) 92.2Target EV/EBITDA (x) 4.0Target EV/Share (Rs) 369Net Debt/Share 152Equity Fair Value/Share (Rs) 217Upside 40%FY14E Implied Target EV/tonne (US$) 58FY14E Implied Target P/E (x) 5.4 FY14E EV based on CMP (Rs mn) 8195FY14E Capacity (EOP, mtpa) 3.3FY14E EBITDA (Rs mn) 2460FY14E EV/EBITDA (x) 3.3FY14E P/E (x) 3.8FY14E EV/tonne (US$) 48


Small capacities like Mangalam Cementlargely remain independent of theregional despatch pattern. As seen inthe adjoining graph, it seems verydifficult to establish a sync patternbetween despatches of MangalamCement and the North Indian industry.

Similarly in Rajasthan, sync betweenMangalam Cement’s despatch and theoverall despatch is not clearly visible.This is to reiterate that smallercompanies like MGC have the liberty tofunction independent of the industry.

We have valued Mangalam Cement at4.0x EV/EBITDA. We believe thismultiple is quite fair given the size of itscapacity, reasonably low risk profile ofmarkets to which it caters, itsindifferent approach towards industry’sdiscipline and potential of robustvolume growth.

– 96 of 133 –



PE band

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– 97 of 133 –


Financials


Net sales 4,916 6,308 7,680 9,591

Growth, % ‐20 28 22 25

Total income 4,916 6,308 7,680 9,591


EBITDA (Core) 588 1,035 1,723 2,460

Growth, % (69.3) 75.8 66.6 42.8

Margin, % 12.0 16.4 22.4 25.7

Depreciation ‐275 ‐320 ‐337 ‐481

EBIT 313 714 1,386 1,980

Growth, % (69.3) 75.8 66.6 42.8

Margin, % 12.0 16.4 22.4 25.7

Interest paid ‐22 ‐31 ‐283 ‐678

Other Non‐Operating Income 122 66 132 142

Pre‐tax profit 414 749 1,235 1,444

Tax provided ‐31 ‐190 ‐312 ‐365

Profit after tax 382 560 922 1,079

Net Profit 382 560 922 1,079

Growth, % (67.8) 46.4 64.8 16.9

Net Profit (adjusted) 382 560 922 1,079




Cash & bank 258 436 436 436

Debtors 118 287 349 436

Inventory 656 582 709 885

Loans & advances 1,762 2,215 2,502 2,995


Investments 11 11 11 11



Add: Capital WIP 89 189 3,000 500

Net fixed assets 3,600 3,714 6,877 9,146

Total assets 6,404 7,245 10,884 13,910

Current liabilities 725 900 1,096 1,369

Provisions 1,006 1,164 1,417 1,769


Non‐current liabilities 726 858 3,432 5,112








Pre‐tax profit 414 749 1,235 1,444

Depreciation 275 320 337 481

Chg in working capital ‐433 ‐215 ‐27 ‐131

Total tax paid 68 ‐163 ‐312 ‐365

Cash flow from operating activities 324 692 1,233 1,429

Capital expenditure ‐681 ‐435 ‐3,500 ‐2,750

Chg in investments 184 0 0 0

Other investing activities ‐1 ‐1 0 0

Cash flow from investing activities ‐498 ‐436 ‐3,500 ‐2,750

Free cash flow ‐174 257 ‐2,267 ‐1,321

Equity raised/(repaid) ‐116 3 0 0

Debt raised/(repaid) 33 105 2,574 1,680

Dividend (incl. tax) ‐186 ‐186 ‐307 ‐359

Cash flow from financing activities ‐269 ‐78 2,267 1,321

Net chg in cash ‐443 178 0 0


EPS, Rs 14.3 21.0 34.6 40.4

BVPS, Rs 147.9 161.9 185.0 212.0

DPS, Rs 6.0 6.0 9.9 11.6

Return on assets (%) 6.2 8.5 12.2 12.2

Return on equity (%) 9.8 13.5 19.9 20.4





Cost of capital (%) 8.0 8.0 8.9 9.1




Sales/Net FA (x) 1.4 1.7 1.5 1.2



Inventory days 48.7 33.7 33.7 33.7

Current ratio (x) 3.9 3.9 3.6 3.5

Quick ratio (x) 3.0 3.3 3.0 2.8

Interest cover (x) 14.3 23.0 4.9 2.9


PER (x) 10.8 7.4 4.5 3.8

Price/Book (x) 1.0 1.0 0.8 0.7

EV/EBIT (x) 6.8 3.8 3.8 3.3

EV/NOPLAT (x) 7.2 4.7 4.6 3.9

EV/CE 0.7 0.6 0.7 0.7

EV/IC (x) 0.8 0.7 0.9 0.8

– 98 of 133 –

Dalmia Bharat Limited A mid‐cap gem!



Dalmia Bharat Ltd. (DBL), in our opinion is a mid‐cap visionary moving courageously, growing organically and inorganically to ensure a growth rate faster than the industry and emerge as one of the leading cement manufacturers of the country. Though, the exposure of the group is largely skewed to slow growing markets of the country (South and East India), strong and firm cement prices coupled with aggressive volume growth will trigger earnings in the next couple of years very strongly. Investment Rationale • Executing four distinct ventures simultaneously ‐ Inorganic growth in North

East India and Greenfield expansion in Karnataka (apart from a Grinding project undertaken by OCL) clearly is an indication of the aggression with which the group wants to increase its market share. The group has climbed the ladder from 17th position in FY06 to 5th position currently. Going forward, the next aspiration of DBL is to be “pan‐India cement major”.

• Significant scope available for volume growth which can ultimately trigger the earnings. Capacities of DBL (including OCL) operated at less than 60% capacity utilisations in FY12.

• Being the oldest cement manufacturer in the country, DBL enjoys a very strong brand recall in most of the regions it caters to (especially Tamil Nadu). This ultimately leads to a strong brand premium for DBL vis‐à‐vis other brands. DBL is also evaluating a brand repositioning strategy and is geared up to create a unified brand identity across markets of the country. This will certainly help DBL in garnering premium in their cement realisations.

• DBL’s expansions seems to be more well defined structured expansions Vs. peers, as most of the incremental capacities of DBL will cater to markets where DBL is already present (directly or indirectly).

• We believe, DBL is clearly following a road‐map resembling to a road‐map which UltraTech Cement has adopted to ensure an undisputed growth. Re‐rating in DBL’s valuations seems inevitable given that the execution of its growth strategy is met with perfection.

Risks • DBL has its capacity skewed in South and East India. Both these regions are at

a risk of lower utilisations in FY13E & FY14E. Hence, DBL has to be very cautious while it increases its capacity utilisations to ensure price stability.

• Delays in project execution. Valuation • We have valued DBL at 5.0x EV/EBITDA on FY14E earnings. We believe, the

assigned multiple is reasonable considering DBL’s current regional exposure, potential of volume growth in longer term and its steady aggression and hunger for new capacities.

• At CMP the stock trades at 5.1x & 3.3x P/E, 5.5x& 4.0x EV/EVITDA and US$ 52 & 53 EV/tonne on FY13E and FY14E earnings, respectively. At our price target of Rs294, the stock will trade at 8.2x & 5.4x P/E, 6.9x & 5.0x EV/EBITDA & US$64 & 65 EV/tonne on FY13E and FY14E earnings, respectively.

BUY DBEL IN | CMP RS 182






ABS ‐0.82 15.0 32.9REL TO BSE ‐5.2 7.9 15.1


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– 99 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / DALMIA BHARAT / COMPANY UPDATE

The next emerging major & “Committed to capex” Dalmia Bharat Limited (DBEL) is all set to emerge as the next cement major with acquisitions of Calcom and Adhunik Cement in North‐East India and execution of organic growth options in Karnataka and West Bengal (by its associate OCL India Ltd. (OCL)) DBL is the holding company of the cement division (Dalmia Cement Bharat Limited (DCBL)) of Dalmia Group. The group enjoys the legacy of being the oldest cement manufacturer in the country. DCBL owns 45% stake in another group company viz. OCL – a leading cement manufacturer in East India. Dalmia Power Ltd. – power venture of Dalmia Group catering to power requirement of South Indian cement plants of the group is a 100% subsidiary of DBL Inorganic growth Since January 2012 DCBL has announced two major acquisitions. In January 2012, DCBL agreed to enter in a joint venture and buy a 50% stake in North East based Calcom Cement for a consideration of Rs2.38bn. This was the first significant inorganic growth initiative by DCBL. Calcom is a manufacturer of both OPC and PPC and is catering to the North East markets. It has a current installed capacity of 1.3mn tonne p.a. grinding and another grinding of unit of 0.85mn tonnes p.a. is under execution. The clinker unit of the company to support the current and additional grinding is likely to be commissioned in the next 18 months. The expanded installed capacity of the company will stand at 2.1mn tonnes p.a. DCBL has recently increased its stake in Calcom to a controlling stake (~76%) resulting in complete management control in Calcom Cement In October 2012, DCBL agreed to acquire 100% stake in Meghalaya based Adhunik Cement Ltd. (ACL) for an Enterprise Value of Rs10.85bn (Equity Value – Rs5.6bn; Debt – Rs5.25bn). ACL enjoys 10% market share in North East India. It has an integrated cement capacity of 1.5mn tonnes p.a. supported by 25MW Captive Power Plant (Commissioned in August 2010; ACL was conceptualized as a strategic partnership between Kolkata based Adhunik and MSP group). Organic Growth DCBL through its 100% subsidiary Dalmia Cement Ventures Limited (DCVL) has plans to execute Greenfield projects. DCVL has already announced a Greenfield project of 2.5mn tonnes p.a. at Belgaum, Karnataka. The estimated capex for the project is at ~Rs13bn and is likely to be executed by end of 1HFY15. In its associate company OCL (45% stake), a East India cement major producing Slag based cement, a grinding unit of 1.35 mn tonnes p.a. is being set up at Medinipur, West Bengal. This project is likely to be completed by January 2014 and is being setup at an estimated capex of ~Rs5.5bn (including infrastructure support facilities).

All set to emerge as the next cementmajor and awaiting its entry to the TierI league of cement manufacturers.

Two inorganic acquisitions in North EastIndia will firm up Dalmia Bharat’s EastIndia footprints. DBL is all set to be thelargest capacity in North East India withlaunch of Dalmia Brand.

Dalmia Bharat remains equally focusedand committed towards organicgrowth. Three distinct expansionprojects (including expansion at Calcom)are being executed simultaneously.

– 100 of 133 –


Volume growth to trigger DBL’s earnings DBL’s South India production volumes have seen a growth of 15% in FY12 with less than 60% capacity utilisation. We believe, with inorganic acquisitions in North East India, DBL is all set to a strong volume growth in excess of 25% YoY. DBL increased its capacity from 4mntpa to 9mntpa in FY10 in South India. Since FY10, DBL has delivered 15% for two consecutive years (an incremental of 1.31 mn tonnes over FY10‐12). With North East acquisitions and marginal improvement in capacity utilisations in South India, volume growth much higher than industry will be a cakewalk for DBL. DBL currently has three cement plants in South India. Out of these three plants, two plants are based in Tamil Nadu (Dalmiapuram (4.0mn tonnes p.a.) and Ariyalur (2.5mn tonnes p.a.)) and one in Andhra Pradesh (Kadapa (2.5mn tonnes)). Dalmiapuram remains the oldest plant of Dalmia Cement, rather the oldest plant in the country. Both of the other plants (Ariyalur and Kadapa) have been commissioned in early 2009. In South India, where major portion of DBL’s current operations are located, the core markets include states of Tamil Nadu, Kerala, AP, and Karnataka. In most of these core markets, DBL has delivered higher than market growth in FY12 as illustrated below: Growth Rates: Dalmia Bharat Vs. Key States in South India / Region

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Capacity Utilisation of DBL in Andhra Pradesh and Tamil Nadu Vs. Respective States DBL Vs. Tamil Nadu

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Dalmia Cement in Tamil Nadu Tamil Nadu


Robust growth (+25%) for DalmiaBharat’s cement volumes is certaingiven the aggressive organic andinorganic growth initiatives.

DBL has proven record of being capableto deliver volume growth higher thanthe market demand growth.

From very robust utilisations in FY06,DBL has toned down its utilisations tostate average of Tamil Nadu. Since FY10when new capex in Tamil Nadu wascommissioned utilisations of DBL haveimproved by mere ~9%. Though scopefor improvement in this state remainslimited (considering the average stateutilisations), it is likely that DBL willfurther increase utilisations in this stateby ~5% in phased manner in FY14E andFY15E, each.

Dalmia Bharat’s Dalmiapuram plantenjoys the legacy of being the oldestcement plant in the country.

– 101 of 133 –


DBL Vs. Andhra Pradesh

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Gap in capacity utilisations of DBL andaverage state utilisations in AndhraPradesh suggest significant scope ofimprovement of capacity utilisation forDBL in this state. For DBL as a whole(excluding OCL), our estimates factor ina 10% increase in clinker capacityutilisation and 7% increase in cementcapacity utilisation in FY14E, and webelieve, its easily achievable.

Dalmia Bharat has been a muchdisciplined player in the South Indiancement industry. The recent more thanproportionate increase in despatches ofDalmia Bharat has been largely onaccount of multifold capacity increase(~3x) since FY08.

Tamil Nadu is a State where DalmiaCement has the strongest recallamongst its consumers. Resultantly thisregion becomes of utmost importanceto Dalmia Bharat and hence in ouropinion Dalmia Bharat cannot afford togo against the regional discipline of thestate at any time.

– 102 of 133 –


Andhra Pradesh

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FY14E EBITDA (Rs mn) 9521FY14E EBITDA margin, % 28%FY14E EBITDA/Share (Rs) 117Target EV/EBITDA (x) 5.0Target EV/Share (Rs) 586Net debt/Share 293Equity fair value/Share (Rs) 294% upside 61%FY14E Implied target EV/Tonne (US$) 64FY14E Implied Target P/E (x) 5.4 FY14E EV based on CMP (Rs mn) 38540FY14E Capacity (EOP, mtpa) 14FY14E EBITDA (Rs mn) 9521FY14E EV/EBITDA (x) 4.0FY14E P/E (x) 3.3FY14E EV/tonne (US$) 52


Dalmia Bharat made its capacity debutin Andhra Pradesh only in FY10. Thoughthe despatch pattern has not been in acomplete sync yet, we can sense thatthe company has been making rigorousattempts to not to increase itsdespatches more than proportionate todespatches of peers in the region.

We have valued Dalmia Bharat at 5.0xEV/EBITDA on FY14E earnings. Westrongly believe, given the company’sstrong commitment of creatingcapacities will make it enter the Tier Ileague of cement manufacturers. Wefirmly believe valuation re‐rating isimminent for the stock with growingcapacity base. Brand repositioningstrategy will be an added advantage toDBL earnings and resultantly a supportto stock valuation multiples.

– 103 of 133 –



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– 104 of 133 –


Financials


Net sales 17,459 23,304 26,639 34,258

Growth, % 14 33 14 29

Total income 17,459 23,304 26,639 34,258


EBITDA (Core) 3,648 5,556 6,893 9,521

Growth, % 27.0 52.3 24.1 38.1

Margin, % 20.9 23.8 25.9 27.8

Depreciation ‐1,753 ‐1,817 ‐2,007 ‐2,224

EBIT 1,896 3,739 4,886 7,296

Growth, % 27.0 52.3 24.1 38.1

Margin, % 20.9 23.8 25.9 27.8

Interest paid ‐1,723 ‐1,513 ‐1,740 ‐2,033

Other Non‐Operating Income 542 874 946 1,083

Pre‐tax profit 1,233 3,244 4,819 7,479

Tax provided ‐611 ‐1,229 ‐1,475 ‐2,353

Profit after tax 623 2,015 3,344 5,126

Net Profit 498 1,830 2,898 4,431

Growth, % (82.7) 267.7 58.4 52.9





Cash & bank 4,543 664 1,394 1,522

Debtors 1,008 1,355 1,522 1,949

Inventory 3,104 2,615 2,933 3,741

Loans & advances 2,354 4,124 5,271 6,518


Investments 6,592 11,935 7,777 7,777



Add: Capital WIP 1,609 1,165 7,641 12,025

Net fixed assets 37,528 35,714 47,871 51,483

Total assets 55,129 56,443 66,769 72,990


Provisions 168 455 527 678










Pre‐tax profit 1,233 3,244 4,819 7,479

Depreciation 1,753 1,817 2,007 2,224

Chg in working capital ‐1,983 345 ‐3,224 ‐1,080

Total tax paid ‐80 ‐832 ‐1,475 ‐2,353

Cash flow from operating activities 923 4,574 2,127 6,271

Capital expenditure ‐39,281 ‐3 ‐14,165 ‐5,836

Chg in investments ‐6,592 ‐5,343 4,159 0

Other investing activities 0 ‐433 38 0


Free cash flow ‐44,949 ‐1,205 ‐7,841 434


Debt raised/(repaid) 18,252 ‐2,371 9,052 427


Cash flow from financing activities 22,258 ‐2,674 8,572 ‐307

Net chg in cash ‐22,692 ‐3,879 731 127


EPS, Rs 6.1 22.5 35.7 54.6

BVPS, Rs 392.5 408.6 443.9 498.0

DPS, Rs 1.3 3.2 5.1 7.8

Return on assets (%) 6.4 5.4 7.3 9.3

Return on equity (%) 3.1 5.6 8.4 11.6



RoIC ‐ Cost of capital (%) (4.3) (4.2) (2.3) (0.9)


Cost of capital (%) 13.3 12.7 12.5 12.6

RoCE ‐ Cost of capital (%) (6.4) (6.8) (4.6) (2.6)



Sales/Net FA (x) 0.9 0.6 0.6 0.7



Inventory days 64.9 41.0 40.2 39.9

Current ratio (x) 2.6 1.5 2.6 2.5

Quick ratio (x) 1.8 1.0 1.9 1.8



PER (x) 29.7 8.1 5.1 3.3

Price/Book (x) 0.5 0.4 0.4 0.4

EV/EBIT (x) 7.7 5.0 5.5 4.0

EV/NOPLAT (x) 9.2 6.5 7.1 5.4

EV/CE 0.5 0.6 0.6 0.6

EV/IC (x) 1.4 0.7 0.8 0.7

– 105 of 133 –

OCL India Volume growth to re‐define company potential

CEMENT: Initiating Coverage 28 January 2013


OCL India Limited (OCL) is an East Indian leader and an associate company (~45% stake) of Dalmia Cement Bharat Limited (DCBL; ~85% stake of DCBL held by Dalmia Bharat Limited (DBL)). OCL is largely a slag based cement producer with a total production capacity of 5.35mn tonnes p.a. of cement (~12% of East India capacity). Investment Rationale • Restoration of normal mining operations in OCL will rationalize the cost

structure. On back of fairly strong cement pricing, EBITDA/tonne is likely to improve by +70% YoY in FY13E.

• A very high blending ratio on account of largely slag cement production gives competitive advantage to OCL vs. peers. Average blending ratio of OCL since FY06 works out at ~2.20. OCL sources its slag requirements from SAIL’s Rourkela steel plant, Rashtriya Ispat Nigam Limited’s Vizag steel plant and JSW’s steel plant in South India.

• Grinding expansion at Medinipur of 1.35 mn tonnes p.a. (Scheduled to be operational by June 2014; actual commissioning might be much earlier than that), West Bengal will provide a volume trigger to OCL. OCL currently has a clinker capacity of ~2.9mn tonnes p.a. Even at 2.0x blending ratio and full clinker capacity utilisation, OCL can comfortably produce ~5.8mn tonnes of cement p.a. (a potential volume growth of 84% vs. volumes delivered in FY12).

• DBL has recently made two significant acquisitions in North‐East India (~2.5mn tonnes p.a. of current capacity; being expanded by further 0.9mn tonnes p.a.). These acquisitions are likely to further strengthen the group’s overall footage in East India and thereby the bargaining power of OCL.

• Commissioning of 54MWs of power capacities in OCL makes OCL self‐sufficient for its power requirements. Though no significant savings may be expected on per unit basis, it will make OCL more confident of scaling up its volume smoothly and efficiently.

Risks • Any barrier reinforced for mining activities / inability to mine adequate

limestone to support volume growth. • Delays in commissioning of grinding expansion. • Lack of integration with DBL’s operation in East India (Distribution network /

marketing / branding etc.). Valuation • We have valued OCL at 4.0x EV/EBITDA on FY14E earnings. Given OCL’s large

chunk of capacity share in East India (5th largest on standalone basis), high blending ratio and its potential for a high volume growth, OCL’s valuation are very likely to trigger to better levels.

• At CMP, the stock trades at 5.3x & 3.4x P/E, 3.2x & 2.6x EV/EBITDA & US$ 44 & 43 EV/tonne on FY13E & FY14E earnings, respectively. At our price target of Rs283, the stock will trade at 10.1x & 6.5x P/E, 5.0x & 4.0x EV/EBITDA & US$ 69 & 64 EV/tonne on FY13E and FY14E earnings, respectively.

BUY OSC IN | CMP RS 150

TARGET RS 283 (+89%) Company Data





ABS 2.6 ‐5.1 59.5REL TO BSE ‐1.8 ‐12.2 41.8


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Net Sales 14,704 17,663 21,046EBITDA 2,073 4,080 5,794Net Profit 318 1,601 2,493EPS, Rs 5.6 28.1 43.8PER, X 26.8 5.3 3.4EV/EBIDTA, % 5.7 3.2 2.6EV/Net Sales, x 0.8 0.7 0.7ROE, % 3.6 16.6 22.3Source: PhillipCapital India Research Est. Vaibhav Agarwal (+ 9122 6667 9967) [email protected]

– 106 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / OCL INDIA / INITIATING

Poised for volume growth with improving efficiencies OCL India is poised for an aggressive volume growth FY14E onwards. Volumes took a hit in latter half of FY12E on account of regulatory restrictions imposed by the State Government of Odisha. These restrictions are now withdrawn and the company is all set for an aggressive volume growth FY14E onwards. Except for FY12, since the time OCL increased its capacity in FY09, OCL has delivered volume growth of ~12‐13% for two consecutive years (FY10 & FY11). We have factored in volume growth of ~14% and 12% in FY13E and FY14E, respectively (Absolute volumes of 3.58 and 4.03 mn tonnes in FY13E and FY14, respectively). Volumes (Mn Tonnes) & Volume Growth

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OCL India’s blending ratio is on a very high side (~2.0x Clinker), as it is a largely slag based cement producer. OCL India has its long term slag procurement contracts in place. Infact, the grinding expansion at Medinipur in West Bengal is also a slag based grinding unit with a capacity of 1.35mn tonnes p.a. and expected to go operational before end of June 2014. OCL currently has a clinker capacity of 2.91 mn tonnes p.a. At 2.0x blending, the clinker volumes can easily support volumes upto 5.8mn tonnes p.a. At 5.8mn tonnes of cement production in FY16E, OCL volumes will report a CAGR of 16% p.a. which will undoubtedbly be signifcantly higher than the industry’s volume CAGR. Blending Ratio of OCL

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Being a slag based cementmanufacturer, OCL’s blending ratio ismuch higher than industry standrd of~1.3x. Average blending of OCL is at~2.2x (FY06‐11) and this gives OCL aclear competitive advantage over peers.

Volume CAGR of OCL will remaindistinctly robust at ~16% between FY12‐16E and much higher than Industry’sCAGR. This is one of the key reasonswhy we believe OCL deserves betterstock valuations.

Restoration of mining operationsaddresses volume concerns. Volumegrowth expected to remain robust inFY13E and FY14E. OCL remainsconfident of delivering volumes of +4mntonnes in FY14E.

Except for FY12, since the time OCLincreased its capacity in FY09, OCL hasdelivered volume growth of ~13% for twoconsecutive years. Our estimates factor ina volume growth of 14% and 12% in FY13Eand FY14E, respectively.

– 107 of 133 –


OCL’s EBITDA/tonne is bound to improve significantly FY13E onwards. We expect OCL’s EBITDA/tonne to post an improvement of 73% and 26% at Rs1,139 and Rs1,437 in FY13E and FY14E, respectively. OCL’s EBITDA/tonne improvement in 1HFY13 is much higher at 111% Vs. FY12 at Rs1,388. Market trends are likely to be weak 3QFY13E. However, we believe our EBITDA/tonne expectations for OCL’s EBITDA growth in FY13E and FY14E is fairly reasonable and achievable. OCL’s EBITDA/tonne

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Behavior of OCL East India

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1HFY13 EBITDA/tonne improvement was at 111% Vs. FY12.

We expect EBITDA/tonne to improve substantially by 73% and 26% YoY in FY13E and FY14E, respectively.

OCL has been able to take the volumeadvantage in East India, though OCL’sdiscipline has been in fairly good syncwith East India. OCL accounts for ~19%of East India capacity and is completelydependent on this region only for sale ofits produce. The blip and recoverytowards January‐April ’12 is on accountof the mining ban imposed on OCL andother players took this opportunity tocapture the market for time beingwhich was serviced by OCL.

– 108 of 133 –


Odisha

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FY14E EBITDA (Rs mn) 5794FY14E EBITDA margin, % 28%FY14E EBITDA/Share (Rs) 102Target EV/EBITDA (x) 4.0Target EV/Share (Rs) 407Net debt/Share 124Equity fair value/Share (Rs) 283% upside 89%FY14E Implied target EV/Tonne (US$) 65FY14E Implied Target P/E (x) 6.5 FY14E EV based on CMP (Rs mn) 15098FY14E Capacity (EOP, mtpa) 7FY14E EBITDA (Rs mn) 5794FY14E EV/EBITDA (x) 2.6FY14E P/E (x) 3.4FY14E EV/tonne (US$) 43


OCL has clearly pressed the volumeaccelerator since the time it hasincreased its capacity in FY09 from 2 to5.35mn tonnes p.a. Currently, if wecompare only Odisha, OCL is incomplete sync with the discipline of thisstate and is clearly visible from theadjoining graph.

We have valued OCL at a targetmultiple of 4.0x EV/EBITDA on FY14Eearnings. Considering volume growthpotential of OCL and taking intoaccount OCL’s skewed regionalexposure to East India only, we believethis multiple is fair.

– 109 of 133 –



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– 110 of 133 –


Financials


Net sales 14,744 14,704 17,663 21,046

Growth, % 7 0 20 19

Total income 14,744 14,704 17,663 21,046


EBITDA (Core) 3,036 2,073 4,080 5,794

Growth, % (21.2) (31.7) 96.8 42.0

Margin, % 20.6 14.1 23.1 27.5

Depreciation ‐1,228 ‐1,276 ‐1,402 ‐1,674

EBIT 1,808 798 2,678 4,121

Growth, % (21.2) (31.7) 96.8 42.0

Margin, % 20.6 14.1 23.1 27.5

Interest paid ‐624 ‐749 ‐697 ‐865


Pre‐tax profit 1,518 380 2,288 3,562

Tax provided ‐373 ‐62 ‐686 ‐1,069

Profit after tax 1,145 318 1,601 2,493

Net Profit 1,145 318 1,601 2,493

Growth, % (30.1) (72.2) 403.4 55.7

Net Profit (adjusted) 1,145 318 1,601 2,493




Cash & bank 3,902 1,328 1,328 1,328

Debtors 1,316 1,207 1,450 1,727

Inventory 2,541 2,603 3,126 3,725

Loans & advances 772 1,239 1,488 1,773



Investments 76 1,763 1,763 1,763



Add: Capital WIP 2,936 1,486 3,500 3,000

Net fixed assets 12,921 12,122 14,220 17,946

Total assets 21,547 20,333 23,462 28,366


Provisions 298 163 196 234










Pre‐tax profit 1,518 380 2,288 3,562

Depreciation 1,228 1,276 1,402 1,674

Chg in working capital ‐846 924 ‐1,264 ‐309

Total tax paid ‐430 ‐1 ‐686 ‐1,069



Chg in investments ‐15 ‐1,687 0 0


Free cash flow 394 415 ‐1,761 ‐1,542

Debt raised/(repaid) 234 ‐2,857 2,161 2,165


Cash flow from financing activities ‐30 ‐2,990 1,761 1,542

Net chg in cash 364 ‐2,574 0 0

Pre‐tax profit 1,518 380 2,288 3,562


EPS, Rs 20.1 5.6 28.1 43.8

BVPS, Rs 155.4 158.6 179.7 212.6

DPS, Rs 4.0 2.0 6.1 9.4

Return on assets (%) 7.4 3.9 9.4 11.8

Return on equity (%) 13.6 3.6 16.6 22.3



RoIC ‐ Cost of capital (%) 2.5 (0.3) 6.8 10.1


Cost of capital (%) 13.3 12.5 12.5 12.4




Sales/Net FA (x) 1.1 1.2 1.3 1.3



Inventory days 62.9 64.6 64.6 64.6

Current ratio (x) 2.8 1.4 1.7 1.7

Quick ratio (x) 2.0 0.8 1.0 1.0



PER (x) 7.5 26.8 5.3 3.4

Price/Book (x) 1.0 0.9 0.8 0.7

EV/EBIT (x) 4.3 5.7 3.2 2.6

EV/NOPLAT (x) 4.9 5.8 3.8 3.2

EV/CE 0.7 0.7 0.7 0.7

EV/IC (x) 0.9 0.8 0.9 0.8

– 111 of 133 –

JK Cement Getting in the “Aggression” Mode – Cautiously!



JK Cement Ltd. (JKC) is an aspiring cement manufacturer, currently having a capacity of 7.5mn tonnes p.a. of Grey Cement (North+South India) and 0.4mn tonnes p.a. of White Cement capacity. It is a rare mid‐tier cement player, who has announced two major expansions simultaneously (including an overseas expansion in Fujairah, UAE). Investment Rationale • Volume growth to trigger in from Karnataka plant, FY13E onwards. JKC

operated its Karnataka capacity at 14% lower utilisations than regional utilisation in Karnataka in FY12E. JKC has guided for a 33% increase in Karnataka production from 1.53mn tonnes in FY12.

• Capacity expansions in white cement and putty segment to further strengthen and stabilize overall profitability of JKC in longer term, white cement segment being a much more stable business segment vs. grey cement. Operating margins in white cement business remains firm and consistent between 25‐30%. Flexibility to produce both grey cement/white cement as per market scenarios is a competitive advantage for JKC to trigger volume growth further (especially for white cement).

• Brownfield expansion in North India and Greenfield project at Fujairah to help JKC maintain consistency with volume growth trends. JKC expects volume growth to remain at +12‐15% YoY for the next couple of years. Our estimates factor in volume growth of ~10‐11% for FY13E and FY14E.

• Overseas expansion will help JKC save its white cement capacity in India for domestic use, as demand for export markets will then be serviced by this plant. This may materially increase grey cement volumes in North India as Nihon Nirman plant can then remain dedicated to grey cement production.

• JKC has recently taken a Board approval for a QIB placement of Rs2bn. The management has clarified that QIB placement is only with a view to enable the company to smoothly increase its capacity further. The management has indicated a Greenfield project in Central India.

Risks • Delays in capex execution at Mangrol and UAE. • Rising debt levels. Net Debt:Equity likely to rise to 1.13x in FY14E from 0.62x

in FY12. Hence, price wars, if any may prove fatal. Valuation • We have valued JKC at 6.0x EV/EBITDA in White Cement segment and 7.0x

EV/EBITDA in Grey Cement segment on FY14E earnings. JKC is moving smartly with two simultaneous expansions, effectively in two different business segments (Grey and white cement). Volume triggers for JKC will continue to emerge in both these segments one after the other, as these expansions commission. Stock is bound to re‐rate upwards as it moves closer to the 10mn tonnes p.a. capacity mark.

• At current market price of Rs 331 stock of JKC trades at 8.3x and 8.0x PER; 5.5x and 5.9x EV/EBITDA and US$ 78 and 99 EV/tonne on FY13E and FY14E earnings, respectively. At our price target of Rs485, stock of JKC will trade at 12.2x and 11.7x PER; 7.2x and 7.3x EV/EBITDA and US$101 and 123 EV/tonne on FY13E and FY14E earnings, respectively.

BUY JKCE IN | CMP Rs 331






ABS ‐7.8 22.2 188.0REL TO BSE ‐12.2 15.0 170.3


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– 112 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / JK CEMENT / COMPANY UPDATE

Accelerating cautiously… JK Cement’s (JKC) operations came into existence with the acquisition of the cement division of JK Synthetics in November 2004. These assets included grey cement plants at Nimbahera and Mangrol, captive power plant at Bamania and a white cement plant at Gotan, all in the State of Rajasthan. These assets were acquired “as going concern” on 4th November 2004 through slump purchase in terms of One Time Settlement Scheme from JK Synthetics Limited for a purchase consideration of Rs4.68bn. JK Cement subsequently made a public offering and got listed on exchanges. JKC today is a ~7.5mn tonnes p.a. of grey cement and 0.4mn tonnes p.a. of white cement capacity. Grey cement operations are located in Rajasthan (North India ‐ 4.5mn tonnes p.a.) and Karnataka (South India ‐ 3.0mn tonnes p.a.). White cement operations includes 0.4mn tonnes p.a. of white cement capacity and 0.3mn tonnes p.a. of white putty capacity located at Gotan, Rajasthan in North India. Stock Re‐rating likely as capacity crosses 10mn tonnes p.a. mark JKC has announced aggressive capacity expansions in both grey cement and white cement segments (including an expansion overseas) which will increase installed capacity by ~50% and 100% in these segments. JKC plans to execute a Brownfield expansion of a grey cement plant at its existing site in Mangrol and Greenfield project of grey‐cum‐white cement at Fujariah, UAE. The company has very recently also taken an approval in it Board Meeting for a QIB placement of Rs2bn. JKC is planning yet another +3mn tonne capacity in Central India and this QIB placement, is with a view to enable the company to smoothly execute further expansions to grow its capacity size in‐line with market size. North India Expansion At Mangrol (Rajasthan), JKC has announced a grey cement expansion with integrated plant of 1.5mn tonnes p.a. (Kiln capacity: 5000TPD) and a split grinding unit of 1.5mn tonnes p.a. in Jhajhar, Haryana. The project will include 25MW Thermal Captive Power Plant, 5MW Waste Heat Recovery Plant and Railway Sidings at both sites. Total estimated project cost is at Rs17bn with a targeted Debt:Equity funding of 2:1. JKC is confident of executing the project in 24 months of times starting October 2012. A cushion in grinding capacity is intentionally created with this expansion, in order to play safe taking in into account maintenance shutdowns of cement mills, surge in demand etc. Obviously, purchase of clinker to support additional volumes with surplus grinding capacity will always remain a possible option to evaluate to trigger volume growth. UAE Expansion JKC has also made an ambitious foray in the middle‐east region with a Greenfield project of grey‐cum‐white cement plant. This project is likely to be on stream by March 2014 with a capacity of 0.6m tonne p.a. of White Cement or 1 mn tonnes p.a. of Grey Cement or a combination of both. JKC is confident of the shift from Grey Cement to White Cement and vice‐versa, as the company is already doing the same in India at its Nihon Nirman Plant. The shift from White Cement to Grey Cement can be done immediately with no gaps; however, a shift from Grey Cement to White Cement will mean a production gap of ~3 days. This is to ensure that the White Clinker is completely free from any impurities, which may be present in the raw meal of Grey Cement. The technology has been provided by Taiheiyo Cement Corporation and JKC is the only player in India who is doing so.

JKC came into existence with theacquisition of cement division of JKSynthetics in November 2004. Capacityhas almost been double since thecompany came into inception. Thepresent capacity of the company is~8mn tonnes p.a. (Grey + WhiteCement)

JKC is now slowly and steadily getting more focused on expansions. Capacity isset to increase by ~50% and 100% byend of 1HFY15E. QIB placement ofRs2bn is with a view to expand furtherin Central India.

3 mn tonne p.a. expansion in NorthIndia will be on track by October 2014.

Overseas expansion in the Middle Eastof a grey‐cum‐white cement plant willbe on track by March 2014. Onceoperational, the entire export marketserviced from India by JKC will then beserviced by this plant. JKC currentlyexports +5000 tonnes per month ofwhite cement which will then beavailable in India and accelerate localvolumes. It is to be noted domesticmargins are in most cases better thanthe export margin.

– 113 of 133 –


Project cost for UAE expansion has been firmed up at 150mn USD and JKC does not expect any cost escalation. JKC will hold 90% equity stake of the UAE plant (10% being with the Government of Fujairah for extending facilities to JKC for setting up of the plant). JKC will contribute 50mn towards equity (10mn Equity and 40mn Preference Capital). Preference Capital is being infused with intent of bringing the money back to the parent as and when the operations in Fujairah become profitable and the redemption is viable. Of the 50mn USD contribution of JKC (~Rs2.5bn); 3/5th is likely to be funded through debt and balance through internal accruals. Financial Closure for this debt of Rs1.5bn is also in place. Capacity Utilisation of JK Cement in Rajasthan and Karnataka Vs. Respective States JKC vs. Rajasthan

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Source: PhiilipCapital India Research

JKC will enjoy 90% stake in UAE project(10% being held by Government ofFujairah. 3/5th of JKC’s contribution toUAE project to be through debt and restvia internal accruals.

JKC has a material scope ofimprovement of 14% in Karnataka.Average JKC’s utilisation in Karnataka inFY12 was at 51% while Karnataka aswhole operated at 65%. This will meana volume increase of ~0.4mn tonnes justby syncing its utilisations to stateaverage in South India.

Not much scope of improving capacityutilisations in Rajasthan for JKC with thecurrent capacity. This highlights theimportance and need of a new capacityfor JKC in Rajasthan / North India.

– 114 of 133 –


Behavior of JK Cement North India

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Capacity has always been the biggestconstraint for JKC in North India. NorthIndia has really not felt the pinch ofexcess capacity yet. As we can see in theadjoining graph, JKC’s production inNorth India has always been rangedbound. It has never misbehaved inNorth India by increasing its productionto more than proportionate vs. industry.Infact, in relatively tough times we canclearly sense a production cut in orderto ensure a healthy regional scenario.

All of the JKC’s current capacity in NorthIndia is located in Rajasthan itself andas we know Rajasthan is the biggestchunk of capacity in North India(~2/3rd). Hence JKC’s behavior vis‐à‐visRajasthan is almost the same and notmaterially different from what it is tothe region as a whole.

JKC has been a new entrant to SouthIndia. JKC’s behavior in South India haslargely followed the regional pattern ofSouth India. JKC is surely one of thewell‐behaved mid‐caps in North andSouth India. If we closely observe JKC ‘sbehavior in North and South India, itwill not be incorrect to term JKC as‘accommodative’ by nature. Hence therisk to pricing / realisations for JKCremains fairly minimal, in our view.

– 115 of 133 –


Karnataka

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FY14E Grey cement EBITDA (Rsmn) 5,076 FY14E Grey cement EBITDA margin, % 19%FY14E Grey cement EBITDA/Share (Rs) 73 Target EV/EBITDA (x) 8.0 EV/Share ‐ Grey cement (Rs) 581 FY14E Implied target EV/Tonne (US$) – Grey Cement 105 FY14E White cement EBITDA (Rsmn) 2,579 FY14E White cement EBITDA margin, % 30%FY14E White cement EBITDA/Share (Rs) 37 Target EV/EBITDA (x) 6.0 EV/Share ‐ White cement (Rs) 221 Implied Target EV/Tonne (US$) – White Cement 372 Total EV/Share 802 Net debt/Share 317 Equity fair value/Share (Rs) 485 % upside 47%FY14E Implied target P/E (x) 11.7FY14E EV based on CMP (Rs mn) 45203FY14E EV/EBITDA (x) 5.9FY14E P/E (x) 8.0FY14E Grey cement capacity (EOP, mtpa) 7.5FY14E white cement capacity (EOP, mtpa; includes Putty Capacity) 1.3Total cement capacity (Assumes capex of White Cement at 2x Grey Cement) 8.8Current EV/tonne (US$) – (Grey + White Cement) 99Implied EV/tonne (US$) – (Grey + White Cement) 123


JKC’s capacity in South India is locatedin Karnataka only. As seen in theadjoining graph, in a very short span oftime, JKC has well‐synced with theregional despatch pattern of Karnataka.

We have valued JKC’s grey cementbusiness and white cement business at8.0x and 6.0x FY14E, respectively. GivenJKC’s regional exposure and pipeline ofcapacities, we believe these multiplesare fair. At our price target of Rs485/‐the stock will trade at an EV/tonne of~123 on FY14E earnings, which is still adiscount of ~20% to currentreplacement cost.

– 116 of 133 –



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– 117 of 133 –


Financials


Net sales 20,831 25,378 29,634 34,678

Growth, % 14 22 17 17

Total income 20,831 25,378 29,634 34,678


EBITDA (Core) 2,625 5,050 6,569 7,655

Growth, % (40.0) 92.4 30.1 16.5

Margin, % 12.6 19.9 22.2 22.1

Depreciation ‐1,128 ‐1,256 ‐1,576 ‐1,868

EBIT 1,497 3,793 4,993 5,787

Growth, % (40.0) 92.4 30.1 16.5

Margin, % 12.6 19.9 22.2 22.1

Interest paid ‐1,040 ‐1,443 ‐1,681 ‐2,428


Pre‐tax profit 824 2,908 3,975 4,156

Tax provided ‐197 ‐1,084 ‐1,193 ‐1,247

Profit after tax 626 1,824 2,783 2,909

Net Profit 626 1,824 2,783 2,909

Growth, % (72.1) 191.3 52.6 4.6





Cash & bank 3,215 4,332 5,185 6,064

Debtors 608 837 1,002 1,172

Inventory 3,211 3,628 4,343 5,079

Loans & advances 2,295 2,683 3,212 3,756



Investments 42 92 92 92



Add: Capital WIP 1,504 904 4,500 11,000

Net fixed assets 24,472 24,071 29,362 39,959

Total assets 33,970 35,760 43,334 56,284


Provisions 163 406 620 648








Source:PhillipCapital India Research Estimates


Pre‐tax profit 824 2,908 3,975 4,156

Depreciation 1,128 1,256 1,576 1,868

Chg in working capital 328 ‐773 ‐781 ‐613

Total tax paid ‐197 ‐1,084 ‐1,193 ‐1,247



Chg in investments 5 ‐50 0 0



Debt raised/(repaid) 3,104 24 4,549 9,800


Cash flow from financing activities 2,614 ‐138 4,142 9,180

Net chg in cash 1,897 1,139 853 879


EPS, Rs 9.0 26.1 39.8 41.6

BVPS, Rs 199.5 217.7 248.6 280.9

DPS, Rs 2.0 5.0 7.6 8.0

Return on assets (%) 4.1 7.9 9.8 9.0

Return on equity (%) 4.6 12.5 17.1 15.7





Cost of capital (%) 9.2 9.1 9.2 9.4

RoCE ‐ Cost of capital (%) (4.6) (0.2) 1.9 0.7



Sales/Net FA (x) 0.9 1.0 1.1 1.0



Inventory days 56.3 52.2 53.5 53.5

Current ratio (x) 2.3 2.6 2.6 2.6

Quick ratio (x) 1.5 1.8 1.8 1.8



PER (x) 37.0 12.7 8.3 8.0

Price/Book (x) 1.7 1.5 1.3 1.2

EV/EBIT (x) 12.9 6.5 5.5 5.9

EV/NOPLAT (x) 13.9 8.2 6.7 7.1

EV/CE 1.1 1.0 1.0 0.9

EV/IC (x) 1.4 1.3 1.3 1.2

– 118 of 133 –

JK Lakshmi Cement Executing “Intelligent” capex opportunities



JK Lakshmi Cement (JKLC) is another leading cement manufacturer with total capacity of 5.3mn tonnes spread across North and West India. JKLC also rides high aspirations to nearly double its capacity by end of FY15E. JKLC is working on two distinct projects simultaneously in order to increase its capacity base in the country which will ultimately result in volume trigger for JKLC. Installed capacity of JKLC will see an increase of 88% by end of FY15E. Investment Rationale • Greenfield expansion in East India (including grinding expansions) to add 50%

incremental capacity by end of FY14E. Brownfield refurbishment of JK Udaipur Udyog and additional grinding expansion in West India (Surat, Gujarat) to further add ~1.7mn tonnes to total capacity taking it near to 10mn tonnes p.a.

• Capital cost of Udaipur Udyog plant to be lower by ~33% despite refurbishment of all key equipments thereby resulting in a materially higher return on investments than a regular capex project. It is also to be noted that JKLC has adequate amount of resources at its Udaipur site to undergo an expansion of equivalent or even higher capacity.

• Like other mid‐tier cement companies, JKLC has also kept its focus to creation of capacities in order to support a strong volume growth. However, it is to be noted that JKLC’s East India expansion is going to be amongst the first few ones by mid‐tier cement companies in India and thus a competitive advantage for JKLC.

• Capacity increase will help JKLC to boost its volume growth significantly higher than peers, especially in established markets. We expect JKLC to post a volume growth of ~12% in FY14E. Moreover, capacity expansion at Udaipur will further trigger volume growth in FY15E. Volume growth expected in FY15E is as high as 31%.

• Expansions in Chhattisgarh with grinding units in West Bengal and Odisha will also expand the overall geographical reach of JKLC. Valuation multiples are bound to get re‐rated with capacity nearing 10mn tonne mark and business model getting de‐risked to multiple regions/states.

Risks • Delays in capacity expansion and execution. • Prolonged time span for establishment of brands and markets in East India. Valuation • We have valued JKLC at a target multiple of 8.0x EV/EBITDA on FY14E

earnings. We strongly believe, with the potential volume growth of JKLC in FY14E and FY15E, valuations will re‐rate.

• At a CMP of Rs 146, the stock of JKLC trades at 7.8x & 6.8x EV/EBITDA, 10.8x & 10.5x P/E and US$ 91 & 71 EV/tonne on FY13E and FY14E earnings, respectively. At our price target of Rs 211, the stock of JKLC will trade at 9.5x & 8.0x EV/EBITDA, 15.6x & 15.2x P/E and US$ 142 & 107 EV/tonne on FY13E and FY14E earnings, respectively.

BUY JKLC IN | CMP Rs 146






ABS ‐6.5 18.5 211.2REL TO BSE ‐10.9 11.3 193.5


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– 119 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / JK LAKSHMI CEMENT / INITIATING

Aggressive organic growth to re‐rate valuations JK Lakshmi Cement Limited (JKLC) is a leading cement manufacturer with total capacity of 5.3mn tonnes p.a. spread across North and West India. JKLC‘s integrated plant is located at Sirohi, Rajasthan with a total capacity of 4.2mn tonnes p.a. The split grinding units are located at Kalol, Gujarat (0.55mn tonnes; commissioned in February 2009) and Jharli, Haryana (0.55mn tonnes; commissioned very recently in April 2012). JKLC’s is amongst the most aggressive mid‐tier cement companies with few sizeable organic capacity additions in pipeline. Capacity to grow by 88% by end of FY15E

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JKLC is currently executing a capacity expansion in Durg, Chhattisgarh, East India. The company has planned a 2.7 mn tonnes p.a. capacity expansion in East India. The mother plant of this expansion will be located at Durg in Chhattisgarh (Clinker capacity ‐ 1.5mn tonnes p.a.; Grinding capacity – 0.9 mn tonnes p.a.) with split grinding units in Orissa and West Bengal (0.9mn tonnes p.a. each). JKLC is investing ~Rs12.5bn in the said project and is scheduled to be commissioned by end of 3QFY14 Volume growth potential remains very strong with high capacity growth:

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Volumes are very likely to shoot up with JKLC’s East India expansion. Though FY13E volumes are likely to remain flattish, JKLC’s volume growth is likely to shoot up FY14E onwards. We expect JKLC to report volume growth of 12% and 31% in FY14E and FY15E, respectively.

Capacity set to increase by 88% by end of FY15E.

JKLC is amongst the most aggressivemid‐tier companies in terms of organiccapacity expansions.

Volume growth of JKLC will remainrobust at 12% and 31% in FY14E andFY15E, respectively.

– 120 of 133 –


Behavior of JK Lakshmi Cement North India

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JKLC is an aggressive North major whohas successfully pushed volumes infavorable times and toned down itsaggression in tough times to fall in‐linewith the market discipline.

JKLC’s capacities are largelyconcentrated in Rajasthan. JKLC’sbehavior in Rajasthan is thereforelargely similar as to what behaviorpattern has been observed vis‐à‐vis North India. An aggressive approach infavorable times and cautious and toneddown approach in tough times.

JKLC has been a recent entrant to WestIndia. As seen from the adjoining graph,JKLC has made successful attempts tosync its despatches to the overallregional despatches of West India. JKLC,in our view is not a concern to thediscipline of West India, in total.

– 121 of 133 –


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FY14E EBITDA (Rsmn) 5365FY14E EBITDA margin, % 24%FY14E EBITDA/Share (Rs) 46Target EV/EBITDA (x) 8.0Target EV/Share (Rs) 365Net Debt/Share 153Equity Fair Value/Share (Rs) 211% upside 45%FY14E Implied Target EV/tonne (US$) 107FY14E Implied Target P/E (x) 15 FY14E EV based on CMP (Rsmn) 36366FY14E Capacity (EOP, mtpa) 8.0FY14E EBITDA (Rsmn) 5365FY14E EV/EBITDA (x) 6.8FY14E P/E (x) 10.5FY14E EV/tonne (US$) 91


The only capacity of JKLC in West Indiais located in state of Gujarat. Thoughthe sync of despatches of JKLC is fairlysimilar, a better sync pattern can besensed for JKLC in West India, if wecompare it to the state of Gujarat only.

We have assigned a target multiple of8.0x to JKLC on FY14E earnings. Webelieve, given the aggressive capacitygrowth (at relatively low capex) and theresultant potential volume growth ofthe company, this target multiple isquite fair.

– 122 of 133 –



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– 123 of 133 –


Financials


Net sales 13,188 17,181 18,472 22,109

Growth, % ‐12 30 8 20

Total income 13,188 17,181 18,472 22,109


EBITDA (Core) 1,832 3,280 4,097 5,365

Growth, % (56.9) 79.0 24.9 31.0

Margin, % 13.9 19.1 22.2 24.3

Depreciation ‐846 ‐1,297 ‐1,400 ‐1,811

EBIT 986 1,983 2,697 3,554

Growth, % (71.4) 101.1 36.0 31.8

Margin, % 7.5 11.5 14.6 16.1

Interest paid ‐509 ‐797 ‐1,221 ‐1,547


Pre‐tax profit 788 1,820 2,123 2,330

Tax provided ‐197 ‐340 ‐531 ‐699

Profit after tax 591 1,480 1,592 1,631

Net Profit 591 1,480 1,592 1,631

Growth, % (75.5) 150.3 7.5 2.5


Unadj. shares (m) 122 122 118 118

Wtd avg shares (m) 122 122 118 118


Cash & bank 913 890 890 890

Debtors 298 382 419 502

Inventory 1,199 1,201 1,317 1,577

Loans & advances 3,133 4,588 5,033 6,023


Investments 5,278 4,561 2,281 1,140



Add: Capital WIP 744 2,941 10,000 6,000

Net fixed assets 14,555 16,234 24,834 31,023

Total assets 25,376 27,857 34,774 41,156


Provisions 1,233 355 389 466










Pre‐tax profit 788 1,820 2,123 2,330

Depreciation 846 1,297 1,400 1,811

Chg in working capital ‐150 ‐787 547 183

Total tax paid ‐45 ‐179 ‐531 ‐699



Chg in investments ‐472 717 2,281 1,140

Other investing activities ‐157 93 0 0


Free cash flow ‐2,143 ‐15 ‐4,181 ‐3,235

Equity raised/(repaid) 0 0 ‐24 0

Debt raised/(repaid) 1,030 277 4,620 3,661


Cash flow from financing activities 852 ‐8 4,181 3,235

Net chg in cash ‐1,290 ‐23 0 0


EPS, Rs 4.8 12.1 13.5 13.9

BVPS, Rs 85.5 96.0 109.7 119.9

DPS, Rs 1.2 2.0 3.0 3.1

Return on assets (%) 3.7 7.5 7.6 6.9

Return on equity (%) 5.7 13.3 12.9 12.1





Cost of capital (%) 5.2 5.0 5.8 6.2




Sales/Net FA (x) 1.0 1.1 0.9 0.8



Inventory days 33.2 25.5 26.0 26.0

Current ratio (x) 1.5 1.3 1.2 1.1

Quick ratio (x) 1.1 1.1 1.0 0.9



PER (x) 30.2 12.1 10.8 10.5

Price/Book (x) 1.7 1.5 1.3 1.2

EV/EBIT (x) 27.5 13.9 11.9 10.2

EV/NOPLAT (x) 16.6 9.3 9.0 7.8

EV/CE 1.3 1.2 1.1 1.1

EV/IC (x) 1.7 1.6 1.4 1.2

– 124 of 133 –

HeidelbergCement India Improvement in efficiencies to re‐define valuation multiples



HeidelbergCement India Limited (HCIL) is a group company of the global major HeidelbergCement. In India, HCIL enjoys presence in Central India, Western India and Southern India markets. HeidelbergCement entered Indian markets through inorganic route by acquiring Mysore Cements Ltd. in August 2006. HCIL is amongst one of the most attractive buying opportunities in the near term in Indian cement sector given its attractive valuations at US$50/tonne. Investment Rationale • HCIL remains one of the few mid cap cement companies which is all set to

double its capacity base from 3mn tonnes p.a. to more than 6 mn tonnes p.a. Infact the company has already commissioned commercial production at its grinding expansion at Jhansi (Uttar Pradesh) on 16th January 2013 while the commercial production of clinker unit is likely very shortly (before March 2013). Valuation re‐rating is very likely with doubling of capacity.

• Volume growth likely to be very robust for CY13E. We expect HCL to deliver volumes of +5mn tonnes in CY13E from ~3mn tonnes in CY12E. It is to be noted that HCIL is a 100% blended cement producer and hence volume increase of 65‐70% with doubling of capacity is not an impossible task for HCIL. In other words, HCIL targets a ramp up of upto +85% of its capacity expansion, once it begins commercial production in 1QCY13E.

• The major concern for HCIL has always been its low operational efficiency and unviable cost structure. However, with the expansion coming in operation, a lot of these concerns will be addressed. Improvement in operational efficiencies is likely to be a significant contributor to EBITDA growth. EBITDA/tonne is expected to improve from Rs208/tonne in CY11 to Rs661/tonne in CY13E. Behavioral analysis suggests though the size of capacity of HCIL is relatively small, its sync with despatches of respective regions and states is probably one of the best in small / mid‐tier companies.

• Ambitious expansion plans / inorganic acquisitions (if any) can trigger further re‐rating to valuation multiples. Earlier, HCIL had set in an ambitious target of being a 15mn tonne p.a. capacity by end of CY15E. It is quite obvious; HCIL will have to adopt the inorganic route, if at all it still has the mindset to reach this benchmark by end of CY15E.

Risks • Failure to deliver operational efficiencies with expanded capacity / deliver

aggressive volumes in CY13E and any delays in execution of expansion plans. • Inorganic expansion which may not be economically viable or may not be in

synergy with the existing operations of HCIL. No thrust on further capacity expansions, may result in loss of re‐rating trigger.

Valuation • We have valued HCIL at a target multiple of 7.0x EV/EBITDA CY13E earnings.

At our target multiple HCIL will trade at an EV/tonne of US$ 72 on FY14E earnings as against US$50 currently. Given the potential of a robust volume growth at HCIL in the next 12‐15 months and improving efficiencies of its plant operations, HCIL clearly deserves better stock valuations.

BUY HEIM IN | CMP Rs 50






ABS ‐9.3 ‐0.4 49.4REL TO BSE ‐13.7 ‐7.6 31.7


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140


Heidelberg BSE Sensex


Other Key Ratios


Net Sales 9,826 11,294 20,186EBITDA 605 1,119 3,338Net Profit 292 438 959EPS, Rs 1.3 1.9 4.2PER, X 38.8 25.9 11.8EV/EBIDTA, % 26.4 16.6 4.9EV/Net Sales, x 1.6 1.6 0.8ROE, % 3.6 5.2 10.6Source: PhillipCapital India Research Est. Vaibhav Agarwal (+ 9122 6667 9967) [email protected]

– 125 of 133 –

28 January 2013 / INDIA EQUITY RESEARCH / HEIDELBERGCEMENT INDIA / INITIATING

Capex to reduce inefficiencies, trigger volumes HeidelbergCement India Ltd. (HCIL) is all set to double its capacity base from 3mn tonnes p.a. to +6mn tonnes p.a. HCIL made a dual entry in India in 2006, with a 50:50 joint venture with Indorama Cement (in Raigad District, Maharashtra) and majority acquisition of Mysore Cements Limited (S.K. Birla Group Company incorporated in 1960s). The Raigad unit is a grinding unit where HCIL buys slag from JSW Ispat (Imports Clinker or buys it from competitors) and sells cement to Mumbai and Pune markets (Primary markets for this plant). The other units were mainly located in Central India with a small unit in Southern India (in Karnataka in Ammasandra (110kms away from Bengaluru), this plant can produce ~0.4mn tonnes of cement p.a.). In 2008, both these entities were merged to form HCIL. Resultantly, HCIL currently has 4 plants spread across regions of Central, West and South India. HCIL has very recently executed and commissioned a large expansion in Central India which has helped HCIL doubled its capacity base. It has increased its clinker capacity from 1.2 mn tonnes p.a. to 3.1 mn tonnes p.a. (trial runs underway) at its unit in Damoh (Madhya Pradesh)) and its cement grinding capacity to 6 mn tonnes p.a., (at Jhansi, Uttar Pradesh) thereby doubling the existing capacity (Grinding unit has commissioned commercial production on 16th January 2013 while the clinker unit is likely to commence its commercial production very shortly). Capacity exposure to Central India has increased from 50% to 75%. Capacity Mix of HCIL post expansion in Central India

South9%

Central75%

West16%


The major concern with HCIL historically has been its unviable and inefficient cost structure which is largely on account of location disadvantages. In central India distance between mines and plant is ~20kms and another 20kms from clinker unit to 1st grinding unit and 300 kms to the second one. To address these legacy issues partially, HCIL has commissioned an Over Land Conveyor Belt (OLBC) to transport limestone from mines (~20 kms away) to the clinker unit and should help the company in saving ~30% of the limestone extraction costs. Previously, HCIL used to large use Trucks and Tippers to transport limestone which is a relatively expensive mode of transportation. Also for the recently commissioned new units, power and fuel consumption parameters will be much better than the older plants which will further help in cost savings. Overall, on back of all these initiatives, we expect HCIL’s EBITDA/tonne to improve from Rs208 in CY11 to Rs368 and Rs661 in CY12E and CY13E, respectively (an improvement of more than 77‐79% YoY for two consecutive calendar years). HCIL’s 9MCY12 EBITDA/tonne has been at Rs359. EBITDA margins are seen improving from 6.2% in CY11 to 16.5% in CY13E.

HCIL made a dual entry in India with50:50 JV with Indorama Cement andmajority acquisition of Mysore Cement.

All set to increase volumes with robustvolume growth of ~67% (about 5mntonnes in CY13E as against 3mn tonnesin CY12) for CY13E with doubling ofcapacity from 3mn tonnes p.a. to +6mntonnes p.a.

HCIL’s capacity share in Central Indiawill increase from 50% to 75% withcommissioning of expansions.

Inefficiencies to get partially addressedwith new technology plants, OLBC’s etc.Resultantly, we see EBITDA/tonneimproving by 77‐79% YoY for CY12E andCY13E. EBITDA margin to jump by morethan 1000bps from 6.2% to 16.5% inCY13E.

– 126 of 133 –


EBITDA/tonne and EBITDA margin of HCIL

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9MCY06 CY07 CY08 CY09 CY10 CY11 CY12E CY13E

EBITDA/tonne, Rs ‐ LHS EBITDA margin ‐RHS

Behavior of HCIL

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HCIL, rhs


HCIL made its entry in India since 2006.In favorable time, we can clearly seethat HCIL despatches wereproportionately higher than industryand in tough times, at no point has HCILbreached the market discipline byincreasing its despatches more thanproportionate to the region as a whole.Though, it can be otherwise as well,that as other participants increasedcapacity, they were given share ofadditional despacthes in the region.However, we need to note that HCIL hasbeen a much disciplined player inCentral India and the same can beclearly seen in the adjoining graph.

EBITDA/tonne will be seen at an all timehigh for HCIL since its entry in Indiasince CY06. Potential of furtherimprovement cannot be ruled out asHCIL expands further with newcapacities.

Despatches have always been in tandemwith the overall sate despatches inMadhya Pradesh and HCIL has never beenseen breaching the market discipline.

– 127 of 133 –


Uttar Pradesh

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In Uttar Pradesh, where HCIL opeates agrinding unit of 0.5mn tonnes p.a.HCIL’s despatches have beenconsistently higher than that of peers.However with capacity bottleneck atHCIL, other players took the advantageand increased their despatches tomatch HCIL. HCIL’s grinding unit herehas now increased its capacity to 2.7mntonnes p.a. and we will see HCIL dervingthe benefits of this capacity addition inCY13E. Recently in tough times, the syncin Uttar Pradesh has been prettyfavorable, however, one needs to waitand watch as to how these otherplayers react as HCIL’s despatches willnow increase more than proportionate.

Though HCIL operates a very smallcapacity (~2%) as compared to theoverall capacity size of West India, it isamazing to see the sync in the despatchpattern of HCIL and West India region.This clearly brings out the importance ofmarket discipline to HCIL and highlightsHCIL maturity despite being a vey smallplayer currently in this market.

HCIL has only one grinding unit locatedin West India which is in Maharashtra(~5% capacity share in Maharashtra).The well behaved nature of HCIL is astrue vis‐à‐vis Maharashtra as comparedto region as a whole. Discipline patternof HCIL in this region is truly remarkableand hence HCIL faces minimal risk ofloss in realisation in this market. It is tobe noted HCIL operates a slag basedfacility here.

– 128 of 133 –


South India

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32003400360038004000420044004600480050005200540056005800600062006400660068007000

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CY13E EBITDA (Rs mn) 3338CY13E EBITDA margin, % 17%CY13E EBITDA/Share (Rs) 15Target EV/EBITDA (x) 7.0Target EV/Share (Rs) 103Net debt/Share 22Equity fair value/Share (Rs) 81% upside 61%CY13E Implied target EV/Tonne (US$) 72CY13E Implied Target P/E (x) 19.1 CY13E EV based on CMP (Rs mn) 16413CY13E Capacity (EOP, mtpa) 6.3CY13E EBITDA (Rs mn) 3338CY13E EV/EBITDA (x) 4.9CY13E P/E (x) 11.8CY13E EV/tonne (US$) 50


HCIL’s behavior comparison in SouthIndia does not make much sense as itaccounts for less than 1% of theregional capacity in South. However, itis interesting to note that since Jan’11when HCIL increased its despatchesagain in South India, the despatchpattern has been identical to that of thewhole of South India.

HCIL’s only capacity in South India is inKarnataka and accounts for ~3% of thestate capacity. Like we saw in theprevious graph, recovery of HCIL’sdespatches since Jan’11 is also incomplete sync with the overall despatchpattern of the state of Karnataka. In allregions where HCIL operates maturityof HCIL despite being a marginal playerstands out distinctly.

We have valued HCIL at 7.0x EV/EBITDAon CY13E earnings. This multiple webelieve is fair given the near termrobust volume growth of HCIL thoughthe capacity size will remain relativelysmall to the industry. Clearly HCIL willneed to fast track its next phase ofexpansions for stock valuations tosustain these valuations.

– 129 of 133 –



PE band

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– 130 of 133 –


Financials


Net sales 8,655 9,826 11,294 20,186

Growth, % ‐8 14 15 79

Total income 8,655 9,826 11,294 20,186


EBITDA (Core) 989 605 1,119 3,338

Growth, % (38.0) (38.9) 85.1 198.2

Margin, % 11.4 6.2 9.9 16.5

Depreciation ‐288 ‐314 ‐435 ‐1,217

EBIT 701 291 685 2,121

Growth, % (38.0) (38.9) 85.1 198.2

Margin, % 11.4 6.2 9.9 16.5

Interest paid ‐42 ‐38 ‐186 ‐893


Pre‐tax profit 959 424 636 1,392

Tax provided ‐326 ‐132 ‐198 ‐434

Profit after tax 633 292 438 959

Net Profit 633 292 438 959

Growth, % (52.8) (53.9) 50.0 119.1

Net Profit (adjusted) 633 292 438 959

Unadj. shares (m) 227 227 227 227

Wtd avg shares (m) 227 227 227 227

Balance Sheet Y/E Mar, Rs mn CY10 CY11 CY12E CY13E

Cash & bank 2,195 3,107 3,571 6,383

Debtors 243 243 279 499

Inventory 712 1,107 1,272 2,274

Loans & advances 1,468 2,533 2,912 5,205





Add: Capital WIP 4,282 11,083 719 1,235

Net fixed assets 7,586 14,559 17,844 17,862

Total assets 12,219 21,556 25,886 32,236


Provisions 1,084 1,122 1,289 2,304


Non‐current liabilities 301 331 331 331


Paid‐up capital 2,266 2,266 2,266 2,266





Cash Flow Y/E Mar, Rs mn CY10 CY11 CY12E CY13E

Pre‐tax profit 959 424 636 1,392

Depreciation 288 314 435 1,217

Chg in working capital 488 7,532 3,311 1,871

Total tax paid ‐190 ‐102 ‐198 ‐434



Chg in investments 1 0 0 0

Other investing activities ‐23 32 9 140


Free cash flow ‐2,599 913 0 0

Debt raised/(repaid) ‐155 0 0 0

Dividend (incl. tax) ‐5 0 ‐25 ‐111

Cash flow from financing activities ‐160 0 ‐25 ‐111

Net chg in cash ‐2,759 913 448 2,840


EPS, Rs 2.8 1.3 1.9 4.2

BVPS, Rs 34.6 36.0 37.9 42.2

DPS, Rs 0.0 ‐ 0.1 0.4

Return on assets (%) 5.7 1.9 2.3 5.3

Return on equity (%) 8.4 3.6 5.2 10.6



RoIC ‐ Cost of capital (%) 4.3 (5.3) (4.5) 3.9


Cost of capital (%) 7.9 9.2 9.4 9.3




Sales/Net FA (x) 1.5 0.9 0.7 1.1

Working capital/Sales (x) (0.1) (0.8) (1.0) (0.6)


Inventory days 30.0 41.1 41.1 41.1

Current ratio (x) 1.5 0.6 0.5 0.7

Quick ratio (x) 1.3 0.5 0.4 0.6


Dividend cover (x) 145.2 20.0 10.0

PER (x) 17.9 38.8 25.9 11.8

Price/Book (x) 1.4 1.4 1.3 1.2

EV/EBIT (x) 9.2 26.4 16.6 4.9

EV/NOPLAT (x) 13.8 33.8 20.2 5.7

EV/CE 1.0 1.7 1.8 1.3

EV/IC (x) 1.7 1.5 1.2 0.9

– 131 of 133 –


Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Sajid Khalid (Head – Institutional Equities) (91 22) 6667 9972 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles, IT Services Deepak Jain (9122) 6667 9758 Neha Garg (9122) 6667 9996 Varun Vijayan (9122) 6667 9992 Banking, NBFCs Manish Agarwalla (9122) 6667 9962 Sachit Motwani, FRM (9122) 6667 9953 Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Ennette Fernandes (9122) 6667 9764 Vivekanand Subbaraman (9122) 6667 9766 Cement Vaibhav Agarwal (9122) 6667 9967

Economics Anjali Verma (9122) 6667 9969 Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Jishar Thoombath (9122) 6667 9986 Metals Dhawal Doshi (9122) 6667 9769 Dharmesh Shah (9122) 6667 9974 Infrastructure Vibhor Singhal (9122) 6667 9949 Raheel Arathodi (9122) 6667 9768 Oil&Gas, Agri Inputs Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951

Retail, Real Estate Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Mid‐caps Kapil Bagaria (9122) 6667 9965 Raheel Arathodi (9122) 6667 9768 Technicals & Quant Neppolian Pillai (9122) 6667 9989 Shikha Khurana (9122) 6667 9948 Sr. Manager – Equities Support Rosie Ferns (9122) 6667 9971

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Pawan Kakumanu (9122) 6667 9934 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756

Sunil Kamath (Sales Trader) (9122) 6667 9747 Chetan Savla (Sales Trader) (9122) 6667 9745 Rajesh Ashar (Sales Trader) (9122) 6667 9746

Mayur Shah (Execution) (9122) 6667 9945 Gurudatt Uchil (Execution) (9122) 6667 9750

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

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