IndiaEquityResearch Cement

May3,2011

SectorUpdate
ACC
CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDmn)

Cement
Impendingfallinutilizationpresentsanobstacle
Likely additions to capacity during FY12 may pull down capacity utilizationbyc10%fromthecurrentc78%andcouldtriggeraspellof Hold underperformanceincementstocks.Thiscouldsnapthesectorsthree 1,080 quarter long outperformance to the Nifty. The past nine quarters 1,066 reveal a striking correlation between a sequential rise in capacity ACCIN utilizationandoutperformance.Weforecastcapacitytoriseby7.5%in ACC.BO FY12, while demand may grow at 8%. Another indicator of a likely 403,368 neartermpeakinginvaluationistheriseintheEV/tonneclosetothe 416 top end of its range. We believe a potential correction could present 1,144/695 202.8/4.6 anopportunityasthedownsideisrestrictedbyvaluations.Weprefer UltraTech Cement over ACC and Ambuja Cements for its lower Reduce valuationandtheupwardbiastoitscapacityutilization.
150 140 ACEMIN GACM.BO

AmbujaCements
CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDbn)

Capacityutilizationlikelytofallbyc10%in2H2011

UltraTechCement
CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m)(mn) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDbn)

Weforecastgrindingcapacityutilizationtodeclinefrom80.6%inApr11Jun11 to71.1%inJul11Sep11and71.3%inOct11Dec11.CapacityadditionforFY11f 3.4 FY13fislikelytogrowataCAGRof8.2%.Consumptiongrowthduringthesame 482 period is likely to increase by a CAGR of 8%. Hence, we forecast capacity 167/100 utilization for FY12f and FY13f to remain in the range of 75%76%. Capacity 229.1/5.1 additionduringFY09FY11grewataCAGRof16.3%,whileconsumptiongrew ataCAGRof10%.Thisledcapacityutilizationtodeclinefrom88.3%inFY09to Add 75.3%inFY11f. 1,033
1,178 UTCEMIN ULTC.BO 166,149 171 1,197/820 283.1/6.4

PreviousCementunderperformancecorrelateswithfallinutilization

The performance of the Cement Index visvis the Nifty is correlated to the changes in grinding capacity utilization. Better capacity utilization led to the Cement Index outperforming the Nifty and viceversa. Hence, the impending fallinutilization,afterJun11,raisestheprobabilityofunderperformance.

Outperformanceofpastthreequartersmayreverse
Cementstocksoutperformedthemarketduringthepastthreequartersdueto capacity utilization increasing from 71.4% in Jul10Sep10 to 77.9% in Jan11 Mar11. The Cement Index outperformed the Nifty by 12% during this period. Based on the likely c10% drop in capacity utilization in 2H2011 and the correlation between the Cement Index and the Nifty, we forecast the outperformanceofthepastthreequarterstoreversein2H2011.

CementIndexrollingEV/tonne(INR)
7,500

6,250

UltraTechCementisourpreferredpickoverACCandAmbujaCements
UTCEMislikelytooutperformitspeerswithintheCementIndex.OnEV/tonne basis,UTCEMtradesatadiscount,atINR5,933,comparedtoACCandACEM, whichtradeatINR6,114andINR7,722.However,capacityutilizationforUTCEM is likely to be 90.6% in FY12f, whereas ACC and ACEM it is likely to be 75.6% and81.5%,respectively.Thisrestrictsthedownsideintermsofvaluationsfor UTCEMwhencomparedtoitspeers.Broadbasedmarketcorrectionisariskto our call as the Cement Index and EV/tonne valuation range of INR5,400 INR5,850limitthedownsideinstocks.
JimeshSanghvi,+9102266842859 Jimesh.sanghvi@avendus.com

5,000

3,750

2,500 Jan09

Jun09

Dec09

May10

Nov10

May11

Pleaserefertothedisclaimertowardstheendofthedocument.

India Equity Research

Cement

Cementstockslikelytounderperformascapacityutilizationdeclines
The performance of the Cement Index visvis the Nifty is correlated to the changes in grinding capacity utilization. Better capacity utilization led to the Cement Index outperforming the Nifty and viceversa. We forecast grinding capacityutilizationtodeclinefrom80.6%inApr11Jun11to71.1%inJul11Sep11and71.3%inOct11Dec11,assuming averageconsumptiongrowthof8%inFY12.Hence,weforecasttheCementIndextounderperformtheNiftyforthe nextsixmonthsonrelativebasis.CapacityadditionislikelytogrowinlinewithconsumptiongrowthforFY11fFY13f. Capacityutilizationislikelytoremainintherangeof75%76%forthenexttwoyears.TheCAGRof16.3%incapacity addition over FY09FY11f led to utilization declining from 88.3% in FY09 to 75.3% in FY11f. Cement prices have also beencorelatedwiththemovementincapacityutilization,thoughattimeswithalagofonemonth.Onthebackofa dropincapacityutilizationforthenextsixmonths,cementpricesarelikelytodecline.WepreferUTCEMtobothACC andACEMasittradesatadiscountintermsofvaluationsandislikelytooperateitscementplantsatahighercapacity utilizationcomparedtoitspeers.
Exhibit1: Relativeperformanceofcementindextogrindingcapacityutilization(%)
CementIndex Nifty Relative Capacity(mntonnes) Production(mntonnes) Capacityutilization(%) EV/Tonne(INR) Jan09Mar09 Apr09Jun09 20.5 2.1 18.4 54.2 50.2 92.7 3,655.6 34.8 42.0 7.2 57.0 49.7 87.2 4,756.4 Jul09Sep09 Oct09Dec09 Jan10Mar10 Apr10Jun10 Jul10Sep10 Oct10Dec10 Jan11Mar11 16.4 18.5 2.1 58.4 47.1 80.6 5,641.3 1.4 2.3 1.0 61.28 49.2 80.3 5,301.0 15.6 0.9 14.7 63.7 55.0 86.3 6,046.3 17.1 1.2 18.3 67.4 53.0 78.7 5,844.0 17.8 13.5 4.3 68.0 48.6 71.4 5,601.6 2.2 1.7 0.5 69.7 50.9 73.0 6,324.8 2.3 4.9 7.2 71.2 55.5 77.9 5,762.7

Source:CementManufacturersAssociation,AvendusResearch

Dropincapacityutilizationtobeacatalystforunderperformance
The performance of the cement index visvis the Nifty is correlated to the changes in grinding capacity utilization. Better capacity utilization led to the Cement Index outperforming the Nifty and viceversa.Thedropincapacityutilizationfrom92.7%inJan09Mar09to78.7%inJul09Sep09ledto the 9.3% underperformance of the Cement Index (7.2% in Apr09Jun09 and 2.1% in Jul09Sep09). However, the Cement Index in absolute terms reported an increase during the same period due to relativelylowEV/tonnevaluationofINR3,655inJan09Mar09. Exhibit2: Sensitivityincapacityutilizationbasedonconsumptiongrowth(%)
Capacity(mntonnes) Consumption(mntonnes) growthof10% growthof8% growthof6% Capacityutilization(%) Capacityutilization(%) growthof10% growthof8% growthof6% 82.1 80.6 79.1 78.7 58.5 57.4 56.4 JanMar11 AprJun11f 71.2 JulSep11f 72.7 52.6 51.7 50.7 72.4 71.1 69.8 72.6 71.3 70.0 80.2 78.8 77.3 55.5 54.4 53.4 61.6 60.5 59.4 OctDec11f 76.4 JanMar12f 76.8

Source:CementManufacturersAssociation,AvendusResearch

Weforecastgrindingcapacityutilizationtodeclinefrom80.6%inApr11Jun11to71.1%inJul11Sep11 and 71.3% in Oct11Dec11f, assuming average consumption growth of 8% in FY12. We forecast the Cement Index to underperform for the next six months on relative basis. On normalized basis, we forecasttheEV/tonnetoremainintherangeofINR5,400(USD120)toINR5,850(USD130),asseenin thepast.TheEV/tonnetradedbelowUSD120duringJan09Jun09duetotheglobalrecession.Hence, wedonotforeseeanabsolutedeclineintheCementIndex. Cement 2

India Equity Research

Cement

CapacityadditioninlinewithconsumptiongrowthforFY11fFY13f
WeforecastcementproductiontogrowataCAGRof8%duringFY11FY13,inlinewithconsumption growth.Cementinventoryislikelytoremainunchangedduringtheperiod.CapacityadditionforFY11f FY13fislikelytogrowataCAGRof8.2%,withaCAGRof8%inconsumptiongrowth.Hence,capacity utilizationislikelytoremainintherangeof75%76%forthenexttwoyears.Capacityadditiongrewat a CAGR of 16.3% during FY09FY11 compared to a CAGR of 10% in consumption. This led capacity utilizationtodeclinefrom88.3%inFY09to75.3%inFY11f. Exhibit3: Industrycapacityutilization
(mntonnes) Grindingcapacity %Increase Cementproduction %Increase Grindingcapacityutilization(%) FY06 157.7 3.9 141.8 12.9 89.9 FY07 165.9 5.4 155.1 9.4 93.9 FY08 175.7 6.1 168.3 8.5 95.8 FY09 205.3 16.9 181.4 7.8 88.3 FY10 240.4 17.1 201.0 10.8 83.6 FY11f 276.3 14.9 208.0 3.5 75.3 FY12f 297.1 7.5 224.6 8.0 75.6 FY13f 323.6 8.9 242.6 8.0 75.0

Source:CementManufacturersAssociation,AvendusResearch

Dropincapacityutilizationlikelytobemetbyadeclineinprices
Exhibit4: CapacityutilizationandCementprices
104 Capacityutilization(%) 94 Cementprices(INR/bag) 255 270

84

240

74

225

64 Jan09

Apr09

Aug09

Dec09

Apr10

Aug10

Dec10

210 Mar11

Source:CementManufacturersAssociation,AvendusResearch

Cement prices have been corelated to the movement in capacity utilizationas seen in Exhibit 4, though there might be a lag of one month in certain cases. Based on our forecast of a decline in capacityutilization,weforecastcementpricestodeclineoverthenextfourmonthsbeforestabilizing bySep11.Thisincreasestheuncertaintyoverneartermearnings.Historically,cementpriceshavealso beenweakintheJulNovperiodduetoseasonalfactors.TheincreaseincementpricesduringJan11 Mar11hasalsobeenduetoariseininputcosts,mainlythecostofcoalandfreight.

UltraTechCementlikelytooutperformACCandAmbujaCements
UltraTechCement(UTCEMIN)islikelytooutperformitspeerswithintheCementIndex.UTCEMtrades atanEV/tonneofINR5,933whichisatadiscountofc20%toAmbujaCements(ACEMIN).ACC(ACCIN) trades at an EV/tonne of INR6,114 which is at a marginal premium to UTCEM. However, capacity utilizationforUTCEMislikelytobe90%inFY12f,whereasACCandACEMarelikelytooperateat75.6% and81.5%,respectively,during2011.Highercapacityutilizationanddiscountedvaluationsrestrictthe downsideinUTCEMsvaluationswhencomparedtoitspeers. UltraTechCement:WeassumeanEV/tonneofINR5,714,whichisthehistorical(betweenApr06and Apr11) industry average EV/tonne and P/E of 11.3x. Applying these to our consolidated oneyear forwardrollingEPSandEV/tonne,wearriveatfairvaluesofINR1,182andINR1,174,respectively.Our Cement 3

India Equity Research

Cement

Mar12 target price of INR1,178 is the average of the fair values based on the EV/tonne and P/E methods.WehaveanAddratingonthestock. ACC:WeassumeanEV/tonneofINR5,505,whichisthehistorical(betweenJan07andApr11)average EV/tonne and a P/E of 12.5x. Applying these to our consolidated oneyear forward rolling EPS and EV/tonne, we arrive at fair values of INR1,062 and INR1,070, respectively. Our Mar12 target of INR1,066istheaverageofthefairvaluesbasedontheEV/tonneandP/E methods.WehaveaHold ratingonthestock. Ambuja Cements: We assume an EV/tonne of INR6,624, which is the historical (between Jan07 and Apr11) average EV/tonne and a P/E of 12.0x. Applying these to our consolidated oneyear forward rollingEPSandEV/tonne,wearriveatfairvaluesofINR141andINR139,respectively.OurMar12target priceofINR140istheaverageofthefair valuesbasedontheEV/tonneandP/Emethods.Thestock trades at an EV/tonne of USD168 (based on 2012 capacity) after the rally since midMar11. These premiumvaluationsareunsustainable,consideringthesurplussupplyscenariointhecementindustry. WehaveaReduceratingonthestock. Exhibit5: UTCEMOneyearforwardEV/tonne(INR)
9,000 EV/tonne 7,000 AverageEV/tonne 17

Exhibit6: UTCEMOneyearforwardP/E(x)
22

5,000

12

3,000

7 P/E AverageP/E Apr11 Mar12

1,000 Apr06

Apr07

Apr08

Apr09

Apr10

Apr11

Mar12

2 Apr06

Apr07

Apr08

Apr09

Apr10

Source:Capitaline,AvendusResearch

Source:Capitaline,AvendusResearch

Exhibit7: ACCsOneyearforwardEV/tonne(INR)
12,000 EV/tonne 9,500 AverageEV/tonne 19

Exhibit8: ACCsOneyearforwardP/E(INR)
24 P/E AverageP/E

7,000

14

4,500

2,000 Jan07

Jan08

Feb09

Feb10

Mar11

Mar12

4 Jan07

Jan08

Feb09

Feb10

Mar11

Mar12

Source:Capitaline,AvendusResearch

Source:Capitaline,AvendusResearch

Cement 4

India Equity Research

Cement
Exhibit10: ACEMOneyearforwardP/E(INR)
19.0

Exhibit9: ACEMOneyearforwardEV/tonne(INR)
12,000 EV/tonne 9,500 AverageEV/tonne

15.5

7,000

12.0

4,500

8.5 P/E AverageP/E May11 Mar12

2,000 Jan07

Nov07

Sep08

Aug09

Jun10

May11

Mar12

5.0 Jan07

Nov07

Sep08

Aug09

Jun10

Source:Capitaline,AvendusResearch

Source:Capitaline,AvendusResearch

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India Equity Research

AnalystCertification

Cement

I,JimeshSanghvi,CharteredAccountant,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonal viewsaboutthesubjectcompany/companiesanditsortheirsecurities.Wefurthercertifythatnopartofourcompensationwas,isorwillbe,directlyorindirectlyrelatedto specificrecommendationsorviewsexpressedinthisdocument.

Disclaimer
ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(Avendus).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdisseminationtoall intendedrecipientsissimultaneous,notallintendedrecipientsmayreceivethisdocumentatthesametime.Thisdocumentisneitheranoffernorsolicitationforanoffertobuy and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation.Eachrecipientofthisdocumentshouldmakesuch investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors.This documenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.Avendushasnotindependentlyverifiedalltheinformationgiven inthisdocument.Accordingly,norepresentationorwarranty,expressorimplied,ismadeastoaccuracy,completenessorfairnessoftheinformationandopinioncontainedinthis document.Theinformationgiveninthis documentisasofthedateofthisdocumentandthere can benoassurancethat futureresultsoreventswillbeconsistentwiththis information.ThoughAvendusendeavourstoupdatetheinformationcontainedhereinonreasonablebasis,Avendus,itsassociatecompanies,theirdirectors,employees,agentsor representatives(Avendusanditsaffiliates)areundernoobligationtoupdateorkeeptheinformationcurrent.Also,theremayberegulatory,complianceorotherreasonsthat maypreventusfromdoingso.Avendusanditsaffiliatesexpresslydisclaimanyandallliabilitiesthatmayarisefrominformation,errororomissioninthisconnection.Avendusand itsaffiliatesshallnotbeliableforanydamageswhetherdirect,indirect,specialorconsequential,includinglostrevenueorlostprofits,whichmayarisefromorinconnectionwith theuseofthisdocument.Thisdocumentisstrictlyconfidentialandisbeingfurnishedtoyousolelyforyourinformation.Thisdocumentand/oranyportionthereofmaynotbe duplicatedinanyformand/orreproducedorredistributedwithoutthepriorwrittenconsentofAvendus.Thisdocumentisnotdirectedorintendedfordistributionto,oruseby, anypersonorentitywhoisacitizenorresidentoftheUnitedStatesorCanadaorislocatedinanyotherlocality,state,countryorotherjurisdiction,wheresuchdistribution, publication,availabilityorusewouldbecontrarytolaworregulationorwhichwouldsubjectAvendusanditsaffiliatestoanyregistrationorlicensingrequirementswithinsuch jurisdiction.Personsinwhosepossessionthisdocumentcomesshouldinformthemselvesaboutandobserveanysuchrestrictions.Avendusanditsassociatecompaniesmaybe performingorseekingtoperforminvestmentbankingandotherservicesforanycompanyreferredtointhisdocument.AffiliatesofAvendusmayhaveissuedotherreportsthat areinconsistentwithandreachadifferentconclusionfromtheinformationpresentedinthisdocument. Avendusgenerallyprohibitsitsanalystsandpersonsreportingtoanalystsfrommaintainingafinancialinterestinthesecuritiesorderivativesofanycompanythattheanalysts cover.Avendusanditsaffiliatesmayhaveinterest/positions,financialorotherwise,inthecompaniesmentionedinthisdocument.Inordertoprovidecompletetransparencyto ourclients,wehaveincorporatedaDisclosureofInterestStatementinthisdocument.Thisshould,however,notbetreatedasanendorsementoftheviewexpressedinthe document. Avendus is committed to providing highquality, objective and unbiased research to our investors. To this end, we have policies in place to identify, consider and managepotentialconflictsofinterestandprotecttheintegrityofourrelationshipswithinvestingandcorporateclients.Employeecompliancewiththesepoliciesismandatory. AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofAvendus.

DisclosureofInterestStatement(asofMay3,2011)

ACC AmbujaCements UltraTechCement

Analystownership ofthestock No No No

Avendusoritsassociatecompanys ownershipofthestock No No No

InvestmentBankingmandatewith associatecompaniesofAvendus No No No

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BSECMINB011292639|NSECMINB231294639|NSEF&OINF231294639

Cement 6