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Sector Update - Cement

Sector Update - Cement

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India Cement Sector

Feedback from Automobile Dealers Survey

Rising from the ashes

What’s inside?
Our estimates of cement demand-supply across regions Cement price trends – from dealer checks Cement demand drivers – elections in major states, infrastructure push, major deliveries in real estate Reasons for our upgrade in sector outlook from Neutral to Positive

What we expect?
FY11 to be a trough year for cement – Q2FY11 likely to hit rock bottom Demand revival in FY12 – both from real estate and infrastructure Supply pressures to ebb from FY12 – driving capacity utilisation Upcycle ahead – ripe time to Accumulate cement stocks over the next two months

Recommendations
Large Cap Buys: UltraTech, ACC, Ambuja Cement Mid Cap Buys: Shree Cement, Birla Corp, Orient Paper & Industries Sell: India Cements

Mihir Jhaveri
(91-22) 6766 3459 mihir.jhaveri@religare.in

Suhas Harinarayanan
(91-22) 6766 3404 suhas.hari@religare.in

August 2010

Cement

Sector Report

04 August 2010

Contents

Section Cement Executive summary Upcycle ahead – we upgrade sector outlook to Positive Demand growth to underpin cement upcycle Valuations attractive Key risks Annexures Companies UltraTech Cement Ltd ACC Ltd Ambuja Cement Ltd Shree Cement Ltd Birla Corp Ltd Orient Paper & Industries Ltd India Cements Ltd

Page No.

1 2 3 12 16 17 22 23 27 31 35 39 43 47

1

Cement

Sector Report

04 August 2010

Cement
Rising from the ashes
We upgrade our outlook on the cement sector from Neutral to Positive and reset our recommendation to BUY on UltraTech, ACC and Ambuja Cement among large caps, with a 23–36% upside. Among mid caps, we reiterate BUY on Shree Cement (best diversified play), Birla Corp (best mid cap play) and Orient Paper (most efficient play), where the upside exceeds 30%. We believe the cement sector downcycle is close to bottoming out, and investors should accumulate stocks in order to ride the upcycle that will follow over the next 3–4 years. We see FY11 as the trough year for cement (prices likely to bottom out in Q2), following which the sector would turn a corner, as – a) the demand environment improves, backed by higher infrastructure and real estate offtake, b) capacity utilisation rises as incremental additions ease off, and c) cement prices firm up. We find current valuations appealing – stocks have corrected 8–28% over the past four months – and the downside limited. M&A activity in the sector could also fuel a re-rating. Demand to revive in FY12 even as supply pressure ebbs: We expect cement demand to remain subdued in FY11 and have accordingly built in a 7–7.5% growth in dispatches, down from our earlier estimate of 10%. At the same time, we are raising our growth estimate for FY12 to 11.5–12% from 10% earlier, given the increased government thrust on infrastructure, new project launches and deliveries in real estate, rising urbanisation, and the low base effect. Further, with elections scheduled for FY12 in some major states, demand growth is likely to be higher in the run-up to the polls. Utilisation levels too are expected to bottom out at 77–78% in FY11 and improve from FY12 onwards, leading to a cyclical upturn in cement. Downward spiral in prices to be arrested for the most part: Over the last few months, cement prices have fallen by Rs 20–80/bag across India, with the southern markets bearing the brunt of the decline. Although prices could fall further in some parts of the country, we believe the downside from current levels is limited and Q2FY11 would see the worst of the price erosion. As the busy construction season gets underway from October, prices could see a revival. We accordingly factor in a 2–3% YoY rise in cement realisations for FY12, which will follow a 6–10% decline in FY11. EBITDA/tonne falls but not as hard as the last downcycle: With the downward spiral in prices and increased cost pressure (higher freight, power and fuel costs), EBITDA/t is likely to decline to Rs 400–1,000/t for our cement universe – once again with a bottoming out in Q2FY11. This is still far better than the lows of Rs 200–300/t hit in the previous cycle. Moreover, with improved balance sheet positions, ROE and ROCE will remain comfortable. Valuations attractive; under-ownership provides room for upside: Most cement stocks have corrected by 8–28% in the last four months. While pricing concerns will continue to play out in the near term, we believe negatives are largely priced in and the valuation downside capped at 5–10%. In our view, we are nearing the bottom of the cement downcycle – we would therefore recommend investing at the dips, in order to ride the next upcycle. Among large-cap pure cement plays, we prefer UltraTech, ACC and Ambuja Cement in that order. We also remain bullish on diversified plays like Shree Cement. Select mid caps like Birla Corp and Orient Paper could be potential multibaggers in the next 3–4 years given their attractive valuations. India Cements is the only potential laggard in our cement universe – we maintain a SELL on the stock.
Recommendation snapshot
Company Large caps UltraTech ACC Ambuja Mid caps Shree Cement Birla Corp Orient Paper India Cements 1,798 360 53 104 2,400 500 70 100 Buy Buy Buy Sell 33 39 30 (3) 858 825 117 1,170 1,060 145 Buy Buy Buy 36 28 23 CMP Target Price Rating % Up/ Downside

All-India cement demand growth

(%) 15 10 5 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E (%) 25 20 15 10 5 0 FY12E

Cement capacity addition and incremental growth

(Mn tonnes) 400 300 200 100 0 FY06 FY07

Cement Capacities incremental gro wth (R)

FY08

FY09

FY10E

Cement capacity utilisation

(%) 105 95 85 75 65

B o tto m in FY02

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

FY11E

B o tto m in FY1 1

1

Cement

Sector Report

04 August 2010

Upcycle ahead – we upgrade sector outlook to Positive
FY11 a trough year; cyclical upturn to begin in FY12

The cement sector has underperformed the broader market over the past four months on concerns related to a weak pricing environment, oversupply and muted demand. We believe these negatives are now largely factored into stock prices and the downside from current levels is limited. We expect the sector to shift gears in FY12 and enter a cyclical upturn as demand and pricing dynamics improve, led by stronger cement consumption from the infrastructure and real estate sectors. This would fuel strong stock outperformance over the next 3–4 years – we thus upgrade our outlook on the sector from Neutral to Positive. Fig 2 - Mid cap cement stocks: Relative performance
Sensex Orient Paper India Cement Mangalam Cement Shree Cement JK Lakshmi

Fig 1 - Large cap cement stocks: Relative performance
110 100 90 80 70 Sensex UltraTech ACC Grasim Ambuja

130 120 110 100 90 80 70

May-10

May-10

Apr-10

Apr-10

Jul-10

Mar-10

Mar-10

Jun-10

Source: RCML Research, Company

Source: RCML Research, Company

Valuations reasonable with limited downside potential Since March ’10, cement stocks have corrected in the range of 8% to 28% from their peaks. Ambuja Cement saw the lowest drop, while UltraTech registered the maximum downslide. We believe any further downside from current levels will be capped at 5–10%, and view this as an opportune time to accumulate cement stocks on every decline. Fig 3 - Cement stocks: Absolute performance in last four months
Mangalam Birla Corp India Cement Ambuja Orient Paper
enter the sector

0 (5) (10) (15) (20) (25) (30)
Source: RCML Research

ACC

(%)

Ultratech

Further downside capped; ripe time to

JK Lakshmi

Shree

Jun-10

Jul-10

2

Cement

Sector Report

04 August 2010

Demand growth to underpin cement upcycle
Cement stocks outperformed in FY10 led by demand; weaker utilisation notwithstanding (Shree Cement up 2x)

Past trends suggest that cement industry dynamics depend more on the demand environment than on supply. In FY10, for instance, the cement sector outperformed the broader market led by demand growth of 10.6% (a positive surprise for the street), even as utilisation declined from 89% in FY09 to 85% on account of capacity injections. We see similar grounds for stock outperformance in FY12, where demand could surprise positively on account of: 1) an increased government thrust on infrastructure; 2) new project launches and deliveries in real estate; 3) rising urbanisation; and 4) the low base effect. Even as the demand trajectory rises, we expect capacity additions to ease, leading to improved utilisation and pricing – a confluence of factors that will lead the sector into a sustained, structural upcycle from FY12 onwards. Fig 4 - All-India demand-supply dynamics
(mn tonne) 350 300 250 200 150 100 50 0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Actual Capacities Dispatches Utilization (%) (R) (%) 110 105 100 95 90 85 80 75

Source: RCML Research, CMA

Cement prices to fall 6–10% in FY11, with muted dispatch growth

FY11 a trough year… We expect FY11 to be a trough year for the sector with a 6–10% decline in prices along with low dispatch growth of 7–7.5% (versus 10% estimated earlier), as big ticket projects near completion (Commonwealth Games, Metro rail), demand from Andhra Pradesh (AP) remains weak, weather conditions prove unfavourable, and the high base effect sets in. In AP – which recorded the second-highest dispatch share in FY10 – the Telengana dispute remains unresolved, leading to lower infrastructure demand and hence cement consumption. Also, reduced budgetary allocation to housing, urban development and irrigation in the state will affect cement dispatches (Fig 5). Further, a heat wave across the country during the summer months followed by normal rainfall implies six months of depressed dispatch growth. In order to factor in our revised price and volume expectations, we downgrade earnings for our cement universe by 4–62% for FY11. Fig 5 - AP govt budgetary allocation to Housing, Irrigation and Urban Development
(Rs bn) 280 260 240 220 200 180 160 140 120 100 FY07
Source: Budget Documents

Andhra Budgetary Allocation 255 211

196

211

131

FY08

FY09

FY10

FY11

3

and d) elections in some states (Tamil Nadu: 2011. where the cement to GDP ratio is lower than 1. b) commencement of some major projects in end-FY11 (Delhi Metro Phase III).Cement demand growth (%) 14 12 10 8 6 4 2 0 FY06 FY07 FY08 FY09 FY10 FY11E FY12E Fig 9 . RCML Research Cement Growth GDP Growth Source: CMA. we estimate a healthy revival in dispatch growth to 11. In addition. Uttar Pradesh: 2012.3 FY05 4.State-wise dispatch share in FY10 Others 37% Andhra Pradesh 18% Tamil Nadu 13% Fig 7 . RCML Research 4 .Cement Sector Report 04 August 2010 We expect dispatch growth to recover to 11. This will be driven by a) the low base effect of FY11E.4 FY07 12. Our analysis of past state elections suggests higher cement dispatch growth during the election years.8–1x for FY11E. We estimate a 2–3% uptick in cement prices for FY12. Fig 6 . thereby fortifying the pricing environment. West Bengal: 2011. CMA Maharashtra 6% Gujurat 7% Fig 8 .3x GDP – we peg this ratio at 0.8 Rajasthan 19% Source: RCML Research.9 FY05 14.Dispatch growth v/s Election year in major states State Andhra Pradesh Tamil Nadu Rajasthan Gujarat West Bengal Source: RCML Research.6 FY08 16.5–12% in FY12 …FY12 to mark start of cyclical uptrend in cement: 3–4 years of strong demand For FY12.1 FY06 16. c) a likely demand revival in AP (as per our Infrastructure team). CMA Last election 2009 2006 2008 2007 2006 Dispatch growth (%) FY08 12. With demand estimated at over 10% in FY12.5 FY06 12.2 FY09 12.9 FY06 14. a comparison of India GDP growth and cement demand also suggests that demand improves significantly following the year of aberration. we believe the cement sector will enter into a structural upcycle.Cement dispatch growth post the low-growth year (%) 16 14 12 10 8 6 4 2 0 (2) FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: CMA. Gujarat: 2012). Higher demand coupled with an expected slowdown in capacity additions over the next 3–4 years will result in better utilisation levels.5–12% against our earlier estimate of 10%.2–1.3 FY07 9.

1 124.061 201 Share (%) 38 14 11 12 3 1 7 11 1 4 100 11th plan revised 6. Roads and bridges Telecom FY12E 26% FY08 15% FY09 17% 325 74 Airports 29 Oil & Gas Pipelines Storage FY11E 22% FY10E 20% Source: RCML Research.800 1. This implies an EPC opportunity of ~Rs 12tn for construction companies.500 2.595 1. roads.0 32.5 (25.462 406 361 1.400 1.8) 12.019 56 324 9. 65% of this investment is estimated to be in sectors like power.200 1.8 97.273 20.Percentage of total investment in each year of 11th plan Fig 10 . 11).591 27. and railways.402 1. Fig 12 .Cement Sector Report 04 August 2010 FY12 to see a bulk of the investment. roads. being the last plan year Demand driver 1: Increased thrust on infrastructure.280 606 * At INR/USD of 45 Share (%) 32 17 16 11 3 1 5 9 0 6 100 % rise over 11th plan 32.700* 4. Plan Documents Source: RCML Research.021 1.900 804 250 1. The private sector is likely to account for 39% of the total spend.000 700 595 800 468 600 266 400 108 200 0 Railways (incl. in the next 4–5 years. of which a bulk of the investment is likely to be made in FY12 since it is the last year of the plan period (Fig 10.589 90 1.257 2.1 17. Plan Documents Increased funding for constructionintense segments in 12th plan will fuel cement consumption Further.542 457 Share (%) 32 14 10 12 2 2 5 17 0 6 100 12th plan est.12th plan spend estimated at Rs 27tn. our infrastructure team expects India to record an investment of Rs 27tn in infrastructure development over the 12th plan period (FY13-FY17). Fig 11 . we believe infrastructure demand for cement would increase to 25–30% of total demand.124 1. 8. inland waterways) Airports Water supply & sanitation Telecommunications Storage Oil & gas pipeline Total Spend in US$ bn* Source: Plan Documents.117 3. This further corroborates our view that demand growth will be significantly higher for cement in FY12 as construction activity intensifies across segments.586 2.600 4. Irrigation (incl. up 33% on growth in power. especially roads The 11th Five Year Plan envisages a total investment of Rs 20.5trillion in India’s infrastructure sector.8 NCE – Non conventional energy MRTS – Mass Rapid Transit System 5 .451 90 1.271 1. railways (Rs bn) Electricity (incl NCE) Roads & bridges Railways (incl MRTS) Irrigation (incl water shed) Ports (incl. Based on the above. RCML Research 10th plan actual 3.1 65.8 (30.Investment in FY12 in the 11th plan (Rs bn) 1.600 1.787 2.067 230 69 601 1. WS) Water supply & Ports Electricity (incl.008 2.0) 25. up from the traditional assumption of 20%.

1 4 40 14. 60 Ports. national highways. important towns. highways. 50 Airports.548 131. 42 Gas. Crisil Roads & Bridges. just 6% of the road network carries 80% of India’s total traffic. Fig 14 . 95 Irrigation.320.6 50. other states Main roads.Construction intensity (%) 100 80 60 40 20 0 Source: RCML Research. rural roads Production centres.712 2.7 53. 65 Railways. At present.3 100. Of the overall Rs 27tn spend. 25 Storage. 31 Source: RCML Research.600 6 .0 12th plan (RCML est. Planning Commission 10th plan actual 505 674 92 1. reflecting the growth opportunity in the segment.12th plan: Investment trend in road sector Particulars (Rs bn) Centre State Private Total investments Source: RCML Research.0 11th plan revised 909 1.6tn on roads and highways over the 12th plan. 42 Water Supply. markets.National highways – ~2% of Indian road network but handle ~40% of traffic Road network National Highways State highways Major district roads Rural and other roads Total Length (km) 70. strategic locations State capitals. BRO State PWDs Connectivity Union capitals.0 Fig 13 . MoRD – Ministry of Rural Development Fig 16 .) 857 1.1 79.271 Share (%) 39.Cement as % of raw material (%) 50 40 30 20 10 0 Railways Roads Thermal power plant Urban Infrastructure 15 40 20 12 Hydel power plant 12 Irrigation 8 Airports Share (%) 18.8 100 20 100 State PWDs MoRD Traffic (%) 40 Development agency NHAI. our infrastructure team estimates expenditure of Rs 4. state capitals. Crisil Fig 15 . major ports.9 16. foreign highways.5 100.0 7.787 Share (%) 32. railway stations Source: RCML Research.2 44.899 467.Cement Sector Report 04 August 2010 Roads – a key cement consumer – to garner significant investments Construction intensity is the highest for roads and bridges (at 95%).000 3.650. State PWDs.6 37. with cement accounting for 20% of the raw material requirement.419 459 2.1 100. 25 33 Electricity.210 Length (%) 2.031 4. district centres.763 2.

5 47.Cement Sector Report 04 August 2010 Fig 17 .Residential real estate: Expected deliveries (mn sqft) 70 60 50 40 30 20 10 0 Gurgaon Noida 2010 2011 2012 Bangalore Chennai Mumbai Source: Propequity.8 3.Composition of likely spend of Rs 4. Fig 19 .Private sector likely to account for 44% of road spend* State 37% Private 44% State highways.5 23. Further.3 13.6tn in 12th plan Other state spend on roads 3% Rural roads 14% Fig 18 . RCML Research Area (mn sq ft) 2. which will increase construction activity in the coming years.5 1.Commercial real estate: Expected deliveries (mn sqft) 14 12 10 8 6 4 2 0 Gurgaon Bangalore Chennai Mumbai Noida Kolkatta 2010 2011 2012 Fig 21 . RCML Research Source: Propequity. the expected project deliveries in residential and commercial real estate are pegged at 515mn sq ft and 61mn sq ft respectively over the next three years in major cities.New launches in major cities City Bangalore Chennai Greater Noida Noida Gurgaon Kolkatta Mumbai Total Launches Source: Propequity. RCML Research Kolkatta 7 .7 0.3 *Covers 4–8 projects in each city Launched date Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Apr-May ’10 Completion dates* Jun ’11 to Dec ’13 July ’10 to Dec ’12 July ’12 to Sep ’14 Dec ’12 to Sep ’14 Dec ’12 to May ’13 Dec ’12 to June ’13 Dec ’11 to Dec ’13 Fig 20 .0 2. We believe this would lend a significant fillip to demand for cement as real estate remains the largest cement consumer in India. major district roads 24% Source: RCML Research National highways 59% Source: RCML Research Centre 19% * Primarily on NHAI projects 47mn sq ft of new real estate launches in key cities in Q1FY11 alone Demand driver 2: New launches and high deliveries in real estate The first quarter of FY11 has seen a flurry of new property launches in key cities (Fig 19).

0 2. the shortage of housing stock for rural India stood at 47mn in 2007 and is expected to reach 70mn in 2012. The total deficit of housing stock in the country will hit 96.400 1.Urban India will drive a near four-fold increase in average national income Rising urbanisation in India will boost demand for housing and hence cement Source: India Urbanization Econometric Model-Mckinsey Global Institute analysis Fig 23 .5mn by 2012.040 28 340 365 1. 8 . however. incremental capacity addition is likely to be lower (10–15mt in FY12) compared to demand growth.Cement Sector Report 04 August 2010 Demand driver 3: Rural housing and increased urbanisation According to the Planning Commission. Thereafter.000 800 600 400 200 0 1991 2001 2008 2012 26 220 856 Total population Urbanization rate (R) 1.6 64 4.0 Pucca House Semi-Pucca House Source: National commission on population Only 10–15mt of incremental capacity expected in FY12 versus 40mt in FY11 Supply-side pressures persist but likely to ebb We do expect 35–40mn tonnes (mt) of cement capacity to be added in FY11.0 2.Rate of urbanisation in India (mn) 1.0 1.200 1. leading to supply pressure during the year.0 3.155 Urban population (%) 30 1.0 0.0 4. Fig 22 . We expect the continued increase in per capita income and rising urbanisation to boost demand for housing (and hence cement consumption) in the next 3–4 years.208 30 31 30 29 28 27 290 26 25 24 23 Fig 24 .Growth in pucca and semi-pucca houses mn units 200 150 100 50 0 Rural Housing Stock(in mn) Source: Planning Commission 2007 153 170 2012 CaGR Growth (%) 5.1 70 85 56 2.

9 .Cement Sector Report 04 August 2010 Fig 25 . especially with the busy construction season setting in. we are downgrading our earnings estimates for FY11 in the range of 4–62%. our earnings downgrades are in the range of 0–28%. we expect capacity utilisation to increase going forward. For FY12.0 5. We believe utilisation levels will bottom out in FY11 and thereafter strengthen over the next 3–4 years as the pace of capacity addition slows down.All-India cement utilisation levels to bottom out in FY11 As demand rises and oversupply eases. earnings impact priced in Cement prices have witnessed a sharp correction in recent times in the range of Rs 20–80/bag as overcapacity and sluggish offtake resulted in price erosion. We build in a 6–10% decline in FY11 and an uptick thereafter by 2–3% in FY12. Fig 27 .Incremental capacity growth to taper down (Mn tonnes) 350 300 250 200 150 100 50 0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Source: CMA. Based on the trend in cement prices. capacity utilisation will move up (%) 105 95 87 85 75 65 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 82 80 81 82 84 Bottom in FY02 94 90 97 89 85 78 80 Bottom in FY11 Source: Company We see a reversal of the cement price downtrend in FY12 Further cement price erosion limited. We believe these downgrades are largely factored into stock prices and any further decline in stocks will be a buying opportunity as a sector re-rating sets in. with ACC seeing the lowest downgrade and India Cements the highest. we believe the downside is limited.0 15.0 North Source: RCML Research Cement Capacities incremental growth (R) (Mn tonnes) 20.0 FY11E FY12E South East West Central Utilisation levels expected to revive With the demand-supply gap likely to reduce. RCML Research Fig 26 . While prices could decline further in certain markets.Region-wise capacity addition post FY11 (%) 25 20 15 10 5 0 10.0 0.

Kolkata cement price trend (East) (Rs/bag) 320 290 260 230 200 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Fig 33 .Hyderabad cement price trend (South) (Rs/bag) 235 205 175 145 115 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Fig 29 .Cement Sector Report 04 August 2010 Fig 28 . we see a healthy improvement in demand and pricing. We see Q2FY11 as the trough quarter.Lucknow cement price trend (Central) (Rs/bag) 300 270 240 210 180 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Feb-09 Mar-09 Apr-10 May-10 Jun-10 Jul-10 Jan-09 Fig 31 .000/t for our cement universe in FY11 EBITDA/tonne likely to bottom out We believe FY11 will see the lowest EBITDA/t for cement majors in the last 4–5 years mainly on account of lower realisations and higher costs in terms of freight and fuel expenses. leading to stronger profitability for cement majors.Bangalore cement price trend (South) (Rs/bag) 310 280 250 220 190 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Source: RCML Research Source: RCML Research Fig 30 . 10 .Delhi cement price trend (North) (Rs/bag) 255 250 245 240 235 230 225 220 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Feb-09 Mar-09 Apr-10 May-10 Jun-10 Jul-10 Apr-10 May-10 Jun-10 Jul-10 Jan-09 Source: RCML Research Source: RCML Research Fig 32 . beyond which we anticipate a gradual recovery in cement demand. From FY12 onwards.Mumbai cement price trend (West) (Rs/bag) 280 270 260 250 240 230 220 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Feb-09 Mar-09 Jan-09 Source: RCML Research Source: RCML Research EBITDA/t to decline to Rs 400–1. leading to some sequential price improvement.

Further. Fig 36 . RCML Research 11 . RCML Research Captive power a key margin lever Among the margin drivers will be cost savings linked to lower lead distance to market and an increased reliance on captive power. This will enhance cost savings in the coming years and mitigate the higher coal prices (expected to remain elevated for the next 2–3 years) to some extent. most cement majors are 70–80% self-sufficient in captive power. RCML Research Fig 35 .. RCML Research Source: Bloomberg. As demand improves in major parts of the country post FY11.Captive power plants of cement majors (MW) 600 500 400 300 200 100 0 ACC Ambuja Ultratech Shree Cement India Cement Exisitng Additions Ambuja Ultratech India Cement Source: Company.Imported coal as % of total coal (%) 70 60 50 40 30 20 10 0 ACC Source: Company.Australian coal prices (US$/mt) 220 170 120 70 20 Apr-04 Mar-05 Feb-06 Feb-07 Dec-08 Dec-09 Jan-08 Source: Bloomberg. the lead distance for large cement players (especially south-based companies) will come down. RCML Research Fig 37 .Cement Sector Report 04 August 2010 Fig 34 .Historical EBITDA/tonne comparison (Rs/tonne) 1400 1200 1000 800 600 400 200 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E EBITDA/Tonne higher than previous bottom Source: Company.South African coal prices (US$/tonne) 190 170 150 130 110 90 70 50 30 Jul-10 Mar-05 Mar-06 Apr-07 May-08 Jun-09 Fig 38 .

2 1.4 0. As the extreme pessimism towards the sector begins to dissipate in Q2FY11. particularly large caps. in order to ride the cement upcycle.Cement Sector Report 04 August 2010 Cement majors to maintain healthy return ratios and low gearing Balance sheet health remains strong Most cement players.8 1.Institutional holding in ACC 60 55 50 45 40 35 30 25 Dec'01 June'02 Dec'02 June'03 Dec'03 June'04 Dec'04 June'05 Dec'05 June'06 Dec'06 June'07 Dec'07 June'08 Dec'08 June'09 Dec'09 June'01 June'10 Fig 42 .0 0. Fig 40 .8 0.2 0. a majority of these companies are debt-free as they have utilised cash earned during the last bull cycle (FY04-FY09) to clean up their balance sheets by repaying debt. Fig 41 .Institutional holding in Ambuja 60 55 50 45 40 35 30 Dec'01 June'02 Dec'02 June'03 Dec'03 June'04 Dec'04 June'05 Dec'05 June'06 Dec'06 June'07 Dec'07 June'08 Dec'08 June'09 Dec'09 June'01 (%) (%) Source: RCML Research. are likely to report better return ratios in FY11 despite lower near-term profitability. RCML Research Valuations attractive Institutional holdings in companies like ACC and Ambuja are near historical lows Under-ownership provides room for upside Our analysis of institutional stock holdings in cement majors suggests under-ownership in companies like ACC and Ambuja Cement (holdings near historical lows). Company 12 . Company Source: RCML Research.Better return ratios compared to last cycle (%) 45 40 35 30 25 20 15 10 5 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Relatively better return ratios then last down cycle FY09 FY10E FY11E Source: Company.0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E June'10 Fig 39 .Comfortable gearing position (x) 1. we believe investors could increase their weight on cement from a 3–4 year perspective. RCML Research FY12E Source: Company.4 1. We believe these positives will help cement majors weather the storm of declining demand and weak cement prices in the near term. Further.6 0.6 1.

While there could be a further 5–10% downside if pricing conditions worsen. we prefer UltraTech. RCML Research Target Name Cement Plant. ACC and Ambuja Cement in that order. Fig 44 . we maintain Sell as we believe the stock has further downside risks.Cement Sector Report 04 August 2010 Fig 43 . Company EV/t increases post M&A activity M&A activity could also trigger re-rating During the last cement downcycle (FY01-FY02). For India Cements. We believe a similar situation could emerge in FY11-FY12 where smaller players could be potential M&A targets. This could be a key trigger for a sector-wide re-rating as EV/t increases post acquisitions. the sector witnessed increased M&A activity as smaller players found it unviable to operate their plants. Among large-cap pure cement plays.M&As during FY01-FY03 Year FY 00-01 FY 00-01 FY 01-02 FY 02-03 Source: Bloomberg. likely to move up Historically EV/Tonne was near replacement cost during the down cycle Source: RCML Research. 13 .EV/tonne at replacement cost (US $/Tonne) 350 300 250 200 150 100 50 0 FY00 FY02 FY04 FY06 FY08 FY10E FY12E Replacement cost ACC Ambuja India Cement EV/Tonne is at Replacment cost. we believe the bottom is near and investors should accumulate stocks in the next two months in order to ride the upcycle that will follow over the next 3–4 years. We also remain bullish on diversified plays like Grasim and Shree Cement. Bilaspur Zuari Cement Larsen & Toubro SRI Vishnu Cement Acquirer Name Lafarge SA Italcementi SpA Grasim Industries Zuari Cement Value (US $ mn) 179 168 159 68 EV/Tonne (US$) 80 53 99 56 Accumulate stocks over the next two months Ripe time to accumulate cement stocks Most cement stocks have corrected by 8–28% in the last four months. Select mid caps like Birla Corp and Orient Paper could be potential multi-baggers in the next 3–4 years given their attractive valuations.

0 6.407 FY12E 13.1 0.0 0.4 20.4 25.Cement Sector Report 04 August 2010 Sector valuation matrix Fig 45 .0 9.3 (38.5 FDEPS Growth (%) FY10E 39.8 19.683 179.0 2.2 16.732 55.7 FY11E 7.4 30.6 FY10E 6.7 17.8 20.3 4.1 FY11E 24.103 5.4 FY10E 27.9 9.6 19.944 6.4 4.6 256.5 29.9 8.2 25.7 FY11E 0.0 PAT Margin (%) FY11E 14.4 1.9 34. Debt/Equity Ratio (x) FY10E 0.1 9.643 27.1 14.9 23.3 2.0 FY10E 108 162 57 131 102 83 56 EV/Tonne (US$) FY11E 104 148 57 116 110 80 54 FY12E 97 134 48 97 105 79 49 FY11E 14 .5 3.4 FY11E 62.067 12.7 8.4 3.272 70.Key ratios & valuations Company ACC* Ambuja* Birla Corp.669 7.502 1.6 2.6 4.820 8.7 18.721 39. Shree Cem UltraTech India Cem Orient Paper CMP (Rs) 825 117 356 1.4 5.7 4.6 28.9 21.4 1.0 FY12E 25.3 19.560 16.9 16.2 60.1 11.7 20.1 39.425 73.6 7.716 3.8) FY12E 19.0 8.1 ROCE (%) FY11E 17.514 3.7 24.2 (14.4 6.7 9.9 21.851 42.4 0.1 9.2) 10.1 0.737 1.1 30.435 2.4 7.0 1.4 24.8 13.7 198.340 42.4 19.102 86.0 11.2 2.473 3.4 1.7 7.6 153.3 49.1 10.828 26.8 61.6 0.8 9.0 4.0) (76.873 16.661 174.056 15.0 17.4 3.5 14.0 22.2 8.827 5.9 FY12E 14.3 0.4 EBITDA (Rs mn) FY10E 24.6 17.0 72.5 Fig 47 .0 0.3 8.516 Div Yield (%) 2.388 20.997 20.7 0.3 FY10E 20.4 0.097 FY11E 19.8) (11.0 8.1 74.278 7.8) 4.4 12.8) (37.8 1.5 0.0 0.7 96.613 FY11E 11.2 Adj.8 Sales (Rs mn) FY10E 80.5 8.751 6.3 13.5 5.642 235.5 FY10E 29.797 18.4 FY11E (1. Shree Cements UltraTech Cem India Cem Orient Paper EBITDA Margin (%) FY10E 30.576 7.8 1.7 42.7 72.8 7.798 858 103 53 Target (Rs) 1.6 2.2 20.0 1.0 FY12E 6.2 22.213 7.6 FY12E 0.5 ROE (%) FY11E 18.8 11.9 FY12E 19.7 1.8 4.9 1.092 29.184 5.2 0.1 17.719 26.570 36.2 2.4 4.4 10.2 0.9 2.1 FY12E 18.982 63.8 37.4 2.4 224.904 16.2 5.769 21.345 25.3 P/BV (x) FY11E 2.6 19.0 17.8 1.428 4.6 23.3 17.2 27.8 119.400 1.3 12.571 172.562 Fig 46 .170 100 70 Reco Buy Buy Buy Buy Buy Sell Buy MCap (Rs mn) 155. Shree Cements UltraTech Cem India Cem Orient Paper Source: RCML Research P/E (x) FY10E 9.8) FY11E (27.7 0.6) (12.3 FY12E 74.1 19.1) 4.4 28.4 75.7 19.9 3.8 8.Valuation snapshot Company ACC* Ambuja* Birla Corp.0 21.697 792 1.5 29.032 10.606 19.3 *Y/E Dec EV/EBITDA (x) FY12E 11.4 11.1 (2.7 15.939 4.5 18.4 0.5 13.2 FY12E 2.428 Sales Growth (%) FY10E 9.999 15.4 18.3 23.622 14.984 FY12E 91.5 36.4 32.3 16.3 13.853 302.9 26.5 0.9 4.7 1.5 0.3 6.0 14.2 6.4 13.4 16.4 28.6 29.500 55.9 16.1 0.5 10.1 7.8) (0.8 8.3 FY12E 15.5 0.562 PAT (Rs mn) FY10E 16.2 2.9 19.578 34.4 20.5 6.2 8.921 20.0 9.7 17.9 7.8 5.7 14.614 36.3 141.4 4.9 2.7 12.8 0.4 28.4 23.1 36.7 20.060 145 500 2.5 18.198 FY11E 79.1 FY10E 2.8 30.884 FY12E 23.0 0.691 13.Key ratios & valuations Company ACC* Ambuja* Birla Corp.415 62.8 4.5 14.3) (34.2 3.839 FDEPS (Rs) FY10E 85.2 0.814 149.8 1.321 36.9 22.4 18.225 EV (Rs mn) 150.675 23.2 9.1 39.1 11.1 18.291 47.148 13.225 28.108 1.

RCML Research Source: Bloomberg.000 50.000 255.UltraTech: EV/EBITDA band* (Rs mn) 500.400 1.000 100.000 250.000 5.000 800 600 400 200 0 Nov-07 Nov-08 Nov-09 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 May-08 May-09 Jun-10 Price 4x 7x 10x 14X 17x Fig 53 .000 55.000 155. RCML Research Fig 52 .600 1.000 800 600 400 200 0 Oct-05 Dec-06 Aug-04 Feb-08 Apr-02 Jun-03 Apr-09 Jul-10 Price 4x 8x 12x 14x 18x Fig 49 .000 100.000 305.000 200.000 Nov-04 Apr-06 Sep-07 6x Dec-08 Jun-08 Jan-02 Jun-03 Price 3x 5x 8x Source: Bloomberg.000 200.Ambuja Cement: P/E band (Rs) 250 200 150 100 50 0 Nov-04 Apr-06 Sep-07 Feb-09 Jan-02 Jun-03 Jul-10 Price 4x 8x 12x 16x 20x Fig 51 .000 400.UltraTech: P/E band* (Rs) 1.800 1.000 0 Dec-06 Oct-05 Feb-08 Apr-02 Aug-04 Apr-09 11x 8x Feb-09 Jul-09 Jan-10 Jun-03 Jul-10 14x 10x Jul-10 Jul-10 Price 3x 5x 7x 9x 11x Source: Bloomberg. RCML Research Fig 50 .200 1.ACC: P/E band (Rs) 1.Ambuja Cement: EV/EBITDA band (Rs mn) 355. RCML Research Source: Bloomberg.000 205.000 300.800 1. RCML Research *Standalone 15 .600 1.000 0 Nov-06 May-07 Nov-07 Apr-05 Oct-05 Apr-06 Price 2x 4x Source: Bloomberg.200 1.000 150. RCML Research *Standalone Source: Bloomberg.Cement Sector Report 04 August 2010 Valuation bands Fig 48 .ACC: EV/EBITDA band (Rs mn) 300.000 105.400 1.

000 120.India Cements: P/E band (Rs) 500 400 300 200 100 0 Nov-06 Jul-09 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-07 Dec-08 Jan-10 Jun-08 Price 6x 9x 12x 15x 18x Fig 57 .Cement Sector Report 04 August 2010 Fig 54 .000 1.500 3.000 40.000 120.500 2. RCML Research Source: Bloomberg.000 20. Higher-than-anticipated price decline: Although unlikely.000 60.India Cements: EV/EBITDA band (Rs mn) 140. RCML Research Key risks to our view Protracted weakness in cement demand: A key risk to our call would be a protracted delay in demand revival. leading to subdued stock performance. mainly on account of lower execution of infrastructure and real estate projects.000 0 Nov-06 Apr-05 Oct-05 Apr-06 May-07 Dec-07 Dec-08 Jun-08 Jul-09 Price 8x 4x 10x Source: Bloomberg.000 2.000 100.000 100.Shree Cement: P/E band (Rs) 4.000 20. a sharp worsening of the pricing scenario could prolong the downcycle.500 1. 16 .000 80.000 500 0 Jul-10 Nov-06 Nov-07 Oct-05 Apr-05 Apr-06 Dec-08 Dec-09 May-07 Jun-08 Jun-09 Price 2x 4x 7x 10x 13x Fig 55 .000 80.000 40. RCML Research Source: Bloomberg.000 0 Nov-06 Nov-07 Oct-05 Apr-05 Apr-06 Dec-08 May-07 Dec-09 6x 12x Jan-10 Jun-08 Jun-09 Jul-10 Jul-10 Price 1x 2x 4x 6x 8x Source: Bloomberg.000 3.000 60. RCML Research Fig 56 .Shree Cement: EV/EBITDA band (Rs mn) 140.

0 22.5 155.2% 159.1 17.8 8.4 12.9 15.1 135.2 21.7% FY10E 260.9% 5.6% 1.7 5.0 10.1 2.0 214.8 11.0 3.3% 3.9 11.0% 234.7 168.2 6.6 13.5% FY09 214.4 7.6 144.0% 177.5% 196.7 20.1 3.0% 214.3 12.4% 3. RCML Research FY05 144.0 8.5 5.6 3.6 127.4% 88% 167.Cement Sector Report 04 August 2010 Annexure I: Cement industry demand-supply dynamics Fig 58 .1 12.6 12.5% 97% 154.8% 78% 214.9 11.4 7.8% 83% 200.0 10.0 13.0% 4.3% 80% 240.2% 243.6 88% 124.1 6. supply and utilisation over FY05-FY12 (mn MT) All India Actual Capacities Cap growth (%) Effective capacities for production Effective Production % growth Effective Cap Utilization (%) Cement Despatches % growth Domestic Consumption % growth Cement Exports Clinker Exports Surplus/(Deficit) as a % of effective cap Source: CMA.6 2.6 4.3% FY12E 309.2 2.1% 3.9 3.3% FY07 159.9 FY06 151.0 3.4 202.9% 151.7 10.2% 211.2% 164.2% 191.4% 149.6 181.4% 17 .7 8.Demand.1 7.9 9.6% FY11E 299.7 15.9% FY08 191.6 20.0 3.6 12.8% 2.2% 276.3 8.8 241.6 141.6% 6.3 9.0 9.1% 301.2% 94% 141.8% 85% 181.5% 121.

Central (Mn MT) 45 40 35 30 25 20 15 10 5 0 FY05 Actual Capacities Utilization (R) Dispatches (%) 110 105 100 95 90 85 80 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Fig 64 . CMA.North (Mn MT) 70 60 50 40 30 20 10 0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Actual Capacities Utilization (R) Dispatches (%) 115 110 105 100 95 90 85 80 75 Fig 60 . RCML Research Source: CMA. RCML Research 18 . RCML Research Source.Cement Sector Report 04 August 2010 Annexure II: Region-wise industry demand-supply Fig 59 . RCML Research Fig 61 . CMA. RCML Research Source: CMA.East (Mn MT) 50 40 30 20 10 0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Actual Capacities Utilization (R) Dispatches (% 94 92 90 88 86 84 82 Fig 62 .West (Mn MT) 50 40 30 20 10 0 Actual Capacities Utilization (R) Dispatches Source. RCML Research Fig 63 . CMA.South (Mn MT) 140 120 100 80 60 40 20 0 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E (%) 100 95 90 85 80 75 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 101 96 91 86 81 76 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E Actual Capacities Utilization (R) Dispatches (%) 100 95 90 85 80 75 70 65 60 Source: CMA.All India 350 300 250 200 150 100 50 0 Actual Capacities Utilization (%) (R) Dispatches Source.

South (Rs/Bag) 270 245 220 195 170 145 120 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-09 Jul-09 Source: CMA.All-India price movement (Rs/Bag) 280 260 240 220 200 180 160 140 120 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Source: CMA. RCML Research Source: CMA. RCML Research Source: CMA. RCML Research Fig 69 .Central (Rs/Bag) 290 270 250 230 210 190 170 150 130 110 Jul-02 Fig 70 .East (Rs/Bag) 280 260 240 220 200 180 160 140 120 Jul-02 Fig 68 .North (Rs/Bag) 280 260 240 220 200 180 160 140 120 Fig 66 .Cement Sector Report 04 August 2010 Annexure III: Region-wise cement prices Fig 65 . RCML Research Fig 67 .West (Rs/Bag) 250 225 200 175 150 125 100 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Source: CMA. RCML Research Jul-10 Jul-10 Jul-10 19 . RCML Research Source: CMA.

6 FY12E 4.West (mt) West All India Cap Addition % of total capacity FY10E 1.4 0.7 East All India Cap Addition % of total capacity Capacity additions .East (mt) FY10E 4.8 45.Central (mt) Central All India Cap Addition % of total capacity FY10E 3.North (mt) North All India Cap Addition % of total capacity FY10E 12.Capacity additions Capacity additions .6 Capacity additions .8 FY11E 15.8 FY12E 2.2 45.6 13.1 9.6 14.5 28.7 Capacity additions .4 43.7 9.2 FY12E 2.6 11.6 9.4 39.4 39.4 28.4 39.1 45.5 7.6 21.South (mt) FY10E 23.Cement Sector Report 04 August 2010 Annexure IV: Region-wise capacity additions Fig 71 .0 South All India Cap Addition % of total capacity North South East West Central South India most vulnerable as max capacity additions are in this region Source: RCML Research 20 .9 39.4 27.0 9.4 FY12E 0.4 0.5 10.5 2.6 39.0 FY12E 0.5 39.5 45.8 FY11E 5.7 FY11E 5.1 FY11E 4.9 45.0 Capacity additions .6 FY11E 8.0 9.5 50.

1 0. diesel prices (Rs/tkm) 21 .38 1.10 0.020 12.1) (0.2) FY05 Coal receipt/ cement produced Coal receipt growth YoY (R) Cement prod.020 20 Oct-08 May-03 Dec-09 Apr-02 Jul-05 Aug-06 Sep-07 Jun-04 10.020 4.22 1.1 0.Coal linkages in cement (x) 0.26 1.50 1.30 1.30 1.70 0.Rail-Road cement transport mix (%) 70 60 50 40 30 20 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Rail Road Sea Fig 77 .1) (0.020 8. RCML Research Avg freight rates.0 (0.020 6.Major cement exports from India (%) 50 40 30 20 10 0 Nepal Kuwait Qatar Iraq Sri Lanka Sudan Others FY09 FY10 Source: CMA. RCML Research Source: CMA. growth YoY (R) (YoY%) 27 18 9 0 (9) (18) H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 FY06 FY07 FY08 FY09 FY10 Fig 73 .34 1.50 Oct-05 Oct-07 Oct-09 Feb-05 Feb-07 Feb-09 Jun-04 Jun-06 Jun-08 Jun-10 E Avg freight rates Avg diesel prices Source: Bloomberg. RCML Research Fig 76 .020 Fig 75 .18 1.2 0.14 Apr-02 Sep-03 Feb-05 Jul-06 Dec-07 May-09 Cement/clinker ratio Source: CMA.Freight rates and Diesel prices Tkm: Tonne km 1.2 0.70 1.Industry blending ratio (x) 1.020 2. RCML Research Source: CMA.90 0.Baltic dry index 14. RCML Research Fig 74 .Cement Sector Report 04 August 2010 Annexure V: Key industry parameters Fig 72 . RCML Research Source: CRISIL.

Cement Sector Report 04 August 2010 Companies 22 .

1 1 2.7) 9.571 (2.4 20.0) 60.2bn).6x on FY12E. but believe this slowdown has already been discounted by the market.1 19. With the merger of Samruddhi Cement. the company is poised for strong growth in FY12 as an industry-wide volume upcycle (11%+ growth) sets in.7 9. UTCEM has envisaged investments to the tune of Rs 13.5 15. considering UTCEM’s scope for growth.4) 3.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 8.697 (37.5bn in other cost areas like logistics infrastructure and material evacuation in FY11.2 28. The company clocked an EBITDA/t of Rs 792 during the quarter.7 26. UTCEM is set to become the largest cement company in India. robust 20% market share and strong brand equity. Also.8) 16.115 1-mth (1.2 16. Further. leading to our target of Rs 1.8 21.4 11. Q1 results in line. we arrive at a revised March ’11 target price of Rs 1. We believe the stock merits a premium valuation of 8x FY12E EV/EBITDA.5 1 1 0. which will enhance operational efficiencies in the medium term.9 Industry 1 .083 274 45.3 FY11E 149. We believe these negatives are largely priced in and current valuations are appealing.9 UltraTech Cement 1 4.1 13.2 0. While we believe its Q2FY11 numbers would be muted on account of the decline in cement prices.9bn.2) 4.6 7. a presence across India and strong brand equity. the stock would trade at a P/E of 15.0 17.4 96. What’s New? Target Rating Estimates CMP Rs 858 TARGET Rs 1.0 23 .8 22.UltraTech Cement Ltd Company Update 04 August 2010 UltraTech Cement Ltd Big is beautiful We upgrade UltraTech Cement (UTCEM) from Sell to Buy with a revised March ’11 target of Rs 1.6 14.170 (rolling forward from our December ’11 target of Rs 955) – an upside of 36%.9 (37.170 RATING BUY RISK HIGH BSE 532538 Company data NSE ULTRACEMCO BLOOMBERG UTCEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 235. Further.7 3-mth (10.9 17.0 FY11E 23.4 17. while PAT fell 44% to Rs 2.092/5. Volume revival and cost-cutting to drive growth: We estimate subdued dispatch growth of 7% for UTCEM in FY11 with a 6–7% drop in realisations.9 12.8 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY10E 30.5 21.2 8. Q2 to be muted: UTCEM’s Q1FY11 results were largely in line with our estimates as net revenues declined by 8.975 Stock performance Returns (%) Ultratech Sensex CMP 858 18.170.174 / 669 158. Upgrade to Buy: With most of the negatives priced in and a revival expected in FY12.8 23. We believe the company will now command a valuation premium to peers as the markets adapt to its transition into India’s single largest cement play.7 FY12E 11.8 74.6 1. Valuing UTCEM at 8x FY12E EV/EBITDA.2 FY12E 24.502 22.4 FY11E 14.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY10 8. UTCEM has become the largest cement player in the country (50mt capacity) with a pan-India presence.562 15.0 26. the stock is a likely candidate for inclusion in the market indices (Sensex/Nifty) – a potential stock trigger. with ~50mt of cement capacity. we note that the 30% drop in stock price over the last four months largely factors in the results.3bn (our estimate: Rs 2. The stock has corrected 30% from its peak over the last four months.3 14.170 (36% upside).8 13.0) FY12E 172.2 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY10E 153.1 11. its cost-cutting initiatives are steadily gaining momentum – the company currently has access to ~504MW of captive power (80% self-sufficient).3% YoY to Rs 17. we upgrade the stock from Sell to Buy. with UTCEM emerging as the largest player by market cap. At our revised target.514 171. owing to sector-wide concerns of lower demand growth and soft cement prices. This apart.1 6.4 18.2 6-mth (11. Restructuring to command premium: Following the Samruddhi merger.814 141.

UltraTech v/s Sensex 110 100 90 80 70 Mar-10 Apr-10 May-10 Jun-10 UltraTech Cem Sensex Source: Bloomberg.007 721 2.0 (43.3) 12.286 21.026 259 285 993 3.UltraTech: Premium/discount over Sensex (%) 80 60 40 20 0 (20) (40) (60) (80) Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Jul-10 Jan-10 Jun-08 Jun-09 Fig 82 .057 483 279 1.000 100.9 (2.6 % Chg YoY (8.7 158bps 1.178 36.2 8.326 22.1 18.841 4.400 1.800 1.UltraTech: EV/EBITDA band* (Rs mn) 500.000 300.000 800 600 400 200 0 Nov-06 Nov-07 Jul-09 Jul-10 Apr-05 Apr-06 Oct-05 Jan-10 May-07 Dec-08 Jun-08 Price 4x 7x 10x 14X 17x Fig 80 .Quarterly performance* (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.094 15.8 86.898 13.168 342 330 936 6.360 7.528 12. RCML Research Q1FY11 17.3) (1404bps) (44.4 % Chg QoQ (6.UltraTech Cement Ltd Company Update 04 August 2010 Fig 78 .6 1.1) 0.4 (15.600 1.000 200.000 400.4) 41.1) 2. RCML Research 24 .0) (60.5 (48.7 Fig 79 . RCML Research * Standalone Fig 81 .067 4.3) (44.016 3.7 18.066 4.0 13.246 819 2. RCML Research Source: Bloomberg.000 0 Nov-06 Nov-07 Jul-09 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Jun-08 Jan-10 Jul-10 Jul-10 Price 2x 4x 6x 8x 10x Source: Bloomberg.5) 8.200 1.3) Q4FY10 19.244 2.3) (8.7 33. RCML Research * Standalone Source: Bloomberg.UltraTech: P/E band* (Rs) 1.7 *Standalone Q1FY10 19.

4 42.502 20.9 11.0 6.3 6.2 24.6 2.8 6.737 20.9 20.006 6.0 7.1 0.8) 34.104 8.409 11.0 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) 25 .8 22.348 2.7 14.500 (200) 401 2.4 30.4 8.2 16.3 154.023 4.000 (18.975 390.7 13.8 13.391 4.6 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.523 (17.954 335.000) (28.624 29.1 137.223) (728) 909 702 1. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY10 1.814 141.697 (37.973 2.006 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.473 2.6 14.0 0.991 3.562 15.227 38.741) (6.039) 29.8 0.0) 274.2 1.0 60.3 18.5 10.473 2.4 274.0 FY12E 172.052 32.UltraTech Cement Ltd Company Update 04 August 2010 Consolidated financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY10 153.0 8.1) 8.0 17.0 FY11E 149.619 24.8 0.278 177.168 113.7) 2.553 89.500) 187 2.3 1.747 4.5 2.8 274.7 7.079) (5.624 25.329 4.584 9.952 6.4 11.692 131.923 188.988) 199.5 FY11E 2.0) 6.8 1.9 2.954 15.854 43.355 39.4 1.414 (20.7 0.550 51 (11.904 31.622 (18.187) 14.9 26.946 163.435 31.9 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY10 30.7 26.4 0.744 125.000) 3.487) 163.514 26.975 16.638 (28.395 (14.8 FY11E 10.3 8 39 39 1.740 104.740 122.689 43.148 FY12E 31.2 13 58 51 1.103 41.656 10.364 13.167 20.1 11.167 467.000) (500) (279) 858 3.5 16.8 21.484 199.566 4.082 171.009 25.6 13.8 0.566 4.697 16.949 12.4 FY12E 10.166 106.554 10.574 15.940 9.0 74.147 5.196 30.103 20.853 26.514 171.842 2.939 (26.1 11.7 21.747 FY11E 25.0 47.582 221.9 17.201 1.8 23.823 (2.590 3.489 9.9 (37.2 0.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.4 18.8 2.086 (34.338) (9.718 4.0 23.582 197.500 (16.5 0.5 126.4 17.375 5.9 8.1 FY12E 3.624 25.199 19.991 2.0 96.2 28.6 2.571 (2.8 0.692 144.907 176.679) (893) 14.407 33.406 (729) (1.502 22.392 91.237) 176.4 13 63 51 1.

094 2.528 30.7 21.8 5.286 (26) 17 Q1FY11 17.170 Reco Buy Buy Hold Hold Hold Hold Hold Hold Hold Sell Sell Buy Stock performance 1.700 30.6 4.026 21.6 15.8 11.836 23.UltraTech Cement Ltd Company Update 04 August 2010 Quarterly trend * Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) *Standalone Q1FY10 19.5 23.1) 4.960 (18) (22) Q4FY10 19.5 5.1 2.6 11.057 22.2 22.5 16.2 1.000 800 600 400 Dec-08 Apr-09 Feb-09 Jun-09 200 Hold Sell Buy 16-Dec-08 Sector Report 20-Jan-09 6-Apr-09 21-Jul-09 Results Review Quarterly Preview Results Review 21-Apr-09 Results Review 16-Oct-09 Results Review 16-Nov-09 Company Update 6-Jan-10 18-Jan-10 Quarterly Preview Results Review Oct-09 Dec-09 Aug-09 Feb-10 Apr-10 30-Mar-10 Sector Update 29-Apr-10 Results Review 4-Aug-10 Company Update Aug-10 Jun-10 26 .4 (21.9 Jun-10 54.427 (42) 6 Company profile UltraTech Cement.7 4.7 2.408 10.518 1. is set to become the largest cement manufacturer in India with an installed capacity of 49mt.019 858 409 412 412 532 827 906 821 938 995 1.140 1.168 36.6 11.4 Recommendation history Date Event Reco price Tgt price 347 381 536 565 775 824 729 987 1.200 1. a subsidiary of Grasim. Dubai with a 3mt capacity.509 53 (40) Q3FY10 16.5 2. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 54.8 11. The company enjoys a market share of ~20% with leadership in the western region and a strong presence in the southern and eastern regions.3) (6.2 3. The company also has acquired stake in ETA Star.898 (8.3 7.037 1.0 7.178 58 35 Q2FY10 15.2 Mar-10 54.027 955 1.3) 4.

2 6.6 CY11E 25.5% along with an increase in realisations.7 CY09 9. we believe these risks are already embedded in valuations and will ease in CY11.3 8.8 2. What’s New? Target Rating Estimates CMP Rs 825 TARGET Rs 1.3 for CY10 (pared by 4% from earlier numbers).1) 61.3 (27. As with other cement stocks. We upgrade our recommendation on ACC from Sell to Buy. Now.3 85. Near-term pain largely factored in: With demand slowing down and cement prices declining across the country.7 3-mth (8. At the current EV/t of US$ 102.6 20. For CY11.0 29.2) CY11E 91.086 4.691 (27.764 Stock performance Returns (%) ACC Sensex CMP 825 18.7 Industry 0.1) 11. This. with fresh capacity of 6mt coming up by end-CY10 (taking installed capacity to 30mt) together with the expected revival in demand.067 39.272 9.3 1 2.102 14. ACC could face pressure on profitability in Q3CY10.8 CY11E 11.2 17.374 187. Capacity addition to enhance volume growth in CY11: ACC’s failure to augment capacity in line with peers has suppressed its volume growth over the past year. would drive a re-rating of the stock.060 (rolling forward from our December ’11 target of Rs 844) – a 28% upside from current levels.8 16. we anticipate a resurgence in ACC’s dispatch growth and hence profitability.7 9. with the overhang of capacity expansion delays dissolving (new capacity of 6mt being added by end-CY10).5 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) CY08 73.8 P/E comparison (x) 1 5 1 0 5 0 CY09 CY1 0E CY1 E 1 9.9) 3.4 19.683/3.3 17.8 CY10E 24.5 19. linked to lower dispatch growth and depressed prices in South India.1 1 1 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP CY08 13.4 19.9 26.8 53. At our target price. While the company will continue to witness near-term stress on profits. which largely factors in the price and volume decline.0 7. translating to a value of Rs 79/sh.060 RATING BUY RISK HIGH BSE 500140 Company data NSE ACC BLOOMBERG ACC IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 155.3 18.4 6. We have a conservative EPS estimate of Rs 62.4 27. we expect the company to register healthy volume growth of 12.115 1-mth (3. rising to 26mt in CY11.7 74. upgrade to Buy: We value the stock at 8x EV/EBITDA on CY11E and arrive at a revised March ’11 target price of Rs 1.060 (28% upside).1 CY10E 13.2 CY09 30.020 / 681 416.9 27.9 A CC 1 3. We see significant synergies for ACC from such a merger. ACC has underperformed the broader market during the last four months.2x on CY11E.3 11.425 (1.9 27 .3 CY10E 79.4 16.1 14.3) 4.7 13.7 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE CY08 23.6 20.6 17.7 18. the stock would trade at a P/E of 14. We build in volumes of 23mt for CY10.8 25.7 12.1) CY09 80.2 23.2 6-mth (6.2) 9.7 19. in turn. we find valuations cheap with little downside.2) 62. losing 23% from its peak. we believe this move is on the cards. We peg net cash and equivalents at Rs 15bn in CY11. Potential merger with Ambuja Cement could provide synergies: While the management has not confirmed any merger announcement in the near term.2 15.5 17.4 22.ACC Ltd Company Update 04 August 2010 ACC Ltd On the road to recovery We upgrade ACC from Sell to Buy with a revised March ’11 price target of Rs 1.4 1. Balance sheet to remain strong: With capex nearing completion in CY10. cement demand improving in CY11 and healthy net cash and equivalents. Bottom in sight.4 (6.6 1 . ACC’s balance sheet will remain sturdy.3 15.537 (6.5 39. Further.999 19.5 14. we believe volumes will see a sharp increase in CY11.

8) (11.9 % Chg YoY (2.4) (0.589 27.9) (26.9 New 79.8 (11.192 24.3 25.7 (27.ACC Ltd Company Update 04 August 2010 Fig 83 .ACC: Premium/discount over Sensex (%) 80 60 40 20 0 (20) (40) (60) Oct-05 Mar-02 May-03 Dec-06 Feb-08 Apr-09 Jul-04 Jul-10 Fig 88 .187 64.800 1.9) 9.2) (794bps) (26.435 3.200 1.9) (16.025 1.000 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Jul-10 Price 3x 5x 7x 9x 11x Source: Bloomberg.677 5.107 4.768 1.4 2.7) 4.4) (11.466 7.1 Q2CY09 20.1) (1.8) 22.000 100.9) 10. RCML Research 28 . RCML Research Source: Bloomberg.2) Q1CY10 21.9) (31.9) (0.000 150.530 597 141 962 5.4) Fig 84 . RCML Research Source: Bloomberg.347 570 159 784 6.866 35.717 4.01) (4.0 (24.4 11.400 1.4 19.000 200.796 6.ACC: P/E band (Rs) 1. RCML Research Fig 87 .600 1.813 13.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.ACC: EV/EBITDA band (Rs mn) 300.018 14.000 800 600 400 200 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Price 4x 8x 12x 14x 18x Fig 86 .425 24.3 % Chg (3.ACC v/s Sensex 110 105 100 95 90 85 80 Mar-10 Apr-10 May-10 Jun-10 ACC Sensex Source: Bloomberg.1) Fig 85 . RCML Research Q2CY10 20.207 14.222 609 127 935 5.4 12.1) (4.6 % Chg QoQ (3.4) (224bps) (11.051 29.691 62.000 250.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research CY10E Old 82.8 (12.6 21.974 2.000 50.

974 4.a 0.933 6.613) 103.562 (3.626 124 (2.6 25.3 (27.536 Financial ratios Y/E Dec Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover CY09 10.9 57.280 758 17.294 CY11E 18.379 3.9 7.8 21.124) (12.2 69.294 2.536 2.3 2.877 30.864 327 11.9 6.4 19.253 10.154) (7.919 5.350 4.6 18.842 CY09 19.8 24.756 68.614 5.1) 20.5 39.7 CY11E 7.3 0.3 17.511 262.645 103.5 14.9 0.958) 442 (22.878 47.000) (10.462 2.5 19.790 5.017 (1.756 102.1 15 50 87 1.4 0.1 0.067 39.3 0.1 11.999 19.500 23.654 14.0 1.277 81.6 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.7 18.806 2.453 (27.1 0.8 61.833 413.8 85.791 58.4) (159) 2.251 7.408 9.9 CY08 CY09 CY10E CY11E Economic Value Added (EVA) analysis Y/E Dec WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) CY08 10.061 (10.5 489 11.918 6.955 9.654 14.3 187.388 (21.770 (15.825 72.746 9.102 14.7 23.4 CY09 7.000) (30) (4.1 0.358) 81.352 16.126 (12.359) (2.217 5.6 20.972 17.371 13.160 97.332 (9.829 5.357 34.865 75.639 1.339) 2.780) 4.669 1.493) 97.253 12.5 29 .960 18.1 0.7 6.610 1.738 4.878 58. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) CY08 9.3 Cash flow statement Y/E Dec (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq CY08 14.4 4.1) 187.210 (3.162) 3.5 0.1 9.391) 7.797 43.376 51.086 4.488 1.4 17.2 1.2) 23.0 Balance sheet Y/E Dec (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.944 6.352 320.272 9.959 156 (54) 19.1 1.1 2.6 1.2 0.1 3.8 25.253 12.0 29.4 19.8 24.868) 14 1.000) (30) (3.2) 187.6) 3.031 355.1 13.1) 19.250 (3.935 15.7 2.031 14.345 20.0 CY09 80.421 21.844 (13.952 20608 6608 32.920 66.751 17.7 22.399 49.1 10 50 93 1.653 5.238 31.2 49.833 15.679 11.691 (27.7) 733 2.317 5.511 14.282 60.3 CY10E 3.5 3.029 (3.889) 12.790 3.820 1.475 6.8 13.4 (6.205 14.328 16.7 13.000) (13.762) 2.861 (13.0 CY10E 79.8) 3.7 19.3 15.3 23.7 187.825 77.4 23.6 20.1 0.1 23.2 30.8 74.8 62.3 1.763) 113.462 CY10E 15.3 1.7 27.654 14.037 7.781 33.878 64.756 112.691 11.0 729 2.ACC Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E Dec (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) CY08 73.669) 19 849 (4.9 25.7 16.5 CY11E 10.0 CY11E 91.0 n.1 8.594 113.583 21.537 (6.2 15.842 3.102 7.2 CY10E 10.425 (1.385 19.3 74.411 22.5 11.263 41.639 4.4 27.7 23.471 5.782 2.8 0.362 4.553 5.2 12 52 101 1.9 26.697 16.176 8.067 16.3 843 2.756 (4.395 9.0 16.878 73.1 10 293 488 1.993) (4.8 25.140 5.7 17.

4 117.0 20.356 53.1 (5.4 6.051 0.8 18.0 20.7) (35.5 21.2 Q3CY09 19.000 900 800 700 600 500 400 16-Dec-08 Company Update 5-Feb-09 24-Jul-09 6-Oct-09 4-Feb-10 4-Aug-10 Results Review Results Review Quarterly Preview Results Review Company Update 22-Apr-09 Results Review Sell Buy Dec-08 Oct-09 Dec-09 Apr-09 Aug-09 Apr-10 29-Oct-09 Results Review 22-Apr-10 Results Review Aug-10 Feb-09 Feb-10 Jun-09 Jun-10 30 .1 19.7 CY08 69.9) 5.ACC Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q2CY09 20.3 98.813 14.1 33.8 Q2CY10 20.589 (26.7 (10.4 Recommendation history Date Event Reco price Tgt price 514 530 653 854 794 746 857 919 825 430 416 595 796 801 704 819 844 1.2) (11.9) (3.1 21.3 7.4 CY10E 66.347 35.3 25.215 1.5 79.3 4.060 Reco Sell Sell Sell Sell Sell Sell Sell Sell Buy Stock performance 1.297 22.4 3.5) Q4CY09 19.4) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity CY07 71.5 23.018 2.1 19.6 19.2 11.679 33.2 20.3 157. It currently enjoys a market share of ~12% with a strong pan-India presence.9 (2.9 113.6 4.8) Q1CY10 21.4 29.9 4.4 CY09 70.530 27. The company intends to scale up its capacity to 30mt by CY10E. Capacities are spread across north (26%).6 89. south (29%) and west (5%) India.2 20.2 1.0 152.1 20.797 (6.694 9.0 114.2 84.3 26.0 107.6 20.4) 4.8 163. central (20%). Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 46.4) 6.8 Jun-10 46.4 2.1 44.222 29.3 9.3 168.6 Company profile Holcim owned ACC is the country’s largest cement player with a total capacity of 26mt.2 13.207 (2.4 C CY11E 67.6 163.866 85.2 13.2 Mar-10 46.9 112.5 106. east (20%).

4 18.203 9.9 19.4 1 1 0.0 11.8 8.0 3. Timely expansion: ACEM is likely to report volume growth of 10% in CY10.893 1.2 17.4 22.4 16.8 9.4 1 2.184 6. we believe Q3CY10 would be a trough quarter for the company in terms of EBITDA/t.8 19. Merger with ACC a potential stock trigger: While the merger with ACC has not been confirmed by the management.5 (12.2 6-mth 13.8 18. this still translates to 10% earnings growth for ACEM in CY10.1 CY11E 29. Only company to report earnings growth in CY10: In order to factor in the impact of soft cement realisations.8 12.2 CY11E 86.6 CY10E 28.6 9.4 19.0 6. any such development will drive valuations for ACEM going forward.403 (12.1 13.1) 7.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP CY08 15.827 17.9 10.4 23.Ambuja Cement Ltd Company Update 04 August 2010 Ambuja Cement Ltd Ahead of peers We upgrade Ambuja Cement (ACEM) from Hold to Buy with a revised March ’11 target price of Rs 145 (23% upside). Although near-term weak fundamentals in the northern and western regions are likely to affect the company in Q3CY10. However.8 18.4 14.5 18.0 23.3 22.9 A mbuja Cement 1 3.7 CY10E 73.8 19.7 3-mth (2. Q3CY10 a trough quarter: ACEM is likely to see a subdued Q3CY10 as volumes weaken and prices decline across the country.5 8. ahead of its peers.8 P/E comparison (x) 20 1 5 1 0 5 0 CY09 CY1 0E CY1 E 1 1 4. we believe ACEM will continue to weather the storm and remain ahead of peers in terms of earnings growth. with a recovery setting in thereafter. considering timely capacity expansion and lower costs on clinker purchase.9 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) CY08 62.8 19. Our revised target offers a 23% upside from current levels.3 CY11E 11. Upgrade to Buy: We have valued the stock at an EV/EBITDA multiple of 8x on CY11E to arrive at a March ’11 target price of Rs 145 (rolling forward from our December ’10 target of Rs 125).1 20.900. We upgrade ACEM from Hold to Buy.1 18.1 9. What’s New? Target Rating Estimates CMP Rs 117 TARGET Rs 145 RATING BUY RISK HIGH BSE 500425 Company data NSE AMBUJACEM BLOOMBERG ACEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 179.8 18. However.522 53.428 10.7 31 . lower costs on account of clinker expansion.4 CY10E 13.2 CY09 26.6 1.225 17.6) 4.675 4.2 19.1) CY09 70.643/3.9 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE CY08 28.4 10.2 23.520 Stock performance Returns (%) Ambuja Sensex CMP 117 18.769 13. This along with cost reduction in terms of lower clinker purchases is likely to benefit the company and support earnings growth ahead of peers. and benefits from a superior geographic mix (no operations in the vulnerable southern region). we have downgraded our earnings estimates for CY10 by 4% .6 19.8 21. ACEM is the only company in our cement universe poised for earnings growth in CY10 – we expect strong volume growth during the year.115 1-mth 4. as both clinker units in Himachal Pradesh and Chhattisgarh were commissioned in Q1CY10.9 126/82 1.2 20.0 CY09 14.8 10.0 15.7 Industry 1 .2 8.0 6.4 17.

227 546 108 767 5.1) 22.0 2.897 1.902 13.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research CY10E Old 74.5) (183bps) (11.3 2.246 26.5) Fig 90 .6 25.1 % Chg YoY 10.705 3.8 20.677 4.07 14.000 55.5 42.6 (3.6 Q2CY09 18.1 18.8 % Chg (1.Ambuja v/s Sensex 106 103 100 97 94 91 88 85 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Ambuja Cem Sensex 0 (10) (20) (30) (40) (50) (60) Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Source: Bloomberg.000 255. RCML Research Q2CY10 20.Ambuja Cement Ltd Company Update 04 August 2010 Fig 89 . RCML Research 32 .486 3.019 9.5 2.421 31.Ambuja: EV/EBITDA band (Rs mn) 405.9) 30.000 355.9 % Chg QoQ 2.444 6.5 349bps 20.675 6. RCML Research Fig 93 .474 13.7 (3.8 5. RCML Research Price 3x 5x 8x 11x 14x Jun-03 Nov-04 Apr-06 Sep-07 Feb-09 Jul-10 Source: Bloomberg.5 (11.675 28.000 105.732 1.4 (4.797 692 52 704 4.9 5. RCML Research Source: Bloomberg.Ambuja: P/E band (Rs) 250 200 150 100 50 0 Jan-02 Price 4x 8x 12x 16x 20x Fig 92 .42 13.428 8.5) (65bps) (4.3 (24.032 667 81 1.5 Q1CY10 19.5) 55.000 Jan-02 Jun-03 Nov-04 Apr-06 Sep-07 Feb-09 Jul-10 Source: Bloomberg.000 5.000 205.001 5.618 1.2) Fig 91 .2) (4.7 14.000 305.476 14.000 155.912 29.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.Ambuja: Premium/discount over Sensex 20 10 (%) Fig 94 .788 29.2 New 73.476 4.7) 15.

3 15.125 8.4 23.518 CY09 15.2 3.225 17.448 7.050 70.7 CY10E 10.318) (2.264 657 3.0 0.725 10.230 10.4 4.909) 28 91.8 3.1 29.537 2.9 70.9 224 2.524.806 1.0 11 62 59 2.8 0.264 1.9 10.533 11.215 (5.223 1.000) (1.902) (511) (5.827 (18.234) 74 (637) (3.8 72.827 15.415) 4.524.9 19.184 6.033 5.083 14.616 5.9 257.045 53.670 1.1 20.0 1.838 1.703 6.1) 2.000) (9.361) (3.784 10.4 17.353 8.712 22.849 32.6 13.1 18.3 13.699 5.9 11.9 0.835 2.225) 6.983 58.9 1.1 1.262) 10.4 8.2 17.337 Financial ratios Y/E Dec Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover CY09 10.398 3.270 62.000) (3.0 15.260 7.8 18.970 15.2 23.4 2.9 46.2 0.109 16.6 1.585 409 (11.154 2.1 18.669 7.8 1.7 2.337 3.978 8.858) 27 83.189 (13.894 7.944 12.792 15.Ambuja Cement Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E Dec (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) CY08 62.2 1.598 14.034 9.051 (7.4 CY10E 6.909) 28 103.919 20.6 70.622 (3.657 3.2 3.524.3 CY09 8.5 9.5 28.324 57.353 37.0 0.8 105.024 3.4 CY11E 12.2 19.780 12.218 31.083 11.9 2.7 166 2.4 CY10E 73.983 9.000) (4.9 1.233 3.648 (4.807 CY10E 16.422) 12 (327) (3.5 18.581 3.1 19.8 54.4 22.7 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.8 10.680 56.270 104.890 3.2 20.897 25.9 1.0) 320 2.330) 8.900) (203) 288 8.448 6.1 21.808) 43 74.024 5.1 0.4 14.050 61.827 17.518 2.400 103.894 48.241 35.853) (20) (17.725 74.1) 1.741 1.323 4.484) 10.608 (3.756 12.246 9.581 CY11E 20.000 (5.4 19.5 (12.425 (14.0 17.855 91.802 1.1 15 70 51 2.203 9.410 17.282) 5.7 79 2.230 4.633 7.2 2.470 5.448 7.1 2.351 85.4 19.0 25.9 8.213 20.2 CY09 70.7 CY08 CY09 CY10E CY11E Economic Value Added (EVA) analysis Y/E Dec WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) CY08 10.8) 2.428 13.4 CY11E 86.522 6.3 22.295 15.1 19.4 2.0 Cash flow statement Y/E Dec (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq CY08 16.213 1.627 (9.4 Balance sheet Y/E Dec (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.6 28.428 10.8 58.852) (2.000) (3.769 13.4 0.2 26.0 6.4 7.805 73.8 10.675 4.4 2.7 33 .9 0.0 23.386 65.576 5.5 CY11E 10.184 12.832 2.488 22.3 1.778 42.706 2.1 20.1 10 57 63 1.000) (9.657 3.8 2.386 68.0 12 61 58 2.659 64.0 6.8 18.876 30.725 7.270 96.1 0.676 34.645 6.2 2.558 18.522.820 (16.9 8.069 35.4 12.038 (6.050 82.134 2.709 83.3 0.746 (709) 20.8 18.403 (12.778 9. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) CY08 8.277 19.8 2.

5mt in CY08.710 9.2 89.9 4.7 101.912 20.227 31.902 7.0 19.4 26.5 131.8 91. except in the southern region.7 111.6 2.2 2.174 (17.1 CY09 67.9 126.4 27.0 23. Capacities are spread across north (35%).1 (12.476 10.474 17.8 83.421 24.Ambuja Cement Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q2CY09 18. west (43%) and east (22%) India.5%.5 (11.3 4.4 106.5 31.4) Q1CY10 19.4 CY11E 69.0) 4.1 23. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 46.6 16.1 CY10E 68.6 31.4 Q2CY10 20.0) Q3CY09 16.7 12.110 16.797 26.2 16.0 123.8 Jun-10 46.1 9.7) Q4CY09 17.9 10.9 Company profile Holcim-owned Ambuja Cement will increase its capacity to 25mt in CY10 from an installed capacity of 18.8 CY08 68.5 88.8) 4.7 137.0 3.0 (13.6 114.3 9.802 12.032 3.4 27.008 22.6 22.9 22.5 9. The company boasts of strong brand loyalty with a domestic market share of ~9. It has a presence across India.6 112.8 19.9 6.5 Mar-10 46.2 20.3 16.1) (22.4 6.0 103.5 130.379 27.4 112.7 (0.246 4.7 Recommendation history Date Event Reco price Tgt price 67 72 79 97 88 99 101 119 120 118 49 49 68 87 82 88 99 113 125 145 Reco Sell Sell Sell Sell Sell Sell Hold Hold Hold Buy Stock performance 130 110 90 70 Dec-08 Apr-09 Feb-09 Jun-09 50 Sell Hold Buy 16-Dec-08 Company Update 6-Feb-09 24-Jul-09 Results Review Results Review 22-Apr-09 Results Review 29-Oct-09 Results Review 23-Dec-09 Company Update 5-Feb-10 Results Review 30-Mar-10 Sector Update 23-Apr-10 Results Review 4-Aug-10 Company Update Oct-09 Dec-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-10 34 .9 23.5) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity CY07 67.7 (9.8 2.

115 1-mth (8.7 19.087 103.0 Shree Cement 1 2. and the risk-reward ratio is now turning favourable.614 9. it is setting up another 1.7 27.1 26.0 18.2 28. What’s New? Target Rating Estimates CMP Rs 1.8) FY12E 55.2 (11.0 35 . SRCM’s strategy of selling surplus power amidst a downturn in the cement cycle will bear rich dividends. which mitigate the cyclicality in the cement business.0 9.300).642 29.3) 4. Faster ramp-up of power capacity to boost FY12 revenues: SRCM is expected to commission a 300MW power unit by June ’11.5 0.2) 9. Assigning an EV/EBITDA multiple of 5x on FY12E (P/E of 9.1 6.357 35 34.732 Stock performance Returns (%) Shree Cement Sensex CMP 1.0 22. we expect power revenues of Rs 14. we anticipate a smart rebound in dispatches and hence profitability in FY12.1 29. six months before schedule.4 3.8mt. Further.372 25.321 36.3 13. We believe the recent 25% correction in stock price largely factors in the subdued environment in cement.542/1.3 7.828 28.6 224.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 8.8 64.2mt and 1. Accordingly. equipped with a power portfolio that enables it to counter cyclicality in the cement business.5mt grinding unit along with a 1mt clinker plant.400 (rolling forward from our earlier December ’11 target of Rs 2.2) 3.7 28.1 12.3 20.6 2.798 TARGET Rs 2.4 25.6 FY11E 39.7 FY12E 7.642/1. We see limited downside to valuations and a higher potential upside than peers once the upcycle commences. We maintain our Buy rating on the stock.2bn and Rs 14. Further.400 (33% upside). We believe the trend will continue as the company is largely cushioned by power sales.9 16.0 6.4 21.7 3-mth (16.7 8.4 FY10 36.7 28.2 19. We have assumed a blended EBITDA/t of Rs 1.904 (11. which will take its total capacity to 13.Shree Cement Ltd Company Update 04 August 2010 Shree Cement Ltd Cement and Power – a potent mix Shree Cement (SRCM) is currently the best play among diversified cement stocks.1 4.2 FY11E 9. Most efficient cement player: SRCM continues to be the most efficient cement player in the industry with the highest EBITDA margins in the sector (at 34% in FY11E).8) 198.4% respectively.9 FY11E 34.2 6-mth (10.5 FY12E 37.9 9.1 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 26.4x).7 Industry 1 0.3 20.9 17.4 174. The recent stock correction by 25% from the peak largely factors in the subdued cement environment in H1FY11.4 30. Earnings estimates revised.1 7.5mt in Q2FY11. Although we believe lower dispatch growth (6% as per our estimates) and a decline in realisations (down 6%) will impact the company in FY11.260 for SRCM in FY11 (drop of Rs 240/t YoY) to factor in higher costs and lower realisations. We thus reiterate our Buy rating on the stock with a revised March ’11 target of Rs 2. we believe SRCM will continue to be the most efficient player in the industry.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 10.5bn from the sale of power in FY11 and FY12 respectively.400 RATING BUY RISK HIGH BSE 500387 Company data NSE SHREECEM BLOOMBERG SRCM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 62.2 256.3 23. we arrive at a revised March ’11 target price of Rs 2.921 29. Capacity expansion on track: The company has recently commissioned two grinding units of 1.340 39.3 FY10 42. With 450MW of surplus power likely to come into play as merchant power in FY12.7 24.798 18. we have reduced our earnings estimates for FY11 and FY12 by 13% and 3.7 6.7 FY10 8.6 49.2 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 35.7 4.0 9.7 103. we build in revenues of Rs 5.5bn. up from Rs 5bn in FY11E.1 29. maintain Buy: To factor in lower cement prices and increasing pet coke costs. Despite the expected decline in cement margins.0 10.

RCML Research Source: Bloomberg.3 6.000 40.000 20.8 New 36321 34.921 256.4) (3.340 37.000 120.500 3.1 % Chg 1. RCML Research Source: Bloomberg.682 37. RCML Research 36 .2 (17bps) (3.000 500 0 Nov-06 Nov-07 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Price 2x 4x 7x 10x 13x Fig 97 .240 265.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 40.0) (13.Shree Cement: Premium/discount to Sensex (%) 450 360 270 180 90 0 (90) Jul-10 Apr-02 Apr-03 Apr-04 May-05 May-06 May-07 Jun-08 Jun-09 Fig 99 .000 3.Shree Cement v/s Sensex 110 105 100 95 90 85 80 Apr-10 May-10 Jun-10 Jul-10 Shree Cement Sensex Source: Bloomberg.0 7.Shree Cement: P/E band (Rs) 4.500 1.938 227. RCML Research Fig 98 .Shree Cement: EV/EBITDA band (Rs mn) 140.000 2.Shree Cement Ltd Company Update 04 August 2010 Fig 95 .4) Fig 96 .000 1.000 60.9 9.904 198.07) (75bps) (13.000 0 Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Jul-10 Price 1x 2x 4x 6x 8x Source: Bloomberg.000 80.7 8.2 FY12E New 55.500 2.390 35.000 100.0) Old 54.2 % Chg (10.

2 8.0 22.578 (11.2 37 .8 174.4 10.1 1.4 FY12E 18.443 10.828 28.0 8.723 583 1.054 7.901 7.032 33.4 0.780 7.118 1.586 28.0 27.230 20.1 7.399 FY11E 12.0 3.8 1.8 64.348 17.443 10.723 FY10 12.642 29.904 6.0 1.1 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 7.536 1.500) (7.081 6.500) (2.3 36.2) 5.544 4.4 21.2 3.990) 1.451 94.321 36.081) 48 4.340 39.775 61.9 16.6 34.465 (5.903 347.2 1.3 15.9 5.7 (1.000) (2.097 (408) 3.848 16.2 34.008.7 FY11E 10.242 (10.7 20.Shree Cement Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 26.3 42.593 3.000) (13.593 562.510 17.7 19.3 5.8 1.067) 7.493 8.1 2.1 29.1 13.497 7.2 1.592 10.655 (1.058 348 19.2 744 829 7.057 1. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 4.831 415 219 8.184 354 2.921 29.1 26.741 866 252 19.177 8.545 7.9 3.7 103.660) (8.100 33.903 2.225 4.0 10.761 (1.448 53.851 53.353 751.820 11.6 9 31 49 4.4 34.602 45.0 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 10.918 19.789 104 33.8 4.656 5.0 0.7 28.065 354 2.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.500 251 61.115 3.067) 6.268 1.330) (3.777 (309) 6.087 103.0 39.275 15.426 34.8 7 30 50 5.9 10.2 9 33 52 4.0 FY11E 39.043 4.0 23.364 16.885 14.500) (730) (326) (314) 8.8 198 (11.859 (7.081 1.253 19.3 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.310 8.085 2.328 348 34.752 12.353 1.2 18.962 348 11.353 3.3 20.7 28.7 9.0 9.179 51.7 599 758 9.831 26.6 FY11E 8.000) 5.177 1.0 FY12E 55.9 16.0 1.0 FY10 36.2 2.2 0.269 4.8) 1.1 35.855 13.395 20.4 30.988 (11.7 33.9 FY12E 10.9 34.268 (13.8) 8.704 9.348 15.085 1.177 11.214 (702) (270) 11.7 1.0 19.2 26.3 20.6 9.2 (309) 5.000) (326) 10.2 2.5 37.4 24.118 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.6 49.9 17.465 (490) 12 11.448 37.2 1.6 8.723 2.668 3.443 8.500 251 51.000 251 45.2 0.291 60.448 22.559 17.8 7.5 7 35 45 4.3 FY10 8.4 1.559 6.614 9.505 10.602 354 3.693 19.8) 34.4 1.152 2.6 2.0 0.449 19.8 256 29.328 348 25.8 225 28.2 8.448 44.085 FY12E 18.399 796 1.7 10.0 1.500) (10.0 25.033 18.746 1.799 354 1.6 4.5 6.904 (11.921 8.0 1.4 6.677 8.

300 2.1mt.4 184.255 46.439 494.8 8.1 19.916 162.9 88.3 10.895 169.9 98.967 2.6 (42.300 800 Dec-08 Apr-09 Feb-09 Aug-09 Jun-09 300 Hold Buy 16-Dec-08 Company Update 29-Jan-09 22-Jun-09 27-Jul-09 9-Nov-09 6-Jan-10 22-Jan-10 Results Review Monthly Update Results Review Company Update Quarterly Preview Results Review 29-Apr-09 Results Review Oct-09 Dec-09 Feb-10 Apr-10 29-Oct-09 Results Review 21-May-10 Results Review 04-Aug-10 Company Update Aug-10 Jun-10 38 .4 250.6 15.4 91.8 101.4 9.996 43.5 16.353 38.2) Q4FY10 9.0) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 73.2 FY12E 80.0 2.0) (84.2 50.3 Company profile Promoted by BG Bangur.7 FY10 80.660 30.7 1.967 1.6 98.0 101.6 15.8 49.7 26.798 485 525 893 1.539 1.645 2.0 90.9 FY09 80.4 FY11E 83.5 29.3 (0.229 50.440 17.2 14.300 1.062 24.0 8.7) Q3FY10 8.1 9.0 21.156 1. Shree Cement is among the top 10 cement producers in India with an installed capacity of 9.967 1.990 1. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 65. It has a total captive power capacity of 116MW.165 2.400 Reco Hold Hold Buy Buy Buy Buy Buy Buy Buy Buy Buy Stock performance 2. The company continues to maintain its leadership position in northern India.2 (3. meeting more than 95% of its total power requirement.Shree Cement Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q4FY09 8.3 357.0 (2.9 Q1FY10 9.2 3.7) 3.7 211..9 19.1 28.1 2.2 Recommendation history Date Event Reco price Tgt price 460 498 775 1.4 2.340 1.674 29.5 267 (89.1 18.800 1. Its plants are located in Beawar and Ras (Rajasthan).7 312.3 101.9 Mar-10 65.306 41.8 Jun-10 65.5) 4.0 20.0 3.0 64.8 30.088 45.5 100.5 Q2FY10 8.8 9.347 35.025 2.5 4.087 1.428 2.574 1.9 81.5 106.1 9.

732 21.7 (14. We view BCORP as the best play in our mid cap cement universe and reiterate Buy with a revised March ’11 target of Rs 500 (39% upside). Further.7 3-mth (8.386 Stock performance Returns (%) Birla Corp Sensex CMP 360 18. is a key positive for the company as its expansion plans over the next 2–3 years can be entirely met out of internal accruals.9) 42. we believe it is best placed to tap into the approaching cement upcycle given timely capacity expansion and high operational efficiencies.8) 61.5 28.5x EV/EBITDA on FY12E and arrived at a revised March ’11 target price of Rs 500 (from our earlier December ’11 target of Rs 465). Best mid cap play.570 20.2 26.3 FY10 4. Our revised target offers a 39% upside from current levels and represents a P/E of 6.8) FY12E 28.6 22.721 10. What’s New? Target Rating Estimates CMP Rs 360 TARGET Rs 500 RATING BUY RISK HIGH BSE 500335 Company data NSE BIRLACORPN BLOOMBERG BCORP IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 27.9 FY10 32.4 18.115 1-mth (1.3 1.9 23.9 36.1 28. Further. at Rs 1.1 25. We believe the stock is the best mid cap play in the pure cement space and reiterate our Buy recommendation.5mt in FY11.1 5.120 in Q1FY11.1) 9.8 3. This will augment its existing ~90MW of captive power. High operational efficiencies: BCORP has been an efficient player in the industry as it sells a higher percentage of blended cement (75–80% of volumes) and has a lower lead distance to market (less than 400km). Expansion will drive volume growth: BCORP plans to expand capacity by 3.0 (22. BCORP has reported one of the highest EBITDA/t numbers among mid cap cement players.5 23. A presence in high-growth markets in Central and East India – which together account for 70–75% of its revenue mix – will benefit the company amid the current subdued demand environment. This.4 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 17.6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 8.7 30.907 3. any decline will be an opportunity to accumulate the stock.7mt will be commissioned in Q2FY11. enhancing cost savings in the medium term.Birla Corporation Ltd Company Update 04 August 2010 Birla Corporation Ltd Best mid cap play We remain positive on Birla Corp (BCORP) given the company’s presence in high-growth regions and its deleveraged balance sheet. BCORP had net cash and equivalents of Rs 7.0 4.0 23.4 FY11E 23.8) 3. maintain Buy: We have valued the company at 4.415/593 77 36.6 20.5mt.8mt in Rajasthan and West Bengal will sustain volume growth in FY13.9) FY10 21.8 21.6 3. Though the company would have a subdued Q2FY11 in terms of volumes and realisations.2 19.7 15.9 9.820 22. the company is planning to add ~52MW of power generation plants in FY12.3 23.2 18.4 19.4 FY11E 25.9 6.7bn. we believe.9 3.4 72.576 72.7 Industry 1 0.6x on FY12E.8 4.0) 4.7 B irla Co rp 1 2.1 20.7 39 .4 FY12E 4. Strong balance sheet: In FY10.1 4.This will take the company’s total capacity to 7. Although the company will feel the heat from lower prices and volumes in Q2FY11.5 5.7 6. another 1. which translate to Rs 100/sh.5 16.235 (22.4 72.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 4.5 11.2 6-mth (2.9 6. of which 1.4 423 / 267 24.8 24. including 22MW of waste heat recovery.8 8.9 5.8 FY11E 5.5 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 23.5 FY12E 27.5 75.751 (14.

7) (14.904 3.000) Price 1x 3x 5x 7x Price 2x 700 600 500 400 300 200 100 0 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Source: Bloomberg.5 (1.2 % Chg YoY 17.000 20. RCML Research Fig 103 .647 285 139 140 1.000 30.3) (11.Birla Corp v/s Sensex 105 100 95 90 85 Apr-10 May-10 Jun-10 Jul-10 Birla Corp.3 Q1FY10 4.1) (28.736 400 86 143 1.000 0 (10.Birla Corporation Ltd Company Update 04 August 2010 Fig 100 .Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.Birla Corp: EV/EBITDA band 5x 7x 9x (Rs mn) 60.102 1.375 28.3) (5. RCML Research Apr-10 40 .2 30.0) (23. RCML Research Source: Bloomberg.0) Fig 101 . Sensex Source: Bloomberg.000 50.756 519 60 133 2. RCML Research Source: Bloomberg.148 1.Birla Corp: P/E band (Rs) Fig 102 .000 40.8 20.000 10.1 5 (20.554 35.284 1.7) (13.9) (716bps) (24.907 532 1.183 28.0) 133.8 % Chg QoQ (4.3 (6.0) (19bps) (14.5) (4. RCML Research Q1FY11 5.8 17.2) (45.653 470 1.Birla Corp: Premium/discount over Sensex (%) 150 100 50 0 (50) (100) Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Fig 104 .8) 61.0) Q4FY10 6.6) (11.082 528 1.6 15.020 4.749 4.

9) 77.725) (314) (1.1 FY11E 1.955 (5.235 3.479 2.4 72.4 77.0 FY11E 23.5 22.824 (31.4 4.0 72.4 5.7 556 6.6 0.2 1.613 2.3 3.820 22.000 (809) 33.2 27.9 1.406 3.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.116 1.117 472 3.927 2.275 1.3 23.489 (15.092 770 17.5 19.0 FY12E 28.7 (14.036 26.000 (5.117 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 10.5 6.7 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.1 7.721 10.6 19.258 (29.311 22.245 365.5 77.609 3.122 33.2 5 53 73 2.1 25.9) 659 5.130 25.9 3.296 672 2.9 23.1 926 7.035 (1.7 0.9) 5.8 44.4 0.5) 168 1.367 770 26.569 8.365 1.9 FY11E 10.9 36.278 (795) 29.372 11.907 3.425 20.929 1.4 32.8 32.479 1.6 16.245 5.800) (5.5 13.319 232.5 1.1 20.2 1.0 270 1.1 28.1 1.2 0.0 42.0 6.7 1.065 12.0 4 60 87 2.383 7.3 8.800) (5.570 20.660 31.367 770 21.600 1.889 2.271 3.071 28.3 1.7 30.8 0.419 (772) 19.5 6.100 17.4 5 55 83 1.509 325 2.2) 434 3.8) 77.158 8.576 72.9 24.121 286.148 (12.670 (246) 611 4.393 221 2.408 3.3 28.831 5.8 160 1.8 4.6 22.2 0.000 (824) 39.3 23.333 1.1 0.5 23.235 (22.997 30.746 135 (733) 6.410 422 123 5.0 4 59 83 1.8 4.7 FY12E 2.8) 6.8 1.393 FY11E 5.0 61.300 6.121 4.9 17.4 5.161 10.4 25.732 21.0 1.425 28.4 1.0 23.542 6.820 5.6 15.9 3.877 19.883 3.0 75.8 24.176 31.7 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 10.5 7.9 32.5 0.4 4.513 5.499 70.8 41 .509 FY12E 6.402 39.5 27.0 FY10 21.4 18.606 6.1 0.884) 1.523 13.056 1.6 FY12E 10.800) (1.808 (2.000) (541) 608 2.Birla Corporation Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 17.1 1.693) 1.8 21.7 FY10 3.6 20.609 166.987 3.5 2.000) 1.420 5.837 1.7) 221 761 4.197 200 1.4 6.066 1.378 19.764 770 12.8 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 3.531 15.751 4.576 5.133 (430) (894) 4.968 11.425 14.319 3.0 (22.197 FY10 6.056 65.751 (14.299 5.109 (254) (838) 46 (360) 2.7 5.4 0. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 3.378 12.555) (8.149 (6.912 29.3 0.8 18.631 27.6 26.650 665 7.350) 4.1 4.368 (631) 196 3.241 4.

8 28. has an installed capacity of 5.5mt by the end of FY11.7 FY12E 68.9 23.9 24.4 5.9) (14.1) 1.0 169.1 198.9 20.0) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 72.904 23.5) 1.1) Q4FY10 6.1 114.647 28.057 35.1 23.9 11.1 1.7 1.020 5.1 88.1 76.756 35.521 154.3 50.2 (4.5 Company profile Birla Corp.2 FY09 74. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Sep-09 62.4 146.5 104.736 28.7 103. Rajasthan and West Bengal.6 126.4 92.6 22.2 3.0 155.183 (23.1 32.2 5.8 1.9 36.4 Recommendation history Date Event Reco price Tgt price 116 137 205 296 301 345 355 403 360 127 144 197 365 365 373 427 465 500 Reco Hold Hold Hold Buy Buy Buy Buy Buy Buy Stock performance 450 350 250 150 Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-09 Jun-10 50 Hold Buy 16-Dec-08 Company Update 28-Jan-09 8-May-09 28-Jul-09 6-Jan-10 2-Feb-10 Results Review Results Review Results Review Quarterly Preview Results Review 23-Oct-09 Results Review 26-Apr-10 Results Review 04-Aug-10 Company Update 42 .2 FY11E 68.3 117.3 Q1FY11 5.3 Q2FY10 5.749 17.589 23.6 11.1 1.1 21.6 119.6 10.1) Q3FY10 5.1 (26.6 1.Birla Corporation Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 4.554 69.3 Mar-10 63.124 38.9 19. Brownfield expansion at existing locations will increase the company’s cement capacity by 1.3 1.2 23.8 1.935 38.7 20. a part of M P Birla group.5 7.2 158.9 (14.2 71.5 10.5 1.626 29.9 Dec-09 62.1 30.7 (2.2 FY10E 73.375 51.7mt to 7.6 79.8mt spread across four cement units located in Madhya Pradesh.3 5.

9 FY10 16.7 3-mth (7.3 2.6 5.1 15.225 / 221 193 66.0 9. Q2FY11 tough for cement biz. while the paper business has hit a bottom and should perform better in H2FY11. On EV/t. Based on an EV/EBITDA of 5x on FY12E.9 6.839 30. What’s New? Target Rating Estimates CMP Rs 53 TARGET Rs 70 RATING BUY RISK HIGH BSE 502420 Company data NSE ORIENTPPR BLOOMBERG OPI IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 10. However.198 7.1 FY12E 18.5 19.2 6-mth 16. The overall EBITDA margin dropped 231bps YoY to 16.4 13. Maintain Buy: We have trimmed our earnings estimates by 6.5% for FY11. The stock has corrected 25% from its peak in the last four months and we see little downside from current levels.8) FY11E 16.0 16. we anticipate a strong overall performance from the company in Q3FY11.984 4. revival seen in Q3: OPI is likely to face challenges in terms of lower cement EBITDA/t in Q2FY11.8 P/E comparison (x) 1 5 1 0 5 0 FY1 0 FY1 E 1 FY1 2E 9.3 8.3 (12. and hence we expect losses to be addressed in H2FY11.2 27.8 66 / 43 294. OPI’s other businesses such as the electrical division are expected to do well.0 23.475 21.1 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 15. which continued to suffer from non-availability of water during the quarter.7 FY10 6. the company is trading at US$ 49 which is attractive.4 43.3 16. Mixed bag in Q1FY11: OPI has reported a strong cement EBIT/t of Rs 723 in Q1FY11 – much higher than its south-based peers on the back of operational efficiencies. it recorded a net EBIT loss of Rs 233mn in the paper business.0 FY12E 5.8 5.4 4. to build in losses from the paper division and lower cement prices.083 16.6) 4.5 3.3 7.613 (34.407 (12.0 13.3 29. we arrive at our March ’11 target price of Rs 70 (P/E of 7.4 2.5x oneyear forward).6mt to 5mt.5 30.9) 3. We therefore recommend buying on dips.1 FY11E 17.8) FY12E 19.7 FY11E 7. as realisations take a severe hit. Thus.497 Stock performance Returns (%) Orient Paper Sensex CMP 53 18.9 12.6 14.0 8. Valuations are inexpensive on an EV/t basis (US$ 49/t) considering the company’s recent cement capacity expansion from 3. we expect cement prices to bottom out in Q2FY11 and volumes to remain firm (up 50% YoY in Q1FY11).8) 7.7 9.5 14.Orient Paper & Industries Ltd Company Update 04 August 2010 Orient Paper & Industries Ltd Best operational efficiencies in the south A high volume growth trajectory coupled with operational efficiencies make Orient Paper & Industries (OPI) the best bet among south-based cement mid caps.7 16. However.3 5.4 1.6 FY10 19.0 12.7 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 26.7 9.2 43 .6 Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 4.4 (34.3 9.115 1-mth (4.7 Industry 1 0.7 10.6 7.3 4.4 1. We maintain Buy with a target price of Rs 70 (30% upside).9 1.1 5. The company is building a water reservoir which is likely to commence in August ’10.6 Orient P aper & Industries 1 2.8) 8.2% owing to the losses in the paper business.428 14. The company reported an EBIT/t of Rs 723 for Q1FY11 – much ahead of its regional counterparts as efficiency gains came into play.0 22.3 14.9 10.

233 30.Orient Paper: Premium/discount over Sensex (%) 20 0 (20) (40) (60) (80) (100) Nov-07 Apr-05 Jul-06 Mar-09 Jul-10 Fig 110 .407 7.1) (22bps) (6. RCML Research Q1FY11 8.642 8.4) (83. RCML Research 44 .000 5.5) (6.0 4.4 0.000 10.3) (96.3) Q4FY10 9. RCML Research Source: Bloomberg.863 68 385 571 1.0 1.259 129 369 616 403 143 297 13.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 17.Orient Paper v/s Sensex 110 105 100 95 90 85 May-10 Apr-10 Jun-10 Jul-10 Orient Paper Sensex Source: Bloomberg.383 1.000 20.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company.1 1.001 285 298 599 389 24 108 11. RCML Research Fig 109 .000 0 Apr-05 Jul-06 Nov-07 Mar-09 Jul-10 \ Price 2x 3x 4x 5x Source: Bloomberg.Orient Paper & Industries Ltd Company Update 04 August 2010 Fig 105 .3 % Chg (4.514 7.9) (20.5) Fig 107 .0 (65) 321 (22.807 7.2 1.984 17.8) (3.976 743 1.7) (6.8) (91.2) (63.6 (19.8) Fig 106 .9 (80.8 New 16.3) (1867bps) (91.Orient Paper: EV/EBITDA band (Rs mn) 25.535 6.711 17.000 15.5) 121.4 Q1FY10 9.Orient Paper: P/E band (Rs) 140 120 100 80 60 40 20 0 Jul-05 Apr-04 Apr-09 Jul-10 Oct-06 Jan-08 Price 3x 5x 7x 9x Fig 108 . RCML Research Source: Bloomberg.4 % Chg YoY (7.671 2.3) (2.8) (170bps) (63.6) 17.7) 4.0 % Chg QoQ (8.806 1.

869 1.8) 192.4 1.202 (13.8 (486) 1.3 1.1 15.365 11.581 14.096 2.845 6.4 14.613 (34.4 17.984 4.081 40.389 (5.6 1.9 45 .1 18.135 29 203 10.3 0.5 29.592 53.796 7.0 22.7 4.097 (21.103) 16.061 2.9 12.7 1.587 (502) 29 13.2 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 11.1 5.3 16.5 16. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 332 1.0 1.8) 1.0 6.135 29 203 7.0 13.5 FY10 16.8 40.198 7.8) 192.6 0.428 14.7 1.0 40.836 15.547 (28.4 (34.8 5.2 60.0 39.257 339 2.1 7.173 472 17.5 10.6 FY11E 11.855 29.7 10.100 693 33.319 6.2) 550 2.562 23.915 33.9 5.173 472 16.1 17.5 19.9 1.7 1.9 4.839 1.837 2.9 13.533 11.026) (32) (5.546 43 (355) 2.4 0.9) 345 159 2.2 52.061 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 11.4 0.475 21.745 906 33.6 36.6) 334 232 2.575 1.9 26.9 9.327 (1.103) 16.5 FY11E 16.346 808 5.4 2.7 1.159 568 (1.7 192.133 10.6 19.Orient Paper & Industries Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 15.296) 4 512 (338) (74) 135 467 FY11E 2.089 (18) (435) 1.884 (6.9 5.7 385 275 2.1 1.9 1.839 30.864 8.7 16.028 92 8.0 192.6 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 2.636 (800) (800) (0) (338) 498 965 FY12E 2.9 2.297 18.260 870.5 27.571 1.7 9.081 2.100 30.047 793 5.5 56.938 (1.0 8.2 49.0 13.5 1.5 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.336 574 (521) 2.6) FY12E 11.592 2.9 8.2 1.6 0.234 (800) (800) (0) (338) 1.5 13.7 1.3 14.810 (77) (0.173 472 18.970 (165) (70) 72 332 FY10 2.361 748 31.3 (12.3 347 3.845 (1.6 14.0 1.837 45.916) (380) (0) (2.407 1.861 1.4 FY11E 965 1.522 13.9 2.0 1.2 1.7 1.097 1.7 6.5 34.928 15.4 43.9 7.9 1.3 11.083 16.407 (12.844 1.058) 5 2.9 0.9 36.733 11.8) 1.993 765 4.4 3.9) 682 2.407 1.2 207 201 3.8 4.503 3.613 1.186 632 (491) 2.1 7.0 1.2 0.182 1.1 1.3 0.4 3.4 3.623 1.1 7.833 16.763 16.5 707 2.6 3.989 (486) 2.103) 18.503 1.0 23.5 FY12E 19.623 203 6.8 FY10 464 1.9 FY12E 2.4 38.258 310 2.0 3.5 14.5 33.5 30.135 29 203 8.2 Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.9 12.915 1.

8 Mar-10 33.7 15.6 31. Its paper plant is in Amlai.5 3.0 209.2 FY09 69.1 1.479 17.0 95.5 FY11E 67. Orient Paper & Industries is a diversified player engaged in the manufacturing of cement.416 27. The company’s cement plants are located in Devapur.2 FY10 68.7 3.1) 641 18.6 31.3 48.3 (26. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 33.2) (37.3 92.6) Q4FY10 5.453 7.0 24.2 99.7 30. Andhra Pradesh and Jalgaon.6 340 (26.5 (37. Cement is the major revenue contributor (~62% in FY09) followed by electrical appliances and paper (~21% & 17% respectively).9) (25.4 33.2 342 0. Haryana.6 226.4) 717 16.Orient Paper & Industries Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 3.9 22.3 194.4 Company profile Promoted by the C K Birla group.2 2.3 711 20.4 13.6 Q1FY11 4.2 171.0 Jun-10 33.1 Q3FY10 3.7) Q2FY10 3.701 7.2 301 (39.532 0.1 61.0 96.5) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 65.047 19.9 (19.8 23.2 100.9 31. West Bengal and Faridabad. Maharashtra.2 14.1 405 (10.1 547 0. while the electrical appliances units are in Kolkata.2 198.2 29.9 FY12E 67.5 43.7 Recommendation history Date Event Reco price Tgt price 21 19 55 52 46 50 56 53 53 39 31 66 62 52 49 70 70 70 Reco Buy Buy Buy Buy Hold Hold Buy Buy Buy Stock performance 65 55 45 35 25 Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 Aug-10 Jun-09 Jun-10 15 Hold Buy 16-Dec-08 Company Update 27-Jan-09 12-Jun-09 28-Jul-09 14-Jan-10 30-Jul-10 Results Review Results Review Results Review Results Review Results Review 27-Oct-09 Results Review 05-May-10 Results Review 04-Aug-10 Company Update 46 .7 109.2 81.8 673 18.9 3.0 103.7 135. Madhya Pradesh.0 4.8 19.7 184.3 16.2) 19.7 108. paper and electrical appliances.

9 4.9 38.3 3.2 Industry 9. with realisations taking a severe hit.1 5.6 (76. Based on the value of US$ 330mn and after deducting ICEM’s outstanding dues and assigning a 25% discount.5) 2. taking the second highest offer as a benchmark.7 3-mth (16. We believe the stock will continue to underperform and therefore maintain our Sell recommendation. we arrive at a value of Rs 30/sh.2 6-mth (13.8) 3.0 9.5 FY12E 18.9 FY11E 12. Earnings downgraded.9 11.219 (23.3% YoY respectively. we have cut our earnings estimate by 62% and 23% for FY11 and FY12 respectively.3 FY12E 13.873 9.6 5.5 1.595 10. likely to be operational in Q4FY11 and Q3FY12 respectively. is unlikely to recover from the slump in profitability in the near term.8 12.115 1-mth (3.9 21.4 FY11E 39.9 8.4 Profitability and return ratios (%) EBITDA margin EBIT margin Adj PAT margin ROE ROIC ROCE FY09 27. We expect the company’s EBITDA/t to touch a low of Rs 175–225/t in Q2FY11.4 6.8 2. We believe the weak performance would spill over into the next quarter as well.7 1 0.1 7. While volume growth could improve following capacity expansion in the new market of Rajasthan.4 5.5 47 .5 15.5 2. The company has clocked an EBITDA/t of Rs 385 during the quarter – one of the lowest in the industry.9 1 2.2 17. which has its business concentrated in the south. leading to a net loss in that quarter.5 6.India Cements Ltd Company Update 04 August 2010 India Cements Ltd Outlook remains bleak India Cements (ICEM) continues to bear the brunt of weak cement prices in the southern market. However. the commissioning of a new cement plant in Rajasthan during the second quarter could lead to better volumes from H2FY11 onwards.032 / 629 282 74.3 FY10 20.9 15.7 Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%) FY09 33.3) FY11E 36.5) 9.560 (0.1 4.4 9. CPP benefits in FY12: ICEM is setting up two captive power plants of 50MW each in Andhra Pradesh and Tamil Nadu. leading to severely crunched margins.606 16.9 2.6 FY1 0 FY1 E 1 FY1 2E Valuation matrix (x) P/E @ CMP P/E @ Target EV/EBITDA @ CMP FY09 5.108 (40. The company has clocked one of the lowest EBITDA/t figures in the industry in Q1FY11 and will likely register a feeble performance in Q2FY11 as well.9) 17. We value the company at an EV/t of US$ 60 and arrive at a target price of Rs 100 after including the IPL value of Rs 30/sh.9 156 / 97 945.8 (31.8) 792 (74.3 13. maintain Sell: In order to factor in lower cement prices.5) 11.5) FY10 36.7 119.8 5. Dismal Q1FY11 results: ICEM has reported dismal Q1FY11 results with a decline in topline and PAT by 7. Thus.4 5.1 3.0 (38.4 9.8 P/E comparison (x) 50 40 30 20 1 0 0 India Cements 39. What’s New? Target Rating Estimates CMP Rs 104 TARGET Rs 100 RATING SELL RISK HIGH BSE 530005 Company data NSE INDIACEM BLOOMBERG ICEM IN Market cap (Rs mn / US$ mn) Outstanding equity shares (mn) Free float (%) Dividend yield (%) 52-week high/low (Rs) 2-month average daily volume 29.2 1.7) 4.737 119. The stock has dropped 23% in the last four months and we believe the bad run will continue. the benefits of lower power expenses would accrue from FY12 onwards. IPL franchise valued at Rs 30/sh: We have valued the company’s IPL cricket franchise based on the latest bids for the Pune/Kochi team.7 9.8 3.0 5. lower cement prices and higher coal costs will continue to crimp profitability.4 4. Concentration in South India a drag on profits: The decline in cement prices has been particularly severe in South India – ICEM. We thus maintain a Sell on ICEM.9 FY10 9.4 8.6% and 91.161 Stock performance Returns (%) India Cement Sensex CMP 104 18.9 1 8.6) FY12E 42.

700 17.517 18.Quarterly performance (Rs mn) Revenue Expenditure Operating profit Other income Interest Depreciation PBT Tax PAT EBITDA margin (%) FDEPS (Rs) Source: Company. RCML Research Q1FY11 8.4 1.1 1.7) 4.2) (63.Revised estimates Key parameters (Rs mn) Revenue EBITDA margin (%) Net profit FDEPS (Rs) Source: RCML Research FY11E Old 40.4 % Chg YoY (7.2) (550bps) (61.000 120.0) Q4FY10 9.863 68 385 571 1.807 7. RCML Research Fig 115 .737 5. RCML Research Source: Bloomberg.4 0.9) (20.7) (6.560 12.2 (474bps) (23.6 2.0) (23.India Cements: Premium/discount over BSE (%) 140 105 70 35 0 (35) (70) Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 Jul-10 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Fig 116 .7 New 36.7 % Chg 0.000 20.0) Fig 113 .0 (65) 321 (22.8) (170bps) (63.8) (91.4 Q1FY10 9.9 (80.000 60.001 285 298 599 389 24 108 11.000 80.642 8.0 4.2 2.3) (1.8) Fig 112 .6 (19.India Cements Ltd Company Update 04 August 2010 Fig 111 .3 FY12E New 42.5) 121.India Cements: EV/EBITDA band (Rs mn) 140.671 2.233 30.0 % Chg QoQ (8.337 7.4) (83.136 6.3) (96.6) (61. RCML Research Source: Bloomberg.000 0 Nov-06 Nov-07 Apr-05 Oct-05 Apr-06 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Jul-10 Jul-10 Price 4x 6x 8x 10x 12x Source: Bloomberg.6) Old 42.383 1.000 40.India Cements v/s Sensex 110 100 90 80 70 Apr-10 May-10 Jun-10 India Cement Sensex Source: Bloomberg.000 100.259 129 369 616 403 143 297 13.535 6.India Cements: P/E band (Rs) 500 400 300 200 100 0 Nov-06 Nov-07 Jul-10 Apr-05 Apr-06 Oct-05 May-07 Dec-08 Dec-09 Jun-08 Jun-09 Price 6x 9x 12x 15x 18x Fig 114 .8) (3. RCML Research 48 .806 1.976 743 1.6 % Chg (10.3) (2.1 792 2.867bps) (92.6) 17.606 13.

234 131 (3.102 39.737 119.3 13.8 (31.435 (40.0 1.8) 4.426 1.131 47.7 0.3) 2.0 FY10 36.9 FY12E 2.853 4. net Other assets Total assets Accounts payable Other current liabilities Provisions Debt funds Other liabilities Equity capital Reserves & surplus Shareholder's funds Total liabilities BVPS (Rs) FY09 852 3.6 FY10 538 4.595 10.5 47 50 63 3.360 41.786 5.5 FY09 FY10 FY11E FY12E Economic Value Added (EVA) analysis Y/E March WACC (%) ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%) FY09 11.8) 1.9 21.7 119.773 1.4 2.502 139 (302) 4.0 6.3 42 51 92 2.1) 2.131 47.India Cements Ltd Company Update 04 August 2010 Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%) Interest Other income EBT Income taxes Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs) FY09 33.345 5.010 (552) (4.0 FY12E 42.9 56.4 FY11E 1.951 48.7 0.5 1.442 1.105) (8.108 (9.5 1.186 7.5) 282.108 (40.083 9.507 4.196 (683) (1.068 4.070 39.1 4.606 16.346 1.556) 136 67.449 79.5 0.5 36 53 103 2.478 18.9) FY12E 11.068 FY12E 4.8 0.6) FY11E 11.296 4.355 1.000 (2.4 0.275) (7.436 4.070 38.3 20.959 (2.8 1.7 1.401 18.4 17.693) 75.961) (1.136 38.000) (2.4 9.7 (795) 4.1 5.289 4.430 77.5) 307.322 (897) 5.9 3.2 0.234 854 19.896 3.473 (20.5 15.540 3.161 29.3) 2.6 0.6 0.727 128.3 68.0) 1.346 750 27.286 41.357 75.208 (5.3 9.3 Cash flow statement Y/E March (Rs mn) Net income + Depreciation Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity Issue/repay debt Dividends paid Other financing cash flow Change in cash & cash eq Closing cash & cash eq FY09 6.9 15.067) 298 (5.5 0.7 40 47 41 3.140 70.705 13.5) 3.9 2.5 7.122 1.727 7.378 42.000) (400) (718) 1.793) 77.140 68.246 (3.9) 282.9 0.2) 49 .033 7.000) 6.187 450 20.0 0.951) 2.0 (38.5 3.277 4.2 2.140 57.737 1.4 0.053 18.5 12.0 FY11E 36.9 8.716 28.404) 852 FY10 6.0 2.4 68.896 3.2 1.4 6.8 27.206) 6.6 (76.8 7.5 39.348 (22.590 53.346 788 27.659 3.9 5.4 11.6 0.5 5.7 0.831 1.0 11.142 (30.000 (2.2) 1.425 146.538) (324) (9.099 21.2 9.7 18.099) 530 1.049 257 24.5 63.594 830 2.6) 2.4 307.0 5.445 3.5 6.381 (13.2 3.5 2.331 5.9 12.277 148.679 571 3.7 5.259 3.896 3.772 (6.824 33.220 2.490 36.2 0.7) 2.818 35.3 13.4 0.5 0.339 (2.052 7.0 Balance sheet Y/E March (Rs mn) Cash and cash eq Accounts receivable Inventories Other current assets Investments Gross fixed assets Net fixed assets CWIP Intangible assets Deferred tax assets.2 5.1 4.008 1.289 Financial ratios Y/E March Profitability & Return ratios (%) EBITDA margin EBIT margin Net profit margin ROE ROCE Working Capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios (x) Gross asset turnover Total asset turnover FY10 11.806 4.029 (2.5 792 792 (74.560 (0.989) (4.765 2.5 0.880 2.9 0.991 134.863) 28 981 (659) (3.9 436 3.6 1.331 (1.278 2.327 3.9 4.878 (661) (314) 538 FY11E 3.070 38.893) 79.314 67.6 0.7) Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 1.339 1.219 (23.866) 591 (2.566) (5.425 7.993 (61.991 3.8 1.630 686 1.873 9.4 9.000) (5.4 8.061 1.040 (2.

7 185.5 232 (69.4 Q2FY10 9.8 (12.7) 1.977 30.9 7.9 51.2) (83.1 297 (72.5 52.7 99.2 Jun-10 25.7) 28.6) (8.4 74.7) 1. Shareholding pattern (%) Promoters FIIs Banks & FIs Public Dec-09 27.5 4.0 FY10 61.535 13.1 185.5mt plant in Basawa (Rajasthan).8) DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy) Return on equity FY08 76.1 1.3) (63.165 13.4 22.5 11.3 195.0 1.382 (15.807 (7.642 8.5 184.894 4.5% across the country.4 98.8 FY09 71.9 54.6 1. commanding a market share of ~17% (south) and ~5.8 93.001 11.259 13.5 47.4 Mar-10 25.8) 13.0 21.6 5.863 30.3 56.4 16.9 52.8 2.8 Recommendation history Date Event Reco price Tgt price 100 106 95 131 139 114 113 126 131 125 104 102 94 94 124 124 102 91 91 116 110 100 Reco Sell Sell Sell Sell Sell Sell Sell Sell Sell Sell Sell Stock performance 160 150 140 130 120 110 100 90 Sell 16-Dec-08 Company Update 28-Jan-09 1-Jul-09 22-Jul-09 25-Jan-10 Results Review Results Review Results Review Results Review 23-Mar-09 Company Update Dec-08 Oct-09 Dec-09 Apr-09 Feb-09 Aug-09 Feb-10 Apr-10 29-Oct-09 Results Review 08-Mar-10 Company Update 30-Mar-10 Sector Update 03-May-10 Results Review 04-Aug-10 Company Update Aug-10 Jun-09 Jun-10 50 .641 14.2 187.2 20.6) 12.0 FY11E 75.India Cements Ltd Company Update 04 August 2010 Quarterly trend Particulars Revenue (Rs mn) YoY growth (%) QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%) Adj net income (Rs mn) YoY growth (%) QoQ growth (%) Q1FY10 9.8 31.1 6.1 Q3FY10 8.8 23.2) Q4FY10 9.9 FY12E 79.4 15.4 Q1FY11 8.3 1.4 32. In a branding effort.2 32.4 108 (91.233 (24.1 23.4 13.1 Company profile India Cements remains the largest cement player in South India.2 32 19.3 2.3 8. the company has acquired franchise rights of an India Premier League team for US$ 91mn to be paid over 10 years. The company has a cement capacity of 14mt and will be expanding in north India with a 1.6 3.6 24.

RCM. or the fact of its distribution. Vile Parle (E). indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. form the basis of. nor shall it. may be taken or transmitted into the United States. and share prices are given as at close of business on. Australia. th Disclaimer This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA). nor any copy of it. not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. GYS Infinity.$1 bn 32 6 < $200mn By market cap (US$) 62 Recommendation interpretation Recommendation Buy Hold Sell Expected absolute returns (%) over 12 months More than 15% Between 15% and –5% Less than –5% Recommendation structure changed with effect from March 1. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation. Mumbai 400 057. in whole or in part. Canada. This document is issued by Religare Capital Markets plc (“RCM”) in the UK. . including the risk of capital loss. any contract relating to such action or any other matter. for any purpose whatsoever. This document is confidential and is supplied to you for information purposes only. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.Coverage Profile By recommendation (%) 60 50 40 30 20 1 0 0 54 37 (%) 80 60 40 9 Buy Hold Sell 20 0 > $1 bn $200mn . Paranjpe ‘B’ Scheme. our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note. or be relied upon in connection with. the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate. Neither this document. may have a position in any of the securities or may have provided corporate finance advice. complete. Any failure to comply with this restriction may constitute a violation of relevant local securities laws. further distributed to any person or published. Subhash Road. Ireland. Our asset management area. RCM is a member of the London Stock Exchange. Religare Capital Markets Ltd 4 Floor. 2009 Expected absolute returns are based on share price at market close unless otherwise stated. which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. It may not (directly or indirectly) be reproduced. and any of its connected or affiliated companies or their directors or employees. RCM accepts no liability whatsoever for any direct. South Africa or Japan or into any jurisdiction where it would be unlawful to do so. Our target price represents the fair value of the stock based upon the analyst’s discretion. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk. If you have received this document in error please telephone Nicholas Malins-Smith on +44 (0) 20 7382 4479. The material in this report is based on information that we consider reliable and accurate at. other investment services in relation to any of the securities or related investments referred to in this document. This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument.

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