Madras Cement: Ready To Build

Cement
September 03, 2013
Madras Cement
Bloomberg: MC IN EQUITY Reuters: MSCM.NS
BUY
Accounting: AMBER Predictability: AMBER Earnings Momentum: AMBER INITIATING COVERAGE

Nitin Bhasin
Tel: +91 22 3043 3241 nitinbhasin@ambitcapital.com
Ready to build
Madras Cement (MC) stands out the best on our South Indian competitive matrix, given its premium pricing, lower cost of production (100% captive power) and high market share (13%). A strong brand and retail dominant client mix (75%) support premium pricing and regional leadership. With near doubling of capacities to 14.5mn tonnes over FY07-13, we expect MCs market-leading volume growth to pick up pace with demand momentum. We assume retail demand momentum to drive 8% volume and 18% unitary EBITDA CAGR in FY13-16 and value MC at `200/share, implying 7.5x FY15 EBITDA. MC presently trades at 6.5X FY15 EBITDA; profitability decline in FY14 and relatively lower RoICs call for valuation discount but we find present discount (27% to 5-yr average and 12-37% to peers) relatively high. Competitive position: STRONG Change to this position: POSITIVE South India is down but not out: South India is not only the largest cement producing (30%) and consuming (25%) region in India but also a supplier to large consuming states such as Maharashtra and Eastern states. Demand recovery in either South or Maharashtra can be beneficial for the regions utilisation (presently one of the lowest) and profitability. Excepting AP and Karnataka, retail customers dominate the demand and Tamil Nadu stands out as the best cement market in the region given its large size and stable pricing. Madras Cementthe best play on uncertain but inevitable South Indias recovery: MCs strong brand and well entrenched distribution network in TN, Kerala and Karnataka make it a preferred brand with retail customers in urban and rural markets and thus enables it in selling cement at 7% premium. On our regional competitive framework, MC stands out the best because of lower cost of production (450bps), high market share and premium pricing. Now with expanded capacities (14.5mn tonnes in FY13), we believe MC can grow ahead of the industry with a stability/recovery in south India; MC grew at 9% over last decade whilst South region grew at 7%. Ahead of industry growth to improve profitability and cash generation: We expect 6% volume growth in FY15 and then 10% in FY16. Pricing stability and gradual improvement due to dominant share of demand from retail customers will drive 18% unitary EBITDA CAGR over FY14-16 (FY08-13 CAGR of 7.6%). Stable utilisations (58%) in FY14-15 on higher capacities (16.5mn tonnes) and lower capex needs vs last five years will improve RoEs to 12.5%/16% in FY15/FY16 respectively from 9% in FY14. Unjustified discount to historical averages and peers; BUY, TP `200: Our DCF-based target price of `200 implies 7.5x FY15E EBITDA. At 5.1x FY15 consensus EBITDA, MCs discount to Shree and Ambuja has widened to 12-37% from 0-18% earlier. Whilst inferior capital allocation and large related party CSR payouts partially explain the discount, we believe such a steep discount is unjustified given MCs strong brand with retail clients in better markets. Key risks: Delayed demand recovery; accentuated tussle for market share gains.
Key financials
Year to March Operating Income (` mn) EBITDA (` mn) EBITDA margin (%) PAT (` mn) EPS (`) RoCE (%) EV / EBITDA (x) Source: Company, Ambit Capital research FY12 32,696 9,517 29.1 3,851 86.2 FY13 38,454 10,217 26.6 4,042 99.6 FY14E 39,610 7,940 20.0 2,153 106.8 FY15E 45,142 9,958 22.1 3,369 118.9 FY16E 52,194 12,280 23.5 4,986 136.2
Achint Bhagat
Tel: +91 22 3043 3178 achintbhagat@ambitcapital.com
Recommendation
CMP: Target Price (12 month): Upside (%) EPS (FY15E): Variance from consensus (%) `157 `200 28 `14.1 -29
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: `37bn/US$565mn `274/135 `63mn/US$1.0mn
Stock Performance (%)

Absolute Rel. to Sensex 1M (21) (12) 3M (44) (33) 12M (24) (26) YTD (44) (37)
Performance (%)
300 250 200 150 100 Aug-12 Dec-12 Apr-13 Oct-12 Jun-13 Aug-13
Aug-13
21,000 20,000 19,000 18,000 17,000 Feb-13
Madras
SENSEX
One-year forward EV/EBITDA chart

(x) 8 7 6 5 4 Dec-11 Dec-12 Apr-11 Apr-12 Aug-11 Aug-12 Apr-13
1-yr fwd EV/EBITDA 5-year Avg EV/EBITDA
10.9
6.6
11.0
6.2
5.8
8.1
7.5
6.4
9.6
5.0
Source: Bloomberg, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Madras Cement
CONTENTS
South Indiaa unique region. 4 Market analysis of the South India states. 7 Tamil Nadu stands out as the best market in south India.9 Madras Cementstrong brand; right market13 Set for a financial recovery 21 Financial assumptions.24 Inexpensive valuations25 Madras vs Shree and Ambuja...29 Key catalysts..34
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Madras Cement
Company Financial Snapshot

Profit and Loss (` mn unless specified)
FY13 Net sales Optg. Exp(Adj for OI.) EBIDTA Depreciation Interest Expense PBT Tax Adj. PAT Profit and Loss Ratios EBITDA Margin % Adj Net Margin % P/E (X) EV/EBITDA (X) EV/tonne (US$) 38,454 28,237 10,217 2,806 1,796 5,887 1,846 4,042 26.6 10.5 8.8 6.1 72.5 FY14E 39,610 31,670 7,940 3,063 1,815 3,121 967 2,153 20.0 5.4 16.6 7.9 62.7 FY15E 45,142 35,185 9,958 3,264 1,865 4,883 1,514 3,369 22.1 7.5 10.6 6.3 59.8
Time-line of events
Year 1962 1987 1994 1994 1995 1995 Time line of Event First plant commissioned in Tamil Nadu with a capacity of 200 tonnes per day Set up Jayanthipuram plant near Vijayawada in Andhra Pradesh The company upgraded the capacity of the Jayanthipuram Unit to 1.1 million tonnes The company substantially increased the capacity of windmills by installing 70 more windmills The company enhanced power generation capacity at the Jayanthipuram unit to 15.3MW 27 more windmills with a total additional installed capacity of 10.5MW set up in Tamil Nadu Set up the Alathiyur capacity in Tamil Nadu
1997 2005Set up 119MW of wind power 2009 2007 Brownfield expansion at the Jayantipuram plant 2008 2010 2013
Line 1 of the Ariyalur capacity commissioned (2mn tonnes) Set up grinding capacity in TN, Karnataka and West Bengal Line 2 of the Ariyalur capacity commissioned (2mn tonnes)
Balance Sheet (` mn unless specified)

Total Assets Net Fixed Assets Current Assets Investments Total Liabilities Net worth Dept Current Liabilities Deferred Tax Balance Sheet Ratios ROE % ROCE % Net Debt/Equity Equity/Total Assets P/BV (X) FY13 57,542 49,276 14,550 887 23,708 26,671 5,299 7,164 18.3 11.0 1.1 0.41 1.5 FY14E 60,251 52,179 14,205 887 25,416 27,671 7,020 7,164 8.8 5.8 1.1 0.42 1.4 FY15E 63,630 52,963 17,805 887 28,295 28,171 8,025 7,164 12.5 7.5 0.9 0.44 1.3
Cash Flow (` mn unless specified)

PBT Depreciation Tax Change in Wkg Cap CF from Operations Capex Investments CF from Investing Change in Equity Debt Dividends CF from Financing Change in Cash Opening Cash Balance Closing Cash Balance FY13 5,882 2,806 (1,148) (2,277) 7,014 (3,993) 73 (3,828) 40,342 (692) (2,885) 301 196 497 FY14E 3,121 3,063 (967) (33) 6,940 (4,000) (3,941) 1,000 (444) (1,260) (183) 497 314 FY15E 4,883 3,264 (1,514) (688) 7,756 (4,048) (3,993) 500 (491) (1,856) 1,907 314 2,221
State-wise sales mix of Madras Cement

States TN Kerala Karnataka AP Orissa Goa West Bengal Others Exports Total FY12 3.5 1.8 0.9 0.7 0.1 0.0 0.5 0.1 0.0 7.6 FY13 3.5 2.0 0.9 0.8 0.2 0.0 0.7 0.2 0.1 8.4 Growth 1.4% 8.6% -0.5% 21.1% 116.1% 7.1% 52.3% 117.4% 90.9% 11.0% Market share 19.4% 23.0% 6.5% 5.7% 2.9% 6.0% 7.7% NA NA NA
RoCE subdued at present but likely to pick up gradually
0.9 0.8 0.7 0.6 0.5 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY14E FY15E FY16E
60 45 30 15 0
CE turnover (X) RoE(%) (RHS)
RoCE (%) (RHS)
Source: Company, Ambit Capital research
Madras Cement
South Indiaa unique region

Region-wise reserves
Region South North West East Central Total
limestone
% of total 49% 19% 15% 14% 4% 100%
Reserve (bn tonnes) 60.8 23.8 18.3 16.9 4.8 124.5
South India has large limestone reserves (61bn tonnes; 49% of Indias total reserves), which makes the region the largest cement producer and exporter in India. The region is a large cement market (25% of Indias consumption) with a strong institutional and retail client base, owing to the industrially developed and high per capita income states. Over FY08-13, deceleration/decline in cement demand growth amid significant capacity addition resulted in the utilisation level dropping to 63% in FY13 from 95% in FY07. Thus, despatches to other regions (mainly, west and east India) have increased to ~20% of production in FY13 from 12% in FY07. We believe the region has a strong growth potential with a recovery in Indias GDP and resolution of region-specific challenges.
Source: Working Committee of the Planning Commission
Cement consumption growth: Two distinct phases

Phase I (FY01-08): In this phase, south India cement consumption CAGR was at 10.6% as against Indias 8.5%. Cement consumption was driven by the following factors: (a) development of the IT industry, resulting in strong growth of commercial and residential real estate construction, (b) significant investment in public infrastructure such as irrigation in Andhra Pradesh and urban infrastructure (roads and highways) in Karnataka and Tamil Nadu, and (c) significant investment by the private sector in IT, automobiles and pharmaceutical industries. Phase II (FY08-12): Cement demand growth was muted in this phase (CAGR of 3.2% as against Indias average of 7.6%). In addition to a general macroeconomic slowdown in India, the region faced unique challenges such as: (a) political instability in AP and Karnataka, (b) the mining ban in Karnataka, (c) significant power shortage across the region hurting industrial production, and (d) failing monsoons hurting agricultural output.
Exhibit 1: Cement consumption growth has slowed down materially
60 (mn tonnes) 40 20 FY13* FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
CAGR (FY01-08): 10.6%
CAGR (FY08-13): 3.3%
110% 95% 80% 65% 50%
Consumption
Utilisation (RHS)
Source: CMA, Crisil, Ambit Capital research. Note: We aggregate consumption of south Indian states based on data reported by CMA to ascertain the consumption of the region
Volume movement in FY13: Whilst region-wise demand growth is not available for FY13 (as CMA stopped providing the numbers), our channel checks and discussions with managements suggest flat volume growth in AP and low-single digit volume growth in other south Indian states (which implies volume growth of 3.5% in south India in FY13).
Madras Cement
South India Indias GDP
15.0% 10.0% 5.0% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12
forms
25%
of
Exhibit 2: GDP growth in south India decelerated in FY07-12, after strong growth in FY02-07
15,000 (Rs bn) 10,000 5,000 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 16% 12% 8% 4% 0%
26% 26% 25% 25% 24%
South India GDP growth India GDP growth South India as a % of India (RHS)
Source: MOSPI
Andhra Pradesh
Karnataka
Kerala
Tamil Nadu
YoY growth (RHS)
Source: CMA, Crisil, Ambit Capital research. Note: We calculate south Indias GDP by aggregating the GSDP of the four states (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu).
Declining utilisation resulting in rising despatches to other regions

Deceleration in demand growth and significant increase in installed capacity (123mn tonnes in FY13 as against 55mn tonnes in FY07) led to a sharp decline in utilisation and higher despatches to other regions (supported partially by rising demand in adjoining states). Note that currently ~60% of the total production in Karnataka and 25% in Andhra Pradesh (AP) is despatched to Maharashtra.
Exhibit 3: Capacity addition amid muted growth leading to sharp decline in utilisation demand Exhibit 4: Low demand leading despatches outside the region to increasing
120 105 (mn tonnes) 100 80 60 40 FY06 FY07 FY08 FY09 FY10 FY11 53 59 73 93
113
100% (mn tonnes) 90% 80% 70% 60%
65 55 45 35 FY06 FY07 FY08 FY09 FY10 FY11 FY12
20% 15% 10% 5% 0%
50
FY12
South-India Production South-India Consumption % despatched outside (RHS)

Source: CMA, Ambit Capital research. Note: We aggregate consumption of south India states based on data reported by the CMA to ascertain the consumption of the region
Capacity
Source: CMA, Ambit Capital research
Utilisation (RHS)
South India cement market underpinned by both infra and retail clients
South India is not only the largest cement-consuming region of India (55mn tonnes; 25% of Indias consumption) but also the largest cement-producing region (125mn tonnes; 37% of India). Thus, south India is extremely important in the Indian cement landscape. South Indian states are amongst the most industrially developed with a high per capita income; hence, the growth potential of cement demand remains significant. Historically, public infrastructure and real estate construction have been the main drivers of cement demand growth in south India. Whilst public infrastructure construction has been weak for the last 3-4 years (as stalled irrigation projects in
Madras Cement AP and land acquisition problems in TN and Karnataka resulted in a slowdown in road construction), real estate construction remains fairly strong (real estate GSDP increased by 9-14% over FY06-12), with strong growth in tier-II cities of Karnataka and Tamil Nadu.
Exhibit 5: Construction NSDP growth has decelerated in the last 3-4 years Exhibit 6: Real estate GSDP growth has been fairly strong ranging between 9% and 14%
1,200 800 400 0
(Rs bn)
20% 15% 10% 5% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
2,000 1,600 1,200 800 400 0
(Rs bn)
20% 15% 10% 5% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Others 10 2 2 5 25 1 59 18
AP Kar YoY growth (RHS)

Source: RBI database, Ambit Capital research
TN Ker
AP Kar YoY growth (RHS)

Source: RBI database, Ambit Capital research
TN Ker
Supply dynamics of the four states

Within south India, Andhra Pradesh (AP) is the largest cement-producing state given its large limestone reserves and proximity to the markets in south and west India. The other regions have smaller limestone reserves and hence lower capacities. Furthermore, AP is a fragmented market with a large number of small cement plants. Kerala has no capacities but it does have packing units close to major markets; it is mainly serviced from TN, Karnataka, AP and Gujarat (mainly Ambuja).
Exhibit 7: State-wise capacity and despatch mix
State Installed capacity (FY13) (mn tonnes) AP TN Karnataka South-India 68 35 25 130 Capacity Utilisation (FY13) (%) 60 65 68 65 AP 30 9 22 State-wise despatch mix (%) TN 10 65 0 27 Kar 20 4 29 15 Ker 5 29 1 13 Mah& Goa
Source: CMA, Ambit Capital research
Prices declined with influx of AP players

350 325 300 275 250 Apr-10 Apr-11 Apr-12 Dec-10 Dec-11 Aug-10 Aug-11 Aug-12 Dec-12 Apr-13
Maharshtra Cement prices
Source: CMA. Crisil, Ambit Capital research
South Indian players influence pricing in other regions: The three major cement-producing states in south IndiaAP, TN and Karnatakahave different limestone clusters and hence have different market exposures. South Indian states (mainly Karnataka and AP) influence prices in other states such as Maharashtra and Orissa. Whilst Karnataka has historically had high exposure to Maharashtra, AP-based players have increased despatches to Maharashtra materially in last 2-3 years. Rising supplies from these states amid muted demand growth has resulted in declining prices in Maharashtra. South India players get an easy entry into Maharashtra by breaking through the existing incumbents channel partners with higher incentives. Demand growth in west and east India positively affects the players in Karnataka and AP, given the high exposure they have to these markets.
Madras Cement Fragmentation analysis: We believe that pricing is a function of fragmentation of capacities. Higher fragmentation results in lower bargaining power of the top3/5 cement groups and hence pricing discipline is challenged during times of weak demand (a common phenomenon in Andhra Pradesh).
Exhibit 8: AP is highly fragmented Exhibit 9: with <3 mn tonne capacities controlling 45% of the market
80 60 40 20 0
82%
100% 71% 80% 60% 28% 40% 20% 0%
100% 80% 60%
0% 37% 29%
0% 20%
8% 29%
36% 41% 45% 17% 18% 13% TN 03-06 06-09 AP South India Greater than 9 44% 32%
40% 20% 0%
30%
KTK
TN Capacity (mn tonnes)
AP
KTK Less than 3
Share of top 3 players (RHS)

Source: Working Committee of Planning Commission, Ambit Capital research
Source: Working Committee of Planning Commission, Ambit Capital research
Market analysis of the South India states

Andhra PradeshIndias largest and most fragmented cement producer Andhra Pradesh (AP) is the largest cement producer in India (~70mn tonnes of installed capacity). Cement demand, after declining for the last three years, is now stabilising in AP. Prices in AP are 15-20% lower than Indias average, owing to the large demand-supply mismatch in the state. But, it was still unclear if the demandsupply mismatch was the only reason for the lower prices. Our analysis of the state and discussions with dealers and managements clearly shows that the key reason for the fractured pricing is the fragmentation of capacities with no clear leaders51% of the capacities are with 0-3mn tonne players and the top-3 cement groups within the state account for 27% of the capacities, unlike 50-80% in other larger states. Whilst cement consumption was driven by government expenditure on infrastructure (irrigation and urban infra), today rural housing is the largest segment. For a detailed understanding, refer to our cement monthly dated 3 April 2013, No signs of improving demand. Tamil Nadu the best cement market in South India Tamil Nadu (TN) is a large cement-consuming market (19mn tonnes in FY13, 8% of Indias consumption) which expanded at a rapid pace in FY06-10 (12.5% CAGR). After this phase, demand growth has been paltry, as institutional demand declined and growth in rural/semi-urban housing moderated. Tamil Nadu accounts for 11% of Indias installed capacity and consumes most of the cement produced internally. Pricing remains relatively stable, as the concentration of capacities and the retail nature of demand confers strong pricing power to the established brands. Whilst over 30 brands are available in TN, five brands dominate the premium segment. Chennai is the largest market in Tamil Nadu; however, it has remained flat in recent times and stable/strong demand in tier-II cities has supported volume growth. Tamil Nadu is the best cement market in south India in our competitive framework. For a detailed understanding, refer to our cement monthly dated 5 July 2013, Discipline maintained.
Madras Cement Karnatakaless fragmented but largely an institutional market Karnataka consumes around 13mn tonnes of cement within which Bangalore (54%), Mangalore (7%) and Mysore (7%) are the large demand centres. Weak infrastructure investment and weak-to-moderate industry growth (due to the mining ban) as well as agri growth alongside moderating services have kept demand growth low; this low level of demand growth was driven by smaller cities, as demand in Bangalore remained stagnant. More importantly, within Bangalore, retail demand continues to decline and institutional demand is moving toward Ready Mix Concrete (RMC), reducing the brand importance and making way for the entry of new players (Jaypee, BMM, Bharathi, and JSW). Whilst UltraTech (with its brand, Birla Super) remains the largest brand in Bangalore, ACC is the largest brand outside Bangalore. For a detailed understanding, refer to our cement monthly dated 5 June 2013, No demand but discipline. Keralaa small but premium market Kerala is the smallest cement market in south India (8.5mn tonnes in FY13) with low single-digit growth over FY08-12. However, it is a lucrative market for cement players, given premium realisations. Brand has a significant relevance, as the IHB segment is the main driver of cement consumption. Dealers highlight that Ramco Cement and Coromandel Cement are the top brands in Kerala. The key markets are Cochin (3.0mn tonnes) and Trivandrum (2.5mn tonnes). Within Kerala, south Kerala is dominated by TN-based players (Madras Cement and India Cement), whereas north Kerala has players from other regions including Ambuja, ACC and several AP- and Karnataka-based players.
Volume (mn tonnes) FY07 13 13 11.1 7 44 31 153 110 FY08 15 15 12 7 48 33 166 118 FY09 18 16 12 8 53 35 181 128 FY10 18 18 13 8 56 38 200 144 FY11 15 18 13 8 54 40 209 155 FY12 FY08 Change YoY (%) FY09 FY10 FY11 4.0% 4.0% -1.0% -3.1% 2.9% 4.7% 7.7% FY12 -8.0% 3.0% 2.0% 5.0% 0.0% 3.1% 6.8% 9.1% 14 16.7% 22.2% 19 13.3% 13 9 41 223 169 6.3% -1.3% -1.0% -16.0% 8.0% 4.0% 5.3% 8.5% CAGR (FY07-12) 1.7% 8.1% 3.8% 4.0% 4.6% 5.7% 7.8% 9.0%
Exhibit 10: Cement consumption in the south Indian states

Region Andhra Pradesh Tamil Nadu Karnataka Kerala South India South India- ex AP India India- ex South
9.5% 11.0%
1.4% 11.2% 8.1% 8.4% 7.5% 6.1%
54 10.6% 11.0%
8.8% 10.4% 8.0% 12.6%
Source: Industry, Ambit Capital research
Exhibit 11: Major players in south India

Capacity (mn tonnes) Company UltraTech India Cement Madras Cement Chettinad Cement ACC Dalmia Cement Penna Zuari Cement Kesoram Bharathi Cement Orient Cement Total Total capacity 15.0 13.0 13.5 10.5 9.7 9.0 6.5 6.2 5.8 5.0 3.0 97.2 AP 5.6 7.1 3.5 2.5 6.5 5.2 5.0 3.0 38.4 Karnataka 6.9 0.3 8.5 5.8 21.5 Tamil Nadu 2.5 5.9 9.6 10.5 1.2 6.5 1.0 37.2 Kerala AP Market exposure Karnataka Tamil Nadu Kerala
Source: CMA, Industry participants Ambit Capital research. Note: Number of indicates the extent of market exposure, a indicates very small or no exposure to the market.
Madras Cement
Tamil Nadu stands out as the best market in south India

Our analysis suggests that Tamil Nadu is the best cement market due to its large size (largest market in south India), relatively stable pricing (higher IHB demand and lesser fragmentation) and superior macroeconomic positioning (high level of industrialisation; second most industrialised state in India). Whilst Karnataka has the best demographics (high level of urbanisation and skilled manpower), the pricing has been volatile with rising mix of institutional demand. Andhra Pradesh is a large market but it is facing growth challenges due to political instability, resulting in declining volumes. Furthermore, high fragmentation of capacities leads to fractured pricing. Whilst Kerala is a premium realisation market, it is relatively a small market and hence cannot be a major volume growth driver. We use four broad parameters for our ranking of the states: 1. Cement consumption: Here, we rank a state based on the size of the cement market and the growth in the last five years. 2. Pricing: We do a fragmentation analysis of capacities to ascertain the pricing power. We believe higher consolidation of capacities confers strong pricing power to the incumbents. We also ascertain the volatility of cement prices in the states over the last three years to ascertain the pricing movement; we find that states with the lowest capacity fragmentation also have the least pricing volatility. 3. Macro economic parameters: We compare state GSDP, construction NSDP and per capita income to understand the growth in the general economy of the states and its resultant impact on construction growth. 4. Demographics: We ascertain the size of the housing demand using the population in the large cities and the level of urbanisation.
Exhibit 12: Ranking of south Indian states - Tamil Nadu stands out as the best market for cement
Ranking Tamil Nadu Karnataka Andhra Pradesh Kerala Cement Consumption 1 2 3 4 Pricing stability 2 3 4 1 Macro economic Demographics parameters 1 3 2 4 3 1 2 4 Overall Rank 1 2 3 4
Source: Company, RBI database, MOSPI, Ambit Capital research
Exhibit 13: Numbers behind our ranking

Macro Economic Parameters Construction NSDP GDP Particulars FY12 (` bn) 347 235 321 212 CAGR (FY05-12) 9.0% 8.0% 12.0% 6.0% FY12 (` bn) 4,281 2,980 4,079 2,085 CAGR (FY05-12) 10.0% 8.6% 8.9% 8.3% PCI FY12 (`) 56,461 41,545 42,710 53,427 Demographics Cities Population Size of the market Pricing Cement consumption FY12 FY12 Share of CAGR (mn top 5 (FY08-12) tonnes) players 18.9 13.3 13.7 8.5 6.9% 3.1% -1.8% 4.6% 94% 98% 41% NA
CAGR 1mn5mn+ 0.5-1mn (FY05-12) 5mn 9.4% 6.4% 7.8% 7.7% 1 1 1 2 2 4 3 3 2
Tamil Nadu Karnataka Andhra Pradesh Kerala
Source: Company, RBI database, MOSPI, Ambit Capital research
Limitation to our analysis

The limitations of our ranking of the states are: a) The state-wise cement consumption and GSDP data is available only up to FY12 and hence we do not include FY13 in our analysis.
Madras Cement b) Whilst GFCF is a better indicator of construction activities, given that it is not available on a state level, we use construction NSDP. c) We use CMA data for ascertaining the size and the growth of the market. CMA data does not include ACC and Ambuja after FY09, and hence we adjust the same for our analysis by adding it back based on their south India sales mix.
d) Pricing is also a function of the sales mix (trade/non-trade); however, no useful indicator can quantify this at the state level.
Exhibit 14: Porter analysis of south India cement industry
Bargaining power of suppliers

HIGH Rail accounts for most of cement/coal transport. Rail freight is controlled by the government. Cement companies have little control on rail freight rates. Prices of critical inputs like coal are determined by the government or they follow the global benchmark prices. Cement companies are largely price takers. In south India, small companies are dependent on grid power. Power tariffs are determined by the regulatory commissions. Cement companies are price takers.
Bargaining power of buyers

MEDIUM Institutional customers buy in bulk and hence have a high bargaining power especially in an over-capacity market like south India. The bargaining power of the retail clients is low as they chase brands and the prices are mostly controlled by the companies.
Competitive intensity
HIGH The presence of the three largest limestone clusters has led to a large number of cement manufacturers in south India. With many players present in the market, over capacity and weak demand, the competition is intense, as players are vying for a higher market share. High fragmentation in AP signifies intense competition.
Barriers to entry
MEDIUM Rising procedural issues and duration for land acquisition, environmental clearances, licences, raw material/fuel sourcing and high capital requirement are slowing down greenfield and brownfield expansion Whilst there are challenges around capital sourcing and rising project finance costs, mid-sized players have aggressively added capacities by reinvesting cash flows generated in the last 3-4 years. Whilst it is tough to enter retail markets due to significant cost and time involved in brand building, it is easier to enter institutional markets.
Threat of substitution
LOW As a raw material for housing and infrastructure, cement does not have any significant threat of substitution. However, in road construction, cement can be substituted with bitumen. Rising Ready Mix Concrete (RMC) penetration will only benefit the players with cement and RMC capacities.
Improving
Unchanged
Deteriorating
Source: Ambit Capital research
10
Madras Cement
Cement price movement over the last three years

Phase I (April 2010 - August 2010): This was the first instance of a sharp price decline in south India (to `180/50kg bag from `260/50kg bag), as demand faltered in large markets like AP amid significant capacity addition. Fragmentation created further pricing pressure as mini cement plants started fighting for market share. Phase II (September 2010 - April 2012): Whilst demand improvement was paltry, pricing discipline helped in maintaining cement prices. Phase III (May 2012 - June 2013): Cement prices declined significantly in south India (especially AP), as cement companies were competing on prices to gain volumes from brand-agnostic institutional clients (hoping that pre-election spending/revival in corporate capex would drive institutional demand). Furthermore, new players like JSW Cement reduced prices in a bid to gain market share. This phase also saw rising despatches to other regions. Phase IV (June 2013 onwards): With demand remaining weak amid significant increase in input costs, the regional players profitability has deteriorated. With fading volume growth and market share gain expectations, they choose to tag along with the larger players rather than fight for market share. Thus, the bargaining power of the larger players (with much better balance sheet strength) has increased and hence the prices have increased.
Exhibit 15: Recent pricing discipline driven by weakened bargaining power of small players
Prices declined with rising over capacity and slowing demand Despite weak demand, pricing discipline helped maintain cement prices No demand improvement and significant capacity addition led to price wars
300 260 220 180 Feb-11 Feb-12 Feb-13 Jun-10 Jun-11 Jun-12 Dec-10 Dec-11 Aug-10 Aug-11 Aug-12 Dec-12 Jun-13
11
Recent pricing with fading volume growth and market share gain expectation of smaller players
Apr-10
Apr-11
Apr-12
South India (Rs/50kg bag)

Source: Industry, Ambit Capital research
Is the recent pricing discipline sustainable?

We believe that the biggest risk to pricing discipline is either a sharp growth in institutional demand or a delay in recovery from IHB customers. With aboveaverage rainfall and hopes of improvement in the political environment, the probability of a revival in retail demand is high. We believe that price wars could accentuate if retail demand fails to improve, as the fight for market share could intensify. We hear that prices have reduced by 8-15% in south India after the sharp increase in June-July 2013. Whilst this could be a function of seasonality (monsoon season), subsequent price increases would be difficult if demand remains weak.
Apr-13
Oct-10
Oct-11
Oct-12
Madras Cement
How will the competitive landscape change?

South India is operating at paltry utilisation levels of ~60%, which has resulted in frequent price wars and fight for market share. In times when the demand environment remains uncertain, a relief for incumbents is low upcoming capacity addition. (As against 14mn tonnes of annual capacity addition over FY08-13, we expect 5-6mn tonnes annual addition during FY14 and FY15.) Whilst competition might increase due to the lack of demand growth, it is not likely to increase due to incremental supply-side pressure. We believe that competitive intensity might increase in the other target markets of Madras Cement (especially east India), as we expect significant capacity addition in that region. Several players are targeting these markets to drive volume growth. Whilst UltraTech has already added 4.8mn tonnes of capacity in east India, capacities of north-based players, such as Shree Cement and JK Lakshmi, is likely to be commissioned in FY15.
Exhibit 16: Upcoming capacities in south India over FY14 and FY15
Company UltraTech Madras Cement India Cements State Karnataka Andhra Pradesh Tamil Nadu Region South South South Capacity Year 4.4 FY14 1.0 FY14 3.0 FY15 Type Greenfield integrated and split grinding Grinding capacity at Vishakhapatnam Brownfield expansion at integrated plant Greenfield integrated unit Greenfield integrated unit Status The clinkerisation is complete, and the grinding would be completed by 3QFY14. The management highlights it is on track and expects completion by the start of FY15. This is likely to be delayed as the company is calibrating adding capacities. The company has received environmental clearance but mining clearance is awaited. The equipment ordering is in progress and construction is likely to start soon. Commissioning is likely in FY15. According to our discussions with management, execution is on track.
Orient Cement
Karnataka
South
1.8 FY15
Dalmia Bharat Total
Karnataka
South
2.5 FY14 12.7
ConclusionSouth India is down but not out!

Whilst concerns around over-capacity, weak demand and fractured pricing in south India are legitimate, we believe that the long-term demand drivers are intact. That said, a revival in cement consumption would require certain catalysts such as: (a) improvement in the political landscape in AP and revival of stalled infrastructure projects, (b) a recovery in the Indias economic cycle driving corporate capex, (c) improvement in IT exports and industrial GSDP driving urban infrastructure construction, and (d) recovery in rural housing demand with improvement in agricultural output driving rural household income. Recovery in demand to benefit adjoining regions as well Not only would a recovery in cement demand in south India benefit local players through higher volumes and better realisation, but it would also benefit players in the adjoining regions, as exports in these regions would reduce. This would lower competition and help in maintaining pricing discipline.
12
Madras Cement
Madras Cementstrong brand; right market

Madras Cement stands out as a strong cement player in south India, given: (a) its established premium brand, (b) high retail client base, (c) well-established network of dealers and distributors, and (d) access to captive power unlike many south players. We find it the second best in our competitive matrix amongst the south India players, given its superior market mix and efficient cost structure.
Exhibit 17: Business description and revenue share
Segment Cement Description The companys installed cement capacity of 14.5mn tonnes (2mn tonnes split grinding units) is located mainly in TN and AP. Nearly 65% of the overall sales are in high-realisation markets like TN and Kerala. Its brand, Ramco Cement is one of the oldest and well-established brands in south India. The company has 159MW of wind power generation capacities located in Tamil Nadu and AP. This business is a drag on the companys overall profitability, as ~25% of the capital is employed in the business with RoCE of 3-4%. Revenues (` mn) 37,437 Revenue share FY13 97.1% RoCE FY13 16%
Wind Power Total
1,096 38,533
2.9% 100%
4% 11%
Exhibit 18: Capacity details of Madras Cement

Capacity Ramaswamy Raja Alathiyur Ariyalur Mathodu Jayanthipuram Chengalpattu (G) Salem (G) West Bengal (G) Total State TN TN TN Kar AP TN TN WB Grinding Capacity (mn tonnes) 1.6 3.0 4.0 0.3 3.6 0.5 0.6 0.9 14.5 Clinker Capacity (mn tonnes) 1.0 2.2 3.0 0.1 2.7 0.0 0.0 0.0 9.0 Captive Power plant (MW) 25 36 60 36 157
Source: Company, Ambit Capital research; Note: (G) signifies grinding unit.
Exhibit 19: Madras Cement - SWOT analysis

Strengths Weaknesses
In south India, Madras Cement has built a very strong brand and
dealer/distribution network due to which it commands premium pricing (`10-15 /50kg; 5-10% higher than peers).
High freight costs due to higher despatches through road (Road:Rail

mix of 75:25)
Suitable market mix, with ~65% of sales in profitable markets

like TN and Kerala.
Whilst Madras Cements brand is popular in south India, it does not

have a strong brand in other regions. Its realisations in new markets like West Bengal are 10% lower than the tier-I players. drag on overall profitability.
Captive power capacity of 157MW makes it the most costefficient cement manufacturer in south India. Due to this, it reported industry leading EBITDA/tonne (of `1,140 in FY13).
Weak profitability of wind power business (4% RoCE in FY13) is a Due to low coal linkage, Madras Cement is dependent on imported
coal (~95% of overall coal use). Imported coal is costlier and susceptible to currency fluctuations. Threats
Huge reserves of captive limestone mines (850mn tonnes) will aid

future capacity expansion. Opportunities
A failure of demand recovery in south India will lead to low Foray into other regions by setting up split grinding units. The
company is setting up a 1mn tonne grinding unit in Vizag and contemplating capacity addition in Maharashtra. utilisation levels and subdued volume growth. We currently factor in volume growth of 6% in FY15.
Intensifying fight for market share may distort pricing discipline.

Rising costs and low realisations will lead to decline in profitability.
Market share gains with stabilisation of recently added capacity

with demand recovery in south India. Source: Company, Ambit Capital research
Weakening of the INR will increase landed cost of international

coal.
13
Madras Cement
Madras Cementbest placed amongst southern peers

We assess Madras Cements competitiveness vis--vis other south-based cement players on various financial parameters and find that the company stands out as the best player, due to scale of operations, premium realisations and low cost of production. Thus, we believe that the company is well-positioned to be a major beneficiary of a demand recovery in south India and surrounding states.
Exhibit 20: Madras Cement ranks the best on our competitive framework
Capacity Cap. Util (mn tonnes) FY13 Madras Cement Chettinad India Cement UltraTech Dalmia ACC Sagar Orient 13.5 10.5 13.0 15.0 9.0 9.6 2.4 3.0 63% 51% 63% 79% 51% 80% 70% 80% Pricing 1 6 2 3 3 5 8 7 Cost of production 1 3 7 2 6 5 8 4 Cost of sales 6 1 5 7 2 4 2 8 Market Overall share ranking 2 1 6 2 4 8 4 6 1 2 3 5 6 7 7 8
Source: Company, Ambit Capital research. Note: * Chettinad Cements FY13 numbers are not available and hence we use FY12 numbers. We use Dalmias numbers from FY11 onwards. We use only FY13 numbers of Orient Cement. For UltraTech and ACC, we use India-wide numbers.
Exhibit 21: Numbers behind our ranking

Realisation (`/tonne) FY13 Madras Cement Chettinad India Cement UltraTech Dalmia ACC Sagar Orient Average 4,467 3,905 4,354 4,096 4,081 4,218 3,609 3,669 4,159 CAGR (FY08-13) 5.9% 5.1% 5.8% 6.0% 6.3% 5.6% 1.0% 3.8% 5.5% Cost of production as a % sales Avg FY13 (FY08-13) 52.5% 56.0% 63.8% 53.8% 61.4% 60.6% 71.2% 57.1% 57.0% 52.5% 54.8% 63.8% 53.8% 62.1% 60.6% 65.1% NA 57.3% Cost of sales as a % of sales FY12 22.9% 12.0% 22.2% 23.6% 16.2% 21.7% 19.4% 25.6% 22.5% Avg (FY08-13) 19.4% 11.1% 18.3% 22.4% 16.4% 17.4% 14.5% NA 19.2% Market share Capacity (mn tonnes) 13.5 10.5 13.0 15.0 9.0 9.6 2.4 3.0 76 volume CAGR (FY08-13) 7.6% 15.3% 1.8% 6.0% 12.8% 4.0% 15.8% 11.1% 10.3%
Source: Company, Ambit Capital research. Note: * Chettinad Cements FY13 numbers are not available and hence we use FY12 numbers. We use Dalmias numbers from FY11 onwards. We use only FY13 numbers of Orient Cement. Whilst UltraTechs realisation is only grey cement, cost of production and cost of sales includes white cement numbers.
Pricing: We use grey cement realisation as a benchmark to judge the pricing power/market mix of the players. With consistently better-than-industry realisation, Madras Cement and India Cement stand out as the best players on this parameter. This shows their superior positioning in states like TN and Kerala where pricing discipline is strong. We hear that the cement prices of Madras Cement and India Cement are at an 8-12% premium to its peers in TN and Kerala, given their strong brand name. Cost of production: We assess the players on the cost of production to gauge their cost competitiveness. We ascertain cost as a percentage of sales given different OPC:PPC mix. We find Madras Cement and UltraTech as superior players, with the lowest production cost in the industry. Low production cost is driven by access to captive power which is significantly cheaper than grid power. Cost of sales: Here, we compare the players on selling costs like freight, marketing and distribution. Madras Cement is relatively a weak player on this metric on two accounts: (1) it has a higher mix of road transportation (75:25
14
Madras Cement road:rail) which leads to high freight costs, and (2) advertisement and marketing expenses of Madras Cement are higher than its peers on account of high dealer incentives and significant marketing expenditure. Note that even India Cement fairs poorly on this metric as both India Cement and Madras Cement spend a significant amount on brand building and dealer incentives. Market share: We ascertain market share on the basis of capacity and five-year volume CAGR. Madras Cement is the second-largest player in south India (behind UltraTech). Whilst the companys volume growth is significantly higher than its closest competitor, India Cements, its volume growth is lower than other south-India and pan-India players. We highlight that capacity utilisation of Chettinad Cement is extremely low (51% in FY13), and the higher volume growth can be explained by significant capacity addition (to 10.5mn tonnes from 1.8mn tonnes in FY08). If, we were to carry out the above exercise on a unitary cost basis, the outcome would broadly remain the same; however, Orient Cement appears the best on the cost of production.
Limitations to our analysis

a) b) c) UltraTechs and ACCs numbers include the performance for all India operations and cannot be segregated for south India. Chettinad Cements numbers are available only up to FY12 given that the company was de-listed during FY13. We use Dalmia Cements numbers from FY11 onwards, given that cement costs were not determinable separately earlier. Similarly we use Orient Cements numbers only for FY13. Our competitive mapping exercise considers ~60% of the capacities in south India, as requisite details are not publicly available for the others. We include miscellaneous expenditure as a part of cost of production since the nature of the cost item is not determinable.
d) e)
Captive powera key competitive advantage

Company-wise captive power capacity
Cost per KWH Particulars Madras Cement UltraTech ACC Ambuja India Cement Chettinad CPP 4.7 4.2 4.3 3.8 2.6 5.4 Grid Power 6.7 6.6 5.4 5.2 5.4 7.7 % diff -30% -37% -20% -26% -51% -30%
A key competitive advantage that Madras Cement enjoys over its south India peers is access to captive power (157MW in FY13; refer to Exhibit 18), whereas most south India players (barring Madras Cement and Chettinad Cement) largely depend on grid power. The plants are fungible and can run on both coal and petcoke, which aids the company to calibrate the fuel use. Note that Madras Cement meets ~85% of its power requirement from CPP as against 16% for India Cement and 1% for Sagar Cement (see Exhibit 22). Hence, Madras Cements power and fuel costs are 10-15% lower than such peers. The company has recently announced further addition of 60MW of captive power capacity.
Exhibit 22: Madras Cements unitary power cost is among the lowest in the industry
Particulars % of power from CPP FY13 Madras Cement ACC UltraTech Chettinad Cement Sagar Cement India Cement Source: Company, Ambit Capital research 85% 72% 80% 98% 1% 16% FY10 750 717 707 776 1,039 917 Power and fuel cost (`/tonne) FY11 911 758 898 934 1,076 1,007 FY12 973 927 1,056 1,096 1,143 1,149 FY13 966 970 1,057 1,080 1,151 1,218 Average (FY10-13) 900 850 964 949 1,107 1,069
Source: Company; Ambit Capital research
15
Madras Cement
Cement superbrand of the south

Madras Cement has positioned itself as a premium brand in south India. The company has continuously invested in brand building through advertisements and in expanding the dealer network. Madras Cement has built a strong relationship with the dealers through incentives and discounts which motivate them to refer its brand over other brands. Whilst the companys brand, Ramco Cement is a premium brand in its main markets, such as Tamil Nadu, Kerala and Karnataka, it falls in the tier-II bracket in AP and West Bengal.
Exhibit 23: Ramco Cement positioned as a premium brand in its main markets
States Tamil Nadu Kerala Karnataka AP WB Ramco Sales mix Tier I India Cement, Madras Cement, 42% UltraTech, Chettinad 23% Madras Cement, India Cement UltraTech, Zuari, ACC, Madras 11% Cement 10% UltraTech, ACC, Dalmia 8% Ambuja, UltraTech, Lafarge Brands Tier II Zuari, Penna, Maha cement Ambuja, UltraTech Chettinad, Dalmia, Priya Madras Cement, Penna, Priya Madras Cement, OCL India Price (`/50 kg bag) Tier I 320 335 300 290 350 Tier II 290 310 270 250 300
Source: Ambit Capital research, Industry
Favourable market mix

Madras Cement has a favourable market exposure, with ~65% of sales in highrealisation markets such as Tamil Nadu and Kerala. Whilst AP has seen a sharp decline in volumes and fractured pricing, TN and Kerala have reported mid singledigit volume growth and stable prices. Entry into the new markets like West Bengal has been unfruitful, as despite gaining volumes, the ex-freight realisation is extremely low. The management believes that with the establishment of the brand and better logistics management (post the Vizag expansion), the ex-freight realisation and hence profitability should improve in West Bengal.
Exhibit 24: Favourable exposure to AP
FY12 TN Kerala Karnataka AP Orissa Goa West Bengal Others Exports Total 3.5 1.8 0.9 0.7 0.1 0.0 0.5 0.1 0.0 7.6
market
FY13 3.5 2.0 0.9 0.8 0.2 0.0 0.7 0.2 0.1 8.4
mix
with
limited
Exhibit 25: Nearly 65% of the sales are in TN and Kerala

Others , 3% , WB, 8% TN, 42%
Growth 1.4% 8.6% -0.5% 21.1% 116.1% 7.1% 52.3% 117.4% 90.9% 11.0%
Market share 19.4% 23.0% 6.5% 5.7% 2.9% 6.0% 7.7% NA NA NA

Goa, 1% Orrisa, 3% AP, 10% Kar, 11%
Ker, 23%
16
Madras Cement
Dealers recommend the Ramco brand

Dealers in Tamil Nadu, AP and Kerala clearly highlight Madras Cements brand Ramco Cement as a premium high-quality brand in south India. The dealers have a strong loyalty towards the company and hence they recommend the companys brand over other cement brands. A few notable points are: Madras Cement has the highest exclusive dealerships in Tamil Nadu and Kerala. Dealers highlight that Madras Cement has by far the best dealer incentive structure. They say that the company organises several dealer programmes and offers holidays and gold coins for high-volume dealers. Dealers highlight that the company is prompt in re-stocking unlike other players like Chettinad and India Cement whose deliveries are delayed. A large Chennai-based dealer (associated with Madras Cement for over 15 years) highlights that the product quality of Madras Cement is superior to peers and the company is always the first in technology upgradation. Dealers highlight that IHB customers willingly pay a premium to buy Ramco Cement given the superior quality cement. Whilst Chettinad Cement is a strong player, dealers believe they have a stingy incentive structure.
Fully loaded
Madras Cement made significant capacity additions over the last six years. Installed capacity has reached from 6mn tonnes in FY06 to 14.5mn tonnes in FY13, including 2mn tonnes of split grinding units in FY13. In addition to the 2mn tonne brown-field expansion in AP and a 4mn tonne green-field expansion in Tamil Nadu (Ariyalur), the company added grinding units in TN, Karnataka and West Bengal. Furthermore, the company added two packing plants in Tamil Nadu and Hyderabad to ensure timely deliveries in target markets. Whilst utilisation levels are subdued currently, the company has positioned itself to gain volumes when the demand recovers. The company is adding a 1mn tonne grinding unit in Vishakhapatnam (likely commissioning in 1HFY15) to improve its proximity to the eastern market, The company also plans to add a grinding unit in Maharashtra.
Exhibit 26: Phase-wise capacity expansion
(mn tonnes) 18 14 10 6 2 FY07 FY08 FY09 FY10 FY11 FY12 Clinker Capacity FY13 FY14 FY15E 6 4.6
Brownfield Expansion in Jayantipuram Grinding units in TN, Karanataka, WB and upgradation of RR Nagar Ariyalur Unit II Vizag Grinding unit
14.5 12.5 12.5 9.0
14.5
15.5
12.5
Ariyalur Unit I10
8 6.1
7.5
7.5
7.5
7.5
9.0
9.0
Cement Capacity
17
Madras Cement
.and gunning for new markets

Historically, Madras Cement has added small and fragmented capacities unlike its peers, such as UltraTech and Shree Cement, which add large capacities at a single location. From our discussion with the management, it appears that the company would continue to add capacities in a fragmented manner. The management highlights that it has huge limestone reserves in AP (~850mn tonnes) and future capacity addition would largely be grinding units at several locations (possibly Maharashtra and Orissa) with the main clinker unit in AP. The focus of the company is to expand beyond south India and cultivate other regions (mainly east) to maintain the volume growth momentum. Until now, the company has set up a 0.9mn tonne grinding unit in West Bengal and is setting up a 1mn tonne grinding unit in Vishakhapatnam (AP).
West BengalSo far not so good

Madras Cement set up a 0.9mn tonne clinker grinding unit in West Bengal in FY10 (which sources clinker from its integrated plant in Andhra Pradesh). Whilst West Bengal contributes 8% of Madras Cements overall despatches (up from 6% in FY12), we hear that the company is struggling to establish its brand in east India. Dealers highlight that Ramco Cement is the lowest-priced cement brand in east India (`30-40/50kg bag discount to the tier-I peers) and does not have the dealer network to gain prominence in the market. Note that the distance between the clinker and grinding unit is the highest in India (~1,300kms) which eats into a large part of the profitability of its operations in West Bengal. Hence, in our view, if the company does not manage to reduce the pricing differential in the region, its foray in West Bengal will not be lucrative.
Vishakhapatnam expansion for Orissa market; but RoCE uncertain

Madras Cement is setting up a 1mn tonne capacity in Vishakhapatnam with a capital outlay of `3,500mn. The management argues that this is a strategic move with efficiencies such as: (a) proximity to the target markets like Orissa, (b) better availability of fly ash, and (c) savings in logistics cost as clinker transportation is cheaper than cement transportation. We do a sensitivity analysis to understand the cost savings required to generate RoCEs of 10-16% at various levels of capacity utilisation.
Exhibit 27: RoCE of 16% will require `560/tonne savings at 100% capacity utilisation
Target RoCE 16% 14% 12% 10% Return (` mn) 0.5 560 490 420 350 1,120 980 840 700 Quantity sold (mn tonnes) 0.6 933 817 700 583 0.7 800 700 600 500 0.8 700 613 525 438 0.9 622 544 467 389 1.0 560 490 420 350
The savings from Vishakhapatnam would largely be due to better logistics management with proximity to the target markets. Currently, Madras Cement transports cement to Orissa at a distance of 1,100kms; despatches from Vizag would reduce the lead distance by 500kms. We expect `350/tonne of savings at best, factoring in `250/tonne from lower transportation costs and `100/tonne from additional fly ash use. If the savings reach `500/tonne at 70% utilisation, the RoCE would be 10%, still lower than the average RoCE of the cement business (16% over FY02-13). The management highlights that the savings could be lower due to the increase in diesel prices.
18
Madras Cement
Orissa: Institutional segment is the only hope

Orissa is a mid-sized cement market (9mn tonnes in FY13) which expanded at 816% in the last 3-4 years. However, the market is dominated by four players (OCL India, UltraTech, ACC and Lafarge) which account for 80% of the cement despatches. The state is serviced from internal capacities and also from capacities in Chhattisgarh and Madhya Pradesh. Infrastructure construction (both public and private) has been strong and is likely to remain so, as the state still requires substantial investment in industries and public infrastructure. This is the only hope for new entrants like Madras Cement, as institutional clients prefer lower prices over brand. Thus, the pricing of Madras Cement will have to be lower than other established brands for it to gain market share in the institutional segment. Since housing is driven primarily by the IHB segment, we believe the company will require substantial investment in branding and dealer reach if it has to establish its presence in the high-realisation retail segment.
Exhibit 28: Market dynamics of Orissa
State Orissa CAGR Competitive Existing Size players (FY12) (FY07-12) intensity 7.8 13% Moderate Expansion type Comments A mid-sized fast-growing market with a sizable growth of infrastructure construction. Housing is mainly driven by IHB (brand conscious). Strong infrastructure construction will support near-term volume growth for new entrants.
OCL, UltraTech, Grinding ACC, Lafarge
Slow start in Maharashtra

In the last few years, Madras Cement has started despatches in north Maharashtra; however, it sells at a significant discount as compared to the established brands. We believe that it might gain volumes after setting up a grinding unit but pricing will be a challenge as it will have to compete with several established players. Maharashtra is the largest cement market in India (30mn tonnes in FY13) wherein two major cities (Mumbai and Pune) account for most of the demand. It is also the most institutional market in India and hence brand names have little relevance. South India players focus on large demand centres like Mumbai (~30% of Maharashtra) by breaking into the incumbents channel partners through 2-3x higher incentives; currently, more than 30 brands operate here. For detailed explanation on Maharashtra as a cement market, refer to our cement monthly dated 3 May 2013, FY14 begins on a weak note.
Exhibit 29: Market dynamics of Maharashtra
State Maharas htra CAGR Competitive Size (FY12) (FY07-12) intensity 30 7.3% Vey High Existing players Multiple players Expansion Comments type The largest market in India with a substantial institutional client Grinding base. Several brands are available in the market, and hence competitive intensity in high.
Business standing governance)
good
(but
not
corporate
Recently, the companys allocation towards corporate social responsibility (`328mn in FY13; 8% of PAT), to promoter-run trust in times of declining profitability has raised investor concerns. The management argues that the expenditure is towards setting up an engineering college (Ramco Institute of Technology) as the company needs engineers for its business operations. We do not find this to be a convincing explanation, as the promoters can fund this through their dividend earnings and
19
Madras Cement remuneration. We highlight that UltraTech had a CSR spend of ~2.2% of PAT in FY13 and Ambuja had a CSR and donation spend of 6.2% of PAT in CY12. A while back a few concerns were raised on the high remuneration paid to the companys promoters (5.3% of PBT). Whilst this is in line/lower than other midcap names like JK Lakshmi, it is slightly higher than its large-cap peers.
Exhibit 30: Madras Cements CSR and managerial remuneration
Particulars (` mn) CSR PAT FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 1QFY13
Corporate Social Responsibility 13 256 10 129 7.4% 8 334 2.5% 11 559 2.0% 13 790 1.7% 11 3,080 0.4% 17 4,083 0.4% 44 3,635 1.2% 45 3,537 1.3% 43 2,110 2.0% 94 3,850 2.4% 328 4,037 8.1% 72 688 10.5%
CSR as a % of 5.2% PAT Managerial Remuneration MR PBT MR as a % of PBT 13 405 3.1%
7 247 2.9%
19 543 3.5%
18 612 2.9%
62 1,160 5.3%
248 4,688 5.3%
324 6,168 5.3%
287 5,458 5.3%
279 5,303 5.3%
156 2,972 5.3%
293 5,574 5.3%
310 5,887 5.3%
NA NA NA
Inter-corporate deposits in related companies like Ramco Systems, is not material and has remained stagnant for the last few years. Moreover, the company receives market rate of interest on those deposits.
Exhibit 31: Inter-corporate deposits form a small portion of loans and advances
Particulars (` mn) Ramco Systems Sandhya spinning mills Ramaraju surgical cotton Inter-corporate deposits (A) Total loans and advances (B) Networth (C) A as a % B A as a % C Source: Ambit Capital research FY08 200 22 70 292 4,520 9,539 6.4% 3.1% FY09 200 22 79 300 4,565 12,602 6.6% 2.4% FY10 85 85 5,320 15,582 1.6% 0.5% FY11 120 120 4,838 17,345 2.5% 0.7% FY12 130 130 3,994 20,503 3.3% 0.6% FY13 138 138 5,035 23,708 2.7% 0.6%
AuditorsNo rotation for over ten years: The companys accounts are audited by M.S. Jagannathan & N. Krishnaswami, a CA firm based in Chennai. Whilst remuneration to auditors is not significant, we highlight that the auditors have not been changed in over ten years which is not the best practice. However, note that several marquee Indian companies do not rotate independent directors and auditors for many years.
Exhibit 32: Explanation of our flags on the cover page
Segment Score Comments In our forensic accounting analysis, amongst the seven cement companies, Madras Cement ranks 5th primarily due to its low gross block turnover and high contingent liabilities as a percentage of net worth. The company has almost always reported high CFO/EBITDA and low volatility in other income and miscellaneous expenditure as a percentage of sales. Madras Cement has always made timely announcements of its capacity expansions, plans/intentions and has rarely surprised in a significantly positive or negative manner. The company does not hold concalls/meetings with analysts on a regular basis or provide additional inputs apart from the statutory requirement. Furthermore, the companys sudden allocation towards CSR raises concerns. FY14 and FY15 EBITDA estimates have seen marginal downgrades over the past three months which are not a cause for concern.
Accounting
AMBER
Predictability
AMBER
Earnings Momentum
AMBER
Source: Ambit Capital research
20
Madras Cement
Set for a financial recovery

We expect FY14 to be challenging year for Madras Cement, given poor volume and realisation growth visibility amid rising costs (resulting in a 24% decline in unitary EBITDA). Whilst we expect mid single-digit volume growth in FY15, we believe a major jump in volumes in FY16 (10% YoY growth) with recovery in south India cement demand and some pick in volumes from other regions (Orissa and Maharashtra). With most of the capex completed, higher volume growth and recovery in unitary EBITDA will improve capital efficiency driving profitability.
Volume growth hinges on improvement of macro environment

Our discussions with industry participants make us less enthused about the nearterm demand growth in south India (with no signs of demand picking up from either the IHB or institutional segment). Not only do the public infrastructure projects remain stalled, but a slowdown in the domestic economy and high interest rates have also resulted in delays in corporate capex and housing demand. Against this backdrop, we expect a volume growth of 3.7% in FY14 and 6.0% in FY15 for Madras Cement. We expect a substantial improvement in cement demand, with a recovery in Indias GDP and revival of the capex cycle. South India cement volumes could likely expand ahead of Indias average as and when the region overcomes the unique challenges mentioned earlier. We believe that Madras Cement is well placed to expand ahead of the industry, with market share gains from new capacities, given its strong brand in large markets like Tamil Nadu and Karnataka; but, we build in a conservative volume growth of 8% in FY16.
Exhibit 33: Stable volume and realisation growth
(mn tonnes) (Rs/tonne)
Exhibit 34: ...will lead to a pick up in revenue growth

(Rs bn)
12 10
6,000 4,500 3,000 1,500 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
60 50 40 30 20 10
30% 20% 10% 0% -10% FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
8 6 4
Volume Realisation (RHS) Realisation-ex freight (RHS)

Revenue
YoY growth (RHS)
21
Madras Cement
Gradual improvement in profitability

We believe that FY14 will be a tough year for Madras Cement, as paltry realisation growth amid rising costs will result in a sharp decline in unitary EBITDA (we expect a decline of 27%). Furthermore, with no material demand growth, capacity utilisation would remain subdued at 65-67%. Thus, we expect RoCE to decline to 5.8% in FY14 as against 11% in FY13. Whilst we expect capacity utilisation to remain at 65-72%, we believe RoCE will improve gradually starting FY15, driven by improvement in unitary EBITDA with higher realisation and stable costs.
Exhibit 35: Unitary EBITDA improvement to be driven by higher realisation and stable costs
(Rs/tonne)
Exhibit 36: RoCE to improve capital employed turnover
gradually
with
rising
0.9 1,400 1,200 1,000 800 600 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E 40% 35% 30% 25% 20% 15% 0.8 0.7 0.6 0.5 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY14E FY15E FY16E
60 45 30 15 0
CE turnover (X) RoE(%) (RHS)

RoCE (%) (RHS)
EBITDA
EBITDA margin (RHS)
Debt is not a concern

Madras Cements debt increased to `28bn in FY11 from `6bn in FY08, as the company doubled capacity over the last five years. We do not see major concerns from an increase in debt as: (a) most of the capacity expansion is complete and the debt repayment would likely start in FY14 (note that historically the company has repaid debt from operating cash flows, post the completion of capex), (b) net debt:equity is at a comfortable 1.1x from 2.0x in FY09, and (c) the company would likely generate sufficient EBITDA to cover interest costs and near-term capex needs.
Exhibit 37: Declining capex and rising CFO.
(Rs mn) 15,000
Exhibit 38: would aid debt repayment
1.6 6.0 5.0 4.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E 3.0 2.0 FY06 FY07 FY08 1.2 0.8
1.9 1.6 1.5 1.3 1.1 1.1 1.0 0.7 0.6
10,000 5,000 (5,000) (10,000) (15,000) (20,000) (25,000) CFO FCF
FY09
FY10
FY11
FY12
FY13
FY14E
FY15E
FY16E
1.0 Capex/CFO (x) (RHS)
Net debt/equity (X)

FY17E
22
Madras Cement
No respite from rising costs

We see no savings in costs as two major cost componentspower and fuel and freight cost (accounting for ~55% of overall costs)would continue to inch up. In addition, unitary EBITDA would significantly decline, owing to an increase in other cost components, such as: (a) employee cost (due to wage revisions), (b) raw material cost (due to higher inward freight for clinker and higher gypsum and aggregate costs), and (c) selling costs (due to higher discounts, and dealer commissions).
INR depreciation offsets benefits of low international coal prices

Whilst the decline in international coal costs supported Madras Cements profitability in the last 4-6 quarters, the recent INR depreciation would eat into the benefits of low international coal/pet coke prices.
Exhibit 39: INR depreciation to offset the decline in international coal prices
(Rs) 66 62 58 54 50 Aug-12 Aug-13 Dec-12 Oct-12 Jun-12 Feb-13 Apr-12 Apr-13 Jun-13 (US$/tonne) 120 105 90 75 60
921 911 750 FY09 FY10 FY11 FY12 FY13 FY14E FY15E 1,033 973
Exhibit 40: and hence power and fuel cost would likely inch up
Power and fuel cost (Rs/tonne)
1,161 1,105
USD-INR
Richards bay coal cost (RHS)
Source: Company, Bloomberg, Ambit Capital research
Freight cost continues to move up

Whilst rail freight has increased by ~32% over the last 18 months, road freight could inch up going ahead with the increase in diesel prices. Our Oil and Gas analyst, Dayanand Mittal, expects a `1 increase in diesel costs for retail buyers on account of a monthly increase in diesel prices after deregulation in January 2013. Furthermore, with the sharp INR depreciation recently (leading to rising costs of importing crude in India), the increase could eventually be higher.
Exhibit 41: Steep rise in diesel costs Exhibit 42: Freight cost continue to inch up with rising road and rail freight costs
30% 20% 45 40 35 1QFY11 3QFY11 1QFY12 3QFY12 1QFY13 3QFY13 1QFY14 10% 0% -10%
567 FY09 589 640 748 918 955
Freight cost (Rs/tonne)
50
1,003
1,053
FY10
FY11
FY12
FY13
FY14E
FY15E
Diesel Price (Rs/litre)
YoY growth (RHS)

FY16E
23
Madras Cement
Financial assumptions
Exhibit 43: Detailed financial assumptions (` mn unless mentioned otherwise)
Particulars Cement sales Capacity utilisation (%) Power sales (kwh) Per tonne analysis Cement Realisation Operating costs 4,467 3,345 4,353 3,624 4,701 3,799 -2.6% 8.3% We expect realisation improvement in FY15 and FY16. However, 8.0% our expectation hinges on a recovery in retail demand and sustaining pricing discipline. Operating costs will continue to rise led by higher power and fuel 4.9% and freight cost. RM cost is likely to increase with higher cost of additives and higher inward transportation cost. Unitary EBITDA will decline materially in FY14, as realisation would likely decline amid significant cost escalation. We expect 20.3% improvement in FY15 driven by higher realisation and stable costs. Assumptions FY13E 8.4 62.8 507 FY14E 8.7 58.0 429 FY15E 9.2 57.6 Change (%) FY14E 3.7% -482 bps FY15E 6.0% Continuation of weak demand in south India will result in muted volume growth in FY14. We expect improvement in FY15 and -36 bps FY16 with improvement/stabilisation in macro environment, election dole-outs and market share gains in TN and Kerala. -2.4% Comments
418 -15.5%
EBITDA Financials (` mn unless specified) Net Revenues EBITDA EBITDA margin (%) Interest expense Adjusted PBT Tax Adjusted PAT Adjusted PAT margin (%) EPS (`) Capex WC Turnover (x) FCF
1,140
835
1,005 -26.7%
38,454 39,610 45,142 10,217 26.6 1,796 5887 1,846 4,037 10.5 17.0 3,993 6.8 3,021 7,940 20.0 1,815 3121 967 2,153 5.4 9.0 4,000 5.8 2,940
3.0%
14.0%
25.4% Increase in cost pressure amid decline in realisation, will lead to -652 22.1 201 bps a sharp decline in margins in FY14. bps We do not expect a material increase in interest costs as debt will 1,865 1.1% 2.8% not increase given low capex needs. Decline in EBITDA margin and higher depreciation will result in a 4879 -47.0% 56.3% significant decline in PBT. 1,512 -47.6% 3,366 -46.7% 7.5 56.3%
9,958 -22.3%
56.3% After a decline in FY14, we expect a sharp recovery in FY15 led by volume growth and margin improvement. -507 202 bps bps 56.3% 26.2% We assume capex for Vishakhapatnam expansion (`3600mn), 60MW of additional captive power capacity (`550mn) and 48 bps assuming acquisition of land and mining lease. Working capital turnover to improve in FY15 with sharp increase in revenue -7.8% growth.
14.1 -46.7% 5,048 0.2% 6.3 -98 bps 2,709 -2.7%
Exhibit 44: Our estimates differ mainly at the EBITDA level and also we have factored in higher depreciation vs consensus
Consensus Revenue (` mn) FY2014 FY2015 EBITDA (` mn) FY2014 FY2015 PAT (` mn) FY2014 FY2015 3,759 4,708 2,153 3,369 -43% -29% Lower-than-consensus EBITDA and higher depreciation leads to a significant divergence at the PAT level. 9,660 11,060 7,940 9,958 -18% -10% Our EBITDA estimates are significantly lower than the industry, since we expect realisations to decline by 1% in FY14 and cost pressures to escalate. 40,738 46,087 39,610 45,142 -3% -2% Our estimates are broadly in line with consensus. We factor in a 1% decline in realisation and 4% volume growth in FY14. Ambit Divergence Comments
24
Madras Cement
Inexpensive valuations
Our DCF-based target price of `200 implies Rs4,460 FY15 EV/tonne and 7.5x FY15E EBITDA. After the recently sharp correction in cement stocks, Madras Cement trades at 5.1x FY15 consensus EBITDA, which implies a discount of 27% over the last six-year average and 12-37% discount to Shree Cement and Ambuja Cement (as against historical discount of 18% to Ambuja Cement and in line/premium to Shree Cement) . We believe current valuations are inexpensive for a player like Madras Cement with a history of strong operational performance and an ability to monetise its brand and market positioning to improve profitability in a good economic environment.
DCF valuation`200/share
We value Madras Cement using a DCF methodology wherein EBITDA margin, working capital turnover and capital expenditure are the key variables controlling the valuation. We undertake a combined valuation for the cement and the windmill business given combined costs and inter-segmental transactions. We value the stock at `200/share which implies 7.5x FY15 EV/EBITDA. The assumptions underlying our valuation are: 1) Volume growth estimates: We estimate a volume growth of 4% in FY14, 6% in FY15 and 10% in FY16, with a recovery in Indias GDP driving the capex cycle and propelling housing demand. We model 7.4% volume CAGR over FY16-24E, marginally lower than our long-term industry growth expectation. 2) Margin and operating cash flows: We expect unitary EBITDA to decline by 27% in FY14, post which we expect a recovery in unitary EBITDA led by realisation growth and stable costs. From FY16 onwards, we expect unitary EBITDA to increase at 8% and we taper it down to 4.0% by FY24. We assume realisation and cost to increase in line with inflation. Factoring in these assumptions, our estimated CFO CAGR is 13% over FY16-24E. High unitary EBITDA CAGR over FY14-24 is driven by the low base of FY14. 3) Capex and FCF: With most of the capacity expansion completed, we model limited capex requirement until FY15E. (Capex will be mainly on the Vishakhapatnam grinding unit and acquisition of land and mining leases). We expect a 5.6% capacity CAGR over FY14-24E assuming a 61% long-term reinvestment rate. Our FY24 exit capacity utilisation is 76%. 4) 14% WACC and 4% terminal growth: We assume a WACC of 14.0% as against 13.5% for large-cap companies on account of higher cost of equity (15% as against 13.5% for large-caps), given its history of lower capital efficiency and given that the company has not displayed the best corporate governance practices. Our terminal growth rate is 4% for Madras Cement, in line with the estimate for the other cement companies in our coverage.
Long-term operational assumptions moderate vis--vis last ten years Particulars CAGR FY03-13 FY14-24
Madras Cement Volume (mn tonnes) EBITDA (`/tonne) Realisation (`/tonne) India Volume (mn tonnes) Realisation (`/ 50kg bag) South India Volume (mn tonnes) Realisation (`/ 50kg bag)
9.0% 11.8% 11.7%
7.4% 8.7% 6.1%
7.9% 8.4%
6.8% 6.9%
Source: Company, CMA, Ambit Capital research
25
Madras Cement
Exhibit 45: FCF generation to pick up profitability and declining capex needs
(Rs mn) 4,000
with
rising
Exhibit 46: DCF-based value of `200/share

PV of the forecasting period up to FY24 (` bn) 30 45 75 27 48 200
20% 3,000 2,000 1,000 FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E 17% 14% 11% 8% 5%
Terminal Value (` bn) Enterprise value (` bn) Less: net debt at Mar-14 (` bn) Implied equity value (` bn) Implied equity value (` per share)
PV of FCFF (LHS)
RoIC
WACC
Sensitivity analysis
Our base-case valuation factors in volume growth of 3.7% and 1% decline in realisation in FY14. Whilst the sensitivity table below shows the changes to the base (FY14) estimates, we highlight that the change in base estimates leads to a change in forward estimates.
Exhibit 47: Base-case valuation of `200/share
Particulars Realisation growth (FY14)
200 -3% -2% -1% 0% 1% 1.7% 107 131 155 179 203
Volume growth (FY14)

2.7% 130 154 179 203 227 3.7% 153 177 200 226 251 4.7% 176 201 225 250 275 5.7% 199 224 249 273 298
Cross-cycle valuation
At the current market price, the stock trades at `3,630 EV/tonne, implying a 16% discount to the five-year average. (Given the volatility in the USD-INR rates, calculation of EV/tonne on a USD basis does not make sense; hence, we do a cross-cycle comparison on an INR basis.) If we adjust the EV of the wind power assets at 1.0x FY13 outstanding debt of `6bn (given that the entire equity invested in the business is wiped out due to losses), the EV/tonne drops to `3,215. The stock trades at 5.1x FY15 consensus EBITDA, which implies a discount of 27% to its five-year average. Post the re-rating during FY07 and FY08 (driven by a significant improvement in EBITDA margin and RoCEs), the drop in valuations during FY09 was driven by a decline in profitability (due to low utilisations, declining EBITDA margins and significant expenditure on capacity addition). The recent decline in stock prices can be explained by the general de-rating of mid-cap cement names, given concerns on declining profitability and fading market share gain expectations and rising investor concerns around Madras Cements corporate governance practices.
26
Madras Cement
Exhibit 48: One-year forward EV/EBITDA is at a 27% discount to five-year historical average Exhibit 49: MC is trading at a one-year forward EV/tonne of `3,630, a 16% discount to 5-year average
(Rs) 6,000
(x)
10 8 6 4 2
Apr-13 Aug-12 Aug-11 Aug-10 Aug-09 Aug-08 Aug-13 Apr-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Apr-08 Apr-09 Apr-10 Apr-11
5,000 4,000 3,000 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11
FY09 FY10 FY11 FY12 FY13
1-yr fwd EV/EBITDA
5-year Avg EV/EBITDA
1-yr fwd EV/tonne
5-year Avg EV/tonne
Source: Company, Bloomberg, Ambit Capital research; Note: We use consensus EBITDA estimates for forward EV/EBITDA
Source: Company, Bloomberg, Ambit Capital research. Note: Our EV/tonne calculation does not adjust for the 157MW of wind power assets. We use USD-INR rate of Rs68 for EV calculation.
Exhibit 50: One-year forward P/B is at a 41% discount to the last 5-year average
Exhibit 51: Profitability will improve gradually with pick up in utilisation level and EBITDA growth
35
3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-08 Dec-09 Dec-10 Dec-11 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Dec-12 Aug-13 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13
5 FY08 FY14E FY15E FY16E
27
25
15
1-yr fwd P/B
5-year Avg P/B
RoCE FY08-13 Avg RoCE
RoE FY08-13 Avg RoE
Source: Company, Bloomberg, Ambit Capital research Source: Company, Bloomberg, Ambit Capital research. Note: We use consensus EBITDA estimates for forward P/B
Relative valuation - discount; but for how long?

Madras Cement currently trades at a discount of 50% to Shree Cement (SRCM) and Ambuja Cement (ACEM) on EV/tonne (as against six-year average discount of 10-30%). On EV/EBITDA basis, Madras Cement has historically traded at an 18% discount to ACEM and at a premium/in line to SRCM; currently it is trading at a 12-37% discount to SRCM and ACEM. Admittedly, a discount is justified given Madras Cements poor capital efficiency (explained in detail in the following section) as compared to SRCM and ACEM. However, we believe the current discount is high and not justified for a player like Madras Cement with a history of strong operational performance and the ability to monetise its brand and market positioning to improve profitability in a good economic environment.
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Apr-08
Madras Cement
Exhibit 52: Madras Cement is trading at a 50% discount to SRCM and ACEM on an EV/tonne basis Exhibit 53: Madras Cement is trading at a 12-27% discount to SRCM and ACEM on EV/EBITDA
16
EV/Tonne (Rs)
8,500 6,000 3,500 1,000 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
EV/EBITDA (X)
12 8 4 0 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Madras Cement Shree Cement Ambuja Cement
Madras Cement Ambuja Cement
Shree Cement
Source: Company, Bloomberg, Ambit Capital research. Note: For calculation of EV/tonne we do not adjust the thermal power assets of SRCM and wind power assets of Madras Cement.
Exhibit 1: Relative valuation summary

Capacity (mn CMP Mcap EV/EBITDA (x) tonnes) ` ` bn FY14 FY15 FY14 FY15 Large cap UltraTech Grasim^ Ambuja* ACC* JPA # Shree Cement ** Mid cap Madras Cements ** Century Tex# India Cements Prism Cement # JK Cement Birla Corp # JK Lakshmi Cement Small Cap Dalmia Bharat #@ Heidelberg* OCL India Mangalam Cement Sagar Cement 11.8 13.7 6.0 5.4 3.5 2.5 6.0 6.7 3.5 2.5 110 29 127 95 238 9 7 7 3 4 6.2 10.3 2.1 2.5 7.2 4.8 6.3 NA NA 5.6 4.9 64.9 3.9 3.3 15.2 3.1 7.9 NA NA 8.3 3,417 3,060 1,880 1,062 2,661 2,943 3,060 1,515 1,062 2,661 9.1 86.5 NA 21.1 NA 17.8 5.8 1.2 16.2 15.0 9.8 8.2 8.8 Na NA 16.1 14.5 15.5 12.8 12.8 15.5 18.5 5.6 10.4 7.5 10.5 10.8 10.8 6.3 9.0 157 226 48 24 176 205 59 37 21 15 12 12 16 7 6.6 9.4 5.3 6.8 3.9 5.7 3.3 5.8 7.0 4.7 5.4 3.0 4.3 2.6 10.0 47.8 8.2 11.3 5.6 6.4 4.1 8.0 18.0 5.8 7.7 4.7 4.8 3.2 4,527 5,007 2,893 5,471 2,483 1,941 2,288 4,527 5,007 2,424 2,946 2,010 1,941 1,601 3.7 22.9 6.6 46.1 7.1 -3.6 12.8 20.2 NA 25.5 NA 11.2 10.3 27.0 14.9 2.2 4.6 7.2 12.9 9.7 13.6 16.4 5.5 6.0 14.1 13.8 11.8 14.4 28.2 30.0 30.1 32.1 35.9 35.9 58.5 58.5 1,498 2,280 170 952 36 411 209 263 179 81 124 9.0 5.2 10.2 8.0 20.9 7.7 7.5 4.3 8.5 6.5 19.4 7.1 14.6 7.9 18.7 14.3 16.3 13.7 12.4 6.7 15.9 11.6 12.3 12.6 7,990 5,164 20,381 7,674 7,511 4,843 20,381 7,223 7,565 7,565 12.6 11.1 -2.5 4.1 6.0 5.3 11.6 7.5 12.5 20.6 12.6 -1.0 17.0 13.0 15.2 16.0 4.5 27.7 17.1 13.0 16.5 17.8 6.2 22.7 P/E (x) FY14 FY15 EV/tonne (`) FY14 CAGR (FY13-15) RoE (%)
FY15 EBITDA
EPS FY14 FY15
16.0 17.0 3,558
NA 140.5 67.6 -21.3
Source: Bloomberg consensus, company data, industry, Ambit Capital research; Note: We use Bloomberg reported EV as of today for calculation of EV/tonne. We take EV/EBITDA as reported by Bloomberg; * indicates December ending (CY13=FY14). ^ Grasim owns 61% in UltraTech. # We have not adjusted the numbers of these companies for the value of the non-cement business. ** Shree Cements: We value power assets of 280MW (of the 560MW) at Rs40mn/MW and adjust the same in the EV. ** Madras Cements: We value windmill assets of 160MW at Rs35mn/MW and adjust the same in the EV.
28
Madras Cement
Madras vs Shree and operational performance
Ambuja
in-line
We compare the income statements of Madras Cement, Shree Cement and Ambuja Cement on a common-size basis to understand the cost structure of the companies. Whilst the EBITDA margins of the three companies are broadly the same, their cost structures are different. We note that: (a) raw material cost of Shree Cement is the lowest in the industry given the significantly lower cost of limestone (`150/tonne against `240/tonne for Madras); industry participants highlight that Shree Cement has large limestone reserves at a single location vis-vis scattered limestone mines and large distances between the clinker unit and the grinding capacity for its peers, which explains the difference in the raw material cost; (b) Ambuja does not include captive limestone cost in raw material costs and hence we add back royalty on limestone and excise duty on clinker; (c) power and fuel cost of Madras Cement is the lowest amongst the three companies, (c) freight expense of Madras Cement is higher than Shree Cement and Ambuja Cement given its higher lead distances due to inter-regional despatches, (d) other expenses of Madras Cement are the lowest given the lower administration and selling costs, and (e) other expenses of Ambuja are the highest due to high miscellaneous expenditure and possibly due to some part of raw material costs booked in other expenses.
Exhibit 54: Common-size financial analysis of Madras Cement, SRCM and ACEM
Particulars Sales (` mn) Raw material cost Employee costs Power and fuel Transport and handling Other expenses Admin and other manfg. Selling expenses Other expenses Total Expenditure EBITDA Depreciation EBIT Interest expense Other income Adjusted PBT Total taxes PAT Source: Company, Ambit Capital research MC FY12 32,696 13.4% 5.2% 22.3% 17.2% 12.8% 10.4% 1.9% 0.5% 70.9% 29.1% 7.8% 21.3% 4.8% 0.6% 17.0% 5.3% 11.8% SRCM FY12 58,981 10.1% 5.4% 25.4% 12.2% 19.0% 13.2% 4.9% 0.9% 72.1% 27.9% 14.8% 13.1% 4.0% 2.8% 11.9% 1.2% 10.5% ACEM CY11 85,907 9.5% 5.0% 23.4% 16.9% 22.1% 15.4% 2.5% 4.1% 76.9% 23.1% 5.2% 17.9% 0.6% 2.8% 20.1% 5.5% 13.8% MC FY13 38,454 13.8% 5.1% 21.1% 20.0% 13.5% 10.8% 2.3% 0.3% 73.4% 26.6% 7.3% 19.3% 4.7% 0.7% 15.3% 4.8% 10.5% SRCM FY13 56,948 9.2% 5.5% 26.6% 16.1% 14.7% NA NA NA 72.0% 28.0% 6.8% 21.3% 4.0% 3.3% 20.6% 3.4% 17.1% ACEM CY12 97,303 6.8% 4.9% 23.9% 17.4% 21.5% 15.3% 1.8% 4.5% 74.6% 25.4% 5.8% 19.6% 0.8% 3.6% 22.4% 6.2% 16.2%
On a long-term financial comparison between Madras Cement, SRCM and ACEM, we find that: a) Shree Cements volume growth has been the best both over a five-year and a ten-year period. This is mainly due to significant capacity additions and high utilisation levels. b) Whilst Madras Cements EBITDA growth has been better than the peers, its unitary EBITDA has either been lower or in line.
29
Madras Cement c) Whilst Madras Cement has been better/in line with peers on an operational level, RoICs are significantly lower due to poor capital efficiency. Note that the invested capital turnover of Shree Cement and Ambuja Cement is significantly better than Madras Cement. However, Shree Cements materially higher turnover is explained by an aggressive depreciation policy due to which net asset turnover is extremely high.
d) Net debt:equity of MC has consistently been higher than the peers.

Exhibit 55: Madras Cements profitability is lower than its peers on account of low capital efficiency
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 5-yr CAGR/ Average 7.6% 14.5% 4.5% 13.8% 21.8% 10.0% 6.2% 12.7% 4.0% -0.8% -1.0% -0.5% 13.5 68.6 30.2 10-yr CAGR/ Average 9.0% 16.4% 8.4% 19.9% 27.9% 19.1% 20.9% 31.5% 16.2% 11.8% 12.9% 7.2% 15.3 39.0 31.6
Volume (mn tonnes) MC SRCM ACEM Sales (` mn) MC SRCM ACEM MC SRCM ACEM MC SRCM ACEM RoIC (%) MC SRCM ACEM MC SRCM ACEM D/E (x) MC SRCM ACEM 2.4 1.1 1.1 1.8 1.0 0.6 1.8 0.8 0.4 1.2 1.0 0.1 0.8 1.0 (0.2) 1.6 0.4 (0.1) 1.9 0.1 (0.2) 1.6 0.1 (0.3) 1.5 0.1 (0.3) 1.3 (0.5) (0.4) 1.1 (0.4) (0.4) 1.5 (0.1) (0.3) 1.5 0.4 0.0 7.9 4.0 13.5 9.8 5.0 15.9 7.8 8.8 22.2 10.5 6.3 59.8 31.1 24.8 46.4 33.8 37.7 38.9 20.7 70.7 39.5 14.9 87.6 32.7 7.2 55.1 24.8 12.4 43.3 29.2 12.0 86.1 24.7 6,272 4,843 17,591 1,525 1,030 4,934 372 378 503 6,970 4,943 19,915 1,646 1,327 5,633 370 467 541 7,421 6,022 26,241 1,574 1,708 7,483 334 558 588 10,103 6,965 63,196 2,125 2,230 21,844 384 696 966 15,772 14,055 56,668 5,590 5,918 20,806 926 1,224 1,241 20,146 21,251 62,693 7,551 8,792 18,126 1,186 1,331 1,031 24,591 27,285 71,781 7,818 9,712 19,682 1,068 1,159 1,047 28,104 36,407 75,015 8,664 15,112 19,349 933 1,475 951 26,303 34,535 85,907 6,429 8,872 19,845 738 864 925 32,696 47,185 38,454 56,948 3.5 2.7 9.8 3.7 2.8 10.4 3.8 3.1 12.7 4.7 3.2 22.6 5.7 4.8 16.8 5.8 6.3 17.6 6.5 7.7 18.8 8.0 9.3 20.0 7.3 9.3 20.9 7.5 11.4 21.4 8.4 12.5 22.0
97,303 100,873 9,517 13,149 24,731 1,170 1,105 1,125 10,217 15,951 22,090 1,140 1,267 1,006
EBITDA (` mn)
EBITDA (`/tonne)
IC Turnover (x) 0.6 0.7 0.7 0.7 0.7 0.8 0.7 0.9 1.1 0.9 1.1 2.4 1.4 2.1 2.0 1.1 2.7 2.0 0.9 3.0 2.3 0.7 3.9 1.9 0.6 3.0 1.7 0.7 4.5 1.8 0.8 4.3 1.8 0.7 3.7 1.9 0.8 2.5 1.7
Source: Company, Ambit Capital research. Note: RoIC is return on invested capital; calculated as EBIT less tax upon capital employed less cash and CWIP.
Why is Madras Cements capital efficiency inferior?

We compare Madras Cements RoCEs and its components over the last decade with its peersACC, Ambuja, UltraTech and Shree Cement and find that its RoCE has been lower than the industry average in seven out of last 11 years. Whilst EBIT margin has consistently been higher than the industry, the companys asset turnover is extremely low which has resulted in lower RoCEs. Whilst the better-than-industry EBIT margin points towards a strong operational performance, the low capital employed turnover raises concerns around efficient capital allocation.
30
Madras Cement
Exhibit 56: Low capital employed turnover leads to the lower-than-industry RoCE of Madras Cement
Particulars RoCE (%) Madras Cement ACC Ambuja Cement UltraTech Shree Cement Average (ex-MC) EBIT margin (%) Madras Cement ACC Ambuja Cement UltraTech Shree Cement Average (ex-MC) Capital employed turnover (X) Madras Cement ACC Ambuja Cement UltraTech Shree Cement Average (ex-MC) Madras Cement (ex-power) Shree Cement (ex-power) Capacity utilisation (%) Madras Cement ACC Ambuja Cement UltraTech Shree Cement Average (ex-MC) 90.3 63.5 105.6 74.5 53.0 73.8 90.1 58.8 83.1 109.3 61.7 90.7 94.9 76.1 109.3 92.7 63.6 93.0 97.9 78.2 116.0 96.3 78.6 96.3 102.0 82.0 100.6 95.2 94.6 96.2 96.9 86.1 118.5 99.4 83.6 94.1 87.7 88.4 113.2 95.8 73.0 92.5 85.6 81.4 100.8 90.1 71.7 87.6 85.7 78.4 88.8 85.1 58.4 79.4 80.1 77.8 73.9 77.8 60.2 82.1 79.0 80.9 105.2 86.8 62.8 80.2 78.4 79.1 92.3 82.5 68.3 87.4 90.6 80.8 101.2 90.0 0.6 1.0 0.4 NA 0.5 0.5 0.6 0.5 0.5 1.1 0.5 NA 0.7 0.5 0.5 0.7 0.6 1.2 0.5 0.7 0.7 0.8 0.6 0.7 0.6 1.3 0.7 0.8 0.8 0.9 0.6 0.8 0.8 1.0 1.5 1.2 0.9 1.2 0.8 0.9 1.1 1.6 1.1 1.8 1.3 1.5 1.1 1.3 0.9 1.7 1.1 2.2 1.2 1.5 1.1 1.2 0.7 1.5 1.1 1.3 1.2 1.3 0.9 1.1 0.6 1.4 1.0 1.4 1.1 1.2 0.7 1.2 0.5 1.2 1.0 1.1 0.9 1.0 0.6 1.1 0.6 1.3 1.1 1.4 1.2 1.2 0.7 1.6 0.7 1.4 1.0 1.4 1.2 1.3 0.8 1.6 0.7 1.3 0.9 1.1 1.0 1.1 0.8 1.0 16.5 11.2 22.9 NA 10.3 11.1 14.1 6.0 18.3 NA 8.8 8.3 14.5 9.1 19.8 6.4 12.0 11.8 12.7 12.9 21.1 5.6 7.9 11.9 14.6 13.3 29.4 11.1 8.5 15.6 30.9 24.7 32.5 24.7 11.3 23.3 32.8 24.0 24.8 27.9 17.0 23.4 26.2 21.7 23.3 22.3 26.9 23.5 23.9 28.1 20.6 23.2 25.3 24.3 16.0 17.8 17.9 14.4 6.1 14.1 21.3 15.0 19.6 18.0 13.1 16.4 19.3 14.2 16.2 18.5 21.3 17.5 20.2 16.5 22.2 14.3 14.0 16.8 10.0 11.5 9.4 NA 4.8 6.4 7.7 6.3 8.8 NA 5.8 5.2 9.2 11.0 10.8 4.4 7.8 8.5 7.7 17.1 15.0 4.7 6.5 10.8 12.4 13.4 44.1 13.2 7.8 19.6 35.3 40.0 36.5 44.5 14.3 33.8 29.3 40.5 26.5 60.4 21.2 37.1 18.0 33.0 24.8 29.9 31.4 29.8 15.0 39.7 20.6 31.9 27.8 30.0 8.6 21.1 18.4 15.5 5.5 15.1 13.3 19.4 21.0 24.8 15.8 20.2 13.3 20.2 16.7 26.0 25.0 22.0 15.0 22.7 21.1 21.3 14.5 19.9 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Avg (FY02-13)
Source: Company, Ambit Capital research. Note: Shree Cements and Madras Cements numbers include power business. If we exclude power business, RoCE of Madras Cement improves to 16-18% and Shree Cements to 18-20%.
31
Madras Cement The reasons for low capital employed turnover are: 1. Low utilisation level: Madras Cements average utilisation over FY02-13 is at 68% as against 85-100% for other large companies due to which capital employed turnover is inferior. Utilisation levels were low in FY03-06 as the companys main marketTN grew at a paltry 2% CAGR in this period; during FY09-13, the low utilisation level was on account of significant capacity additions amid slowdown in south Indias cement demand. Note that whilst capacity utilisation is poor, the clinker:cement ratio of Madras Cement is broadly in line with other peers, signifying an efficient blending mix.
Exhibit 57: Cement:Clinker ratio of Madras Cement is broadly in line with the industry
Clinker conversion ratio Madras Cement ACC Ambuja UltraTech Shree Cement Average (ex-MC) FY06 1.4 1.0 1.3 1.2 1.2 1.2 FY07 1.4 1.5 1.4 1.2 1.4 1.4 FY08 1.4 1.5 1.5 1.2 1.5 1.4 FY09 1.3 1.5 1.4 1.3 1.3 1.4 FY10 1.3 1.5 1.4 1.3 1.3 1.4 FY11 1.3 1.4 1.4 1.3 1.4 1.4 FY12 1.3 1.4 1.5 1.3 1.5 1.4
Cement-Clinker capacity ratio of cement companies (X) Particulars Madras Cement ACC Shree Cement UltraTech FY06 1.3 1.3 1.3 1.1 FY13 1.6 1.5 1.6 1.5
Source: Company, CMA, Ambit Capital research
Source: Company, Ambit Capital research.
2. High capacity set-up costs: Note that Madras Cements capacity set-up costs are significantly higher than other peers (see Exhibit 58). This can be explained by the small-sized and fragmented expansions as against the large singlelocation expansion by peers. Note that Madras Cements capacity expansion cost is the second-highest in the industry (behind UltraTech) whilst Shree Cements capacity expansion cost is the least in the industry, as it has large land and limestone reserves at a single location in Rajasthan, which aids faster and low cost capacity expansion. Note that fixed asset addition of the top-5 companies are similar, as they (barring Ambuja and UltraTech) have spent >80% of overall capex on plant and machinery. Limitation to this analysis: Whilst we aggregate all capex costs (barring power costs for Madras Cement and Shree) to calculate per tonne of the cement business capex, several companies have invested in other assets, such as captive jetties, packing plants and bulk terminals, the cost of which cannot be segregated.
Exhibit 58: Capacity addition cost of Madras Cement is significantly higher than peers
Capacity Addition ( mn tonnes) (1) Integrated Madras ACC ACEM Shree UltraTech 6.5 11.6 12.4 6.0 10.0 Weights (2) Wtd. Combined Capacity cost addition (` mn) (1) X (2) (FY02-13 7.1 12.5 14.2 7.7 11.7 46,956 69,404 73,105 31,638 83,544 Wtd Cost per tonne (` mn) 6,614 5,552 5,148 4,136 7,171 Grinding Capacity (mn tonnes) FY06 6.0 19.9 16.3 4.1 17.0 FY13 14.5 30.0 28.2 13.5 52.8 Clinker Capacity (mn tonnes) FY06 4.6 15.9 12.4 3.7 14.5 FY13 9.0 19.6 17.4 8.8 39.7
Particulars
Grinding Integrated Grinding 2.0 3.0 6.0 5.5 5.5 1 1 1 1 1 0.3 0.3 0.3 0.3 0.3
Source: Company, Ambit Capital research. Note: We assign a weight of 1.0x to an integrated plant and 0.4x to a grinding unit. We exclude power addition by Shree Cement and Madras Cement in our capex cost calculation. Note that UltraTechs clinker and grinding capacity includes Samruddhi Cements capacity.
3. Investment in wind power a strategic mistake and a drag on RoCE: Madras Cement spent a sizable amount (`8.5bn in wind power assets over FY07-12) to de-risk the company from the cyclicality of the cement business and for the benefits of accelerated depreciation (80% of capital employed in the first year of operation). However, the wind power business has not been valueaccretive, as the plants run at low PLF (plant load factor) levels of ~30% due to
32
Madras Cement poor evacuation infrastructure and inadequate grid connectivity. Moreover, the company sells most of the power to the Tamil Nadu Electricity Board (TNEB) which has a long cash conversion cycle. Currently, ~11% of capital employed is in wind power assets, the RoCE of which is abysmally low at 4-5%.
Exhibit 59: RoCE of the wind-power business at extremely low levels
Year FY08 FY09 FY10 FY11 FY12 FY13 Capacity (MW) 136.1 181.6 185.6 159.2 159.2 159.2 Units (mn KWh) 143 261 412 357 286 324 Sales (` mn) 482 800 1,339 1,223 962 1,321 EBITDA Margin (%) 88.7 98.9 92.8 88.1 76.7 50.3 RoCE (%) 4.6 4.0 6.3 6.3 4.2 3.9
Source: Company, Ambit Capital research. Note: We calculate EBITDA margin by adding segmental EBIT and depreciation.
Managements explanation for poor capital efficiency

MCs management states that the low capital employed turnover is on account of installation of grinding units close to the main markets, despite inadequate clinker capacity. Whilst this leads to lower capacity utilisation, it leads to savings in logistic costs. Furthermore, they state that adjusting for the wind-power assets, their capital efficiency is in line with its peers (however, our analysis does not suggest the same; refer to Exhibit 56). The management also believes that MCs future capacity addition cost will be lower, given excess grinding capacity (and hence incrementally only the clinkerisation unit would be required). Whilst we see merit in the argument, we believe the managements choice of capital allocation in capacity expansions and the windmill business is less efficient than peers.
Will capital efficiency improve in the future?

We expect gradual improvement in capacity utilisation with higher volume growth and no material capacity expansions. Capital employed turnover would likely be in the range of 0.7-0.8x during FY14-16 and then improve to 0.9-1.0x over FY17-20. The management highlights that the companys future capacity addition would continue to be fragmented and hence we believe that the capital employed turnover would likely remain lower than the industry average.
Exhibit 60: Capital employed turnover to improve with pick up in utilisation
Expansion phase: MC added
1.0 0.9 0.8 0.7 0.6 0.5
0.9 6.5mn tonnes of integrated and 2

mn tonnes of grinding capacity
0.9 0.7 0.7 0.8
0.9
0.9
1.0
85 80 75 70 65 60
0.7
0.6 0.5
0.6
0.7
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
Capital employed turnover (x)
Capacity utilisation (%)
FY20E
FY08
FY09
FY10
FY11
FY12
FY13
33
Madras Cement
Key catalysts
Faster-than-expected demand recovery: Whilst we do not expect material demand growth in FY14 and FY15, a faster-than-expected demand would result in higher volume growth. We believe the factors that can drive a quicker demand recovery could be higher-than-expected GDP growth, sharp increase in pre-election infrastructure construction in 2HFY14 and retail demand recovery owing to above-normal monsoons. Resolution of South Indias challenges: We believe that cement demand could revive sharply if the current problems like political instability in Andhra Pradesh, power shortage and poor government spending are addressed. Higher-than-industry volume growth: Market share gains led by recent capacity additions would result in higher-than-industry volume growth and improvement in utilisation levels. Market share gain in east India: Madras Cement is in the early stages of building a brand in West Bengal. Given that volume growth is likely to be high in east India, market share gain in these markets would result in higher volume growth. Furthermore, with the Vizag grinding unit likely to be completed by early-FY15, the company can increase volumes in other east India states such as Orissa.
Risks
Break down of pricing discipline: Fading volume growth and likely market share gains by the small- and mid-sized players, have resulted in recent pricing discipline (as they follow the larger players). However, a delayed recovery in retail demand can lead to an intensifying fight for market share and hence the price wars could accentuate. This poses a major risk, as the profitability decline could be sharper especially with a significant increase in costs. Further INR depreciation: Given that the INR depreciation offsets the impact of lower international coal prices, further INR weakening would result in higher coal costs and sharper decline in unitary EBITDA. Furthermore, diesel price increase could also higher if the INR depreciates further. Increase in international coal prices: Coal prices have declined substantially over the last 12-18 months due to the slowdown in China. However, coal prices face an upside risk if coal imports increase in China. Continuation of macro-economic woes: A slowdown in the Indian economy, high interest rates and rising inflationary pressures have resulted in weak cement demand both from institutional and retail consumers. Whilst there are early indications of political stability in south India (with single party majority in Karnataka and the split of AP and Telengana) and the GDP would likely recover with the Union Election in FY15, the failure of the same would result in slackness in construction activities and cement demand. Furthermore, pricing discipline would be challenged if retail demand fails to recover. CCI penalty: The Competition Commission of India (CCI) has imposed a fine of `2,586 mn (11% of end-FY13 net worth) on Madras Cement, alleging its involvement in cartelisation. If this liability materialises, the entire PAT of FY14 will be wiped out. The company has deposited 10% of the penalty. Capital allocation to Myanmar: Recent media articles suggest that Madras Cement has plans to add capacity in Myanmar. Whilst the management highlights no such intentions, we do not see capital allocation in Myanmar as value-accretive at the current juncture.
34
Madras Cement
Balance sheet - Standalone
Year ending March (` mn) Share capital Reserves and surplus Total Networth Loans Deferred tax liability (net) Sources of funds Net block Capital work-in-progress Investments Cash and bank balances Sundry debtors Inventories Loans and advances Total Current Assets Current Liabilities Provisions Current liabilities and provisions Net current assets Application of funds Source: Company, Ambit Capital research FY12 238 20,265 20,503 27,104 6,492 54,100 42,981 5,223 887 475 2,111 4,911 3,994 11,491 4,892 1,591 6,483 5,008 54,100 FY13 238 23,470 23,708 26,671 7,164 57,542 47,797 1,480 887 540 3,028 5,948 5,035 14,550 5,299 1,873 5,299 9,251 57,542 FY14E 238 25,178 25,416 27,671 7,164 60,251 48,401 3,778 887 314 3,039 5,969 4,883 14,205 5,426 1,594 7,020 7,185 60,251 FY15E 238 28,057 28,295 28,171 7,164 63,630 50,429 2,533 887 2,221 3,339 6,679 5,566 17,805 6,431 1,594 8,025 9,780 63,630 FY16E 238 32,317 32,555 28,171 7,164 67,889 51,650 1,706 887 5,051 3,784 7,714 6,550 23,099 7,860 1,594 9,454 13,646 67,889
Income statement - Standalone

Year to March (` mn) Revenue yoy growth Total expenses EBITDA yoy growth Net depreciation EBIT Interest and financial charges Other income Adj PBT Provision for taxation Adj PAT yoy growth Reported PAT EPS basic (`) EPS diluted (`) DPS (`) Source: Company, Ambit Capital research FY12 32,696 24% 23,179 9,517 48% 2,539 6,978 1,585 181 5,574 1,723 3,851 83% 3,850 16.2 16.2 2.5 FY13 38,454 18% 28,237 10,217 7% 2,806 7,411 1,796 273 5,887 1,846 4,042 5% 4,037 17.0 17.0 3.0 FY14E 39,610 3% 31,670 7,940 -22% 3,063 4,877 1,815 59 3,121 967 2,153 -47% 2,153 9.0 9.0 1.6 FY15E 45,142 14% 35,185 9,958 25% 3,264 6,693 1,865 55 4,883 1,514 3,369 56% 3,369 14.1 14.1 1.8 FY16E 53,125 18% 40,650 12,476 25% 3,489 8,986 1,882 121 7,226 2,240 4,986 48% 4,986 20.9 20.9 2.6
35
Madras Cement
Cash flow statement - Standalone
Year to March (` mn) PBT Depreciation Others Interest paid (net) CFO before change in WC Change in working capital Direct taxes paid CFO Net capex Net investments Interest received CFI Proceeds from borrowings Change in share capital Interest & finance charges paid Dividends paid CFF Net increase in cash Opening cash balance Closing cash balance FCF Source: Company, Ambit Capital research FY12 5,574 2,539 1,444 90 9,647 376 (1,135) 8,888 (5,655) 72 60 (5,522) (808) (900) (1,585) (3,292) (178) 5,574 2,539 3,234 FY13 5,882 2,806 (8) 1,760 10,440 (2,277) (1,148) 7,014 (3,993) 73 93 (3,828) 40,342 0 (1,760) (692) (2,885) 301 5,882 2,806 3,021 FY14E 3,121 3,063 (59) 1,815 7,940 (33) (967) 6,940 (4,000) 59 (3,941) 1,000 (0) (1,815) (444) (1,260) (183) 3,121 3,063 2,940 FY15E 4,883 3,264 (55) 1,865 9,958 (688) (1,514) 7,756 (4,048) 55 (3,993) 500 0 (1,865) (491) (1,856) 1,907 4,883 3,264 3,708 FY16E 7,226 3,489 (121) 1,882 12,476 (1,036) (2,240) 9,199 (3,883) 121 (3,762) (0) (1,882) (726) (2,608) 2,830 7,226 3,489 5,316
Ratio analysis (%)

Year to March Revenue growth EBITDA growth PAT growth EPS norm (dil) growth EBITDA margin EBIT margin Net margin RoCE RoIC RoE
FY12 24.3 48.0 82.6 82.6 29.1 21.3 11.8 10.9 12.4 20.4
FY13 17.6 7.4 5.0 5.0 26.6 19.3 10.5 11.0 12.0 18.3
FY14E 3.0 (22.3) (46.7) (46.7) 20.0 12.3 5.4 5.8 6.2 8.8
FY15E 14.0 25.4 56.5 56.5 22.1 14.8 7.5 7.5 8.2 12.5
FY16E 17.7 25.3 48.0 48.0 23.5 16.9 9.4 9.6 10.6 16.4
Valuation parameters
Year to March P/E (x) P/B (x) Debt/Equity (x) Net debt/Equity (x) EV/Sales (x) EV/EBITDA (x) EV/tonne (`)
FY12
9.3 1.7 1.3 1.3 1.9 6.6 4,933
FY13
8.8 1.5 1.1 1.1 1.6 6.2 4,264
FY14E
16.6 1.4 1.1 1.1 1.6 8.1 4,068
FY15E
10.6 1.3 1.0 0.9 1.4 6.5 3,821
FY16E
7.2 1.1 0.9 0.7 1.2 5.2 3,821
36
Madras Cement
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities Research Analysts Aadesh Mehta Achint Bhagat Ankur Rudra, CFA Ashvin Shetty Bhargav Buddhadev Dayanand Mittal Gaurav Mehta Jatin Kotian Karan Khanna Krishnan ASV Nitin Bhasin Nitin Jain Pankaj Agarwal, CFA Pratik Singhania Parita Ashar Rakshit Ranjan, CFA Ravi Singh Ritika Mankar Mukherjee Ritu Modi Shariq Merchant Tanuj Mukhija Utsav Mehta Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Nityam Shah, CFA Parees Purohit, CFA Praveena Pattabiraman Sarojini Ramachandran Production Sajid Merchant Joel Pereira
E&C = Engineering & Construction
(022) 30433174
saurabhmukherjea@ambitcapital.com
Industry Sectors Banking / NBFCs Cement / Infrastructure Technology / Telecom / Media Automobile Power / Capital Goods Oil & Gas Strategy / Derivatives Research Metals & Mining / Healthcare Strategy Banking E&C / Infrastructure / Cement Technology NBFCs Real Estate / Retail Metals & Mining Consumer / Real Estate Banking / NBFCs Economy / Strategy Healthcare Consumer E&C / Infrastructure Telecom / Media Regions India / Asia India / Asia India / USA USA / Europe USA India / Asia UK
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E-mail aadeshmehta@ambitcapital.com achintbhagat@ambitcapital.com ankurrudra@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com dayanandmittal@ambitcapital.com gauravmehta@ambitcapital.com jatinkotian@ambitcapital.com karankhanna@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com nitinjain@ambitcapital.com pankajagarwal@ambitcapital.com pratiksinghania@ambitcapital.com paritaashar@ambitcapital.com rakshitranjan@ambitcapital.com ravisingh@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com shariqmerchant@ambitcapital.com tanujmukhija@ambitcapital.com utsavmehta@ambitcapital.com E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com nityamshah@ambitcapital.com pareespurohit@ambitcapital.com praveenapattabiraman@ambitcapital.com sarojini@panmure.com
Production Editor
(022) 30433247 (022) 30433284
sajidmerchant@ambitcapital.com joelpereira@ambitcapital.com
37
Madras Cement
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >5% <5%
Buy Sell
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Madras Cement: Ready To Build

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Madras Cement: Ready To Build

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Cement

September 03, 2013

Accounting: AMBER Predictability: AMBER Earnings Momentum: AMBER INITIATING COVERAGE

Stock Performance (%)

21,000 20,000 19,000 18,000 17,000 Feb-13

One-year forward EV/EBITDA chart

1-yr fwd EV/EBITDA 5-year Avg EV/EBITDA

Source: Bloomberg, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.

Ambit Capital Pvt Ltd

Company Financial Snapshot

Balance Sheet (` mn unless specified)

Cash Flow (` mn unless specified)

State-wise sales mix of Madras Cement

RoCE subdued at present but likely to pick up gradually

CE turnover (X) RoE(%) (RHS)

RoCE (%) (RHS)

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

South Indiaa unique region

Reserve (bn tonnes) 60.8 23.8 18.3 16.9 4.8 124.5

Source: Working Committee of the Planning Commission

Cement consumption growth: Two distinct phases

CAGR (FY01-08): 10.6%

CAGR (FY08-13): 3.3%

110% 95% 80% 65% 50%

Ambit Capital Pvt Ltd

26% 26% 25% 25% 24%

YoY growth (RHS)

Declining utilisation resulting in rising despatches to other regions

100% (mn tonnes) 90% 80% 70% 60%

65 55 45 35 FY06 FY07 FY08 FY09 FY10 FY11 FY12

20% 15% 10% 5% 0%

South-India Production South-India Consumption % despatched outside (RHS)

Ambit Capital Pvt Ltd

1,200 800 400 0

2,000 1,600 1,200 800 400 0

AP Kar YoY growth (RHS)

AP Kar YoY growth (RHS)

Supply dynamics of the four states

Source: CMA, Ambit Capital research

Prices declined with influx of AP players

Source: CMA. Crisil, Ambit Capital research

Ambit Capital Pvt Ltd

100% 71% 80% 60% 28% 40% 20% 0%

100% 80% 60%

TN Capacity (mn tonnes)

KTK Less than 3

Share of top 3 players (RHS)

Source: Working Committee of Planning Commission, Ambit Capital research

Market analysis of the South India states

Ambit Capital Pvt Ltd

Exhibit 10: Cement consumption in the south Indian states

1.4% 11.2% 8.1% 8.4% 7.5% 6.1%

8.8% 10.4% 8.0% 12.6%

Source: Industry, Ambit Capital research

Exhibit 11: Major players in south India

Ambit Capital Pvt Ltd

Tamil Nadu stands out as the best market in south India

Source: Company, RBI database, MOSPI, Ambit Capital research

Exhibit 13: Numbers behind our ranking

CAGR 1mn5mn+ 0.5-1mn (FY05-12) 5mn 9.4% 6.4% 7.8% 7.7% 1 1 1 2 2 4 3 3 2

Tamil Nadu Karnataka Andhra Pradesh Kerala